The European Union and the Evolving Architectures of International Economic Agreements 981992328X, 9789819923281

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Ottavio Quirico Katarzyna Kwapisz Williams   Editors

The European Union and the Evolving Architectures of International Economic Agreements

The European Union and the Evolving Architectures of International Economic Agreements

Ottavio Quirico  •  Katarzyna Kwapisz Williams Editors

The European Union and the Evolving Architectures of International Economic Agreements

Editors Ottavio Quirico Department of International Humanities and Social Sciences Perugia University for Foreigners Perugia, Italy

Katarzyna Kwapisz Williams ANU Centre for European Studies The Australian National University Canberra, ACT, Australia

Law School University of New England Sydney, NSW, Australia ANU Centre for European Studies The Australian National University Canberra, ACT, Australia

ISBN 978-981-99-2328-1    ISBN 978-981-99-2329-8 (eBook) https://doi.org/10.1007/978-981-99-2329-8 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 This work is subject to copyright. All rights are solely and exclusively licensed 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 Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

The European Union (‘EU’) is promoting a suite of innovations in international economic regulation—among them, reforms for secure and sustainable investment, a comprehensive approach to the mutual recognition of professional qualifications, a viable carbon border adjustment mechanism, heightened intellectual property rights protection, the arm’s length principle in taxation and mediation procedures, and an increased commitment to non-economic vales. Through a critical analysis of key regulations and policies, this volume explores the evolving architectures of international economic agreements in light of EU practice. A comprehensive analysis indicates that novelties are rooted in geoeconomic considerations, through which a fundamental shift is underway towards the adoption of comprehensive bilateral trade agreements. Whilst innovation has the potential to significantly harmonise cross-border regulatory frameworks, it can also trigger significant fractures, particularly when applied restrictively and asymmetrically. Arguably, the ‘Brussels effect’ will to a certain extent foster a progressive development of international economic regulation, while in some respects being constrained by the status quo of the international economic regime. This volume is part of the Jean Monnet project Third Country Engagement with EU Trade Policy led by the ANU Centre for European Studies at the Australian National University, and supported by the European Commission under the Erasmus+ actions. The project seeks to explore and improve understanding of the EU’s evolving trade policy and its implications for third countries, including Australia and countries in the Asia-Pacific region.

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International economic relations span investment and trade, competition, intellectual property (‘IP’) rights and double taxation. They are governed by bilateral and multilateral agreements aiming to maximise tariff reduction, open service markets, reduce regulatory risk and foster increased competition. Multilateralism traditionally prevails in the areas of trade and IP rights globally, particularly via the World Trade Organization (‘WTO’), while bilateralism prevails in the areas of investment and taxation. Regionally, comprehensive regulation, including investment and trade, IP rights, but not (yet) double taxation, has developed particularly through the establishment of differently integrated organisations, including not only the EU, but also institutions such as MERCOSUR and the Association of Southeast Asian Nations (‘ASEAN’), or comprehensive economic agreements such as the former North American Free Trade Agreement (‘NAFTA’), now repealed by the United States-Mexico-Canada Agreement. Integration and disintegration, centralisation and decentralisation meet, clash and harmonise within this context. Recently, international organisations and States, particularly the European Union (‘EU’), and, to a large extent, the United States (‘US’), have intensified the practice of concluding comprehensive bilateral and multilateral economic agreements that cover broader regulatory areas (European Commission 2022). For instance, the EU-MERCOSUR free trade agreement (‘FTA’) aims to increase bilateral trade and investment, lower tariff and non-tariff trade barriers and create a stable regulatory environment for cross-border economic flows. The agreement chiefly spans trade, investment, intellectual property rights and competition. The agreement also fosters fundamental values such as sustainable development, workers’ rights and food safety standards. In fact, the EU is the main trade and investment partner for MERCOSUR, as it exports around €45bn in goods and €17bn in services, with an overall investment of €330bn (European Commission 2020). Similarly, the negotiation of an integrated EU-Australia FTA aims to provide a new comprehensive and progressive set of rules for EU-Australia trade and investment relations. According to the European Commission’s initial analysis, in the long term the FTA would lead

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to a GDP growth of 0.2% for Australia (€4.2bn) and of 0.02% for the EU (€4.9bn) (European Commission 2017). In light of such data, some scholars consider that a new post-WTO order is developing (Lewis et al. 2020). This volume aims to explore the evolution of the architecture of international economic regulation by addressing key issues in international agreements and policies, particularly from the perspective of the impact of EU practice. The volume addresses diverse questions such as: how is the regulatory architecture of international economic relations evolving? What is the impact of the EU new generation of (comprehensive) economic treaties, facilitating cross-border trade and investment, on the structure of international economic agreements? How do integration and disintegration, centralisation and decentralisation reshape international economic relations? Are special agreements giving way to integrated FTAs? Do new regulatory trends harmonise with classical bilateral and multilateral economic agreements at the regional and global level? Do new trends have the potential to reinforce or undermine regional and global international economic organisations? These and other relevant questions are addressed by the contributors to this volume, which is divided into three sections covering key regulatory areas and rights. The first part of the volume addresses the context for the negotiation of international economic agreements, with a specific focus on the culture and politics of the EU. Katarzyna Kwapisz Williams explores the role assigned to culture in the context of international economic relations and the ways in which culture is conceptualised and instrumentalised in international agreements for its economic and extra-economic values. María García shows how geo-economic considerations have become prevalent in EU and US preferential trade agreements, as a key reason to commence negotiations and ensure competitiveness for domestic economic sectors. Within this framework, Yeo Lay Hwee analyses the EU-ASEAN FTA and concludes that the shift in global economic power to the Asia-Pacific region has prompted the EU to move from a bi-regional to a complex bilateral approach with Asian countries towards FTAs, detecting a corresponding decline in EU influence in the context of growing regionalisation. The second part includes contributions focused on the very essence of international economic agreements and aims to understand key regulatory developments in the area of trade and investment. Along the lines of the proposals advanced by the EU, Ottavio Quirico underscores how a reform of the international investment regime should focus primarily on substance and sustainability, rather than on procedural issues currently at the attention of the UNCITRAL.  In this context, Yulia Levashova considers how climate change might prompt a compelling interpretation of environmental provisions in an ‘outdated’ Energy Charter Treaty so as to limit an extensive interpretation of the fair and equitable treatment standard. Pascale Accaoui Lorfing further assesses the (limited) usefulness for sustainability purposes of the right to regulate clauses in investment agreements and suggests a careful drafting aiming to at least limit compensation in the case of unsustainable investment. Ivana

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Damjanovic and Nicolas de Sadeleer explore the EU screening system for foreign direct investment as a means to provide the European Commission with improved political leverage in carrying out its external trade and investment agenda within the common commercial policy. Mutual recognition of qualifications for professional services in EU practice and the Australia-New Zealand Closer Economic Relations Trade Agreement context is the object of the analysis by Jonathan Li, who concludes that these can provide a model to establish comprehensive integration beyond current mutual recognition agreements. Picking up on the economic theory of climate clubs, Joshua Woodyatt and Ottavio Quirico argue that, although the EU practice of carbon border adjustment mechanisms has not (yet) reached sufficient consensus to establish the opinio juris necessary to create universal practice, it may signal the emergence of a regional customary trend at international law. Elaine Fahey explores the EU-US Trade and Technology Council as a vehicle to foster bilateralism in transatlantic relationships. The third part of the book explores key rights and procedures in the architecture of international economic agreements. Hazel Moir investigates IP privileges for pharmaceuticals and agricultural chemicals with a focus on EU and US treaties and demonstrates that the interest of patent holders fundamentally prevails over that of patients and society. Focusing on the COVID crisis, Enrico Bonadio and Magali Contardi underscore that, while largely ineffective for technology transfers, compulsory licensing for patenting has some merit and may have a positive impact on the EU’s bilateral and multilateral trade agreements. Wenting Cheng shows that the crowd-out effect of GI provisions embedded in EU FTAs effectively constrains traders in non-powerful countries more than those in powerful ones. According to Saurabh Jain and Maria Eleni Pouliasi, a move from bilateralism to multilateralism is suitable to avoid double taxation in international relations, whereby EU transfer pricing case law suggests that the arm’s length principle might be evolving towards an accepted general international standard. Focusing on the trade-off between data flow and data protection in international economic agreements, Ottavio Quirico suggests that the EU’s compelling approach to the right to privacy might not be fully consistent with free trade in services under the General Agreement on Tariffs and Services (‘GATS’), whereby EU law can prompt a reform of the GATS or vice versa. While claiming that the EU stands out as an innovator in the promotion of fundamental rights in international economic agreements, Pablo Cristóbal Jiménez Lobeira and Ottavio Quirico challenge the efficacy of non-economic clauses in EU economic agreements. Taking on a procedural perspective, Sascha Ferz and Tetiana Tsuvina argue that, despite significant substantive obstacles, the Singapore Convention on Mediation has meaningful potential to harmonise mediation frameworks in the EU and third countries alike. Taken together, this volume aims to comprehensively examine key trends in the evolving architectures of international economic regulation from legal, socio-­ cultural and political perspectives, at the crossroads between bilateralism,

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regionalism and multilateralism. Against the background of the ‘Brussels effect’ (Bradford 2019), the fundamental question is whether and to what extent EU practice shapes international economic agreements and vice versa. Perugia, ItalyOttavio Quirico Sydney, NSW, Australia Canberra, ACT, Australia Pisa, Italy Fiesole, Italy Canberra, ACT, Australia

Katarzyna Kwapisz Williams

References Bradford A (2019) The Brussels Effect: How the European Union Rules the World. OUP, Oxford European Commission (2017) Impact assessment, accompanying the document, recommendation for a council decision authorising the opening of negotiations for a free trade agreement with Australia (COM(2017) 472 European Commission (2020) EU-MERCOSUR Trade agreement. https://policy.trade. ec.europa.eu/eu-­trade-­relationships-­country-­and-­region/countries-­and-­regions/mercosur/ eu-­mercosur-­agreement_en European Commission (2022) Negotiations and agreements, implementing EU agreements. https://ec.europa.eu/trade/policy/countries-­and-­regions/negotiations-­and-­agreements Lewis MK, Nakagawa J, Neuwirth RJ, Picker CB, Peter-Tobias Stoll P-T (2020) A Post-WTO international legal order: utopian, dystopian and other scenarios. Springer. US Department of State (2022) Trade agreements. https://www.state.gov/trade-­agreements

Contents

Part I Politics and Culture 1

Culture in External Relations: The EU and its International Economic Agreements ��������������������������    3 Katarzyna Kwapisz Williams

2

Beyond Trade – The Politics of Trade Agreements and Interstate Competition and Geoeconomics as a Basis for EU and US Preferential Trade Agreements�������������������   25 María García

3

Geopolitics, Geoeconomics and the EU Trade Policy: The Relationship with ASEAN (Association of Southeast Asian Nations) as a Test Case������������������������������������������������������������������   39 Yeo Lay Hwee

Part II Investment and Trade 4

From Investment Protection to Sustainability (via a Multilateral Investment Court): The EU and a New Universal Model for International Investment Agreements?��������������������������������������������   57 Ottavio Quirico

5

New Wine in Old Wineskins? Climate Cases and the Energy Charter Treaty��������������������������������������������������������������   75 Yulia Levashova

6

Unsustainable Investment: Scoping Expropriation without Compensation����������������������������������������������������������������������������   95 Pascale Accaoui Lorfing

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7

Screening Foreign Direct Investment in Europe: Having a Tiger by the Tail? ��������������������������������������������������������������������  109 Ivana Damjanovic and Nicolas de Sadeleer

8

Trade in Services and Mutual Recognition of Professional Qualifications in the EU and International Systems: Multilateralism à la Carte? ��������������������������������������������������������������������  133 Jonathan Boscarato

9

The EU Carbon Border Adjustment Mechanism: Customary International Law?��������������������������������������������������������������  153 Joshua Woodyatt and Ottavio Quirico

10 T  he EU-US Transatlantic Trade and Technology Council: Shifting Multilateralism Through Bilateralism and Institutions?��������������������������������������������������������������������������������������  171 Elaine Fahey Part III Foundational Rights and Procedures 11 T  RIPS+ IP Privileges for Pharmaceuticals and Agricultural Chemicals: EU and US Treaties��������������������������������  185 Hazel V. J. Moir 12 C  ompulsory Licences During the COVID-­19 Pandemic: A European and International Perspective ������������������������������������������  209 Enrico Bonadio and Magali Contardi 13 T  he ‘Crowd-Out Effect’ of GI Provisions in EU FTAs: Cheeses Exported to South Korea����������������������������������������������������������  227 Wenting Cheng 14 T  he Evolutionary Process of Tax Treaties and Its Interplay with EU Law: A Critical Analysis����������������������������������������������������������  249 Saurabh Jain and Maria Eleni Pouliasi 15 D  ata Flow v. Data Protection: Achieving Cross-Broder Harmonisation via EU Horizontal Clauses?�����������������������������������������  271 Ottavio Quirico 16 N  on-economic Conditionality for Comprehensive EU International Economic Agreements? ��������������������������������������������  283 Pablo Cristóbal Jiménez Lobeira and Ottavio Quirico 17 T  he Singapore Convention on Mediation: National Implementation Practices and EU Prospects������������������������  303 Sascha Ferz and Tetiana Tsuvina Conclusion��������������������������������������������������������������������������������������������������������  315 Index������������������������������������������������������������������������������������������������������������������  317

Editors and Contributors

About the Editors Ottavio Quirico is a Senior Researcher at the University for Foreigners in Perugia, Italy, and an Associate Professor at the School of Law at the University of New England and at the ANU Centre for European Studies at the Australian National University. He has held senior positions in universities across the globe and has acted as a consultant to the United Nations.  

Katarzyna Kwapisz Williams is the Deputy Director and a Jean Monnet Research Fellow at the ANU Centre for European Studies at the Australian National University. She is a cultural scholar whose research is focused, among others, on cultural history and cross-cultural relations, memory and identity making.  

Contributors Pascale Accaoui Lorfing is an Associate Member of CREDIMI (Research Centre for International Market and Investment Law), University of Burgundy in France, and a Lecturer at the ESCP Business School in Paris. She teaches and researches in the field of international investment law.  

Enrico Bonadio is a Reader at City, University of London. He lectures and advises in the field of intellectual property law.  

Jonathan  Boscarato is a Trade Policy Professional who advised the European Union in several rounds of the Australia-EU FTA negotiations in areas such as trade in services, trade and sustainable development and technical barriers to trade. He has also worked on trade facilitation with the Australian Government and trade promotion with the French Directorate-General of the Treasury.  

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Wenting Cheng is a Grand Challenge Fellow at ANU College of Law in Canberra. She has extensive expertise in the area of IP rights and geographical indications.  

Magali Contardi is a Researcher at Scuola Universitaria Superiore Sant'Anna in Pisa, Italy. She practises as a lawyer in the area of IP rights.  

Ivana Damjanovic is a Lecturer at the University of Canberra and a Visiting Fellow at the ANU Centre for European Studies at the Australian National University. Her research focuses on the regulation of international trade and investment.  

Nicolas de Sadeleer is a Professor of EU and comparative law at St-Louis University in Brussels. He has researched and published extensively in the areas of international trade and investment.  

Elaine Fahey is a Professor of Law at the Institute for the Study of European Law at City Law School, City, University of London.  

Sascha Ferz is a Professor of Alternative Dispute Resolution at the Institute of the Foundations of Law at Karl-Franzens-­Universität in Graz, Austria. He teaches and researches on mediation, administrative law and sociology of law.  

María  García is a Senior Lecturer and Head of the Department of Politics, Languages and International Studies at the University of Bath, UK. Her research focuses on EU trade policy, the politicisation of trade policy and EU trade agreements.  

Yeo Lay Hwee is the Director of the European Union Centre in Singapore. She is also Council Secretary at the Singapore Institute of International Affairs, Adjunct Senior Fellow at the S Rajaratnam School of International Studies and Adjunct Faculty at the Singapore Management University. Her research interest covers comparative regionalism, multilateralism and governance networks. She has published extensively on EU-ASEAN and Asia-Europe relations.  

Saurabh  Jain is a Senior Lecturer at Curtin University Law School in Perth, Australia. As a tenured academic for more than 10 years, he has taught Australian taxation law and various subjects related to commercial law at undergraduate as well as graduate levels.  

Pablo Cristóbal Jiménez Lobeira is a Research Associate at the ANU Centre for European Studies. His research explores political philosophy topics in, or relating to, Europe.  

Yulia Levashova is an Assistant Professor at Nyenrode Business University and an Associate Research Fellow at Utrecht University. Her principal research focus is on legal aspects of foreign direct investment and corporate social responsibility.  

Editors and Contributors

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Hazel  V.  J.  Moir is an Adjunct Associate Professor at the ANU Centre for European Studies, Australian national University. She works primarily on patents, geographical indications and other monopolies and restraints on trade which are typically included in ‘intellectual property’ chapters in trade treaties.  

Maria Eleni Pouliasi is an Assistant Professor at Jindal Global Law School, OP Jindal Global University, India. She teaches and researches income tax law, GST law, transfer pricing, source of power for taxation and international tax dispute resolution. She is also a lawyer at court in Greece and a PhD candidate at the University of Auckland, New Zealand.  

Tetiana Tsuvina is an Associate Professor at the Department of Civil Justice and Advocacy, Yaroslav Mudryi National Law University in Kharkiv, Ukraine. Her sphere of expertise is international standards of fair trial, mediation and ADR.  

Joshua Woodyatt is a Research Associate at the ANU Centre for European Studies. His research spans issues of law and foreign policy, including Germany and the German-speaking world.  

Abbreviations

AB ADR AfCFTA AI AMR ANZCERTA

Appellate Body Alternative dispute resolution African Continental Free Trade Area Artificial intelligence Automatic mutual recognition Australia-New Zealand Closer Economic Relations Trade Agreement AP Alianza del Pacífico APEC Asia-Pacific Economic Cooperation ASEAN Association of Southeast Asian Nation AUSFTA Australia-United States Free Trade Agreement BIT Bilateral investment treaty BRI Belt and Road Initiative BRICS Brazil, Russia, India, China and South Africa BRTA Bilateral and regional trade agreement CAMR Canada’s Access to Medicines Regime CARIFORUM Caribbean Forum CBAM Carbon border adjustment mechanism CBT Cross-border trade in services CETA Comprehensive and Economic Trade Agreement CIFIUS Committee on Foreign Investment in the United States CJEU Court of Justice of the European Union COP Conferences of the Parties CPC Civil procedural codes CPTPP Comprehensive and Progressive Agreement for Trans-Pacific Partnership CSR Corporate social responsibility CUSFTA Canada–United States Free Trade Agreement CUSMA Canada, United States and Mexico Agreement DEPA Digital Economy Partnership Agreement DG Directorate-general xvii

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DSB EBA EC ECHR ECT ECtHR EEA EEC EIA EMA EP EPA ETS EU EUCFR FAT FDI FET FTA GATS GCEU GDP GDPR GE GHG GIP GIs GIT HIPO ICCPR ICESCR ICSID ICT ICTSD IDR IEA IEA IIA IoT IP IPA IPC IR ISDS ITO

Abbreviations

Dispute Settlement Body Everything but arms European Commission European Convention on Human Rights Energy Charter Treaty European Court of Human Rights European Economic Area European Economic Community Environmental impact assessment European Medicines Agency European Parliament Economic Partnership Agreement Emissions trading system European Union Charter of Fundamental Rights of the European Union Foreign Affiliates Trade in Services Foreign direct investment Fair and equitable treatment Free trade agreement General Agreement on Trade in Services General Court of the European Union Gross domestic product General Data Protection Regulation General exception Greenhouse gas Green Investment Protocol Geographical indications Green Investment Treaty Hungarian Intellectual Property Office International Covenant on Civil and Political Rights International Covenant on Economic, Social and Cultural Rights International Centre for the Settlement of Investment Disputes Information and communications technology International Centre for Trade and Sustainable Development Institute for Dispute Resolution International economic agreement International Energy Agency International investment agreements Internet of Things Intellectual property Investment Protection Agreements Intellectual Property Code International relations Investor-State dispute settlement International Trade Organisation

Abbreviations

MEA MERCOSUR MFN MIT MNP MRA MRA MSA MLI NAALC NAFTA NDC NJCU NLP NMW NT NZ OCR ODR OECD PDO PPP PQD PRC PTA RCEP RTA SADC SC SCMA SE SME SPSc STRI SWIFT TACD TBT TCA TEU TFEU TIEA TISMOS TiVA TPP

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Multilateral Environmental Agreement Mercado común del sur Most favoured nation Multilateral investment treaty Movement of natural persons Mutual recognition agreement Mutual Recognition Agreement Mediation settlement agreement Multilateral Instrument North American Agreement on Labour Cooperation North American Free Trade Agreement Nationally determined contribution New Jersey City University Natural language processing Non-market economy National treatment New Zealand Optical character recognition Online dispute resolution Organisation for Economic Cooperation and Development Protected designation of origin Polluter pays principle Professional Qualifications Directive People’s Republic of China Preferential Trade Agreement Regional Comprehensive Economic Partnership Regional trade agreement South African Development Community Singapore Convention (Convention on International Settlement Agreements Resulting from Mediation) Singapore Convention on Mediation Act Security exception Small and medium enterprise Supplementary Protection Certificate Services Trade Restrictiveness Index Society for Worldwide Interbank Financial Telecommunication Transatlantic Consumer Dialogue Technical barrier to trade Trade and Cooperation Agreement Treaty on European Union Treaty on the Functioning of the European Union Model Tax Information Exchange Agreement Trade in Services by Mode of Supply Trade in value added Trans-Pacific Partnership

xx

TR TRIPs TSD TSICCMA TTC TTIP TTMRA UDHR UK UN UNCITRAL UNCTAD UNECE UNESCO UNFCCC US/USA USD USMCA VAT VCLT VCLTIO WTO

Abbreviations

Trade representative Agreement on Trade-Related Aspects of Intellectual Property Rights Trade and sustainable development Treaty on Sustainable Investment for Climate Change Mitigation and Adaptation Trade and Technology Council Transatlantic Trade and Investment Partnership Trans-Tasman Mutual Recognition Arrangement Universal Declaration of Human Rights United Kingdom United Nations United Nations Commission on International Trade Law United Nations Commission on Trade and Development United Nations Economic Commission for Europe United Nations Educational, Scientific and Cultural Organization United Nations Framework Convention on Climate Change United States of America US Dollar United States-Mexico-Canada Value-added tax Vienna Convention on the Law of Treaties Vienna Convention on the Law of Treaties between States and International Organisations or between International Organisations World Trade Organization

Part I

Politics and Culture

Chapter 1

Culture in External Relations: The EU and its International Economic Agreements Katarzyna Kwapisz Williams

All international relations are in fact intercultural relations (Akira Iriye 1979)

Contents 1.1  1.2  1.3  1.4  1.5 

Introduction  he Understanding of Culture and ‘Culture in External Relations’ T Culture in International Agreements The EU’s Evolving Approach to Culture in External Relations Culture in Selected EU International Economic Agreements 1.5.1  Protocols on Cultural Cooperation 1.5.2  Cultural Exception Clauses 1.5.3  Chapters on Culture 1.6  Conclusion References

 4  5  8  11  15  15  17  18  20  21

Abstract  Trade and investment are part of cultural exchanges. They are shaped by, but also have tremendous impact on cultural activities. At the same time, cultural activities and diplomacy actively pursue long-term and sustainable objectives in the field of trade and foreign investment. This contribution explores the understanding of culture and the role assigned to it in the context of international economic relations, and the ways in which economic agreements address cultural matters. It also reflects on the ways in which culture is conceptualised and instrumentalised in international agreements for its economic and extra-economic values, and on the complexities involved in separating the two perspectives.

K. Kwapisz Williams (*) ANU Centre for European Studies, The Australian National University, Canberra, ACT, Australia e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 O. Quirico, K. Kwapisz Williams (eds.), The European Union and the Evolving Architectures of International Economic Agreements, https://doi.org/10.1007/978-981-99-2329-8_1

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K. K. Williams

Keywords  Audio-visual services · Cultural diplomacy · Cultural value · Cultural exception · Culture in external relations · European Union

1.1 Introduction Trade and investment are part of cultural exchanges. They are shaped by, but also have a tremendous impact upon, cultural activities. At the same time, cultural activities and diplomacy actively pursue long-term and sustainable objectives in the field of trade and foreign investment. While culture has always underpinned economic relations, it has been a relatively recent addition to trade agreements. For the purpose of bringing culture into discussion on international relations—and, in fact, to exclude it from negotiations of international trade agreements —culture’s broad and complex meaning has been simplified. Thus, instead of culture, economic agreements typically talk about cultural industries and cultural economy. This is perhaps not surprising; culture has been often instrumentalised in various ways in development thinking (Nederveen 2010; De Beukelaer 2015), creative economy debates and international relations. Although there is no clear division between cultural expressions and culture as a ‘way of life’, these are mainly ‘economically remunerative cultural activities and objects’ (Sen 2004, 39) that are considered ‘culture’ in international agreements. This contribution explores the understanding of culture and roles assigned to it in the context of international economic relations. It reflects on the ways in which culture is conceptualised and instrumentalised in international agreements for its economic and extra-economic values, and on the complexities involved in separating the two perspectives. The chapter aims to map the development of thinking about culture in external relations within the evolving architecture of trade agreements. It starts by reflecting on the understanding of culture in the context of international agreements and presents some of the dominating debates arising at the nexus of culture and trade. It discusses the evolving approach to culture taken by the EU and identifies several milestones that define this process. It argues that while culture is the underpinning of the EU’s approach to external relations, it is neither understood nor presented this way in international economic agreements. Thus, the centrality of culture in the EU’s external relations is rather ambiguous, even though the way culture is conceptualized remains crucial for understanding other concepts essential in international relations, such as cultural diversity. Typically, the trade and culture debate is conceived as ‘an opposition between liberalization and protectionism’—some scholars warn against such an approach (Richieri Hanania 2012), while others find it the most convincing framework for analysing the relationship between international trade and cultural diversity (Bellucci 2016). In spite of the increasing emphasis on values and norms, and interest in partnerships founded on shared values and responsibilities, the EU’s understanding of culture in external relations does not seem to move significantly beyond utilizing culture as a resource to protect or advance economic growth.

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To illustrate the EU’s approach to culture in external relations, the chapter discusses the trade agreements between the EU and the Caribbean, South Korea, Canada, and New Zealand. These agreements exemplify the inclusion of culture into trade agreements in the form of provisions, protocols on cultural cooperation, separate chapters, as well as—as in the case of new generation trade agreements— broader and more specific references to values and norms. The EU is committed to promoting its values and conducting its external actions in agreement with its principles, as formulated in the Treaty of Lisbon: democracy, the rule of law, the universality and indivisibility of human rights and fundamental freedoms, respect for human dignity, the principles of equality and solidarity (art. 21, Treaty on European Union).

This commitment constitutes one of the fundamental building blocks of European identity and, in this sense, a critical element defining European culture. Developing instruments to ensure the EU’s ability to realise these commitments and assess implications of trade agreements for the values the EU is founded on, while also recognising and respecting values and culture of its partners, has direct cultural significance.

1.2 The Understanding of Culture and ‘Culture in External Relations’ In discussing trade and culture, the first and major challenge is the definition of terms and the specification of the subject matter. While the idea of trade does not raise any issues in the context of international relations, culture remains this nebulous concept, either very broad and hazy, or very narrow, covering a specific cultural sector or service. A clear definition of culture has been proposed neither by cultural studies (which is understandable, given the scope of the discipline) nor by international relations scholarship, where the concept of culture is utilised for policy purposes, among others. The lack of a clear definition and often arbitrary application of the concept of culture in this context can make cultural exchanges less efficient in reaching mutual understanding, building trust, and promoting non-economic values across communities. Reflecting on the conceptualizations of culture can improve our understanding of culture-trade intersections, including the reasons for its inclusion/exclusion in economic agreements. A broader and more complex understanding of culture can allow us to identify more connections and intersections between culture and trade, and better ways of nurturing these connections (see, for example, NACDI 2018). Generally speaking, culture means a set of values, norms, codes of conduct, beliefs and practices that structure and inform the way a group understands the world. These are also artifacts, products and services which create meaning for a community, that is, which community invests with meaning reflecting their values, norms, and world views. Relevant questions which arise within the cross-cultural

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context are, for example, whether when talking about culture we are referring to customs and attitudes within a particular population within a community (White and Tadesse 2008, 1079), and thus assume a possibility of change and evolution, or rather to traditions and habits that remain ‘fairly unchanged from generation to generation’ (Guiso et al. 2006, 23). This seemingly small difference may have impact on how we understand international relations, what we expect from cross-cultural communications and how we deal with potential boundaries. According to Clifford Geertz, culture can be defined narrowly as a collective identity shaped by religion, race, ethnicity, gender, or class, or more broadly as ‘webs of significance’ within which people live, act and make meaning—‘a symbolic system’ (Geertz 1973, 4, 89). He differentiates between culture and social structure, understanding the latter as embracing economic, political and social life, rituals and institutions (seen through the purposes they serve), and the former as ‘a system of meanings embodied in symbols’ that provide a frame of reference to understand the world we live in (Geertz 1973, 4). The understanding of culture as a symbolic system of meanings has been particularly useful for forging a European identity, the main objective of the EU’s foreign policy. It provides the context within which cultural diversity is to be understood. Focusing on a symbolic system and meaning making raises questions essential in any cross-cultural engagements, including economic exchanges, for example, whether one community can understand another, adapt, build stable relationships and develop mutually beneficial engagement. The environment in which such processes are taking place is complex in itself, as it involves various factors such as cultural affinity, cultural bias or trust, which may affect cross-cultural economic behaviours in different ways. International relations scholars have been reaching for anthropological sources to better understand the ways in which culture can facilitate or hamper international relations. The assumption that the exchange of ideas, beliefs and values can foster mutual understanding in pursuit of economic and political goals (Waller 2009, 74), locates discussion on culture and trade within the context of ‘soft power’ which belongs to and implies actions and strategies of ‘cultural diplomacy’. Cultural diplomacy is considered to be the practice that uses culture (cultural products, heritage, values, and ideas) in engagement with other nations to ‘improve understanding and appreciation of [a nation’s] qualities and identity, in support of its political and economic objectives abroad’ (Scott-Smith 2016, 2), to ‘foster mutual understanding’ (Waller 2009, 74) and to ‘create a foundation of trust’ (Arndt 2006, xxi). Trust induces greater cooperation between nations and is the foundation of successful trade relationships (NACDI 2018, 8). Trust can be built through fostering effective cultural relationships (British Council 2012) and developing mutual understanding. Such mutual understanding can be achieved by a slow and expansive approach to public and cultural diplomacy which: whether directly related to ‘culture’ or not, must be grounded in culture, in an understanding of the values and identities of others, and in thinking about the ways that culture and creative industries can be mobilized to accompany broader (public) diplomacy initiatives that seek to improve political and economic relations (NACDI 2018, 8).

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The importance of cultural diplomacy for generating trade has long been recognized (see, for example, NACDI 2018), but the understanding of and the approaches to cultural diplomacy can differ. The example of the EU is quite interesting here. While the EU Member States deploy ‘cultural diplomacy’ to engage in cultural exchanges and mark their attractiveness in third countries, the EU seems to diverge from this approach (Garner 2017). The EU’s departure from ‘cultural diplomacy’ towards the notion of ‘culture in external relations’ is itself an interesting process of the evolution of thinking about culture in international relations. It may be seen as implying a move away from bilateral engagement focused on individual economic and political interests to performing ‘Europeanness’ on a global arena, a new way of self-presentation (Isar 2015). According to Garner (2017), this rhetorical move (from cultural diplomacy to culture in external relations) ‘signals a commitment to the values of global cultural citizenship and the promotion of cultural diversity in a way that is driven by a series of “idealistic” rather than “expedient” or “instrumental” motives’. The notions of global cultural citizenship and cultural diversity are important here. They imply participation in wider communities, ‘a process rather than a product’ that is both individual and collective, both values-driven and interest-driven (Isar 2015), and thus which addresses the needs of both Europe and its partners—presenting the EU as operating ‘“beyond” its interests’ (Isar 2015, 494). These commitments are only to some extent reflected in cultural policies, most likely due to complex understanding of culture within the EU itself, and only partially (if at all) translated into the actual economic agreements. Looking more closely at trade agreements, it becomes clear that the understanding of culture is rather narrow and very much focused on tangible products rather than processes, and even then only to a degree narrower still. While the EU’s approach to culture has been evolving, in the context of trade agreements culture remains equated with an audiovisual sector. New generation trade agreements have been slowly changing the international trade landscape. They indicate that the conventional understanding of trade agreements is outdated (Claussen 2022) and invite innovative approaches. The Trade and Sustainable Development (‘TSD’) approach promoted by the EU reinforces countries’ climate change and social commitments (other than labour rights). Social issues and cultural values, such as gender and indigenous rights and the right to public participation, are further fostered by an ‘inclusive trade agenda’ as promoted by Canada, Chile and New Zealand. There is a growing tendency to include human rights provisions—a broader commitment to human rights beyond workers’ rights, in trade agreements (Idris 2017, 2) as well as specific chapters dedicated to women’s and indigenous rights (such as a Māori Trade and Economic Cooperation chapter in the EU-New Zealand Free Trade Agreement). Thus, new trade agreements, bringing non-trade values to the fore, potentially expand the understanding of culture in international agreements.

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1.3 Culture in International Agreements In the arena of international relations and for the purpose of international exchanges, culture is referred to in general international agreements and protocols such as the General Agreement on Tariffs and Trade (‘GATT’), the General Agreement on Trade in Services (‘GATS’) and, most importantly, the UNESCO Convention on the Protection and Promotion of the Diversity of Cultural Expressions (‘CDCE’). Each makes an attempt to specify what is meant by culture (for the document’s specific needs) and brings light onto how different understandings of culture may have a different impact on international relations, including trade. The GATT approaches culture as something to be promoted and protected. This approach is solidified with the growing importance (and scope) of the culture industry in the global market. It is further reiterated in the GATS, signed by all members of the World Trade Organization (‘WTO’), which classifies ‘recreational/cultural/sporting services’ as a sector consisting of: (1) Entertainment services (theatre, live bands, circus services); (2) News and press agency services; (3) Libraries, archives, museums, and other cultural events; and (4) Sporting and other recreational services. This classification significantly restricts the understanding of culture and cultural services. The GATT brought to light a long-standing issue, that is, ‘how to reconcile trade liberalization objectives with those of cultural policy’ (Goff 2019). The significance of the problem was initially highlighted in the negotiations of the 1998 Canada– United States Free Trade Agreement (CUSFTA). Similar concerns were raised repeatedly over the years, particularly by France in the 1980s–90s, the EU, which has been increasingly  committed to ‘cultural diversity’  since 2005, and by Latin America and Canada. These concerns resulted in developing a ‘cultural exception’ concept introduced by France during the 1993 GATT negotiations. They also led, together with the growing number of issues and GATT signatories, to the creation of the WTO in 1995, which Goff (2019) sees as a key development for trade and culture—the creation of ‘a powerful dispute settlement body’. Yet, the issues resulting from the dominant non-discriminatory principle (that is, Canada losing a dispute over support to domestic periodicals), led to the creation of one of the most important frameworks incorporating culture in international relations and economic agreements—the 2005 UNESCO Convention on the Protection and Promotion of the Diversity of Cultural Expressions (‘CDCE’), which entered into force in 2007. Most importantly, that Convention declares that: cultural activities, goods and services have both an economic and a cultural nature, because they convey identities, values and meanings, and must therefore not be treated as solely having commercial value

and that: states have, in accordance with the Charter of the United Nations and the principles of international law, the sovereign right to adopt measures and policies to protect and promote the diversity of cultural expressions within their territory (CDCE).

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There are also limitations particularly important in the context of economic agreements: ‘parties recognize that they shall perform in good faith their obligations under this Convention and all other treaties to which they are parties’ and that ‘[n]othing in this Convention shall be interpreted as modifying rights and obligations of the Parties under any other treaties to which they are parties’ (CDCE). The Convention has had a direct impact on the EU’s approach to culture and trade (see, for example, Richieri Hanania 2019). The EU, following the provisions for the promotion and protection of the diversity of cultural expression, utilized this framework for the promotion of its ‘fundamental values, such as human rights, gender equality, democracy, freedom of expression and the rule of law, as well as cultural and linguistic diversity’ (CDCE). Thus, the CDCE crystalized the understanding of culture as having economic and non-economic values, emphasising the principle of the culture’s dual nature. As such, the Convention became the fundamental framework for the EU’s international engagement and developing commitment to culture in external relations. It gave competences to the EC in Europe’s external affairs protecting the EU’s cultural policy autonomy and internal cultural diversity (cf. European Parliament 2010). Following this understanding that culture includes economic and non-economic values, the debate on culture in international relations more broadly, and economic relations specifically, seems to centre on two general distinct approaches (cf. Bernier 2000, 71). One of the ways is to reflect on culture from an anthropological perspective, as an environment shaped by specific values, symbols, meanings and commitments, or as a value itself. In the context of international trade this would mean, for example, reflecting on the extent to which cultural distance and bilateral trade are related (Cyrus 2015), and how they interact and influence each other. Cultural distance can be marked by language, historical events, domestic politics, as well as values and beliefs, and as such it defines a framework employed for international interactions.1 The other way is to approach culture as a product or a resource for economic development, no different to any other products covered by international trade agreements. It seems that irrespective of the motives behind the commitments to the values promoted under the culture rhetoric in international agreements, it is this second approach that prevails and, in fact, defines culture in trade. Some argue that the commitments to the values promoted by the EU under the European identity rhetoric also have clear economic rather than cultural rationale (Chochorelou 2019) and continue to promote culture as a product. Anthony J.  Liehm puts it bluntly, saying that: culture in the strict sense has never been considered as more than merchandise by Brussels, a commodity to which the same rules should apply as to any other product, in other words the highest possible common denominator that can be produced, distributed and consumed as if it were a car, a textile or a food product (Liehm 2000, 116).

 Cyrus points to the significance of language and common past in international trade (2015: 208); see also Melitz (2008), Hutchinson (2005) and Bastos and Silva (2008). 1

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This attitude can be also observed in discussions around the antagonistic nature of the relationship between culture and trade, reflected, for example, in the negotiations of the WTO (Burri 2011). It is also indicated by the very language used in international trade; Throsby observes that if ‘the protection of cultural values and the pursuit of other cultural objectives were accepted as a legitimate element alongside the pursuit of economic value’, possibly the term ‘cultural recognition’ would be used rather than the more negative word ‘exception’ (Throsby 2001, 133). The ‘cultural exception’ doctrine—that the right exists to exempt a sector from standard GATT/WTO legal obligations and treat cultural goods and services differently than other goods and commercial products in international agreements—confirms this approach to culture as a product also on a different level. Seen as the EU’s response to the dominance of American popular culture, the ‘cultural exception’ doctrine is to prevent the adverse impact of foreign culture on ‘national cultural treasures’ (Galt 2004, 912; GATT article XX(f)). For Galt, such reasoning is based on ‘the erroneous assumptions that a state’s cultural identity is an exhaustible resource’ and that, most importantly, ‘it effectively correlates one state’s success at selling tangible goods in the audiovisual sector to a direct and proportionate erosion of another state’s intangible cultural identity’ (Galt 2004, 917). This assumption that culture can be somehow depleted or consumed removes culture from the sphere of values and challenges the understanding of culture as the foundation of life in a society, as an inexhaustible element of people’s identity and activity (cf. Galt 2004). This dominant rhetoric of culture as a product might have less obvious historical foundations. Anthony J. Liehm (1996), for example, points to the traditionally elitist nature of culture and arts in Europe as the reason for Europeans’ fight for a ‘cultural exception’ in free trade agreements [‘FTA’]. He claims that European culture could not have possibly opened easily onto larger audiences, could not have compared to American markets and would rather avoid external dominance, protecting their products against it. He sees this as evidence of very different concepts of culture in Europe and America and, in fact, the very problem of European cultural identity (Liehm 1996). In the EU’s context, the fact that the European cultural identity is largely the result of the elites’ project, only partially rooted in the subjective experience of Europeans (cf. Bachryj-Krzywaźnia 2014), similarly indicates culture as being a resource created to legitimize and strengthen the European integration. It can be argued that the approach to culture as a product has not changed much with the UNESCO Convention on the Protection and Promotion of the Diversity of Cultural Expressions, even though that Convention promotes intangible cultural values associated with cultural products which ‘reflect who we are as a people [...] shape our society, develop our understanding of one another and give us a sense of pride in who we are as a nation’ (Burri 2011; SAGIT 1999). The Convention, although a milestone ‘in terms of filling an existing lacuna for cultural objectives in international law’ (Leiva 2017, 767), is seen as requiring ‘fine-tuning’ (Loisen and De Ville 2011, 256) and more development to make it more effective (Graber 2006, 574). This rhetoric implies the need to protect nations’ cultural identity against foreign influences, and again draws attention to culture’s being featured in international trade merely as a product.

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Within the ‘culture as a product’ narrative and because of the specific nature of trade exchanges, attention usually focuses on a narrow aspect of the interaction between culture and trade, namely, the conflict between the objectives of trade (liberalisation) and those of cultural policies (protection). Navigation of this debate forms the core of what has become known as the ‘culture and trade debate’. There is a great variation in how countries navigate this debate, what they aim to protect and how they do it (Goff 2019). Additionally, there are continuous shifts in cultural policies, trading regulations and international allegiances that need to be taken into account as well.2 According to Goff ‘the central challenge in navigating the trade and culture debate arises when the principles of the trading system are applied to the goals and strategies of cultural policy’ (2019, 548). Since non-discrimination is a key principle underpinning the trading system (Vanden Bossche 2008, 321), excluding products from negotiations and arguing that culture must not be subject to the laws of free trade (Graber 2006, 554) can be seen as protectionist and discriminatory. Thus, the culture and trade debate focuses predominantly on the efforts to reconcile the two. These efforts differ across geographical space, across time, and across specific national circumstances. They also change, for example, due to domestic factors (such as political and economic developments), developments in the world of trade (for instance, the creation of WTO, development of the CDCE, fragmented FTAs), and developments in culture itself (for example, how culture is produced and consumed) (cf. Goff 2019). In different geographical, political and social contexts, different elements of culture are perceived as being threatened by trade liberalization and different elements as those which can actually benefit from inclusion in trade agreements (Goff 2019). In case of the EU, it is the audio-visual sector that is treated as a sensitive and vulnerable area in need of protection. It is thus excluded from trade negotiations, meaning that foreign providers have no access to the EU market (or the right to be treated the same way as their EU counterparts) (Goff 2019). There are two cases, the EU’s FTAs with the Caribbean Forum (‘CARIFORUM’) and South Korea, in which non-EU companies were allowed to provide audio-visual services, as stipulated in the Cultural Cooperation Protocols annexed to those agreements.

1.4 The EU’s Evolving Approach to Culture in External Relations Conceptualizing culture as being of ‘dual nature’, of having an economic and non-­ economic dimension, being an economic product and a ‘vector of identity’ (Leiva 2017, 767), might be a way to bring these two approaches together in international agreements. This is a preferred approach for the EU, committed to upholding and  See, for example, the special issue of International Journal of Cultural Policy 25(5), 2019.

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promoting its values and interests (TEU article 3(5)). The discussion on culture in economic relations has not, however, moved significantly away from culture as a resource and cultural policy, with new agreements signed over several decades. Already in the 1970s, the EU realized the value of culture as an instrument of bringing Member States together, and thus strengthening the Union’s economic position, and in 1990 it developed the concept of ‘cultural diversity’ to manage the differences between the Member States (Chochorelou 2019, 230). The concerns arising from the fact that cultural issues fell within the competencies of the Member States, were addressed in the Treaty of Maastricht (‘TEU’) in 1992. That Treaty gave the EU competencies to ‘contribute to the flowering of the cultures of the Member States, while respecting their national and regional diversity and at the same time bringing the common cultural heritage to the fore’ (TEU article 151(1). Yet, the EU’s role remained limited to supporting—only ‘if necessary’—cultural decisions and actions made by the Member States whose ‘autonomy to pursue their own cultural policies within the limits imposed by the Treaty’ remains protected (Chechi 2004, 284). The Treaty of Lisbon (the Treaty on the Functioning of the European Union; ‘TFEU’) seemingly did not change the situation much as the competences with regard to cultural issues remained predominantly a domain of the Member States. However, the stipulation that EU trade policy is an exclusive EU competence for all sectors (TFEU article 207) in practice cancels the unanimity requirement such that ‘it is no longer possible for a member state to veto a negotiation package that includes cultural and audiovisual services’ (Loisen and De Ville 2011, 258). Moreover, the TFEU (article 207 sub-section 4(3)(a)) states that ‘the Council shall also act unanimously for the negotiation and conclusion of agreements [...] in the field of trade in cultural services, where these agreements risk prejudicing the Union’s cultural and linguistic diversity.’ Yet, it is unclear how potential risks are measured and by whom, and how cultural and linguistic diversity is defined (Chochorelou 2019, 233). Concerns about the EU exceeding its competencies have been raised on numerous occasions, mostly by the Member States, together with the accusations that the EU has become an international body focused on economic and political benefits rather than an ‘ever closer union of people’ (the Treaty of Rome). On the other hand, values and norms such as human rights, social and environmental standards, are cultural constructs that have underpinned the EU agreements from the very beginning. In fact, the Treaty of Rome, establishing the European Economic Community: originated from the convergence of a few European States not only on the declared objective to attain an unhindered economic growth in the aftermath of the Second World War, but also on the need to ensure the pacification of the continent through the respect of certain fundamental ideals. Notably, these principles, such as democracy, liberty and solidarity, are the result of common history and culture (Chechi 2004, 296).

The idea of incorporating human rights, social, and environmental standards into the international trading system and trade agreements has been gathering momentum in recent years. The new generation agreements aim to provide opportunities to

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promote democracy, rule of law, sustainable development, gender equality and other social rights. Yet, the evidence shows that various new generation trade agreements (including the Transatlantic Trade and Investment Partnership and the EU-Canada Comprehensive Economic and Trade Agreement, or ‘CETA’), have not received proper public scrutiny in this respect (cf. Parliamentary Assembly 2016). There are also doubts concerning motives behind this new way of ‘self-presentation’ and the EU’s commitment to act beyond its interest. In case of the EU, it is clear that the understanding of and approach to culture has been an evolving process. Internally, culture (that is, cultural policy) remains largely a competence of the EU Member States, however, following article 6 TFEU, the EU can play an active role in supporting and coordinating these activities, and using culture as an important element of its external actions. There are several steps that mark the development of this approach, including the Conclusions of the Council and of the Representatives of the Governments of the Member States on the promotion of cultural diversity and intercultural dialogue in the external relations of the Union and its Member States (2008/C 320/04) and the Conclusions of the Council on culture in the EU’s external relations with a focus on culture in development cooperation (2015/C 417/06). These steps led to an important milestone —the Joint Communication ‘Towards an EU strategy for international cultural relations’ (European Commission 2016), which was a key step in the evolution of the approach to culture, stressing cultural cooperation, but also further re-defining culture itself. The strategy refers to a broad understanding of culture (cf. GATS), spanning ‘a wide range of activities, from inter-cultural dialogue to tourism, from education and research to creative industries, from protecting heritage to promoting new technologies, and from artisanship to development cooperation’ (European Commission 2016). The strategy’s aim is to provide a more structured and effective approach to what was recognized as fragmented approach to culture in international engagements (cf. Garner 2017), by focusing on three specific areas: (1) culture as an engine for sustainable social and economic development; (2) culture as a tool for promoting peaceful relations between communities; and (3) culture as the focus of cooperation on the protection of cultural heritage. Such a model of international engagement also aims to emphasise culture as an essential element of EU foreign policy and the EU as a strong global actor tackling global challenges such as conflict or radicalisation, without losing sight of economic benefits. The strategy extends the traditional (‘traditional’ within the international relations context) approach to culture which now becomes an official tool to promote ‘a global order based on peace, the rule of law, freedom of expression, mutual understanding and respect for fundamental rights’ (European Commission 2016). The EU’s 2016 strategy draws heavily on the CDCE, strengthening the notion of culture as implying ‘a commitment to the values of global cultural citizenship and the promotion of cultural diversity’ (Garner 2017; Isar 2015). This traces the direction that international cultural policy has taken over the years, facilitating, among other implications, the development of closer links between cultural citizenship and cultural diversity, and economic engagement (Yudice 2003; Hale 2005; Garner

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2016).3 Such is also the direction the EU had been following in the previous decade, anxiously striving to ‘strengthen the international standing of the CDCE and widen its ratification around the world’ (Garner 2017, 163). At the time of its adoption, political concerns arising from increasing instability, radicalisation tendencies and migration, shifted attention more onto two out of three identified areas: peaceful international relations and protection of heritage (cf. Garner 2017). The process commenced with the 2016 strategy, and was duly followed in the Council Conclusions on the EU strategic approach to international cultural relations and a framework for action (Council of the EU 2019). The conclusions aim to strengthen ‘the effectiveness and impact of EU foreign policy by integrating international cultural relations in the range of its foreign policy instruments.’ The conclusions also call on the Member States and EU institutions to ‘strengthen coordination, synergies and strategic guidance on the best way to promote international cultural relations’ (Council of the EU 2019). A reference to the ‘New European Agenda for Culture’ (European Commission 2018) aims to ‘harness the full potential of education and culture as drivers for jobs, economic growth, social fairness, active citizenship as well as a means to experience European identity in all its diversity.’ To achieve that, the agenda specifies three strategic objectives: one social (harnessing the power of culture and cultural diversity for social cohesion and well-being), one economic (supporting culture-based creativity in education and innovation, and for jobs and growth) and one focused externally (towards strengthening international cultural relations). Importantly, the new agenda stresses culture as an engine for sustainable socio-economic development, cohesion, and peace. Irrespective of these milestones, however, critics argue that bringing culture back into trade agreements remains counter-productive, as it reflects an instrumental use of culture that may endanger cultural diversity (Loisen and De Ville 2011, 255) and makes culture ‘just another bargaining chip for use in trade negotiations’ (Loisen and De Ville 2011, 255; ECCD 2009). The section below will therefore examine the meaning and significance of the inclusion of culture in selected trade agreements.

 These links are also seen in the way separate areas complement each other and particularly ‘in the emphasis on how the promotion of intercultural dialogue and exchange, as well as strengthening the protection of cultural heritage, can stimulate trade in cultural goods and services […] both inside the EU and beyond its borders’ (Garner 2017, 150). 3

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1.5 Culture in Selected EU International Economic Agreements 1.5.1 Protocols on Cultural Cooperation The EU’s commitment to the international implementation of the CDCE, and culture in external relations, lay behind the Economic Partnership Agreement (‘EPA’) that was concluded in 2008 between the EU and the CARIFORUM grouping of 15 Caribbean States. The cultural components of EPA, mostly included in the Protocol on Cultural Cooperation and some scattered through the body of the agreement, formulated principles that formed the basis of the 2016 Strategy. Because of its novel approach, the EPA is considered a ‘major innovation in North-South FTA practice’ (Silva 2014, 49) and an agent that created ‘important precedents in the broader international culture and development agenda’ (Garner 2017, 150). The EPA is an important breakthrough in the implementation of the CDCE (Garner 2017; Silva 2014), as it makes references to its provisions in the Protocol on Cultural Cooperation. The Protocol follows the Convention in its emphasis on the dual nature of cultural goods and services, and cultural diversity. It offers a preferential treatment of cultural goods and services from developing countries, providing arrangements for Caribbean business professionals and individual artists to collaborate and supply entertainment services in Europe, improving access to the European market (especially the audiovisual market for co-producers) and European funds, and facilitating the promotion of the region and increased contact between artists and cultural businesses. The EPA also offers protection for Caribbean intellectual property on the European market (CARIFORUM-EU 2008, 1770–1772; Garner 2017; Jessop 2008). Yet, the EPA raised significant concerns, particularly with what is considered its most important cultural contribution, that is, market access. While the EPA provides Caribbean producers with access to European audiovisual market (via co-­ productions), which is considered ‘a considerable concession, since this is historically one of Europe’s most fiercely protected sectors’ (Garner 2017, 156), it is unlikely that Caribbean producers will benefit from this offer. This is mainly because the regional capacity in audiovisual production as well as the knowledge of opportunities and interest in co-production have been very limited. At the same time, some EU Member States have raised concerns about potential threats resulting from easier market access and setting such a precedent in trade negotiations (cf. Garner 2017). With the novel cultural provisions, the EPA is considered to imply a significant shift from diplomatic rhetoric and cultural cooperation to concrete actions, meaning increased market access. Yet, with market access being considered the most valuable and innovative cultural component of the agreement, it is clear that culture features in the EPA predominantly as a product and is deployed in an instrumental sense (cf. Garner 2017, 148). Thus, the EPA exposed the fact that, in spite of the principle of culture’s dual nature, economic values easily prevail. And still, within

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this dimension of culture’s economic values, some criticise the limited substance behind the EPA’s cultural provisions, while others warn against dangers of preferential market access. In any case, the EPA raised doubts about the role of culture underpinning economic agreements. Thus, although EPA was initially considered a model for future agreements with other regions, including Asia and Latin America (European Commission 2008; Garner 2017; Loisen and De Ville 2011), it has never been replicated (cf. Garner 2017).4 The EU-South Korea trade agreement, signed in 2010, also includes a dedicated Cultural Cooperation Protocol that defines the circumstances of market access, particularly in the context of audio-visual services. Due to the fact that the South Korean audio-visual sector is stronger than the Caribbean one, the protocol has caused more concern among the European stakeholders (Loisen and De Ville 2011, 255). This has provoked discussions on the specificity of culture and the division of competencies in the cultural domain: This unilateral strategy of the [European Commission], which confiscates member states’ competency in the field of culture, takes culture back into trade negotiations. It gives [Commission] trade negotiators an additional sector to trade off in a global negotiation, without taking into account the specific requirements of the cultural and audiovisual sector (European Coalitions for Cultural Diversity – ECCD, 2009).

The cultural protocol’s role is to ensure implementation of the CDCE on protecting and promoting diversity of cultural expression. Yet, while some commentators insist criticisms and fears are exaggerated, many critics point out that in the context of trade negotiations, culture will always be of a secondary category and simply “just another bargaining chip for use in trade negotiations” (ECCD 2009; Loisen and De Ville 2011, 255). A broader criticism questions the very rationale behind the CDCE, if culture is reintegrated into trade negotiations. Moreover, due to the significant difference in, among others, the size of the audiovisual market and the number of consumers, it is feared that in practice, a co-production provision included in the protocol would mean a one-way-traffic from South Korea to the EU (Loisen and De Ville 2011, 261–262). This process could be damaging to European cultural industries, particularly the animation sector (Loisen and De Ville 2011, 262), and indeed work against the Convention’s goals. Compared to the EU-CARIFORUM agreement, some changes have been introduced in the cultural protocol, although most of the provisions have remained unchanged. One of the differences is the stipulation that cultural cooperation should be developed on a reciprocal basis. Moreover, the protocol includes the establishment of a Committee on Cultural Cooperation, consisting of cultural domain experts tasked with the duty to deal with and settle any disputes concerning cultural aspects of the agreement. A final change is more strict conditions for developing South

 Take, for example, the South Korea agreement in 2009; a standalone Agreement on Cultural Cooperation in Colombia and Peru (2012); a protocol attached to the Association Agreement with Central America, but not to the trade part (Souyri-Desrosier 2014). 4

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Korean-European co-production and the right to suspend or terminate agreements on preferential treatment. As Loisen and De Ville note (2011, 262), South Korean-European co-production poses little threat to European industries, yet the protocol was viewed as setting a dangerous precedent for further negotiations with stronger partners. Continuous concerns of the Member States about the EU breaching its competences and the counter-productive response of the EU towards the CDCE, have resulted in further changes to culture’s place within trade negotiations. For example, in case of negotiations with Peru and Colombia, a separate agreement on cultural cooperation was developed in place of a protocol annexed to the trade agreement.

1.5.2 Cultural Exception Clauses The EU-Chile agreement was the first FTA to include a clause on cultural exception (2003). The clause ensures no trade liberalization in the context of culture, which in practice means that ‘foreign audiovisual providers are not allowed to access the EU market and they do not have the right to be treated in the same way as their EU counterparts’ (Chochorelou 2019, 234). As a result, audio-visual services are excluded from negotiations. This significantly limits the understanding of culture in the context of international agreements and ultimately equates culture with the audio-visual sector. Another interesting example is the treatment of culture in the EU-Canada CETA signed in 2016. CETA is a new, second-generation trade agreement (Leblond 2010; Hübner 2011) whose comprehensive scope implies that negotiations cover a broad area, all sectors and both tariff and non-tariff barriers to trade. The preamble to the agreement includes direct references to the CDCE’s goals and stresses the signatories’ right ‘to preserve, develop and implement their cultural policies, and to support their cultural industries for the purpose of strengthening the diversity of cultural expressions and preserving their cultural identity (including the use of regulatory measures and financial support)’. The agreement is, thus, of a broader scope than just trade. However, in spite of the direct reference to the CDCE, the text, as Leiva observes, ‘lacks a general exception clause protecting culture. What has been agreed is that some chapters contain articles exempting culture’ (Leiva 2017, 766). In other words, CETA includes a partial cultural exception (Maltais 2014), as it is only applicable to five out of over thirty chapters of the agreement: Subsidies, Investment, Cross-Border Trade in Services, Domestic Regulation and Government Procurement (cf. Leiva 2017, 772). While supporters of this approach emphasise the ‘precision’ of such a targeted perspective and a clear stance on the exemption and thus protection, critics point out deficiencies of such a ‘chapter by chapter’ approach. They identify one major problem, namely, that whatever is not mentioned—that is, explicitly exempted—is not protected. Various omissions on such an exemption list are quite likely due to, for example, restrictive definitions such as the Canadian definition of ‘cultural industries’ in CETA, which does not include performances, video

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games, and web design (Leiva 2017, 773). This refers also to those cultural domains which may only become significant in the future, but which—due to not being included as exceptions in the agreement—will have to be subject to trade negotiations. Re-inserting culture into trade negotiation—by not excluding it from the agreement with the application of a ‘general exemption’ —implies, according to Leiva, that the ‘role assigned to culture and its diversity is secondary and subsumed to free trade relationship’ (2017, 774). Moreover, the tensions between preferences for a general exemption (Canada) and a more targeted approach (EU) resulted in an asymmetrical approach to culture. This means that for the EU exception applies to audio-visual services only, while for Canada it covers all cultural industries (covered by the definition of cultural industries). Irrespective of its scope, culture features in CETA as a product only, in spite of the agreement’s recognition of the importance of policy objectives, for instance, public morals and the promotion and protection of cultural diversity. Moreover, Leiva considers CETA a missed opportunity for building bridges between culture and trade (Leiva 2017, 776); indeed, she suggests this opportunity could have been embraced either with a specific culture-focused chapter in the agreement (Vlassis and Richieri Hanania 2014) or by adding a Protocol on Cultural Cooperation.

1.5.3 Chapters on Culture As mentioned earlier, the EU (empowered by the Treaty of Lisbon) has introduced non-economic values in its economic agreements, spanning democracy, human rights, sustainable development and environmental protection.5 While such an approach provides an opportunity to reconcile culture and trade in a more comprehensive way, and aspires to both protect non-economic values and secure economic benefits, the EU seems to be only at the beginning of this road. Some are of the opinion that CETA has failed to efficiently promote environmental sustainability, human rights, and the rule of democratic law (Leiva 2017). Yet, the EU’s ambition to include non-economic values and objectives into their trade relations propels continuing evolution of trade agreements and offers new opportunities to revise the narrative on culture and trade. In June 2022, the EU concluded negotiations for a comprehensive trade agreement with New Zealand. It is considered ambitious, as it integrates the EU’s new approach to trade and sustainable development. It contains a dedicated chapter on Trade and Sustainable Development that includes commitments to labour rights, gender equality, environmental and climate matters. The Sustainable Food Systems chapter, for example, invites cooperation on topics such as Indigenous knowledge and

 See, for a more detailed analysis, the chapter by Pablo Cristóbal Jiménez Lobeira and Ottavio Quirico in this volume. 5

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leadership in food systems, reflecting the acknowledged importance of traditional knowledge and approaches (EU-New Zealand FTA 2022). What it means in practice remains to be seen. The EU-New Zealand FTA includes also a separate chapter on Māori Trade and Economic Cooperation, in addition to specific Māori-related provisions in other chapters. The chapter aims to contribute to advancing ‘Māori economic aspirations and wellbeing’ (per article X.2, 3) through coordinating cooperation activities (article X.5) such as developing links between EU and Māori-owned enterprises, strengthening opportunities for trade in Māori products or exchanging information and experience on geographical indications. What seems particularly interesting, however, is the attempt to acknowledge and emphasise the importance of cooperation implemented in a manner informed by specific cultural concepts: Te Ao Māori, Mātauranga Māori, Tikanga Māori, and Kaupapa Māori (EU-New Zealand FTA 2022).6 These Māori cultural concepts and terms are briefly defined in the first section of the chapter and their specific hierarchy is signalled. While their deeper meaning remains unfamiliar to the non-Māori party, their prominence in the agreement and use as a framework for cooperation activities, invites efforts aimed at building cross-cultural understanding. This refers also to the concept of ‘wellbeing’ defined within the specific context of interconnected elements of Māori culture. Similarly, recognising the value to promote ‘Māori relational approaches’ or ‘Whakapapa’—a fundamental concept in Māori culture defining ancestry and relationship with the land and people, and thus cultural identity (Barlow 1991, 173)—as means to increase Māori participation in international trade, invites and encourages new practices of doing trade. This is in addition to simply acknowledging the importance of Māori culture to trade and cooperating in a manner consistent with Te Tiriti o Waitangi (‘The Treaty of Waitangi’). Such an approach marks, more decisively than earlier attempts, a move towards the inclusion of culture understood as a way of life and a set of values and norms, into trade agreements. Yet, it remains to be seen whether it will make a substantive difference to external relations or whether chapters on gender, Māori, sustainable development, small and medium-sized enterprises will be considered as merely ‘clip-ons’ or ‘inclusive window dressing’ (Kelsey 2022), as in the case of the UK-NZ FTA. It is worth mentioning that the involvement of civil society features prominently in the agreement and was one of the priorities of the EU-NZ FTA negotiations (in contrast to UK-NZ negotiations). The prominent role of civil society including Māori representatives, who are invited to provide their comments, voice their concerns, and participate in discussions on the implementation of the agreement, shows commitment to the inclusion of diversity of voices which in itself is a sign of a shift from understanding international agreements as instruments for bringing purely

 ‘(a) “Te Ao Māori” refers to the Māori worldview based on a holistic approach to life; (b) “Mātauranga Māori” refers to Māori traditional knowledge that relates to the Māori worldview; (c) “Tikanga Māori” refers to Māori protocols, customs and normal practice; (d) “Kaupapa Māori” refers to an approach entrenched in a Māori worldview’ (EU-NZ FTA, Chap. X). 6

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economic benefits, and culture as simply a merchandise. Undoubtedly, in order to make these hopes reality, genuine effort would have to be made.

1.6 Conclusion Culture is an essential underpinning of international negotiations, yet its actual presence in international economic agreements remains limited. In the context of the EU international trade agreements, culture became largely synonymous with the audiovisual sector. This perception has not changed much despite various attempts to represent culture more broadly, to take into account its dual nature, and to strengthen references to values and fundamental rights. Culture remained a resource ‘to be managed and deployed for social and economic development’ (Garner 2017, 162), or to be leveraged as a ‘bargaining chip’ (Garner 2017, 159) in trade negotiations. The danger is that this instrumentalisation might be applied to both sides of culture’s dual nature, to culture as a product and culture as a meaningmaking system and body of values. If culture is considered a product or a resource, values, no matter how noble and universal, can easily become treated as a product too. The EU’s tendency to move away from cultural diplomacy and vaguely understood cultural cooperation to equally vague concepts of culture in external relations and cultural diversity did not result in significant changes. This vagueness in its approach to culture is certainly not conducive to expanding our understanding of culture as a way of life and meaning-making system, and—more importantly in the context of external relations—as an actual engine behind democracy, human rights, social cohesion, and sustainable development. A mere appreciation of culture being of a dual nature, expressed in trade agreements, is not enough to elevate culture from its secondary role of a merchandise to a fundament on which external relations are built. It may not be enough to make the new way of the EU’s selfpresentation as a value-driven community acting beyond its own interests, credible and influential. The EU’s protection of its own audio-visual sector—considered the defence of cultural diversity, which has been the objective of the EU trade negotiation policy since 2002—can be seen as having had the opposite effect of actually limiting diversity. Similarly, the commitment to promoting cultural diversity and intercultural dialogue (including in the CDCE) may be seen as narrowing the understanding of culture and limiting it to cultural industries operating within specific national priorities (cf. Singh 2011, 107; Garner 2017). It thus becomes vital to recognise the need for the EU to revise and specify its own understanding of culture, and introduce clearly defined cultural objectives of economic and extra-economic values into its trade agreements (while taking into account cultural policies that stay within the competences of the EU Member States). This is especially relevant, given that a conception of culture and cultural diversity can differ, and the same approach may not be applicable in different cultural contexts (Souyri-Desrousier 2014, 212; Garner 2016).

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The problem is obviously more complex than a matter of a simple definition. Even if culture is reduced to cultural products only, there is still no consensus on how they should be dealt with, as WTO negotiations demonstrated over two decades ago (cf. Bernier 2000). Should cultural products be seen as entertainment merchandise subject to international trade rules or rather as ideas and meanings—‘vectors of identity’—that need to be excluded from trade agreements? If it is the latter, should we be worried that culture is so fragile and can be easily depleted or consumed (cf. Galt 2004)? Perhaps it is relevant to ask first how Europeanness can be effectively ‘performed’ in the global arena (cf. Isar 2015), if being European means, in the words of Margaritis Schinas, the Commissioner for Promoting our European Way of Life, ‘peace, freedom, equality, democracy, and respect for human dignity’. So far, and despite the evolution of trade agreements which this chapter details, an important question remains—how best to move away from an instrumental understanding of culture, and to better translate commitments to non-economic values into enforceable solutions? The EU-NZ free trade agreement is potentially a move towards a broader and more comprehensive understanding of culture in international agreements, beyond tangible products and beyond engagement that results in purely economic benefits. Recognising the importance of Māori worldview, core values and key cultural concepts such as wellbeing, it points to culture as a value in itself, and to cultural diversity as a necessary condition for building effective international relations. It seems to be a promising step towards revising the understanding of culture and trade that can be taken further in future trade agreements. Yet, it remains to be seen how the coordination of cooperation activities evolves, and how Māori cultural concepts actually feature and inform such cooperation going forward.

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Chapter 2

Beyond Trade – The Politics of Trade Agreements and Interstate Competition and Geoeconomics as a Basis for EU and US Preferential Trade Agreements María García

Contents 2.1  Introduction 2.2  Why Do States Enter into PTAs? 2.3  The Increasing Importance of Geoeconomics in PTAs 2.4  Geoeconomic Novelties in EU and US PTAs 2.5  Conclusion References

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Abstract  Preferential Trade Agreements (‘PTAs’) are, at their core, an expression of cordial relations between States. After all, States rarely engage in PTA negotiations with enemies. Nonetheless, PTA negotiations, even amongst allies, have become lengthier and increasingly arduous. This is because modern PTAs, with their extensive coverage in terms of sectors and market regulation, are not just complex, but also bring to the fore concerns from domestic groups about potential impacts on their respective business sectors’ competitiveness, and from other domestic groups over possible changes to fundamental standards in areas like health and safety and animal welfare, among others. This chapter explores the politics of interstate competition at play in PTA negotiations. It argues that geoeconomic competition has become an increasingly important consideration in modern PTAs, and points to some novelties in European Union (‘EU’) and United States (‘US’) PTAs that reflect this concern with ensuring their own competitiveness, in particular elements of the USMCA (‘US- Mexico-Canada PTA’) and the EU-United Kingdom (‘UK’) Trade and Cooperation Agreement (‘TCA’).

M. García (*) Department of Politics, Languages and International Studies, University of Bath, Bath, UK e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 O. Quirico, K. Kwapisz Williams (eds.), The European Union and the Evolving Architectures of International Economic Agreements, https://doi.org/10.1007/978-981-99-2329-8_2

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Keywords  TCA · USMCA · PTA · Negotiation · Competition · Geopolitics · Geoeconomics

2.1 Introduction PTAs are an expression of cordial relations between states. After all, states rarely engage in PTA negotiations with enemies. Nonetheless, PTA negotiations, even amongst allies, have become lengthier and increasingly arduous. This is because modern PTAs, with their extensive coverage in terms of economic sectors and market regulation, are not just complex, but also bring to the fore concerns from domestic groups about potential impacts on their respective business sectors’ competitiveness, and from other domestic groups over possible changes in fundamental standards regimes like health and safety and animal welfare, among others. This chapter explores the politics of interstate competition at play in PTA negotiations. Whilst States seek greater market access to other States and opportunities for their own businesses, they simultaneously attempt to minimise the liberalisation of their own markets, especially in sensitive sectors. As Frederik Erixon and Razeen Sally (2010) have put it, States seek to pursue Adam Smith-esque free trade policies abroad, but Keynesian protectionism at home. PTAs thus enable what John Ravenhill described as ‘liberalisation without political pain’ (Ravenhill 2003); in other words, increasing liberalisation elsewhere whilst avoiding the political ‘pain’ of having specific domestic groups opposed to liberalisation united by greater competition from abroad in their sectors mobilizing against such liberalisation. Although all States engage in this behaviour and carve-out exceptions and exclusions in PTAs, economically more powerful States are better able to extract liberalisation from others, whilst retaining some protection for their own sensitive sectors. Increasingly, in modern PTAs, the inclusion of rules around how to develop standards and regulation, good regulatory practices and regulatory cooperation, is also intended to generate business opportunities and advantages for the firms and service sectors of a State negotiating a PTA.  Whoever’s regulatory practices are accepted by the other party will create a potential advantage for their domestic firms. The US and EU, given their market size and levels of development, have been better able to leverage their ‘market power’ (Damro 2012) in PTA negotiations to convince other States to adopt certain regulatory practices that they apply in their territories, for instance the extension of the EU’s preferred system for protection of traditional food products linked to specific localities through geographic indication (‘GIs’). In this sense, PTAs are ‘largely shaped by rent-seeking, self-interested behaviour’ (Rodrik 2018a, 75). They can result in increased trade through agreement to grant each party increased market access, but they also aim at maximising benefits for particular groups, and represent purposeful economic strategies on the part of states, and reveal PTAs as ‘geoeconomic’ strategies. Pascal Larot (in Csurgai 2018, 42) defined geoeconomics as the ‘analysis of economic strategies-notably commercial strategies-decided upon by States in a

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political setting to protect their own economies or certain specific sectors, to help their national enterprises acquire technology or to capture certain segments of world markets’. Although States have other trade policy tools at their disposal to pursue geoeconomic aims, PTAs have traditionally not been discussed in geoeconomic terms. However, this chapter argues that geoeconomic competition has become an increasingly important consideration in modern PTAs both in terms of rationales for pursuing PTAs, and in novelties in their content. The chapter proceeds in four sections. The first reviews the extant literature, explaining the motivations behind the conclusion of PTAs. The second section discusses the concept of geoeconomics and shows how geoeconomic rationales have become increasingly prominent in the PTA context, especially as regards EU trade policy. The third section analyses recent PTAs—chiefly the US-Mexico-Canada USMCA and EU-UK TCA—and highlights those features within them that reflect concerns of domestic competitiveness. The final section concludes that, whilst geoeconomics has always been present in PTAs, in recent years, this motivation and specific considerations based on geoeconomics have become more prevalent in US and EU PTAs, in part due to President Trump’s trade policies and reactions to these, and the simultaneously waning influence of these trade powers in global trade and vis-à-vis the increased influence of the People’s Republic of China (‘PRC’).

2.2 Why Do States Enter into PTAs? Since the second half of the twentieth century, a broad body of international political economy literature has developed to explain the phenomenon of increasing preferential trade agreements and regional trade agreements (‘RTAs’), which reveals the importance of both economic and political factors in determining States’ desires to enter into PTAs. From an economic perspective, increased trade and the attendant market access to other States for domestic businesses is a key motivation, and also the habitual political rationalisation for entering into PTAs. Securing guarantees of stable and continued market access is particularly important for smaller States with modest domestic markets. The irony, of course, is that the welfare generating potential of PTAs is unevenly distributed amongst domestic groups, and depending on the PTA, it can generate minimal gains (Ravenhill 2003). Jacob Viner (1950) described the effects of trade creation (between new PTA/ RTA partners) and trade diversion effects with respect to their trade with non-PTA/ RTA members. This work has spawned a number of explanations for PTAs based on States’ desires to avoid trade diversion effects, and their firms missing out and being placed at a disadvantage in a market vis-à-vis third-party competitors. Richard Baldwin (2006) has argued that in such a situation, in response to pressure and lobbying from domestic exporter groups, States will seek to either join PTAs/RTAs or to establish their own to avoid trade diversions, leading to what he described as a ‘domino effect’ of new PTAs. Evidence on the ground bears out this effect. The conclusion of the North American Free Trade Agreement (‘NAFTA’) in the

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mid-1990s resulted in Mexican firms preferring US and Canadian suppliers (given reduced trade barriers), and led to EU firms losing 20 percent of their Mexican market share (Barrau 1999). In the final years of the 1990s, the EU negotiated its own PTA with Mexico to redress the competitive balance. The situation with Mexico, and the fear of a potential Free Trade Area of the Americas at the time, has been widely credited with motivating the EU to launch PTA negotiations with both Chile and the Mercosur (South America’s trade bloc) economies (Briceño Ruiz 2001; Valladão 1999; García 2011). Securing competitiveness, avoiding market share loss, and the fear of missing out, are all powerful motivations behind PTAs, but political considerations can be equally important. As John Ravenhill (2003) has highlighted with respect to the proliferation of PTAs in East and South-East Asia, there are also ‘political domino effects’ at play, with governments desiring to secure their ongoing relevance vis-àvis any regional agreements and emerging projects. Saori Katada and Mireya Solis (2008) have also pointed to political ‘mimicry’ between governments as an explanation for increased PTAs, including some that did not offer much in the way of additional trade liberalisation. PTAs have also been used for domestic political reasons, for example as a vehicle for locking in domestic economic liberalisation, thereby preventing future administrations from reversing such policies by entrenching high opportunity costs for reversal by including these commitments in international agreements such as PTA. The literature points to examples of this in Mexico’s decision to join NAFTA, and in East and Southeast Asian States’ increased appetite for PTAs from the last 1990s (Whalley 1998; Aggarwal and Urata 2006). The importance of domestic politics and of groups, typically exporters wishing to retain and increase their competitiveness abroad and access to other markets, in pressuring governments to enter into PTAs has been acknowledged by the literature on both PTAs and trade policy in general (Oye 1992; Baldwin 2006). This literature has also highlighted how decisions around PTAs, and crucially the evolution of negotiations and the final design of PTAs, are influenced by the domestic balance between groups in favour of greater liberalisation, and more protectionist voices fearing increased competition from abroad (Dür 2007). The possibility of securing market gains for some groups, whilst carving-out protection for other groups in a PTA—what Ravenhill (2003) described as ‘liberalisation without pain’—can also explain States’ engagement in PTAs. In this way, PTAs allow governments, especially those in larger economies most likely to influence the outcome of a PTA, to signal support for certain domestic groups, which could prove influential in supporting them. Edward Mansfield and Helen Milner (2012) argued that in the case of the US, entering into PTAs was a way of signalling economic policy choices to domestic groups and securing votes. PTAs are also tools of foreign policy, particularly for larger economies. Some PTAs between large economies (unlikely to achieve any economic gains) and small economies can be explained by foreign policy objectives, such as the US rewarding Jordan for support in the ‘War on Terror’ in the early 2000s (Rosen 2004), or the PRC’s first PTA with a Latin American State (Costa Rica) which it used as leverage to advance its so-called ‘one China policy’ (Wise 2016, 89). PTAs have also been

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motivated by tactical considerations to influence General Agreement on Tariffs and Trade (‘GATT’) and World Trade Organisation (‘WTO’) negotiations by putting pressure on other governments through the threat of trade diversion. Examples of this include the creation of the Canada-US Free Trade Agreement (‘CUSTA’) and then NAFTA, and the timing of the end of the GATT Uruguay Round (Whalley 1998, 66). The literature has paid close attention to the foreign policy dimension of PTAs. In line with the liberal peace argument popularised in the post-World War II era— that bilateral trade reduces the probability of interstate conflict—a number of scholars have explained PTAs as a way of fostering ties with geopolitical allies (Martin et al. 2008; Mansfield and Pevehouse 2000). Barry Eichengreen postulated that, ‘in so far as trade agreements increase trade volumes and economic welfare, dyads of military allies have an incentive to conclude PTAs to increase the opportunity cost of war and solidify their security links’ (Eichengreen et al. 2021, 30). Their study of pre-World War I cases revealed that both gravity variables (such as geographic proximity between States which is considered as stimulating trade and enhancing chances of PTAs; see Baier and Bergstrand 2004) and geopolitical factors mattered for the conclusion of PTAs, with ‘defense [sic] pacts boosting the probability of a bilateral trade agreement by 20 percent’ (Eichengreen et al. 2021, 42). Apart from security alliances and high-political foreign policy objectives, PTAs also serve to further increasingly important external economic agendas. Heightened State interest in PTAs in the 2000s has been attributed to the delays and challenging multilateral negotiations for trade liberalisation at the WTO during the Doha Round. The largest and most influential economies, like the US and EU, have also utilised PTAs to bypass the WTO and achieve acquiescence for their preferences for greater liberalisation in trade in services, government procurement markets and tighter intellectual property rights regimes, which have otherwise been contested at the WTO level. US and EU PTAs thus enable a suite of WTO-plus commitments (Horn et al. 2010). As former US Trade Representative Robert Zoellick described it, ‘conducting parallel talks at the bilateral, regional, and multilateral levels generates the constructive process of competitive liberalization and offers channels for pursuing liberalization in case so-called foot-draggers stall progress in the Doha Round’ (in Schott 2004, 371). The use of PTAs to respond to changing power structures at the WTO and in the global economy, and as vehicles for such advancements as WTO plus liberalisation and new trade agenda (Young and Peterson 2006) items like the environment, labour, and regulatory preferences, demonstrates a more strategic use of PTAs for geoeconomic purposes. However, despite analysing these trends and considering the growing geopoliticisation of trade policies, particularly during Donald Trump’s presidency and in response to it (Meunier and Nicolaidis 2019), the literature has not typically taken into account those geoeconomic considerations underpinning PTAs. The following sections seek to remedy this.

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2.3 The Increasing Importance of Geoeconomics in PTAs A geoeconomic perspective on PTAs can broaden our understanding of the rationales behind PTAs, and explains some of the recent trends and innovations in them. Geoeconomics has been described as the use of economic instruments to promote and defend national interests, and to produce beneficial geopolitical results (Blackwill and Harris 2016). As a term, it gained prominence at the end of the Cold War, when it was expected that the security and military rivalry between the US and former Soviet Union and their allies would end, taking with it the suppression of economic tensions amongst allies and duly fostering new economic competition.1 Edward Luttwak (1990, 17) eloquently argued that ‘methods of commerce are displacing military methods  – with disposable capital in lieu of firepower, civilian innovation in lieu of military-technical advancement, and market penetration in lieu of garrisons and bases.’ Although in the initial years of the post-Cold War era, international trade and investment liberalisation expanded, and followed an independent logic to security considerations in the international arena, since the 2008 financial crisis and the magnification of the PRC’s economic power and growing rivalry with the US, a shift towards a global order along the lines of Luttwak’s prediction of international relations dominated by geoecomic considerations has become apparent (Roberts et al. 2019). US constraints on the export of microchips to the PRC, in an attempt to slow down their technological advances, and the push to re-shore production facilities away from that country, are examples of geoeconomic tactics to ensure the US’ status as the pre-eminent global economy and technological powerhouse.2 These policies clearly exemplify Pascal Larot’s definition of geoeconomics as the analysis of economic strategies—notably commercial ones—decided upon by States in a political setting aiming to protect their own economies or certain sectors, or to help their national enterprises acquire technology (in Csurgai 2018, 42). Turning to PTAs, a number of scholars have pointed to the importance of geoeconomic competition in the proliferation of US and EU PTAs. EU PTAs with Latin American and Asian countries, and in particular the abandonment of a strategy to pursue region-to-region PTAs, in favour of selected PTAS with individual States (despite being economically less advantageous to the EU) can be understood in the context of geoeconomics competition with the US. Indeed, as EU PTA partners had already signed, or were in the process of negotiating PTAs, with the USA (García 2013, 2015), the EU demonstrated itself to be a ‘commercial realist’ (Meissner 2018) when it comes to PTA strategies. In this way, through its PTAs, the EU has ensured benefits for itself—or at least precluded disadvantages and additional  As Luttwak (1990, 20) recognises ‘under whatever name, “geo-economics” has always been an important aspect of international life. In the past, however, the outdoing of others in the realm of commerce was overshadowed by strategic priorities and strategic modalities’. 2  The supply-chain challenges caused by the covid pandemic have also served to encourage a shortening of supply chains and reshoring of manufacturing capabilities. Additionally, under President Trump, some of the fiscal disincentives for off-shoring also responded to policies to support certain groups of voters. 1

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competition in foreign markets for its exporting firms, notably service firms bidding for government contracts abroad or seeking to invest in emerging markets. Over time, PTAs have evolved to incorporate matters absent from the WTO agenda, such as minimum standards for labour or environmental protection (Morin et al. 2018), including commitments not to lower domestic standards for the purposes of gaining trade advantages. The EU’s post-2000 PTAs also include commitments to ratifying and implementing core International Labour Organisation (‘ILO’) Conventions and a multitude of multilateral environmental agreements (see, inter alia, Jinnah and Morgera 2013; Bartels 2013; Harrison et al. 2019). Although the incorporation of such clauses into recent PTAs responds to both domestic constraints (e.g. US Congress and European Parliament demands of such clauses to secure parliamentary consent and ratification, especially with those concluded with developing economies and countries with comparatively lower regulatory standards) (see Rosén 2018), and normative concerns around labour and the environment, the inclusion of such commitments attempts to limit the potential of firms abroad to gain competitive advantages over Western firms by undercutting their costs (by virtue of domiciling in a jurisdiction with lower labour and environmental overheads stemming from limited regulation). Developing States have argued that this insistence on standards is nothing more than veiled protectionism on the part of Western economic powers (see Bhagwati 1995). Nonetheless, the inclusion of such elements in US and EU PTAs can be seen as geoeconomics in action, ensuring that domestic companies are not disadvantaged by the higher standard they operate under, whilst also seeking to extend, to the extent possible, their regimes beyond territorial boundaries. Although the potential for exporting domestic regulations abroad through PTAs, and through regulatory cooperation in PTAs, has been limited (Young 2015), the inclusion of regulatory standards and regulatory cooperation in such PTAs has been on the rise (Rodrik 2018b). A key reason for this is to enable domestic companies to produce and commercialise their products under a single set of rules, i.e. their domestic rules, thus conferring upon them savings from not having to comply with another party’s regulations and facilitating access to other markets. The EU’s insistence in PTAs on other States’ creating similar systems for the protection of GIs is a case in point; the aim is to enable EU GI producers to commercialise their products elsewhere under the same conditions that apply within the EU market, without being constrained by producers abroad who might have copyrighted similar names and curtailing the ability of producers abroad from using prestige product names (thus retaining a competitive advantage). The so-called’ ‘megaregional’ agreements of the late 2000s- early 2010s thus aimed to set global rules before competitors had the opportunity to reflect geoeconomics in PTAs. Both the (then) Transpacific Partnership (‘TPP’) including the US, and various Asian, Australasian, and North and South American States, as well as failed negotiations for the Transatlantic Trade and Investment Partnership (‘TTIP’) (2013–2016) were justified and rationalised as a means to ‘setting the rules for the 21st century’. These projects were part of former US President Barack Obama’s plans (2009–2017) for a legacy embedding preferred US liberalisation norms in

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transcontinental agreements incorporating such a large part of the global economy and of global trade that other States would either queue to join or would agree to adopt the conditions and rules for trade set in these megaregional agreements at the WTO. In other words, these mega PTA projects, whilst economically more likely to generate welfare gains given the sizes of the economies involved, also actively hoped to instigate ‘domino effects’ encouraging other States to imitate the rules and regulations of these PTAs, thus ensuring the continued economic hegemony of the US and the West. Victor Ferguson (2022) has defined ‘economic lawfare’ as ‘governments strategically interacting with laws that govern international commerce in order to facilitate or obstruct international economic transactions that generate security externalities’. He describes the pathways for ‘economic lawfare’ as the application of existing laws, conversion (that is, the application of existing laws in ways that are consistent with the letter of the law but not its intent), and modification (the making of formal changes to laws regulating transactions across States, Ferguson 2022). Whilst he considers unilateral trade policy measures and their use in response to security conflicts, in PTAs, States create an additional layer of international laws to constrain the possibility for other States using ‘economic lawfare’ against them. In this sense, had they materialised as originally intended, PTAs, and in particular the TPP and TTIP projects, could have been explained from a geoeconomics perspective as purposeful strategies to maintain and enhance the economic, commercial, and regulatory power of the Western powers, particularly in the face of rising China. Donald Trump’s election in 2016 ended US participation in the TPP—which was later relaunched as the Comprehensive and Progressive Agreement for TransPacific Partnership by its remaining members—and TTIP negotiations. His unilateral trade policies, tariffs, and ‘weaponising of interdependence’ (Farrell and Newman 2019) served to further escalate geoeconomic and geopolitical strategies in trade policies around the globe. Whilst this may have been most evident in unilateral policy decisions, such as the banning of PRC-­owned Huawei involvement in 5G infrastructure products in the US (see Morris 2021), export bans on high-tech products, EU directives on scrutiny of foreign direct investment, and anti-coercion regulation in the EU (see Meunier and Nicolaidis 2019), this trend can also be seen in some subtle innovations in recent US and EU PTAs.

2.4 Geoeconomic Novelties in EU and US PTAs Enhancing opportunities for domestic economic sectors and curtailing them for foreign competitors lies at the heart of geoeconomic strategies. PTAs are, by their very nature, a negotiated outcome between the signatory parties. For this reason, they are not, and cannot be zero-sum outcomes. Both parties need to gain something, or at least perceive that they are gaining something, otherwise, PTA negotiations will not reach a conclusion. This notwithstanding, EU and US PTAs, all of which have to-­date been concluded with smaller and more dependent economies, show a predominance of the US and EU ‘preferred model’ PTA, approach and key objectives

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in the texts. Apart from introducing additional elements that interest domestic audiences and can guarantee continued competitive advantages for domestic businesses, such as labour and environmental standards, and securing the acceptance of standards and regulations beyond their borders, which can be considered geoeconomic factors, in recent years, PTAs have also been used more openly for geoeconomic aims. The US, for example, in the USMCA that resulted from the renegotiation of NAFTA that President Trump forced through, included an antinonmarket economy (‘NME’) clause, that incorporates the possibility of suspending the USMCA should a party to it enter into a PTA with a non-market economy. In this way, the US not only enhances access to Mexican and Canadian markets for its businesses, but it also prevents PRC firms from being able to gain similar access and treatment in the US’s closest neighbours and from taking advantage of preferential market access to the US through relocation to other USMCA States. The US also included a similarly worded clause in its published objectives for PTAs with the EU, Japan and the UK stating that the agreements should ‘provide a mechanism to ensure transparency and take appropriate action if [the other party] negotiates a free trade agreement with a non-market country’ (USTR 2018, 14, 2019, 14). Geraldo Vidigal’s legal analysis of the NME clause in the USMCA concludes that it would be difficult to apply, as it does not clearly define its terms, and implies that in the event of one party entering into a PTA with a NME, the others may (although they are not obliged to) convert the USMCA into a bilateral rather than tripartite agreement (Vidigal 2019), implying that a single State angered by another entering into a PTA with a NME might not have recourse to punitive actions. Nonetheless, the key function of the clause is to provide legitimacy in the future for US reactions to a PTA with a NME that would otherwise be considered as unwarranted unilateral sanctioning and interference in another State’s sovereign affairs, i.e.: inclusion of the ‘anti-NME’ clause legitimizes the adoption of a response that, though lawful, would ordinarily be perceived as an unwarranted exercise of power by the larger trade partner – in this case, the United States. The clause inserts into the agreement between the parties a condition that, if materialized, entitles the larger partner to adoption a response without being perceived as an unreliable negotiation partner (Vidigal 2019, 16).

In this way the US is using the USMCA PTA to enhance its own geoeconomic strategy, securing its partners, and continued market access to these, whilst attempting to influence their relations with the US’s major economic competitor and strategic competitor for economic hegemony. EU trade agreements lack similar clauses targeting third parties or aiming to influence relations with third parties. However, the EU-UK TCA includes novel level-playing-field commitments that are absent in other EU PTAs, and that reflect a geoeconomic strategy to attempt to curtail future UK domestic deregulation so as to maintain EU domestic businesses competitive within Europe and globally. The provisions for a level-playing field apply to competition policy, subsidy control, State-owned enterprises, taxation, labour and social standards, environmental protection and climate change, and were one of the most contentious aspects of the arduous Brexit negotiations between the EU and the UK. Considering that the UK

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would have privileged access to the EU’s market, and that given its geographic proximity, it could become a gateway for foreign investors and exporters into the EU, or an attractive destination for EU businesses should the UK deregulate and lower its environmental, labour or consumer safety standards once outside the EU, the EU insisted that some form of legally binding level playing field commitments needed to be included in the TCA. The main level playing field provisions are set out in title XI of part two of the TCA. The EU and UK recognise that to prevent the distortion of ‘trade or investment’ between the parties, conditions are required to ensure a level playing field for open and fair competition. The TCA says that while the UK and EU are committed to maintaining and improving their respective high standards, they reaffirm their right to regulate and recognise that the purpose of the commitments is not to harmonise those standards (Ares et al. 2021). The final agreement does not commit the UK to raise its standards should the EU do so, and grants the UK greater independence of action. However, by prohibiting a lowering of standards, it secures existing legislation and existing levels of EU standards, as these have been transposed into UK law. In terms of subsidies, the agreement commits the parties to determining their respective subsidies policies in line with common broad principles, and crucially, parties can take unilateral remedial measures if there is evidence that a subsidy of the other party risks creating a significant negative effect on UK-EU trade and investment (Ares et al. 2021). This is significant, as in other PTAs, consultations and if these fail, dispute settlement organised by arbitrators is the common way to deal with disputes, whereas the TCA allows for unilateral action (without dispute resolution) in the case of subsidies. The most innovative aspect of the Agreement’s dispute settlement is a rebalancing mechanism for the level playing field. If significant divergence in subsidy policy, labour and social policy, or climate and environment policy, arises between the UK and EU, and this has material impacts on trade or investment, both parties have the right to take unilateral countermeasures, which are nonetheless subject to arbitration (Ares et al. 2021). These rebalancing measures could include a temporary suspension of parts of the Agreement or the adoption of tariffs, but are not defined beyond that. This stricter and more direct recourse to action (suspension of preferences under the agreement) is a novelty reflecting the geoeconomic significance of the TCA and the EU’s use thereof to try to exert some control over a former member that has become a strategic competitor in economic terms. It is a practical example of the exploitation of power and the influence of asymmetries in economic interdependence that, according to Braz Baracuhy, are becoming the trademarks of geoeconomic competition in the international arena (Baracuhy 2018, 71).

2.5 Conclusion Preferential and regional trade agreements are not a new phenomenon. Indeed, they are a key feature of the post-World War II international economy. PTAs, alongside the GATT and WTO, have furthered economic liberalisation and facilitated rising

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globalisation in the second half of the twentieth century and the beginning of the twenty-first century. There are a number of well-known reasons for States to enter into PTAs, ranging from gaining economic welfare effects through increased trade and investment, to responding to domestic economic groups’ pressures, and ‘domino effects’ resulting from fear of losing market share to competitors entering PTAs. Political motivations, policy mimicry, locking in domestic economic reforms and preventing their reversal by future governments have also been recognised as important. The interactions between geopolitics and security alliances and PTAs to enhance security alliances have also been highlighted as important, especially in pre-Cold War times. Since the end of the Cold War, however, and especially since the 2008 financial crisis and the shift of economic power towards the People’s Republic of China, the concept of a geoeconomic basis for state actions in the international arena has gained pace. This chapter has shown how geoeconomic considerations have become increasingly prevalent in EU and US PTAs, both as a key motivational factor for entering into PTAs, to ensure competitiveness for domestic economic sectors, but also to project certain economic and regulatory preferences internationally to safeguard the position of domestic economic groups. The analysis has also shown how in recent years leveraging their market size and the interdependence of their economies with their closest neighbours (Canada and Mexico in the USMCA, the UK in the case of the EU-UK TCA), the US and EU have introduced innovations in their PTAs that reflect a more strategic use of PTAs in geoeconomic terms. In the case of the USMCA, the anti-MNE clause seeks to influence the behaviour of neighbours and preclude PTAs with a key strategic rival (that is, the PRC). In the case of the TCA, through the level playing field provisions, and possibilities for countermeasures through a rebalancing mechanism, there is a possibility to constrain the behaviour of the UK as a key competitor. Whilst the geographic proximity and close interdependence between the US and its neighbours, and the EU and the UK, explains the incorporation of these novelties in PTAs, both of these states are likely to seek to extend variations of these in other PTAs, as a way of securing their standing and influence in a world where geoeconomic competition increases as global economic power shifts Eastwards.

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Chapter 3

Geopolitics, Geoeconomics and the EU Trade Policy: The Relationship with ASEAN (Association of Southeast Asian Nations) as a Test Case Yeo Lay Hwee

Contents 3.1  I ntroduction 3.2  The EU and ASEAN 3.2.1  Same-Same But Different? 3.2.2  EU Evolving Trade Policy and Its Pursuit of an EU-ASEAN FTA 3.2.3  Bi-Regional EU-ASEAN FTA: What Went Wrong? 3.3  From Bi-Regionalism to Bilateralism 3.3.1  Bilateral FTAs Between the EU and ASEAN Countries 3.3.2  Trade for All – Moving Forward with a Progressive Agenda? 3.3.3  EU’S Trade Policy Under a Geopolitical Commission 3.4  Conclusion References

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Abstract  Tracing the shift in the EU’s international trade strategy through the lens of its negotiations with ASEAN and its member countries discloses interesting insights on increasing competition to shape the rules of international trade and the limits of the EU’s market power. The chapter argues that the shift in global economic power to the Asia-pacific, particularly China, and the need for the EU to stay competitive in the region vis-à-vis its economic peers such as the US and Japan, has prompted the EU to move from a bi-regional attitude to a bilateral approach towards FTAs, with limited outcomes. This perhaps points to the retreat of the EU’s influence as globalisation suffers a body blow and regionalisation becomes the driving force for trade and investments. Keywords  EU-ASEAN FTA · Geopolitics · Geoeconomics · Regionalisation Y. L. Hwee (*) European Union Centre, Singapore, Singapore e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 O. Quirico, K. Kwapisz Williams (eds.), The European Union and the Evolving Architectures of International Economic Agreements, https://doi.org/10.1007/978-981-99-2329-8_3

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3.1 Introduction The European Union (‘EU’) has a longstanding partnership with the Association of Southeast Asian Nations (‘ASEAN’). While informal dialogue and engagement began in the early 1970s, formal relations were only established in 1977. Examining the EU’s trade policy towards ASEAN and its member countries reveals a very interesting tapestry of the interplay between technocratic policy making and policy-­ learning and power and politics. The failure to conclude an ambitious inter-regional free trade agreement between the EU and ASEAN despite initial enthusiasm reveals the lack of understanding between two blocs steeped in their own normative identities, and the limits of the EU’s economic power in a region that has become the centre of competition between the United States (‘US’) and People’s Republic of China (‘PRC’). This paper seeks to explain the evolution of the EU’s trade policy towards ASEAN and the failures and successes of its free trade negotiations with that bloc and its member countries by looking at the EU’s changing trade strategy and approaches towards multilateral and bilateral trade negotiations in the context of the broader geopolitical and geoeconomics forces at play. Following the trajectory of the EU-ASEAN relations, and in particular looking at how the EU approached ASEAN on the issue of free trade agreement, we can discern how the EU has responded to changes in the broader global economic order and adapted its international trade policy towards third parties in order to stay ahead of competition. However, this was only after considerable failure from its initial, parochial approach towards third countries, and broader pressures from a changing external environment. In the 2006 Global Europe: Competing in the World trade strategy paper (European Commission 2006), ASEAN was singled out as one of the EU’s priorities because of its market potential. It was also in recognition of the fact that the world’s economic centre of gravity is shifting to the Asia-Pacific region, and that ASEAN would become an important node of the Asia-pacific growth story. Following concerns that the EU would be outcompeted by other major economies such as the US and Japan, the EU was anxious to gain a foothold in Southeast Asia and hence aiming to conclude the bi-regional EU-ASEAN free trade agreement (‘FTA’) negotiation within 2 years. The EU launched the bi-regional negotiations for an FTA with ASEAN in 2007. Two years later, the EU-ASEAN FTA negotiations were suspended, and the EU in a turn of strategy decided to pursue bilateral FTAs with individual ASEAN countries, beginning with Singapore, Malaysia and then Vietnam, Thailand, Philippines and Indonesia. What were the reasons behind the failed EU-ASEAN FTA despite the initial enthusiasm by the EU? One key reason for the failure is perhaps the EU’s own parochialism and outsized perception of its own power and influence. It also reflected the lack of understanding of the institutional set-up of ASEAN.  The prompt and pragmatic switch to a bilateral approach targeting individual ASEAN member countries, however, also showed a degree of policy-learning and adaptation. With

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increased geopolitical and geoeconomic competition in the Asia-Pacific region, the EU has realised it must become far nimbler, and take a more political rather than overly technocratic approach in its trade policy towards countries in an increasingly important economic sub-region. This paper will examine the importance of trade policy for the legitimacy and identity of the EU and how it has been increasingly used as an instrument of foreign policy. It will trace the shift of the EU’s international trade policy from one initially focused on the multilateral process—and specifically on the negotiations within the World Trade Organisation (‘WTO’)—to a more competitive approach relative to other States by engaging in the race to conclude as many preferential trade agreements (‘PTAs’) as possible. The decision to launch free trade negotiations with a number of Asian countries, including South Korea, India and ASEAN in 2007, was a result of this shift. Using the case study of EU-ASEAN bi-regional negotiations, and the subsequent bilateral negotiations with ASEAN countries, the paper will discuss how successful the EU has been in externalising its regulatory principles and standards and exporting its values. It will also examine the politicisation of the trade agenda and what this means for the future of preferential trade agreements and the multilateral rules-based trading system that the EU has held dear for decades. The paper will first give a brief overview of the key differences between the two fairly successful regional blocs, and how these differences have led to a relationship that has its fair share of trials and tribulations. It will then examine the EU’s evolving trade policy both broadly and specifically towards ASEAN. Next, it will examine in more detail the EU-ASEAN free trade negotiations from 2007 to 2009 and the reasons behind the suspension of this negotiation and the EU’s turn towards negotiating with individual ASEAN countries instead. The paper will conclude with some key takeaways on what this whole process of EU-ASEAN free trade negotiations reveals about the normative identities of the two regional blocs, and the broader shifts in economic power and economic paradigms that have implications for free trade moving forward.

3.2 The EU and ASEAN 3.2.1 Same-Same But Different? The EU and ASEAN have been perceived as fairly successful regional organisations, each having secured a prominent role in its own region. Both pride themselves as norm-setters, albeit with slight differences in the norms that they hold dear. Certainly, both place the centrality of peace and prosperity uppermost among their key goals— for the EU, the way to achieving this is through deep economic integration, democracy, rule of law and having a set of institutions to manage interdependence; for ASEAN, having been colonised and as newly independent developing countries, the member countries put strong emphasis on norms of sovereign equality and the

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principle of non-interference and the non-use of force to resolve conflicts. While the EU has a set of supranational institutions and adopts many decisions through qualified majority voting, ASEAN remains primarily an inter-­governmental organisation, with decisions mainly reached through consultation and consensus. While the EU pursues deep economic integration to achieve its political goals of peace and reconciliation, ASEAN remains an essentially confidence-building organisation first and foremost, aiming to manage differences and build trust amongst its members, and then to serve as an instrument to help members navigate political rivalries and security tensions in the region. It was only with the end of the Cold War, as globalisation intensified with further entrenchment of the neo-liberal economic model, that ASEAN sought to deepen its economic cooperation in order to remain an attractive region for trade and investments. Conversely, the end of the Cold War led the European Community to raise its ambitions from a primarily economic community to become a full-fledged political union with its own common foreign and security policy. The enlargement of the EU and ASEAN entails also two very different processes. Joining the EU is a lengthy process in which candidate States commit to a process of ‘Europeanisation’—undertaking reforms to achieve fundamental standards of democracy and market economy, accepting the acquis (that is, the accumulated body of European acts, statutes, and case-law decisions), and committing to the principles and values of EU as enshrined in its treaties. By contrast, ASEAN comprises members with different political systems, adopting different developmental models often at a very different rate of economic development. Countries in the geographical sub-region of Southeast Asia can become members after acceding to the ASEAN’s Treaty of Amity and Cooperation and with consent from all existing members. For observers cognizant of these differences between the EU and ASEAN it was therefore a puzzle that the EU believed it could conclude an ambitious, comprehensive, and WTO-plus free trade agreement with ASEAN as a bloc. In the mandate for the FTA negotiations with ASEAN, the Commission was aiming for the highest possible degree of trade liberalisation, including far-reaching liberalisation of services and investments and with a strong focus on changing the overall regulatory environment with special emphasis on non-trade barriers. What are the reasons behind the EU’s drive for a bi-regional FTA with ASEAN, and what lessons did the EU learn from its failure? The next section will discuss the EU’s evolving trade strategy, and the broader geopolitical and geoeconomics shifts that could provide a clue to the puzzle behind the EU-ASEAN FTA.

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3.2.2 EU Evolving Trade Policy and Its Pursuit of an EU-ASEAN FTA The EU that has emerged from the European Community in the post-Cold War era has been one confident of its place and role in the liberal world order. It is also the champion of a multilateral rules-based trading system that fosters free and open trade. The creation of the Single Market has made the EU a major player in the global governance of international trade, and an important pace-setter in the WTO system. As is widely acknowledged by scholars of European integration and EU studies, trade policy—or what is known as the Common Commercial Policy—is one of the first few areas of cooperation enshrined in the treaties since the creation of the European Economic Community (‘EEC’) in 1957. The Common Commercial Policy is under the exclusive competence of the EU institutions and, as the EU’s economic power expands with its enlargement, trade and access to the EU’s single market is one of the EU’s most important power resources. Hence, it is not surprising that the EU is widely seen as an economic power, with scholars such as Sophie Meunier and Kalypso Nicolaidis arguing that trade is at the very core of the EU’s potential or actual power. Karel de Gucht, EU Trade Commissioner (2009–2014) went further, describing ‘trade policy as one of the key vectors for promoting the EU’s values and principles, not least because it [is] the external policy area where the Union ha[s] the strongest teeth’ (Young and Peterson 2014, 8:1). ‘International trade was one of the first sectors in which [Member States] agreed to pool their sovereignty’ (Fact Sheet on The EU and its Trade Partners). In global trade negotiations, the EU has leveraged its economic weight and its ability to speak with one voice in the WTO to push for the liberalisation of trade and the inclusion of a whole range of new issues beyond tariff reduction. The move to expand the scope of negotiations in the WTO to include issues such as government procurement, competition and investment was however resisted by many developing countries. These so-called ‘Singapore issues’ were so named as they surfaced in the WTO agenda during the inaugural ministerial meeting held in Singapore in 1996. The EU also led the push for a comprehensive millennium round of liberalisation in the late 1990s (Young and Peterson 2014, 5–13), ‘becoming the principal champion’ of the rules-based multilateral trading system (Young and Peterson 2014, 9). The failure of the EU to achieve its trade objectives in the WTO, and the lack of progress in the WTO’s Doha Round of multilateral negotiations led the EU to shift its attention to PTAs, duly beginning a parallel track of bilateral and regional negotiations, as manifested in the Commission’s 2006 Communication entitled Global Europe: Competing in the World: ‘The EU had to find alternative ways to guarantee better access to third countries markets’ (European Commission 2006). In this Communication, the then-Trade Commissioner Peter Mandelson proposed ‘the adoption of a hard-headed EU trade strategy based, first on a few strategic approach to market access’ and pursuing a ‘more assertive policy toward countries that protect their goods and services through non-tariff barriers’ (Kerr and Viju-Miljusevic

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2019, 399). ‘This assertive European trade strategy resulted from a shift in perception about how Europe must react to globalisation and the lack of success in the Doha Round of multilateral trade negotiations’ (Kerr and Viju-Miljusevic 2019, 399). The Union’s ambitious trade strategy targets emerging markets, and in particular countries or partners with good market potential in terms of size of its markets and growth prospects. Also in the criteria of the EU is the level of protection against EU export interests and the number of bilateral agreements that the partners might have already concluded with other countries, in particular its economic competitors. The reasons for prioritising the countries that satisfy these criteria are obvious—it is to ensure that the EU benefits from the opportunities provided by these high growth emerging markets and that the EU is not outcompeted by its peers such as the US or Japan. Securing economic dominance is one way for the EU to maintain its leading role in the global marketplace. Breaking down regulatory environments and ensuring a so-called level playing field for European companies in these emerging economies is the goal, and hence issues such as intellectual property rights and government procurement are being included in the negotiations. The changes in the EU’s international trade policy—from one focused on multilateral negotiations within international institutions to one that is focused on competitive liberalisation and imposition of its trade agenda via PTAs—was fully reflected in the EU’s approach towards ASEAN. In the 2006 Communication, the EU’s intent was on opening up markets abroad and imposing its policy agenda and regulatory principles as a way to stay ahead of competition. ASEAN was identified as a priority because of its market potential (considering its economic size and growth prospects). Taken as a bloc, ASEAN was in 2006 the seventh largest economy in the world. According to the ASEAN Development Outlook Report, ASEAN is projected to become the fourth largest economic area by 2030, with a total population of some 700 million. Another probable reason for the EU deciding on a bi-regional FTA could be due to ASEAN’s own professed roadmap for regional integration that emerged in 2003. In 2003, ASEAN, a regional bloc of ten Southeast Asian countries with a total population of 600 million, announced that they would build an ASEAN Community by 2020. The driving force behind ASEAN’s shift from its diplomatic and political focus to pursue deeper economic integration was the socio-economic disruptions brought by the Asian Financial crisis (‘AFC’) from 1997–1999. The AFC opened ASEAN eyes to their economic interdependence brought about by market forces, and to the increased economic competition posed by the PRC’s accelerated opening up of its economy. While Southeast Asian countries were demonstrating impressive economic growth in the 1980s and early 1990s, and attracting significant foreign direct investments, the opening up of the PRC’s economy in the post-Cold War era has turned investors’ attention to the vast emerging market in the PRC. Hence, concerted efforts needed to be taken by ASEAN to make their region again a magnet for economic investments. In 2005, the ASEAN Economic Ministers announced the aspirations to realise the building of an ASEAN Economic Community by 2015 instead of 2020. Taken by ASEAN’s rhetoric of community building, and seeing itself as a model for

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regional integration, the EU has also since 2003 embarked on a series of programmes to help ASEAN in its community-building initiatives. The EU has long promoted its own regional integration model as one that can deliver on peace and prosperity and hence was enthusiastically engaged in ASEAN’s efforts to learn from the Europeans experience in building an economic community. Also, by 2006, the EU’s economic competitors such as the US, Japan and PRC had negotiated or had ongoing negotiations of an FTA with ASEAN. The ASEAN-­ PRC FTA came into force in 2005, and Japan had begun negotiating with ASEAN a Comprehensive Economic Partnership Agreement. ‘When the Council authorised the Commission’s negotiation mandate with ASEAN, it confirmed that the EU should aim at WTO compatible FTAs in order to improve Europe’s competitiveness’ (Meissner 2016). The Commission and Council left ‘no doubts that the EU-ASEAN FTA negotiations are closely linked to increasing concerns about their economic interests in Southeast Asia being jeopardised’ by its competitors as following the PRC and Japan, the US has also begun a series of bilateral negotiations with ASEAN countries (Cuyvers 2007, 4). The EU’s decision to go for a bi-regional FTA with ASEAN rather than bilateral FTAs with individual ASEAN countries could also be influenced by the ‘successful’ conclusion of ASEAN-PRC and ASEAN-Japan FTAs. However, there is an interesting caveat in the EU-ASEAN FTA negotiations. The mandate from the Council to the Commission covered only seven of the ten ASEAN countries, leaving the three least developed—Cambodia, Laos, and Myanmar—the option to join later. Cambodia and Laos already have an existing ‘Everything But Arms’ (‘EBA’) agreement with the EU, while Myanmar was subject to EU sanctions on account of the ruling military junta’s poor human rights record. In summary, when multilateral negotiations within the WTO stalled in the first decade of the twenty-first century, the EU ‘had to find alternative ways to guarantee better access to third countries markets’ (Fact sheet on The EU and its Trade Partners). The EU’s shift to seek a new generation of comprehensive FTAs beyond tariff cuts to include investments, public procurements, intellectual property rights, and other core issues with third countries was to cement EU’s regulatory dominance and economic competitiveness, especially vis-à-vis other major economic powers. The priority given to pursue a bi-regional FTA with ASEAN reflected concerns that while ‘European exports are strong in countries where demand is static’ they are ‘less well placed than Japan and the US in rapidly growing markets, particularly in Asia’ (European Commission 2006).

3.2.3 Bi-Regional EU-ASEAN FTA: What Went Wrong? In early 2007, the Council authorised the Commission to open negotiations for a comprehensive FTA with ASEAN, with a view to concluding the negotiations within 2 years. The FTA should cover liberalisation in goods, services, investments and rules on non-tariff barriers including common disciplines on technical barriers

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to trade, sanitary and phytosanitary measures and intellectual property rights. The negotiations should define simple, transparent and liberal rules of origin, and support trade facilitation efforts. The EU-ASEAN FTA was aimed at levelling the playing field between the various players, ignoring the asymmetries between and within the regions and was clearly modelled with neoliberal principles in mind. ‘Underlying the FTA plan is an implicit notion that it is ASEAN that needs to reform its economy if it wants to do business with Europe’ (FTA Reader). The roadmap towards an EU-ASEAN FTA ‘dictates that ASEAN governments [notwithstanding] the different stages of growth, commit themselves to embrace a development strategy that is going to place them and their companies in direct competition with powerful European Transnational Corporations [‘TNCs’]’ (FTA Reader). Such a dogmatic neoliberal approach to secure and protect the EU’s commercial interests is one of the reasons why the EU failed to conclude a bi-regional FTA with ASEAN. Instead of securing the bi-regional FTA in 2 years, the Commission in 2009 decided to suspend the FTA negotiations, and asked the Council for a new mandate to proceed with bilateral bloc-to-country FTA talks. Several reasons were offered to explain the failure of the EU-ASEAN FTA, ranging from the different levels of ambitions between the two blocs to political issues over human rights situation in several ASEAN countries—in particular Myanmar—to the timing of the negotiations. However, the fundamental reason for the failure is the different institutional capacities between the EU and ASEAN and the vast economic divergences within ASEAN itself. As discussed in the earlier part of this paper, the EU and ASEAN have very different institutional set-ups and modus operandi. Unlike the EU Commission, the ASEAN Secretariat does not negotiate on behalf of the ASEAN member countries. Economic divergences and different political interests within ASEAN meant that the EU faced not a clear set of demands or offers, but at times a confusing cacophony of issues. The need for consensus within ASEAN’s decision-making structure often resulted in the lowest common denominator prevailing. As the EU wants an ambitious, high quality, comprehensive FTA, after several rounds of negotiations it became clear that there were different levels of ambitions amongst the ASEAN member countries, and that if the EU wants a bi-regional deal it would have to settle for the lowest common denominator—an FTA that is primarily focused on trade liberalisation in goods and tariff reductions. The EU only came to appreciate the heterogeneity of ASEAN and the intra-ASEAN differences when the negotiations started. The first FTA that ASEAN as a group concluded with the PRC was one that was built primarily on tariff reductions on trade in goods with the agreement on liberalisation of services negotiated a few years later after an early harvest offer by the PRC. Unwilling to settle for a traditional FTA that only focused on trade in goods (which was what the ASEAN countries could agree on amongst themselves), the EU chose to suspend the negotiations and switched to bilateral negotiations with individual ASEAN countries, beginning with Singapore. The latter decision was informed by the EU’s need to gain a foothold in the region. Singapore was an obvious first choice, being the most developed economy in Southeast Asia and the

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number one recipient of EU’s investments within ASEAN. Indeed, of all European investments into ASEAN, 50% went to Singapore, and the EU was both Singapore’s third largest goods trading partner and its largest overall services trading partner. Conversely, Singapore is the largest ASEAN investor into the EU, and stood as the EU’s seventh largest foreign investor. Some analysts have attributed the failure of the EU-ASEAN FTA negotiations to timing. A global financial crisis was brewing when the negotiations first started, and it had become a fully-fledged international recession by 2008–2009. This might have had an impact on the appetite for a bi-regional FTA. In contrast, the ASEAN-­ PRC FTA was concluded just as the ASEAN emerged from the AFC in urgent need of a boost to its member economies. The PRC’s gesture not to allow the yuan to devalue at the height of the AFC was much appreciated to this end. ASEAN came out of the AFC convinced that the structural reforms undertaken would render the countries in good stake to further integrate itself to the regional economy. The PRC’s actions to accommodate ASEAN in its negotiations for an ASEAN-PRC FTA had wholly political motivations—to cement the benevolent image of a peaceful rising PRC in the regional consciousness. While the EU had become convinced of the need for a presence in the region for its own economic interests, it was unwilling to settle for a traditional FTA with ASEAN for political symbolism, and was instead adamant that only a comprehensive, ambitious FTA could both be welfare-enhancing and reinforce the EU’s regulatory principles for it to remain economically competitive. The failure of the EU-ASEAN FTA negotiations perhaps also reveals the limits of the EU’s ‘power through trade’ assumption. Conversely, ASEAN, while interested in diversifying its trading relations, was not ready to undertake the commitments required and the regulatory reforms needed to conclude an FTA with the EU. Indeed ASEAN, which had managed to conclude several FTAs with its other dialogue partners—the PRC, Japan, South Korea, India, Australia and New Zealand—is of the view that negotiations required both parties to make compromises and seek what is possible and not just what is seen as desirable from one negotiating party. In short, trade negotiations are very much a political and diplomatic exercise and not a purely legalistic and technocratic endeavour. The differences in institutional set-up, the importance of trade policy to the identity and power of the EU and the different economic models and diverse interests within ASEAN make it difficult for an EU-ASEAN FTA to be realised. In switching to comprehensive bilateral FTA negotiations with individual ASEAN countries, the EU was sticking broadly to its 2006 strategy to ‘compete in the world’ by stepping up efforts to create opportunities for its companies abroad targeting especially the overall regulatory environment in third countries. Unable to achieve its offensive interests within the WTO framework, the EU realised that these bilateral relationships could serve as stepping-stones towards global liberalisation, leveraging market power as a means to induce neoliberal regulatory reforms.

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3.3 From Bi-Regionalism to Bilateralism 3.3.1 Bilateral FTAs Between the EU and ASEAN Countries Following the suspension of the EU-ASEAN FTA negotiations, the European Commission secured a mandate from the Council to initiate bilateral trade deals with the ASEAN countries, starting with Singapore and Malaysia. The negotiations with Singapore were launched at the end of 2009, with Malaysia in 2010. Subsequently a mandate was also given to negotiate with Vietnam (2012), Thailand (2013), Philippines (2014), and Indonesia (2016). The EU has so far managed to conclude only two of these bilateral FTAs—with Singapore and Vietnam. The EU-Singapore FTA (EUSFTA) came into force in 2019 and the EU-Vietnam FTA in 2020. EU’s bilateral negotiations with the various ASEAN member countries have not been easy either. With Singapore, though conclusions were reached in 2012 for the bulk of the FTA and in 2014 for the investment chapter, the signing and ratification of the agreement was held hostage by the decision of the Commission to seek the opinion of the Court of Justice of the EU (‘CJEU’) on whether a comprehensive FTA between the EU and Singapore (including the chapter on investment) fell under the exclusive competence of the EU. This issue came about because the EU started its negotiations with Singapore just as the Treaty of Lisbon came into effect. Before the Treaty of Lisbon, investments did not come under the EU’s Common Commercial Policy, and EU Member States would negotiate their own bilateral investment treaties with third countries, distinct from EU trade agreements. However, with the expansion of the trade agenda to include a myriad of new issues from public procurement, non-trade barriers and intellectual property rights, the EU has sought to negotiate bilateral agreements with third countries that are ambitious and comprehensive, addressing ‘new issues’ including investments. The CJEU handed down its opinion in 2017 that the FTA between the EU and Singapore fell within the exclusive competence of the EU with the exception of certain provisions in the investment chapter dealing with investment protection, investor-State dispute settlement and portfolio investments. Provisions on these investment-related issues, the Court declared, fall within shared competence between the EU and its Member States. Taking from the experience of the delayed ratification of the Comprehensive Economic Partnership Agreement between the EU and Canada—which had to be ratified not only by the EU institutions but also the respective parliaments and governing institutions of Member States—the EU and Singapore decided to withdraw those provisions over which the EU did not have exclusive competence, relocating these to a separate EU-Singapore Investment Protection Agreement (‘EUSIPA’). The EU-Singapore FTA (‘EUSFTA’) and EUSIPA were signed in 2018, and only the EUSFTA (under the exclusive competence of the EU) has been ratified, coming into force in 2019. Negotiations with Vietnam—the second most important trading partner to the EU in Southeast Asia—benefited significantly from the experience gained through

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the EUSTFA drafting process. Hence, the EU-Vietnam negotiations similarly led to two separate agreements—the EU-Vietnam FTA (‘EUVFTA’) and the EU-Vietnam Investment Protection Agreement. Signed in 2020, only the EUVFTA has thus far been ratified and entered into force. Negotiations with the other major ASEAN economies—Malaysia and Indonesia—have been marred chiefly by the issue of palm oil. Indonesia and Malaysia are respectively the world’s first and second largest palm oil producers. The issue over the EU resolution to stop the import of palm oil for biofuel and other sustainability issues related to the cultivation of palm oil became acrimonious, and led to a prolonged stalemate in the negotiations. However, Indonesia has decided to take the issue of the palm oil to the WTO (EU – Palm Oil, 9 December 2019), and since then negotiations rapidly gathered pace, leading to some optimism that the Comprehensive Economic Partnership Agreement with Indonesia may be concluded soon. For Malaysia, while it had similarly decided to take the palm oil issue to the WTO, its so-called bumiputra policy (a controversial Malay affirmative action scheme in force since the 1970s) remains a thorny issue vis-à-vis negotiations on public procurement. These negotiations have not made much progress. Yet more vexing, political coups and related tensions in Thailand have led to a suspension of EU negotiations with that country. The presidency of Rodrigo Duterte (2016–2022) in the Philippines also affected the negotiations with that country, especially in light of his administration’s brutal war on drugs. Indeed, negotiations were suspended on account of the openly sanctioned extrajudicial killings that took place under Duterte’s presidency, along with various other human rights violations, in line with EU human rights conditionality and clauses.1 From the launch of the bi-regional negotiations with ASEAN in 2007 to the switch to bilateral agreements, the journey had not gone exactly the way the EU would have liked it to. This raises questions as to the reasons behind the slow and protracted negotiations and what can be done to speed up the process.

3.3.2 Trade for All – Moving Forward with a Progressive Agenda? When the EU sought to negotiate a bi-regional FTA with ASEAN in 2007, globalisation was feted, and the neoliberal model of free and open trade was still seen as the best way towards developing and delivering on economic welfare. However, the mood significantly darkened especially in the West (chiefly the US and Europe) in the wake of the global financial crisis that morphed into a serious sovereign debt crisis in the Eurozone. Austerity measures introduced by European governments to bring down debts led to widespread unemployment, wage stagnations and growing

 See the chapter by Pablo Jimenez Lobeira and Ottavio Quirico in this volume.

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inequality. These economic hardships led to a questioning of the benefits of globalisation and the neoliberal economic model. Policy makers in the EU in particular have had to simultaneously respond to the rise of both far-right and far-left political parties that have purveyed a more protectionist agenda—whether seeking to protect the border (against migrants), to protect jobs, or otherwise—and the increased scrutiny of free trade negotiations and agreements. The big gains made by far-right and fringe parties in the 2014 European parliamentary elections gave pause to the EU on how it should position itself in terms of its international trade strategy. While the EU conveyed the message that trade was in its DNA, and still defended the benefits of international trade, the Union’s rhetoric has increasingly become that the EU would pursue fairer trade in response to the critics of comparatively more sweeping free trade. The EU tried to placate its domestic audience by promising to pursue a trade agenda that would focus on reciprocity, and which would prevent social and environmental dumping while at the same time pledging to its external partners that the EU will not become protectionist. Seeking to balance these objectives, the Commission issued its new Trade Strategy paper in 2015 entitled Trade for All: Towards a more Responsible Trade and Investment Policy. Cecilia Malmström, Trade Commissioner from 2014–2019, remarked in the foreword to that paper that this new trade strategy was an answer to the lessons learnt from the rising tide against globalisation and free trade. The Commission is thus adapting its approach to trade policy to make it ‘more responsible’, ensuring that it is ‘more effective, more transparent and will not only project our interests, but also our values’. According to Malmström, the new approach would ‘safeguard the European social and regulatory model at home…and [would] involve using trade agreements and trade preference programmes as levers to promote, around the world, values like sustainable development, human rights, fair and ethical trade and [the] fight against corruption (European Commission 2015a, 5). The Trade for All paper sets out a very ambitious agenda to use the EU’s trade and investments policy as tools to shape globalisation, support sustainable development, and to promote the EU’s values and standards. As the world faces headwinds of rising protectionist sentiments, the EU has spared no effort in articulating in this paper the continued importance of trade and investments to deliver on growth and jobs. It not only reinforced the earlier policy approach to ensure that all trade agreements should be comprehensive, of high standard, and cover a broad range of regulatory issues, but also added a much stronger focus on social and environmental sustainability and good governance and issues that would be seen as highly political by its trade partners. The 2015 trade policy paper also reiterated the need for the EU to continue ‘to pursue bilateral and regional agreements in a manner that supports returning the WTO to the centre of global trade negotiating activity’, whereby ‘bilateral and regional FTAs are supposed to serve as laboratory for global trade liberalisation’ (European Commission 2015a, 9). The emphasis on standards and values, and on being open and transparent in its trade policy inevitably also a means greater politicisation of the EU trade agenda. A

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consequence of this seems to be more protracted negotiations, at least in the case of the EU’s trade negotiations with ASEAN countries. Only two bilateral agreements—with Singapore, Vietnam—have been concluded, despite the longstanding economic partnership between the EU and ASEAN, and the purported importance that both blocs put on free trade. Several other reasons have also contributed to the slow progress in the EU’s trade negotiations with the ASEAN countries. Several of these economies—despite their open rhetorical support for free trade and a rules-based trading order—have not been immune to popular demands or pressures from vested interest groups in rolling back earlier liberalisation measures, and have succumbed to more protectionist measures. Corruption and governance issues have continued to be stumbling blocks in the negotiations. Added to these, the fact that the PRC has become entrenched as the number one trading partner for many of the ASEAN countries has diluted the sense of urgency among them to conclude their negotiations with the EU.  The ASEAN countries have also been involved concurrently in negotiations for the 16-member Regional Comprehensive Economic Partnership Agreement (‘RCEP’). Indeed, RCEP, which includes all ten of the ASEAN countries, plus the PRC, Japan, South Korea, Australia, New Zealand and India was concluded in 2020 (with India pulling out at the last minute, but with the option of re-joining RCEP at a later date). The UK’s decision to leave the EU also had an impact on how the ASEAN countries view the EU. For several ASEAN countries, the UK has been the gateway to Europe. The UK’s pursuit of its professed ‘Global Britain’ policy had also meant that the UK began a rather aggressive strategy, competing with the EU to strike trade deals with ASEAN. As the EU presents a progressive trade agenda in the face of rising protectionist, anti-globalisation sentiments across many developed economies, and as competition for influence heats up in the Southeast Asian region, the EU has continued to contemplate the revival of a bi-regional EU-ASEAN FTA. The broader political goal of engaging ASEAN with a strategic purpose, as presented by the High Representative of the Union for Foreign Affairs and Security Policy in 2015, was perhaps a catalyst for this. In the strategy paper entitled The EU and ASEAN: Joint Partnership with a Strategic Purpose presented to the Parliament and Council, it was made clear that the EU has a strategic interest in strengthening its relationship with ASEAN. The economic dynamism of the region and the important role of ASEAN in underpinning regional stability and security were offered as the reasons for the EU to further strengthen its engagement with ASEAN.  It made clear that ‘investing in the EU-ASEAN relationship will bring significant returns for EU interests, both economically and politically’ (European Commission 2015b, 2). In 2017, EU and ASEAN set up working groups to look into the possible relaunch of the EU-ASEAN FTA and the 2018–2022 ASEAN-EU Plan of Action issued after the ministerial meeting declared the blocs’ commitments to the FTA negotiations. Unfortunately, this initial optimism did not eventuate, as the same issues of ASEAN heterogeneity and differing interests, and the EU’s ambitious agenda on pushing EU’s regulatory standards and focusing on environmental sustainability and human

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rights issues, made it quite unlikely that a concrete EU-ASEAN FTA would be on the horizon any time soon. The EU has returned to focusing on restarting those bilateral agreements that were suspended because of political reasons, with much of this effort being redirected to concluding the Comprehensive Economic Partnership Agreement with Indonesia, the largest economy in ASEAN. During the 45th EU-ASEAN Commemorative Summit held in Brussels on 14 December 2022, the EU committed to intensifying the pace toward concluding the various bilateral trade agreements with ASEAN member countries while ‘reaffirming a future EU-ASEAN FTA as a common long-term objective’ (EU-ASEAN Commemorative Summit 2022).

3.3.3 EU’S Trade Policy Under a Geopolitical Commission In 2019 the new President of the European Commission Ursula von der Leyen in her maiden speech to the European Parliament talked about investing in alliances and coalitions to advance EU values. President von der Leyen declared: ‘we will promote and protect Europe’s interests through open and fair trade. We will strengthen our partners through cooperation, because strong partners make Europe strong too’. She ended her speech by telling the parliamentarians that the Commission will speak the language of confidence and will be a geopolitical Commission that ‘Europe urgently needs’. Her speech has to be understood in the context of an increasingly volatile world with the EU under pressure not only from the increasing assertiveness of the PRC, replete with its unique development model, but also from a US that is increasingly protectionist, using national security as a pretext to act unilaterally on many trade matters. Trump’s unilateralism, protectionism, and trade wars put global free trade on edge, and while there was hope that Biden’s presidency might signal a shift, this has not happened. The intensifying US-China competition, especially in the technological realm has resulted in the US continuing Trump’s ‘America First’ trajectory. From 2016 with Brexit, and then with the election of Trump as US President, the EU has entered into a period of profound foreign and trade policy discomfort. The sudden unreliability of the US as a partner and ally, increasing PRC encroachment with such programs as the 16  +  1 framework and Belt and Road Initiative, have woken the EU up to the reality of modern geopolitics, and the intense competition for influence to shape global rules and norms. The Western-dominated liberal order came under intense pressure as the Trump administration functionally withdrew its support and adopted a purely unilateral, transactional and mercantilist approach towards global trade. Left to defend the open, multilateral trading order, the EU lost no time in seeking out ‘like-minded’ partners to reaffirm the continued importance of open and fair trade. The broader global trends and the supply chain disruptions brought about by the Covid-19 pandemic added to the urgency for the EU to review its international trade policy. In February 2021, the Commission presented its trade policy review entitled

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An Open, Sustainable and Assertive Trade Policy. In crafting a trade policy that would prepare the EU for the world of 2030, the trade commissioner noted the need for the EU to consider the geopolitical instability, growing unilateralism, climate uncertainties and the technological disruptions. Adding that ‘[t]rade is one of the EU’s most powerful tools’, the EU thus needs to use this unique lever to help it achieve the goals of ‘a new, more sustainable growth model as defined by the European Green Deal and European Digital Strategy’. This trade policy review revealed the EU’s intent to take a more muscular and assertive approach towards its trading partners—forging a trade policy in support of the EU’s geopolitical interests. What would be the implications of this re-­orientation of the EU’s trade policy towards the ASEAN countries? The EU put on notice that it would be focusing its efforts on ‘unlocking the benefits of the EU’s trade agreements’, coupled with assertive enforcement of both its market access and sustainable development commitments. This has indeed been observed for instance in EU’s actions in Singapore where active support has been given to EU small and medium enterprises (‘SMEs’) to make the best of the opportunities offered by the EUSFTA. Additionally, the EU and Singapore have begun to take steps towards a comprehensive and forward-looking Digital Partnership agreement. As for the EU-Vietnam FTA, a year after the FTA came into force, ‘Vietnam’s imports from the EU reached US$16.51 billion, up more than 24% compared to a year before EVFTA took effect’ (VEPR/KAS 2021). As the EU focuses on support for a green transition, digital transition, and trade in services, and aims to strengthen its regulatory impact and re-orient its priorities to neighbouring countries and Africa, the ongoing negotiations with the other ASEAN countries could yet face greater hurdles. Several ASEAN countries are also not yet ready to undertake the regulatory reforms to meet the EU’s expectations. The ongoing war in Ukraine, and the sharp nationalism that accompanied a deteriorating geopolitical environment would further slow the negotiations. The dominance of the PRC, and the declining relevance of the EU as a trading partner to several of the ASEAN countries, would make any such negotiations even more protracted.

3.4 Conclusion Tracing the shift in the EU’s international trade strategy through the lens of its negotiations with ASEAN and its member countries reveals interesting insights on the intensifying competition to shape the rules of international trade and also the limits of the EU’s market power. The shift in global economic power to the AsiaPacific, and the need for the EU to stay competitive in the region vis-à-vis its economic peers such as the US and Japan, together with the rising dominance of the PRC, has seen the EU change from a bi-regional approach towards a more pragmatic bilateral approach to negotiating and concluding FTAs.

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Fifteen years after its initial approach to ASEAN, the EU has only managed to conclude two bilateral FTAs—with Singapore and Vietnam—while several others (Malaysia, Philippines and Thailand) are still far from their endpoint. Despite its immense economic power, the EU has not been particularly successful in imposing its preferences on these States. This perhaps points to the retreat of the EU’s influence, as globalisation suffers a body blow and regionalisation becomes the driving force for trade and investments.

References Cuyvers L (2007) An EU-ASEAN free trade agreement: reflections on issues, priorities, strategies. CAS discussion paper 53. EU-ASEAN Commemorative Summit (2022, December 14, Brussels) – Joint leaders’ statement European Commission (2006) Global Europe: competing in the world. European Commission, Brussels European Commission (2015a) Trade for all: towards a more responsible trade and investment policy. COM(2015) 497 Final. https://www.eesc.europa.eu/en/our-­work/opinions-­information-­reports/ opinions/trade-­all-­towards-­more-­responsible-­trade-­and-­investment-­policy European Commission (2015b) Joint communication to the European Parliament and the council. The EU and ASEAN: a partnership with a strategic purpose. https://eur-­lex.europa.eu/ legal-­content/EN/TXT/PDF/?uri=CELEX:52015JC0022 Kerr WA, Viju-Miljusevic C (2019) European Union adapting to an era of no ruling trade paradigm. Eur Foreign Aff Rev 24(3):387–404 Meissner K (2016) A case of failed Interregionalism? Analyzing the EU-ASEAN free trade agreement negotiations. Asia Europe Journal 14:319–336 VEPR/KAS (2021) Quarterly economic report. https://www.kas.de/en/web/vietnam/single-title/-/ content/quarterly-economic-report-ii-2021 Young AR, Peterson J (2014) Parochial global Europe: twenty-first century trade politics. Oxford University Press, Oxford

Part II

Investment and Trade

Chapter 4

From Investment Protection to Sustainability (via a Multilateral Investment Court): The EU and a New Universal Model for International Investment Agreements? Ottavio Quirico

Contents 4.1  4.2  4.3  4.4 

Introduction  he Fundamentals of the Current System: Investment Protection T The Envisaged Reform: A Procedural Focus Sustainability, UNFCCC, BITs and MITs: Systemic Inconsistencies 4.4.1  The UNFCCC Regime 4.4.2  BITs, MITs and Sustainability 4.5  Refocusing the Investment Reform 4.5.1  Prioritising Carbon-Neutral Investment 4.5.2  New Procedures for Sustainable Investment 4.6  Conclusion References

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Abstract The global investment system is currently based on liberalisation grounded in market access and investment protection, aiming to create a cross-­ border competitive environment. A reform of the system is under discussion, O. Quirico (*) Department of International Humanities and Social Sciences, Perugia University for Foreigners, Perugia, Italy Law School, University of New England, Sydney, NSW, Australia ANU Centre for European Studies, The Australian National University, Canberra, ACT, Australia Department of Political Science, University of Pisa, Pisa, Italy Law Department, European University Institute, Fiesole, Italy e-mail: [email protected]; [email protected]; [email protected]; [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 O. Quirico, K. Kwapisz Williams (eds.), The European Union and the Evolving Architectures of International Economic Agreements, https://doi.org/10.1007/978-981-99-2329-8_4

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p­articularly at the United Nations Commission on International Trade Law (‘UNCITRAL’) largely upon a proposal by the European Union (‘EU’), comprehensively focusing on procedural issues and the possible establishment of a Multilateral Investment Court. This paper argues that such an approach is fundamentally flawed, as it overlooks the main issue that the global investment system currently faces, that is, the necessity of greening investment. The paper claims that a comprehensive reform of the investment system should first address substance, particularly the clash between, on the one hand, green commitments under the UN Framework Convention on Climate Change (‘UNFCCC’) and the Paris Agreement and, on the other, investment protection under bilateral and multilateral investment agreements. Priority rights and duties should therefore be envisaged for carbon-­ neutral investment, adjusting the fair and equitable treatment (‘FET’) standard on climate grounds. On this basis, the procedural reform of the investor-State dispute settlement (‘ISDS’) system should be tailored to address substantial developments focused on sustainability, or at least include them adequately. Keywords  European Union · UNCITRAL · Investment protection · Sustainable investment · Compensation

4.1 Introduction The current regime for international investment governance is largely centred on the idea of fostering a cross-border competitive playing field: the system facilitates market access and affords investment protection via equitable treatment. This regime has been under intense critique for several reasons, spanning questions of consistency, transparency and costs, which has spurred various proposals for a reform. On the initiative of States and international organisations, with the EU in the frontline, since 2017 the UNCITRAL has worked on a revision of the investment regime. Whilst the reform aims to be comprehensive and incisive, its focus is almost exclusively a procedural one: substance is completely sidelined, and the reform includes very limited references to the problems of climate change and sustainability. Climate governance is currently regulated via the international regime established under the UNFCCC.1 That Convention creates obligations for the parties to contain greenhouse gas (‘GHG’) emissions within sustainable limits, with investment in low-carbon technology being essential to its implementation. Indeed, it is actually surprising that, despite the centrality of climate governance and sustainable investment to the functioning of the international community, the UNCITRAL reform of the investment system only includes sparing references to environmental protection. The question therefore arises as to whether the UNFCCC, on the one hand, and the investment regime and its envisaged reform, on the other, are aligned

 Opened for signature 4 June 1992, 1771 UNTS 107, entered into force 21 March 1994.

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and mutually consistent. Indeed, along the lines of the principle of systemic integration established in article 31(3)(c) of the Vienna Conventions on the Law of Treaties,2 insofar as possible treaties must be interpreted harmoniously in a contextual way, considering their reciprocal relationships within the wider international normative environment (International Law Commission 2006, 209). The analysis is divided into three parts. The first part illustrates the fundamental mechanisms of the current international investment regime, showing that investment protection is the absolute priority. Subsequently, this part of the analysis provides a concise but comprehensive critical review of the reform of the investment system underway at the UNCITRAL. The second part of the research takes a systemic approach and explores the relationship between the UNFCCC system and the international investment regime. This analysis singles out a fundamental inconsistency: investment protection under bilateral investment treaties (‘BITs’) and multilateral investment treaties (‘MITs’) has the potential to hamper the implementation of duties contracted by sovereign entities under the UNFCCC regime. Taking stock of the analysis developed under the first and second part of the research, the third part proposes a refocusing of the investment reform under way at the UNCITRAL and explores (targeted) prospective solutions. In the light of some model proposals, particularly the Treaty on Sustainable Investment for Climate Change Mitigation and Adaptation (‘TSICCMA’),3 the chapter develops the foundations for a systemic reform prioritising sustainable investment over unsustainable investment and consequent complementary procedural remedies.

4.2 The Fundamentals of the Current System: Investment Protection Unlike other regulatory regimes, such as the World Trade Organisation (‘WTO’), the investment system is decentralised and based on BITs and MITs. These aim to create a cross-border competitive playing field for foreign investment and, for this purpose, BITs and MITs govern two main issues: (1) market access; and (2) the protection of investment within foreign markets. More analytically, BITs and MITs establish that members afford equal domestic treatment to foreign and domestic investment, in keeping with the principle of national treatment (‘NT’). Furthermore, the parties must usually afford the same most favourable nation (‘MFN’) treatment to foreign investors, regardless of their country of domicile or residence. Once investment enters a market, according to the FET standard, it is thereafter to be protected from undue expropriation, which can only be exceptionally justified—for  Vienna Convention on the Law of Treaties (VCLT), opened for signature 23 May 1969, 1155 UNTS 331, entered into force 27 January 1980; Vienna Convention on the Law of Treaties between States and International Organisations or between International Organisations (VCLTIO), opened for signature 21 March 1986, not yet into force. 3  Available at https://stockholmtreatylab.org/the-outcome 2

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instance, on environmental grounds—and necessarily entails compensation. These conditions are embedded, for instance, in the Organisation for Economic Co-operation and Development’s (‘OECD’) Draft Multilateral Agreement on Investment4 and the Declaration on International Investment and Multinational Enterprises.5 Furthermore, instruments such as the OECD Guidelines for Multinational Enterprises support the system by requiring corporations to comply with the host State’s rules in matters such as transparency and environmental protection.6 BITs and MITs also outline procedures for the settlement of disputes between parties. Interstate disputes can be resolved via consultation, mediation, conciliation, international adjudication, and arbitration. Investor-State disputes are resolved via domestic adjudication, based on conflict of laws rules, or via international arbitration. In particular, the 1965 Convention Establishing the International Centre for the Settlement of Investment Disputes (‘ICSID’),7 which has been so far ratified by 155 States, outlines a framework that facilitates ad hoc conciliation and arbitration in the case of investor-State litigation (article 1). Essentially, ICSID proceedings commence upon a request for conciliation or arbitration by either the investor or the host State addressed to the Secretary-General (ICSID Convention articles 28 and 36). While conciliation commissions facilitate an agreement between the parties (ICSID Convention article 34), arbitral tribunals decide in accordance with the law chosen by the parties, or the law of the host State, as well as international law (ICSID Convention article 42). Awards are final (that is, not subject to appeal) and binding. This system has been subject to growing critiques, with the EU in the frontline. With regard to substance, core concerns go to the fact that current BITs and MITs do not adequately distribute power between sovereign entities and investors, so much so that scholars invoke an expansion of States’ regulatory discretion (Chan 2021, 202). Other concerns focus on the fact that the investment system does not adequately take into account the needs of developing countries (Morosini et  al. 2017). From a procedural standpoint, whilst radical criticism is not unanimous (De Luca 2020, 397), ISDS mechanisms have largely been attacked as undergoing a ‘legitimacy crisis’ (Langford et al. 2020, 167). Critiques have been raised against the ICSID mainly for: (1) not being impartial, consistent and transparent; (2) lacking an appellate mechanism; (3) being excessively lengthy, costly and bypassing domestic jurisdictions; and, last but not least, (4) for threatening the right of States to regulate in the public interest (Ning and Qi 2018; Echandi 2019, 32; Behn et al. 2020, 188). Interestingly, sustainability has thus far not emerged as a priority amidst such a variety of shortcomings.  Available at https://www.oecd.org/investment/internationalinvestmentagreements/multilateralagreementoninvestment.htm 5  Available at https://www.oecd.org/investment/investment-policy/oecddeclarationoninternationalinvestmentandmultinationalenterprises.htm 6  Available at https://www.oecd.org/corporate/mne 7  Opened for signature 18 March 1965, 575 UNTC 159, entered into force 14 October 1966. 4

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4.3 The Envisaged Reform: A Procedural Focus Since 2017, the UNCITRAL has been working on a reform of the investment system. At its fiftieth session, in 2017, the Commission established a working group with a broad mandate to consider a reform of the ISDS system, in the light of the work of relevant international organisations and States (UNCITRAL 2023). The rationale for an exclusively procedural approach is that considering substance would have required a broader consensus, which is difficult to achieve, given that States are often in disagreement about the viability of BITs and MITs (Langford et  al. 2020, 170 and 172). The UNCITRAL reform proposals can be divided into three categories. A first stream of provisions aims to adjust the ISDS procedure. A second set of norms seeks to create procedural remedies alternative to those already existing under ISDS, such as mediation and appellate procedures. A third category of rules proposes substantive amendments, including for the determination of damages and third-party funding. It is noted, for example, that in some cases it has proven impossible for States to recover procedural costs in the case of favourable decisions (Bottini et al. 2020, 254). For this purpose, the working group has prepared several provisional instruments. Among initiatives that aim to make existing procedures more impartial and transparent, the Initial Draft on the Selection and Appointment of ISDS Tribunal Members and Related Matters (UNCITRAL WG III 2021a) establishes stringent technical requirements for adjudicators, such as knowledge of public and private international law, relevant domestic law, as well as international trade and investment law (UNCITRAL WG III 2021a, para. 9). This draft also includes issues of sustainable development and industry-specific knowledge and calculation of damages (UNCITRAL WG III 2021a, para. 9). For the purpose of implementing these standards, the draft proposes ad hoc selection and appointment options, such as a selection of panel members by third parties, with limited input by the disputing parties, including the option of a recourse to a pre-established list or roster of arbitrators. New procedures also aim to address the problem of the absence of diversity among ISDS arbitrators (Bjorklund 2020, 410). This document is complemented by the Code of Conduct for Adjudicators in Investor-State Dispute Settlement (UNCITRAL WG III 2021b), which establishes that adjudicators in investment disputes must be independent, impartial, competent and fair, and avoid any conflicts of interest, impropriety and bias (article 3). For this purpose, adjudicators have an obligation to disclose all possible conflicts of interest (article 3) and disqualification and removal procedures apply under article 11. This approach seeks to remedy issues such as ISDS party appointment, the impropriety of connections between arbitrators and parties, and alleged pro-investor bias (Bjorklund 2020, 426). The Initial Draft on Mediation and Other Forms of Alternative Dispute Resolution (UNCITRAL WG III 2021c) envisages mediation as a procedural remedy that is less time- and cost-intensive than arbitration (UNCITRAL WG III 2021c, para. 5; Bottini et al. 2020, 268). The idea is extending mediation from the pre-arbitration stage and cooling off period to the entire time of arbitration proceedings (UNCITRAL

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WG III 2021c, para. 9), directly including mediation clauses in investment agreements (UNCITRAL WG III 2021c, para. 14). Different mechanisms are established in this framework to enter mediation, either on a voluntary basis or on compulsory grounds (UNCITRAL WG III 2021c, paras 24–25). A ‘without prejudice’ provision—establishing that recourse to mediation does not affect the rights of the disputing parties—is included as a necessary means not to disincentive recourse to mediation (UNCITRAL WG III 2021c, para. 48). Still aiming to limit ISDS disputes, the working group is considering the possibility of either prohibiting or limiting third-party funding in arbitration proceedings (UNCITRAL WG III 2021d, para. 11). In the case of a limitation, among other options, the proposal has been put forward that third-party funding only be allowed in the event that investment is compliant with sustainability requirements (UNCITRAL WG III 2021d, para. 17). A second category of reforms envisages the establishment of new institutions, in particular, the Draft on the Creation of a Multilateral Advisory Centre (UNCITRAL WG III 2021e), which is inspired by the Advisory Centre on WTO Law (UNCITRAL WG III 2021e, para. 5). The proposed centre would assist States and investors in ISDS procedures (UNCITRAL WG III 2021e, paras 49 ff.), particularly as regards access to justice, the cost of ISDS proceeding, as well as the correctness and consistency of decisions (UNCITRAL WG III 2021e, para. 4), including advise on alternative dispute resolution and the possibility of acting itself as a mediation centre (UNCITRAL WG III 2021e, paras 12 and 16). More radically, the UNCITRAL working group envisages the establishment of an appellate mechanism against arbitral awards or first-instance court judgements (UNCITRAL WG III 2021f). The absence of a second level of adjudication is considered a major weakness in the current ISDS system. The appellate jurisdiction would have competence over errors of interpretation and application of both substantive and procedural law, as well as errors in the finding of relevant facts, including damages (UNCITRAL WG III 2021f, paras 4 and 18). The working group is also discussing the extent of the power of revision, including the possibility of affirming, reversing, modifying and setting aside decisions, and remitting cases (UNCITRAL WG III 2021f, paras 27–28). While, on the one hand, appellate mechanisms extend the duration of proceedings and their cots (Zárate 2020, 302), on the other, they ensure consistency in the jurisprudence developed by tribunals and courts (Arato et al. 2020, 351). Inconsistency fosters unpredictability—it is facilitated by the unclear limits of standards such as the FET principle and disincentives investment (Arato et al. 2020, 351). For the purpose of enforceability, coordination with key treaties, such as the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards8 and the ICSID Convention, is under discussion (UNCITRAL WG III 2021f, paras 41 ff.). Particularly upon the initiative of the EU (European Commission 2017; Council of the EU 2018), the debate has also focused on the establishment of a Multilateral Investment Court (‘MIC’). The UNCITRAL Working Group is thus considering the

 Opened for signature 10 June 1958, 330 UNTS 3, entered into force 7 June 1959.

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creation of a permanent investment court financed by the parties to the founding instrument. Aiming to avoid the concerns for partiality and lack of transparency raised by the current ad hoc arbitration system, the proposed standing mechanism comprises permanent full-time adjudicators, including first instance and appeals proceedings (UNCITRAL WG III 2021g, paras 52–57). The awards rendered by the court would be enforceable under the New York Convention,9 which should be amended to also cover the awards rendered by ‘permanent arbitral bodies’ (UNCITRAL WG III 2021g, para. 57). In practice, it is considered that the MIC would reduce procedural costs by excluding counselling for choosing arbitrators, saving up to 8 months in the appointment process and limiting the number of nominated experts (Bottini et al. 2020, 261–262). As concerns substantive remedies, the Initial Draft on Assessment of Damages and Compensation determines that the current practice of assessment for compensation is excessively complex, particularly owing to a lack of clear parameters for the calculation of damage (UNCITRAL WG III 2021h, para. 69). Among other factors to be considered, it is noted that compensation is often disproportionate with respect to the amount invested and it is therefore necessary to define some limits, for example, by establishing a cap based on the amount actually invested (UNCITRAL WG III 2021h, para. 74). The viability of these reforms is debated and some scholars consider that, while minor adjustments, such as the adoption of a code of conduct for arbitrators, are viable, it is unclear where major systemic amendments are heading (Giorgetti et al. 2020, 474). Within such a context, questions of sustainability and climate change are almost completely sidelined and only considered to a marginal degree, as in the case of reform perspectives for third-party funding.

4.4 Sustainability, UNFCCC, BITs and MITs: Systemic Inconsistencies 4.4.1 The UNFCCC Regime The UNFCCC establishes an accepted international regulatory regime for addressing global warming, and defines the basic principles and duties for parties to that Convention to achieve sustainable GHG emissions (Voigt 2008, 5; Mayer 2018, 135; Fitzmaurice 2010, 106; Bodansky 2016, 150). It currently includes 197 States and international organisations.10 Essentially, under UNFCCC articles 2 and 3, the parties pursue the objective of stabilising GHG concentrations in the atmosphere to prevent dangerous interference with the climate system, according to the precautionary principle and that of  Opened for signature 10 June 1958, 330 UNTS 3, entered into force 7 June 1959.  Status of Ratification of the UNFCCC, https://unfccc.int/process-and-meetings/the-convention/ status-of-ratification/status-of-ratification-of-the-convention 9

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common but differentiated responsibility (‘CBDR’). For this purpose, within the framework of adequate mitigation policies, under UNFCCC article 4(1)(a)-(b) the parties establish national inventories of GHG emissions by sources and removals by sinks, whereby developed countries take the lead under UNFCCC article 4(2)(a). To ensure compliance, UNFCCC article 4(2)(b) and (e) commits the parties to providing detailed information on coordinated climate policies and to periodically reviewing such policies. Consistent with the UNFCCC, the Paris Agreement11 spells out emission reduction targets. Notably, article 2 of the Paris Agreement provides that the parties aim to ‘strengthen the global response’ to climate change, which entails ‘holding’ global average temperature ‘well below 2°C above pre-industrial levels’. The same provision establishes that the parties ‘pursue efforts to limit’ temperature increase to 1.5 °C, as this would ‘significantly’ reduce the impact of global warming. According to article 4, the parties seek to achieve the peaking of GHG emissions ‘as soon as possible’ via adequate mitigation measures. For this purpose, under article 3 the parties commit to determining national contributions on a voluntary basis and, under articles 4(2) and (9), engage to report on progress as they do so. In this context, as of 23 April 2021, 80 countries have submitted new or updated nationally determined contributions (‘NDCs’), spanning around 40% of global CO2 emissions. Furthermore, 27 countries and the EU have communicated long-term low GHG emissions development strategies under the Paris Agreement (article 4(19)), with some including a net zero pledge. To this end, 44 countries plus the EU have indeed advanced net zero emission targets, covering around 70% of total carbon emissions and gross domestic product (‘GDP’), either via policy documents or through binding legislation (IEA 2021, 32–33). 200 150 100 50 0

First NDC

New/Updated NDC

Net zero emission Long-term strategies submissions

Countries that have submitted first and updated NDCs, net zero carbon emission strategies and long-term strategies. (Based on data reported in IEA, Net Zero by 2050: A Roadmap for the Global Energy Sector, 2021, 31–32)

Achieving the objective of carbon sustainability under the UNFCCC and the Paris Agreement requires radically shifting investment from carbon-intensive activities to carbon-neutral ones. According to the International Energy Agency (‘IEA’), around 40% of reductions towards net zero emissions should result from the 11

 Opened for signature 22 April 2016, entered into force 4 November 2016.

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implementation of low-carbon technologies that necessitate massive investment, for instance, for the purpose of electricity generation; 55% of reductions demand the adoption of both low-carbon technologies and the engagement of citizens and consumers, for instance, installing a solar water heater; and a reduction of around 5% is required in overall energy demand, via measures such as limiting business-related air travel (IEA 2021, 67).

Technology and behavioural change in carbon emission reductions. (Based on data reported in IEA, Net Zero by 2050: A Roadmap for the Global Energy Sector, 2021, 68)

In order to face an increased expansion of electrification, with annual investment rising from average US$260 billion to around US$800 billion in 2030–2050, the IEA estimates that increasing investment in energy, and redirecting capital towards clean energy technologies, will be essential to any meaningful green transition. Public policies thus need to create adequate incentives and direct governmental financing is needed to develop new infrastructure and accelerate innovation (IEA 2021, 82).

4.4.2 BITs, MITs and Sustainability BITs and MITs currently in force have not been designed to accommodate the need for sustainability that underpins the UNFCCC regime. As we have seen,12 the system proceeds upon three fundamental questions, that is, granting market access to foreign investment, ensuring protection for investment in foreign countries, and affording fair and equitable treatment. Only in relatively recent times (and to a relatively limited extent) have environmental externalities emerged in the context of BITs and MITs, codifying the evolution of a body of case law that otherwise remains quite restrictive. The reference case in the development of environmental protection in the area of investment governance is Metalclad v. Mexico. In this dispute, Metalclad, a US-based company, purchased a landfill site in Mexico, planning to expand a dump 12

 Section 4.2.

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to storage thirty thousand tons of hazardous waste within 25  years, despite the absence of a permit from municipal authorities. Following the rejection of a request for a permit and the declaration of an ecological reserve covering the landfill area, in 1996 Metalclad commenced arbitral proceedings to claim damages from the Mexican Government. An ICSID Arbitral Tribunal held Mexico liable for failing to ensure a transparent and predictable investment framework and awarded US$16.7 million in compensation for indirect expropriation,13 which was later reduced to US$15.6 million by a court in the Canadian province of British Columbia, upon recourse by Mexico.14 The case shows that environmental purposes allow a derogation from investment liberalisation and protection only within the restrictive limits of investment protection. Still giving adequate weight to investment protection, in Methanex, an UNCITRAL Arbitral Tribunal considered that environmental sustainability does not permit disguised restrictions on international investment.15 The Arbitral Tribunal in Glaims Gold Ltd v. US further considered that only ‘manifest arbitrariness’ entails a breach of the FET principle under NAFTA article 1105, and held that legislation aiming to protect Native American sites in California from the environmental effect of excavations is in breach of the FET standard vis-à-vis a Canadian company.16 However, in light of the environmental purpose of the measures adopted, the Tribunal excluded indirect expropriation under article 1110 of the North American Free Trade Agreement (‘NAFTA’).17 In Clayton and Bilcon Inc v. Canada, an investor challenged the decision of Canadian authorities to reject the project for a quarry and marine terminal in Nova Scotia, following an environmental impact assessment. The Permanent Court of Arbitration held the assessment in breach of the minimum standard of investment treatment under NAFTA article 1105 and awarded compensation.18 The principle of genuine environmental protection has been progressively included in bilateral and multilateral investment agreements. This is the case, for instance, of article 14(16) (Investment and Environmental, Health, Safety, and Other Regulatory Objectives) of the US-Canada-Mexico FTA,19 which corresponds to former article 1114 of NAFTA. This rule establishes the possibility for a party to adopt, maintain or enforce any appropriate measures ‘to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental, health, safety or other regulatory objectives.’ Derogations from free cross-border investment  Metalclad Corporation v. The United Mexican States, ICSID Case No. ARB(AF)/97/1 (30 August 2000) paras 73, 109 and 131. 14  The United Mexican States v. Metalclad Corporation, 2001 BCSC 664 (2 March 2001) para. 134. 15  US Methanex Corporation v. United States of America, UNCITRAL Arbitral Tribunal, Final Award on Jurisdiction and Merits (3 August 2005) para. 4. 16  Glaims Gold Ltd v. US, NAFTA Arbitral Tribunal, Award (8 June 2009) para. 22. 17  Id., para. 536; Opened for signature 15 April 1994, 1867 UNTS 14, entered into force 1 January 1994. 18  Clayton and Bilcon Inc v. Canada, PCA Case No. 2009–04, Award: Damages (10 January 2019). 19  Opened for signature 30 November 2018, entered into force 1 July 2020. 13

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are therefore only exceptionally allowed for public policy reasons. Article 14(17) further contains a provision on corporate social responsibility (‘CSR’), whereby the parties encourage enterprises to ‘voluntarily incorporate into their internal policies’ relevant ‘internationally recognized standards, guidelines, and principles’, such as the OECD Guidelines for Multinational Enterprises, which aim, inter alia, to enhance the contribution of multinational enterprises to sustainable development (Preamble). Whilst it is important, this rule is clearly grounded in a voluntary approach, along the lines of soft law instruments currently governing the area. Some investment agreements embed a more advanced approach. This is particularly the case of BITs and MITs recently concluded or under negotiation by the EU.  For instance, the Canada-EU Comprehensive Economic Trade Agreement (‘CETA’)20 establishes under article 8(9) (Investment and Regulatory Measures) the right of the parties to regulate for achieving legitimate policy objectives, including environmental protection. This can go as far as to affect investment and investors’ expectations, including a modification of subsidies, in order to comply with international obligations. Although the provision does not specifically address climate change, it allows room for a State to adopt regulation, inter alia, in compliance with the UNFCCC and the Paris Agreement, in derogation from the FET standard as regards foreign investment. The same provision is embedded in article 2(2) of the proposed ‘Investment Protection Agreement’ between the EU and Singapore.21 De lege ferenda, some investment agreements currently under negotiation by the EU propose a more advanced approach. Thus, the EU-New Zealand Trade and Investment Agreement22 includes a provision (article 19(6)(1)) establishing that the parties ‘recognise the importance of taking urgent action to combat climate change and its impacts’, consistent with the UNFCCC, the Paris Agreement, and other MEAs governing global warming. For this purpose, the parties ‘effectively implement’ NDCs (article 19(6)(1)) and ‘facilitate the removal of obstacles to trade and investment in goods and services of particular relevance for climate change mitigation and adaptation’, notably ‘renewable energy, energy efficient products and services’, by means such as ‘addressing tariff and non-tariff barriers’ or via ‘the adoption of policy frameworks conducive to the deployment of best available technologies’ (article 19(6)(4)(b)). An identical provision is embedded in article X(5) of the draft EU-Australia FTA.23 This norm introduces a ‘climate clause’ and aligns investment regulation with the trade regime as established, for instance, in the EU-MERCOSUR Association Agreement.24

 Opened for signature 30 October 2016, entered into force 21 September 2017.  Available at https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/countries-and-regions/new-zealand/eu-new-zealand-agreement/text-agreement_en 22  Available at https://trade.ec.europa.eu/doclib/docs/2019/april/tradoc_157866.pdf 23  Available at https://trade.ec.europa.eu/doclib/docs/2019/april/tradoc_157865.pdf 24  Available at https://trade.ec.europa.eu/doclib/press/index.cfm?id=1769 20 21

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4.5 Refocusing the Investment Reform 4.5.1 Prioritising Carbon-Neutral Investment In the light of the extensive obligations that States and international organisations have to curb GHG emissions, it appears that the current regulatory framework for international investment is neither particularly progressive nor targeted. It is therefore argued that the priority for States and international organisations in reforming the investment regime should not be a radical procedural review of the ISDS system, which, by the way, has given rise to understandable scepticism. Rather, the reform should be grounded in a radical re-thinking of the substance of international investment regulation, extending protection for carbon-neutral investment and bringing BITs and MITs into line with the UNFCCC regime. A few model proposals have indeed been recently elaborated for advancing sustainability in the area of investment, among which the TSICCMA emerges as the most comprehensive one (Brauch et al. 2019, 7). Fundamentally, along the lines of the principle of systemic integration established in article 31 of the Vienna Convention on the Law of Treaties and the Vienna Convention on the Law of Treaties between States and International Organisations, BITs and MITs should become complementary instruments with respect to the UNFCCC and the Paris Agreement (Henin et al. 2019, 39). Article 1 (Purpose and Interpretation) of the Green Investment Protocol (‘GIP’)25 establishes the need to ‘encourage, promote, and facilitate investments consistent with a pathway towards low greenhouse gas emissions and climate-resilient development’, in order to implement ‘[a]rticles 2 and 9 of the [Paris Agreement]’. This requires ‘providing protections to green investments’ and must be done ‘in a manner that builds on existing Investment Treaties and is compatible with the objectives and consistent with the principles of the [Paris Agreement] and the SDGs’. The approach is in line with some of the new investment treaties being negotiated or recently concluded by the EU, such as the EU-Australia FTA and the EU-New Zealand Trade and Investment Agreement.26 On this basis, BITs and MITs could foster an investment system that prioritises low-carbon investment over a carbon-intensive one (Henin et  al. 2019, 39). For instance, GIP article 4 establishes that a contracting party ‘shall encourage, promote and facilitate green investments’ via mechanisms that are ‘appropriate and consistent with its international obligations’, in the light of the principles of equity and CBDR. A ‘binary’ approach would permit to confine the application of the principle of non-discrimination, and thus the MFN and NT principles, to low-carbon investment only (Brauch et  al. 2019, 12–13). TSICCMA article 3(2)(3) (Non-­ Discrimination) establishes that determining ‘like circumstances’ for the purpose of the application of the MFN and NT principles requires an assessment of whether 25 26

 Available at http://stockholmtreatylab.org  See Sect. 4.4.2.

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investment ‘qualifies as sustainable investment, unsustainable investment or non-­ classified investment’ and consideration of ‘global and national impacts on climate change or on the prospects for adaptation to climate change impacts’. BITs and MITs should also include a right for sovereign entities to implement climate measures disrupting investment in the public interest (Magraw et al. 2019, 105). Article 6(1) of the Green Investment Treaty (‘GIT’)27 establishes that the parties have a ‘right to regulate within their territories to achieve legitimate policy objectives, such as the protection of public health, safety, the environment, climate change mitigation or adaptation’, including ‘the right to regulate regarding subsidies and other incentives’. GIT article 6(2) further specifies that a party can adopt measures ‘including through a modification to its laws, in a manner which negatively affects an investment or interferes with an investor’s expectations, including its expectations of profits’. In fact, ‘investors may not have a legitimate expectation that a Party’s legal regime applicable to matters relating to climate change [such as taxes, fees, and regulations] will remain static, even if specific promises are made’. This system would permit the exclusion of compensation in the case of expropriation of investment for purposes of sustainability (Brauch et  al. 2019, 24). TSICCMA article 5(1)(3) (Right to Regulate) provides that the treaty shall not ‘be construed to oblige a party to pay compensation for adopting or enforcing non-­ discriminatory regulatory measures taken in good faith’, which are necessary to ‘achieve the [SDGs]’ and ‘the objectives of the [Paris Agreement] and other climate change mitigation and adaptation objectives’. This is essential for excluding the possibility that international investment tribunals hold State policies supporting carbon-neutral investment in violation of the rights of investors in fossil fuel, as illustrated in the recent cases of Aura Energy and Uniper.28 In these disputes, foreign companies claim compensation for billions of USD against Sweden and The Netherlands because of the implementation of sustainable policies that have led to banning mining activities. In addition to provisions addressing States and international organisations, sustainability obligations could be imposed on individuals and corporations (Brauch et al. 2019, 25). TSICCMA article 4(1) (Compliance with International Law) provides that investors shall make sure that ‘the establishment, acquisition, management, operation and disposition of investments occur in a manner that furthers and does not hinder compliance of the host State and the home State with their international law obligations’, including ‘the [Paris Agreement] and future international agreements on climate change mitigation and adaptation’.

 Available at http://stockholmtreatylab.org/wp-content/uploads/2018/10/Team-13-ModelTreaty.pdf 28  Aura Energy Limited v. Sweden, Claim for Damages under the Energy Charter, Union Law and European Law, 4 November 2019, https://www.italaw.com/cases/7847; Uniper SE, Uniper Benelux Holding B.V. and Uniper Benelux N.V. v. Kingdom of the Netherlands, ICSID Case No. ARB/21/22, Claimant’s memorial of 20 May 2022. 27

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4.5.2 New Procedures for Sustainable Investment According to the simple mechanisms that govern the law (Kelsen 1967, 75), the substantive reform of BITs and MITs grounded in sustainability should drive a review of procedural mechanisms. In this regard, it is useful to divide prospective measures into pre-investment procedures and enforcement mechanisms. Concerning pre-investment procedures, BITs and MITs should establish an obligation to carry out preliminary climate impact assessments for cross-border investment projects (Brauch et  al. 2019, 26–27; Magraw et  al. 2019, 121). TSICCMA article 6 (Pre-Establishment Environmental, Social, Human Rights and Climate Change Impact Assessment) provides a comprehensive model. Article 6(1) states that the parties ‘shall ensure that their respective domestic laws require investors or their investments to carry out a pre-establishment impact assessment or assessments covering positive and negative impacts of the proposed investment’ on, inter alia, ‘climate change mitigation and adaptation, including the quantification of greenhouse gas emissions of the proposed investment.’ Article 6(2) further requires ‘high standards’ for assessments, including, as a minimum, that they: (a) ‘be carried out by an entity that is wholly independent of the investor or its investment and any State with a stake in the investment’; (b) ‘include input from independent experts’, such as climate change specialists; (c) ‘be carried out in a way that is transparent and accessible to the public, to investors and any other affected person; and (d) ‘actively seek participation of the communities most likely to be affected by the investment and ensure that their input is reflected in the impact assessment or assessments.’ From the standpoint of enforcement, some of the UNCITRAL reforms that are already underway address critical sustainability problems. Measures aiming to foster transparency in the ISDS system, establish an appellate mechanism and limit compensation target the root causes of massive claims for damages advanced by investors in fossil fuel that have emerged in cases such as Uniper and Aura Energy (Uniper 2022; Aura Energy 2019). However, at the same time, these reforms can inhibit compensation when incentive schemes for renewables are rolled back, as in the case of Eiser Infrastructure.29 In fact, as the reforms currently envisaged by UNCITRAL regulate sustainable and unsustainable investment alike, very few provisions create a preferential system for sustainable investment, such as some of the norms on third-party funding.30 Additional prospective solutions include the possibility of class action and State-­ to-­State dispute settlement, besides investor-State dispute resolution mechanisms, along the lines of the WTO Dispute Settlement Understanding (Brauch et al. 2019, 25–26).31 For instance, TSICCMA article 7(3) (Lodging of a Complaint) establishes  Eiser Infrastructure Limited and Energia Solar Luxembourg S.À R.I. v. Kingdom of Spain, ICSID Case No. ARB/13/36, Award of 4 May 2017. 30  See Sect. 4.3. 31  Opened for signature 15 April 1994, 1867 UNTS 3, entered into force 1 January 1995. 29

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that ‘[a] natural person or group of natural persons of the host State Party or a civil society organization of the home State Party or host State Party’ may ‘lodge a complaint with a National Contact Point of a Party’, particularly if ‘a Party has not complied with the classification of investors and investments as Sustainable Investments or Unsustainable Investments’. Moreover, BITs and MITs could include action by the host State against investors in breach of sustainability duties. Conversely, procedural remedies could be limited for unsustainable investors (Brauch et al. 2019, 23). TSICCMA article 9(1) (Dispute Prevention and Settlement) provides that ‘[a]n Unsustainable Investor or its investment may not submit claims or counterclaims’ for dispute prevention and settlement, so that ‘[c]laims or counterclaims by Unsustainable Investors or their investments shall be subject to the exclusive jurisdiction of the domestic courts of the host State.’

4.6 Conclusion Since 2017, the UNCITRAL has considered a reform of international investment regulation, which prioritises investment protection, with a focus on ISDS and adjudication procedures. This reform, with consideration of the EU at its fore, seeks to both improve the current ISDS system and to establish additional mechanisms for dispute resolution. Provisions aiming to adjust the current ISDS system include measures such as new criteria for the selection of arbitrators, the adoption of a code of conduct fostering independence and impartiality, as well as the limitation or exclusion of third-party funding. A second set of norms intend to create procedural remedies alternative to those already existing under ISDS, such as mediation and appellate procedures. Further proposals aim to implement substantive amendments, establishing a more balanced determination of damages. In the reforming process, only a few rules include considerations of sustainability, particularly some of those addressing third-party funding. It is argued that, in the light of the commitments contracted by States and international organisations (particularly the EU) under the UNFCCC regime, the current reform of the ISDS system is fundamentally flawed. Rather than addressing procedural issues, it is suggested that the reform should prioritise substantive problems of sustainability, whereas procedural questions should be addressed as implications of such a substantive reform, and should be grounded in effective climate policies. Along the lines of a few model treaties concluded by the EU and others that have been recently drafted, among which the TSICCMA emerges as the most comprehensive, arguably de lege ferenda BITs and MITs should establish priority rights and duties for carbon-neutral investment with respect to both sovereign and non-­ sovereign entities, and should adjust the FET standard on climate grounds. As a consequence, pre-investment and enforcement procedures should be reformed to include objective climate impact assessments for investment projects as well as investor-State and State-State litigation, and the possibility of action by any interested stakeholders.

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References Álvarez Zárate JM (2020) Duration of investor-state dispute settlement proceedings. J World Invest Trade 21(2–3):300–335 Arato J et  al (2020) Parsing and managing inconsistency in investor-state dispute settlement. J World Invest Trade 21(2–3):336–373 Aura Energy Limited v. Sweden (2019, November 4) Claim for damages under the energy charter. Union Law and European Law, https://www.italaw.com/cases/7847 Behn D, Langford M, Létourneau-Tremblay L (2020) Empirical perspectives on investment arbitration: what do we know? Does it matter? J World Invest Trade 21(2–3):188–250 Bjorklund A (2020) The diversity deficit in international investment arbitration. J World Invest Trade 21(2–3):410–440 Bodansky D (2016) The legal character of the Paris agreement. Rev Eur Comp Int Env L 25(2):142–150 Bottini G et al (2020) Excessive costs and recoverability of costs awards in investment arbitration. J World Invest Trade 21:251–299 Brauch M et  al (2019) Treaty on Sustainable Investment for Climate Change Mitigation and Adaptation: aligning international investment law with the urgent need for climate change action. J Int Arbitr 36(1):7–35 Clayton and Bilcon Inc v. Canada, PCA Case No. 2009–04, Award: Damages (10 January 2019) Council of the EU (2018) Negotiating directives for a convention establishing a multilateral court for the settlement of investment disputes. 12981/17 ADD 1 DCL 1 De Luca A (2020) Responding to incorrect decision-making in investor-state dispute settlement: policy options. J World Invest Trade 21(2–3):374–409 Echandi R (2019) The debate on treaty-based investor–state dispute settlement: empirical evidence (1987–2017) and policy implications. ICSID Rev 34(1):32–61 Eiser Infrastructure Limited and Energia Solar Luxembourg S.À R.I. v. Kingdom of Spain, ICSID Case No. ARB/13/36, Award of 4 May 2017 European Commission (2017) A multilateral investment court, fact sheet. h t t p s : / / w w w. c o n s i l i u m . e u r o p a . e u / e n / p r e s s / p r e s s -­r e l e a s e s / 2 0 1 8 / 0 3 / 2 0 / multilateral-­investment-­court-­council-­gives-­mandate-­to-­the-­commission-­to-­open-­negotiations Fitzmaurice M (2010) Responsibility and climate change. Ger Yearb Int Law 53:90–138 Giorgetti C et al (2020) Independence and impartiality of adjudicators in investment dispute settlement: assessing challenges and reform options. J World Invest Trade 21(2–3):441–474 Glaims Gold Ltd v. US, NAFTA Arbitral Tribunal, Award (8 June 2009) Henin P et al (2019) Innovating international investment agreements: a proposed green investment protocol for climate change mitigation and adaptation. J Int Arbitr 36(1):37–70 IEA (2021) Net Zero by 2050: a roadmap for the global energy sector International Law Commission (2006) Fragmentation of international law: difficulties arising from the diversification and expansion of international law, UN Doc A/CN.4/L.682 Kelsen H (1967) Pure theory of law (trans: Knight M). Berkeley: UCP Langford M et al (2020) UNCITRAL and investment arbitration reform: matching concerns and solutions: an introduction. J World Invest Trade 21(2–3):167–187 Magraw D et  al (2019) Model green investment treaty: international investment and climate change. J Int Arbitr 36(1):95–134 Mayer B (2018) Obligations of conduct in the international law on climate change: a defence. Rev Eur Comp Int Environ Law 27:130–140 Metalclad Corporation v. The United Mexican States, ICSID Case No ARB(AF)/97/1 (30 August 2000) Morosini F, Ratton M, Badin S (2017) Reconceptualizing international investment law from the global south. CUP, Cambridge Ning H, Qi T (2018) Multilateral investment court: the gap between the EU and China. Chinese J Glob Gov 4(2):154–175

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The United Mexican States v. Metalclad Corporation, 2001 BCSC 664 (2 March 2001) UNCITRAL WG III (2021a) Possible reform of Investor-State Dispute Settlement (ISDS), selection and appointment of ISDS tribunal members, UN Doc A/CN.9/WG.III/WP UNCITRAL WG III (2021b) Possible reform of Investor-State Dispute Settlement (ISDS) assessment of damages and compensation. https://uncitral.un.org/en/working_groups/3/investor-­state UNCITRAL WG III (2021c) Code of conduct for adjudicators in investor-state dispute settlement. https://uncitral.un.org/en/working_groups/3/investor-­state UNCITRAL WG III (2021d) Possible reform of Investor-State Dispute Settlement (ISDS) Mediation and Other Forms of Alternative Dispute Resolution (ADR), UN Doc A/CN.9/ WG.III/WP UNCITRAL WG III (2021e) Possible reform of Investor-State Dispute Settlement (ISDS) draft provisions on third-party funding. https://uncitral.un.org/en/working_groups/3/investor-­state UNCITRAL WG III (2021f) Possible reform of Investor-State Dispute Settlement (ISDS) advisory centre. https://uncitral.un.org/en/working_groups/3/investor-­state UNCITRAL WG III (2021g) Possible reform of Investor-State Dispute Settlement (ISDS) appellate mechanism and enforcement issues, UN Doc. A/CN.9/WG.III/WP UNCITRAL WG III (2021h) Possible reform of Investor-State Dispute Settlement (ISDS) appellate and multilateral court mechanisms, UN Doc. A/CN.9/WG.III/WP.185 UNCITRAL WG III (2023) Investor-State Dispute Settlement Reform. https://uncitral.un.org/en/ working_groups/3/investor-­state Uniper SE, Uniper Benelux Holding B.V. and Uniper Benelux N.V. v. Kingdom of the Netherlands, ICSID Case No. ARB/21/22, Claimant’s memorial of 20 May 2022 US Methanex Corporation v. United States of America, UNCITRAL Arbitral Tribunal, Final Award on Jurisdiction and Merits (3 August 2005) Voigt C (2008) State responsibility for climate change damages. Nordic J Intl Law 77:1–22 Ying Chan S (2021) On the international investment regime: a critique from equality politics. Philos Econ 20(2):202–226

Chapter 5

New Wine in Old Wineskins? Climate Cases and the Energy Charter Treaty Yulia Levashova

Contents 5.1  I ntroduction 5.2  The Role of the Environment in the Energy Charter Treaty 5.2.1  Environmental Objectives in the Energy Charter Treaty’s Preamble 5.2.2  The Energy Charter Treaty’s Environmental Provisions: Articles 19 and 24 5.3  Application and Interpretation of the Energy Charter Treaty’s Environmental Provisions in Climate Disputes 5.4  Conclusion References

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Abstract The Energy Charter Treaty (‘ECT’)  went through a process of modernisation. However, the adoption of the modernised ECT has been delayed because most European countries were unable to reach an agreement on the revised text and announced their withdrawal from the treaty. Regardless of whether the modernised ECT is adopted, foreign investors will most likely continue to rely on its text, as, upon withdrawal by a State from the treaty, the sunset clause will apply, implying that foreign investors will still be able to rely on the ECT to initiate arbitration proceedings against a withdrawing State for a period of twenty years from the date of withdrawal. Even in the scenario of a coordinated withdrawal from the ECT by the European Union (‘EU’) that can eradicate the sunset clause intra-EU, the ECT will be still applicable for non-EU States that are the contacting parties to the treaty. Hence, the ‘old’ ECT will not be forgotten any time soon, and climate change investment cases may continue to arise under the existing treaty. This chapter investigates the potential of the ‘old’ ECT to argue the State position to invoke climate change or other environmental measures in ECT disputes. An analysis of current ECT environmental provisions shows that, despite the limited direct Y. Levashova (*) Nyenrode Business University, Breukelen, Netherlands Associate Research Fellow at Utrecht University, Utrecht, Netherlands e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 O. Quirico, K. Kwapisz Williams (eds.), The European Union and the Evolving Architectures of International Economic Agreements, https://doi.org/10.1007/978-981-99-2329-8_5

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applicability of articles 19 and 24(2) of the ECT in inter-State dispute settlement (‘ISDS’), a few tribunals have referred to these provisions either to underscore the environmental objectives of the ECT in combination with its preambular statements, or to interpret the meaning of the fair and equitable treatment standard under ECT article 10(1). In the context of growing climate cases, this can foster a compelling interpretation of the objectives under the ECT preamble in order to overcome the environmental limits of the ‘old’ treaty. Keywords  Energy charter treaty · Climate change · Sunset clause · Environmental clauses

5.1 Introduction On 24 June 2022, the contracting parties to the ECT reached an ‘agreement in principle’ on a ‘modernised’ ECT.1 This signature moment marked five years of a negotiation process that started in 2017.2 The need to reform the ECT has been expressed by most of the contracting parties—specifically, these States agree that the clean energy transition is a necessary step for the realisation of the goals of the Paris Agreement as the ECT concluded in 1994 falls short of achieving this ambition (European Union Proposal for Modernisation of the ECT 2020). Despite its relatively young age, the ECT has become one of the most invoked treaties, especially for European investors in the energy field. Since the ECT does not differentiate between fossil fuel and green investments, States initiating the phasing out of fossil fuels are at risk of becoming subject to investment arbitration proceedings. Recent cases, notably Rockhopper Italia v. Italian Republic and RWE v. Kingdom of the Netherlands demonstrate the growing trend for a new type of lawsuits that are based on States’ climate change measures.3 The agreement in principle is a compromise between the different positions of the contracting parties. The key achievement of a new ECT text is the inclusion of a provision that regulates the mitigation of climate change and the protection of fossil fuel investors. Furthermore, the agreement in principle clarifies substantive protection standards, restricts ISDS, and includes a provision on the State’s right to regulate. The new text of the ECT was scheduled for adoption by the ECC on 22 November 2022. However, adoption has been delayed as several European countries were unable to reach an agreement on the revised text and announced their withdrawal from the treaty (EURACTIV 2022a, b). As a result, it is currently unclear whether  Available at: https://www.energycharter.org/fileadmin/DocumentsMedia/CCDECS/2022/ CCDEC202210.pdf 2  Available at: https://www.energychartertreaty.org/modernisation-of-the-treaty 3  Rockhopper Italia S.p.A., Rockhopper Mediterranean Ltd, and Rockhopper Exploration Plc v. Italian Republic, ICSID Case No. ARB/17/14, Award (24 August 2022), not publicly available; RWE AG and RWE Eemshaven Holding II BV v. Kingdom of the Netherlands, ICSID Case No. ARB/21/4. Claimants’ Memorial (18 December 2021). 1

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the modernised ECT will ever be adopted. The question that remains is whether, and if so, for how long, foreign investors can rely on existing ECT provisions. The answer is ambiguous. On the one hand, in case the agreement in principle will still be adopted, despite a massive withdrawal, the ECT will be applicable for new investments made after 15 August 2023 and for existing investments made after 10 years from the entry into force of the relevant provisions. On the other hand, the agreement in principle speaks of a new ‘flexibility mechanism.’ This will allow States to exclude protection for fossil fuels for new and existing projects. The agreement provides that the EU and the United Kingdom (‘UK’) have already opted to carve-out fossil fuel-related investments from investment protection under the ECT. However, there are many uncertainties regarding the specific application of a flexibility mechanism in any ‘new’ ECT. In particular, it is not clear how the flexibility mechanism can be procedurally invoked by a State and what investments will exactly qualify for a carve-out as well as from what moment the new mechanism, if invoked, will apply. According to International Institute for Sustainable Development (‘IISD’) analysis on this issue, it is most likely that ‘in practice, existing fossil fuel investments might continue to be protected for significantly more than 10 years’ (IISD 2022, 16). The sunset clause included in Article 47(3) ECT will apply to States that have withdrawn or wish to withdraw from the ECT, such as Italy, the Netherlands, France, Spain, and Poland (EURACTIV 2022a, b). This means that foreign investors will still be able to rely on the ECT to initiate arbitration proceedings against a withdrawing State for a period of twenty years from the date of withdrawal. In the event of a coordinated withdrawal from the ECT by the EU, which could result in the intra-EU inapplicability of a sunset clause, the ECT will continue to apply to non-EU states that are contacting parties to the treaty. The above considerations demonstrate that the old ECT will not be forgotten any time soon, and that climate change investment cases will continue to arise under the existing treaty. Therefore, an analysis of ECT provisions is a worthwhile exercise in determining the potential to argue the State position to invoke climate change or other environmental measures in ECT disputes. The ECT contains a reference to environmental protection in articles 19 and 24 (2), as well as in the Protocol on Energy Efficiency and Related Environmental Aspects and in the preamble to the ECT.4 The precautionary principle and the polluter pays principle, embedded in article 19 are recognised environmental principles that have so far received limited attention in investment law. As this chapter will demonstrate, such environmental principles should not be underestimated in the context of ISDS as they can be successfully relied upon in climate change disputes. The following sections analyse environmental provisions in the ECT, and aim to show how existing mechanisms outlined in the aforementioned clauses can be invoked in climate-related cases.  Energy Charter Protocol on Energy Efficiency and Related Environmental Aspects, 1994, https:// www.energycharter.org/fileadmin/DocumentsMedia/Legal/1994_PEEREA.pdf. The Protocol contains recommendations directed at States for improved energy efficiency and reduction of adverse environmental impacts. The Protocol has been ratified by the majority of the Contracting States. To date, the Protocol has not been invoked in ISDS cases and the provisions of the Protocol do not apply to foreign investors. 4

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5.2 The Role of the Environment in the Energy Charter Treaty The number of ECT investment disputes concerning environmental repercussions, notably, in the field of renewable energy and fossil fuels, has steadily grown in the past 10 years. UNCTAD observes that 90% of renewable energy ISDS cases have been initiated on the basis of the ECT (UNCTAD 2022, 6). The ECT has thus become a key instrument in the legal fight between States transitioning to the alternative energy sources and foreign investors experiencing losses due to the transition. The ECT was negotiated in the early 1990s with a view to creating strong co-­ operation by promoting the further liberalisation of trade and investment in the energy sector. Protection of the environment in this context was a side factor with no specific commitments of the Contracting parties regarding the reduction of the negative environmental impacts in the energy sector (Hobér 2020, 351). At the same time, the contracting parties were aware of an increasing political and social concern about the need to address the rapid deterioration of the environment and to fight the global warming. Therefore, the Parties to the ECT agreed to include a reference to the United Nations Framework Convention on Climate Change (‘UNFCCC’) in the preamble to the ECT and to integrate key environmental principles—namely, sustainable development, the precautionary principle, and the polluter-pays principle—into the operative part of the treaty. For a long time, the environmental provisions included in the ECT were invoked in investment disputes incidentally. That situation is now changing. Environmental provisions under the ECT have never been more relevant than now, considering the growing number of climate change cases and the political urgency to address the climate crisis. In the following sections, the objectives of the ECT, as well as its environmental provisions (articles 19 and 24) will be reviewed against the background of relevant jurisprudence (at sections two and three). Further, analysis will focus on the precautionary and polluter-pays principles in the context of ISDS., before a final body of conclusions.

5.2.1  E  nvironmental Objectives in the Energy Charter Treaty’s Preamble Out of fifteen preambular statements in the ECT, one-fifth (three) refer to environmental protection. The objectives of the ECT, as reflected in its first twelve paragraphs, primarily concern cooperation between parties directed at the efficiency of energy markets, the liberalisation of trade and investment, and the avoidance of

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discriminatory practices.5 Environmental objectives are embedded in the three last preambular statements of the ECT6: whereby the Parties recognise ‘the necessity for the most efficient exploration, production, conversion, storage, transport, distribution and use of energy,’ recall ‘the [UNFCCC], the Convention on Long-Range Transboundary Air Pollution and its protocols, and other international environmental agreements with energy-related aspects’, and recognise ‘the increasingly urgent need for measures to protect the environment, including the decommissioning of energy installations and waste disposal, and for internationally agreed objectives and criteria for these purposes.’ In addition to ‘the increasingly urgent need for measures to protect the environment’, referenced in the preamble the parties also refer to key international treaties addressing climate threats that were current at the time of the negotiation of the ECT. According to some scholars, such emphasis suggests that the protection of investments is not meant to be prioritised over the environment, and that irreversible environmental challenges must be addressed with increasing urgency (Shine 1996, 552). The objectives mentioned in the ECT preamble primarily derive from the European Energy Charter.7 The European Energy Charter was adopted in 1991 as a political declaration containing a commitment to negotiating a legally binding ECT and its Protocols. Article 2 of the ECT (that is, the ‘Purpose of the Treaty’) states that the goal of the ECT is to ‘promote long-term cooperation in the energy field’ in line with the objectives of the European Energy Charter. The key economic objectives of the European Energy Charter include the improvement of security of energy supply and the maximisation of the efficiency of production. The central environmental objective referred to there focuses on the need of the contracting parties to minimise environmental problems. Importantly, the European Energy Charter also recognises ‘State sovereignty and sovereign rights over energy resources’ that should be exercised in accordance with international law.8 The inclusion of State sovereignty and related rights stems from the concept of permanent sovereignty over natural resources, which originated in the 1950s and has duly been reflected in several authoritative international law instruments, such as the Charter for Economic Rights and Duties of States. For example, article 2 of that Charter includes the right of a State to regulate foreign investment. Article 2(2)(a) in particular states that ‘[e]ach State has the right: (a) To regulate and exercise authority over foreign investment within its national jurisdiction in accordance with its laws and regulations and in conformity with its national objectives and priorities.’10 By inserting a reference to the recognition of permanent sovereignty over natural resources in the European Energy Charter and article 18 of the ECT, the contracting

 Available at: https://www.energycharter.org/fileadmin/DocumentsMedia/Legal/1994_ECT.pdf  ECT, Preamble, https://www.energycharter.org/fileadmin/DocumentsMedia/Legal/1994_ECT.pdf 7  Available at: https://www.energycharter.org/fileadmin/DocumentsMedia/Legal/ECTC-en.pdf 8   European Energy Charter, Objectives, https://www.energycharter.org/fileadmin/Documents Media/Legal/ECTC-en.pdf 5 6

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parties intended to emphasise the need for balancing the State right to regulate in the energy sphere with the economic rights of foreign investors. Overall, the objectives of the ECT have a strong environmental dimension, considering the neo-liberal economic era during which the agreement was negotiated. The insertion of language that stresses the urgency of protecting the environment and minimising environmental problems in conjunction with the recognition of State sovereignty over energy resources suggests that State parties envisioned a mechanism under which the State right to regulate in the interest of environmental protection must be balanced with the economic rights of foreign investors. So far, tribunals have paid relatively little attention to the environmental objectives embedded in treaties.9 However, ECT tribunals have clearly recognised the right to regulate stemming from State sovereignty. Nonetheless, the interpretation of the goals pursued by States under the right to regulate is mostly limited to longterm cooperation in the energy field, and to the need for States to ensure a stable regulatory framework.10 With the breakthrough of climate change cases and the rise in importance of environmental rhetoric in the context of the ECT, in the future the environmental objectives embedded in the treaty might be interpreted by tribunals in a new light. According to the general rules on treaty interpretation under article 31 of the 1969 Vienna Convention on the Law of Treaties (‘VCLT’), the preamble to a treaty plays a role in establishing the meaning of the treaty’s substantive provisions.11 In a recent dispute between the EU and the South Korea under the EU-South Korea free trade agreement,12 a panel of experts deciding the dispute under Chap. 13 on ‘Trade and Sustainable Development’ underscored the need for a holistic approach in interpreting the objectives of the treaty: The prevailing jurisprudence on Article 31 […] requires a holistic approach based on examining the ordinary meaning of the terms together with their context in light of the object and purpose of the treaty, all under the rubric of good faith. A disproportionate reliance on one particular element may yield a misplaced or inaccurate interpretation.13

The panel referred explicitly to the preamble of the EU-South Korea FTA, where the parties reaffirm their commitment to the Charter of the United Nations (‘the UN’), the Universal Declaration of Human Rights (UDHR), and sustainability (Boisson de Chazournes 2022, 329–346). These references assisted the panel in establishing that ‘decent work is at the heart [of the parties’] aspirations for trade and sustainable  See Sects. 5.2.2 and 5.3.  Silver Ridge Power BV v. Italian Republic, ICSID Case No. ARB/15/37, Award (26 February 2021), para. 396. 11  Vienna Convention on the Law of Treaties (adopted 23 May 1969, entered into force 27 January 1980), (VCLT) 1155 UNTS 331. 12  Panel of Experts Proceeding Constituted under Article 13.15 of the EU-South Korea Free Trade Agreement, ‘Report of the Panel of Experts’ (20 January 2021). See further the chapter by Wenting Cheng in this volume. 13  Panel of Experts Proceeding Constituted under Article 13.15 of the EU-South Korea Free Trade Agreement, ‘Report of the Panel of Experts’ (20 January 2021), paragraph 46. 9

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development.’14 Thus far, tribunals have primarily relied on the economic component in interpreting the intentions of the parties. A holistic approach to the interpretation of the objectives of the ECT requires proportionate reliance on all goals of the treaty, including environmental objectives. With the further integration of climate change into ISDS, the ECT goals might be subject to a more systemic and integrated interpretation.

5.2.2  The Energy Charter Treaty’s Environmental Provisions: Articles 19 and 24 Article 24(2)(i) of the ECT includes general exceptions concerning measures ‘necessary to protect human, animal or plant life or health., which were modelled after article XX of the 1994 General Agreement on Tariffs and Trade (‘GATT’). However, exceptions included in ECT article 24(2)(i) do not apply to part III of the ECT on investment protection. This means that a State will have little success in invoking the exception to ‘protect human, animal or plant life or health’ in an investment claim and explains why article 24 has rarely been invoked in ECT proceedings (Hobér 2020, 390). More specifically, article 19 (‘Environmental Protection’) is included in part IV of the ECT (‘Miscellaneous Provisions’). Article 19 stipulates that ‘in pursuit of sustainable development and taking into account its obligations under those international agreements concerning the environment to which it is party’, States ‘shall’ strive ‘to minimize in an economically efficient manner harmful Environmental Impacts’ arising from activities in the energy cycle. To achieve these objectives States ‘shall’ act in a cost-effective manner and strive to take precautionary measures to prevent or minimise environmental degradation. Furthermore, States ‘agree’ that ‘the polluter […] should, in principle, bear the cost of pollution, including transboundary pollution,’ by taking ‘public interest’ into consideration and ‘without distorting Investment in the Energy Cycle or international trade.’ Article 19 further elaborates on concrete commitments by providing that contracting States shall: • take account of environmental considerations throughout the formulation and implementation of their energy policies (article 19(1)(a)); • reflect upon environmental costs and benefits throughout the energy cycle (article 19(1)(b)); • encourage cooperation in the attainment of the environmental objectives of the Charter and cooperation in the field of international environmental standards for the energy cycle (article 19(1)(c));

 Panel of Experts Proceeding Constituted under Article 13.15 of the EU-South Korea Free Trade Agreement, ‘Report of the Panel of Experts’ (20 January 2021), paragraph 78–79 and paragraph 96. 14

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• develop and use renewable energy sources to promote cleaner fuels to reduce pollution (article 19(1)(d)); • collect and share information on environmentally sound and economically efficient energy policies and cost-effective practices and technologies (article 19(1)(e)); • promote public awareness of the environmental impacts of energy systems (article 19(1)(f)); • promote and cooperate in the research, development and application of energy efficient and environmentally sound technologies to minimize the environmental impacts (article 19(1)(g)); and • promote the transparent assessment, at an early stage and prior to decision making, and subsequent monitoring, of environmental impacts of environmentally significant energy investment projects (article 19(1)(i)). Article 19 is grounded in three key environmental concepts: (1) sustainable development; (2) the precautionary principle; and (3) the polluter-pays principle. 1. Sustainable development The principle of sustainable development provides that all operations in the energy sector should be conducted having in mind the goal of ‘sustainable development’. It should be noted that the concept of sustainable development has evolved significantly since the ECT was negotiated. The foundation of sustainable development is the integration principle, which includes the assimilation of environmental concerns into economic development, along with the reciprocal integration of economic and social concerns into environmental policies and obligations (Sands 2003). The concept of sustainable development has developed into a legal concept, as evidenced by treaty practice and investment cases. For example, countries like Morocco and South Africa have placed the concept of sustainable development at the core of their model investment agreements. Article 1 of the Model Bilateral Investment Treaty developed by the South African Development Community (‘SADC’) refers to sustainable development as the ‘main objective’ of the SADC Model BIT.15 The Moroccan Model BIT also states in ­article 1 that ‘the objectives of this Agreement are to promote investment that contributes to sustainable development in the Host Party.’16 Other recent international investment agreements also embed explicit provisions and chapters dealing with sustainable development.17 Moreover, compliance with sustainable development provisions

 Article 1, SADC Model BIT Template of 2012 with Commentaries, note 18,8. Text available at: https://www.iisd.org/itn/wp-content/uploads/2012/10/sadc-model-bit-template-final.pdf 16  Article 1, Morocco Model BIT 2019, https://edit.wti.org/document/show/b5908c50-ef94-4902b71d-12024f285ef8 17  The Dutch Model BIT includes a provision on sustainable development (article 6). The South Korea-Peru FTA, includes a provision on sustainable development (article 19.1). The EU-China Comprehensive Agreement on Investment (agreement in principle, 2020) includes Sect. IV on Investment and sustainable development. 15

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was challenged in recent lawsuits commenced under FTAs.18 The articulation of the concept of sustainable development in relation to the environment has evolved from non-committal, vague and aspirational ‘minimizing environmental impact’ language, to specific and pressing commitments on the part of States to comply with the UNFCCC and the Paris Agreement.19 2. The Precautionary Principle The precautionary principle is a concept based on the notion that States have a duty to implement preventive measures to protect the environment,20 including in the event of scientific uncertainty about the likelihood of environmental harm (Peel 2021, 302–306). The application of the precautionary principle lowers the threshold of harm required for environmental protection. In the absence of full scientific certainty, harm must be ‘serious or irreversible:’21 when this threshold is met, precautionary measures are mandated (Kazhdan 2011, 529). Principle 15 of the Rio Declaration contains perhaps the most authoritative definition of the precautionary principle: In order to protect the environment, the precautionary approach shall be widely applied by States according to their capabilities. Where there are threats of serious or irreversible ­damage, lack of full scientific certainty shall not be used as a reason for postponing cost-­ effective measures to prevent environmental degradation.22

This principle is also reflected in numerous international instruments, such as the 1982 United Nations Convention on the Law of the Sea, the 1985 Vienna Convention for the Protection of the Ozone Layer and its subsequent 1987 Montreal Protocol, the 1991 United Nations Economic Commission for Europe Convention on Environmental Impact Assessment, the 1992 climate change and biodiversity

 Arbitral Panel established under Chapter 20 of the Dominican Republic-Central America-United States Free Trade Agreement, ‘In the Matter of Guatemala – Issues Relating to the Obligations Under Article 16.2.1(a) of the CAFTA-DR, Final Report of the Panel’ (14  June  2017); Panel of Experts Proceeding Constituted under Article 13.15 of the EU–Korea Free Trade Agreement, ‘Report of the Panel of Experts’ (20 January 2021). 19  EU-China Comprehensive Agreement on Investment (agreement in principle, 2020), Article 6: Investment and Climate Change; Dutch Model BIT, Article 6 (6). Article 3 of the Canada Model BIT (May 2021) emphasises the state’s right to regulate in order to address climate change. Also, the agreement in principle reached on the modernised ECT aligns the ECT with the Paris Agreement and its environmental objectives (24 June 2022). 20  The precautionary principle should be distinguished from the prevention principle, which extends to measures to ‘prevent or minimize risks of significant transboundary environmental harm.’ Both principles require early preventive action, possibly even before damage occurs. The prevention principle applies to known risks of harm, whereas precautionary measures apply to uncertain threats of damage. 21  General Assembly, Rio Declaration on Environment and Development, A/CONF.151/26 (Vol. I), 12 August 1992, Principle 15, https://www.un.org/en/development/desa/population/migration/ generalassembly/docs/globalcompact/A_CONF.151_26_Vol.I_Declaration.pdf 22  Rio Declaration, Principle 15. 18

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conventions,23 the 1996 Protocol to the London Dumping Convention,24 the 1994 Convention to Combat Desertification, and the Treaty on the Functioning of the European Union (‘TFEU’).25 Some bilateral investment treaties, such as that concluded in 2016 between Morocco and Nigeria, also require the parties to apply the precautionary principle.26 In addition to international treaties, many national regimes have incorporated the precautionary principle in their environmental laws.27 Some scholars suggest that the precautionary principle might have developed into a customary principle of international law (Ayalew 2020). This is implied in the 2011 advisory opinion of the International Tribunal for the Law of the Sea on the Responsibilities and obligations of States sponsoring persons and entities with respect to activities in the Area28: The precautionary approach has been incorporated into a growing number of international treaties and other instruments, many of which reflect the formulation of Principle 15 of the Rio Declaration. In the view of the Chamber, this has initiated a trend towards making this approach part of customary international law.29

Moreover, in its analysis of the precautionary principle the tribunal referred to the International Court of Justice (‘ICJ’) judgment Pulp Mills on the River of Uruguay (Argentina v. Uruguay), where the ICJ underscored that ‘a precautionary approach may be relevant in the interpretation and application’ of the provisions of the Statute setting up the Administrative Commission of the River Uruguay.30 In its Advisory Opinion, the tribunal stressed that the statement of the ICJ can be considered ‘in light of article 31, paragraph 3(c), of the [VCLT], according to which the interpretation of a treaty should take into account not only the context but “any relevant rules of international law applicable in the relations between the parties”’. The precautionary principle is also reflected in various international decisions, for instance, the

 1992 Convention on Biological Diversity, preamble; 2000 Biosafety Protocol, Article 10.6.  1996 Protocol to the 1972 London Dumping Convention, Article 1. 25  The Treaty on the Functioning of the European Union, C 326/50, Official Journal of the European Union, 26 October 2012, Article 191. 26  2016 Morocco-Nigeria BIT, Article 14 (3), https://investmentpolicy.unctad.org/internationalinvestment-agreements/treaty-files/5409/download 27  Constitution and the Environmental Law of Costa Rica; Colombian Environmental Law; French Environmental Code; German Federal Emissions Control Act. 28  Advisory Opinion, ‘Responsibilities and Obligations of States Sponsoring Persons and Entities with Respect to Activities in the Area’, International Tribunal for the Law of the Sea’ (February 2011), https://www.itlos.org/fileadmin/itlos/documents/cases/case_no_17/17_adv_op_010211_ en.pdf 29  Ibid., para. 135. 30  Argentina and Uruguay disputed the provisions of the Statute resulting from Uruguay’s issuance of a permit to produce pulp for the construction of a mill on the Uruguay River. 23 24

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WTO Hormones case,31 and Tâtar v. Romania, which was heard before the European Court of Human Rights (‘ECtHR’).32 The precautionary principle was also applied in the recent ISDS cases of Eco Oro v. Colombia and Aven v. Costa Rica. In Eco Oro, the application of the precautionary principle was concerned with Colombian environmental policy and article 1.6 of Colombia’s general environmental law.33 In assessing whether Colombian measures constituted an indirect expropriation of Eco Oro’s rights, or a legitimate exercise by Colombia of its police powers, the tribunal referred to the precautionary principle. Considering the proportionality of Colombia’s measures in relation to its objective of protecting an important environmental site in the light of Principle 15 of the Rio Declaration on Environment and Development, the tribunal held the State policy to be reasonable and in accordance with the precautionary principle, notably as ‘(i) there [was] no certainty as to the damage that could be caused by mining activities and whether or not such damage would be irreversible and (ii) if not irreversible, the time it would take for the páramos to regenerate.’34 In Aven v.. Costa Rica, the respondent argued that according to the precautionary principle embedded in Costa Rican law, the burden of proof to disclose sensitive environmental information and to demonstrate the absence of an adverse environmental impact should lie with the claimants.35 The claimants had failed to disclose environmental information collected during the application process for the proposed development of real estate. By taking into account the precautionary principle as integrated into domestic legislation, the tribunal agreed with the respondent and established that the claimants had a duty ‘to advise the competent authority in matters that affect any impact to the environment.’36 3. Polluter-pays The polluter pays principle (‘PPP’) is defined as ‘an economic policy for allocating the costs of pollution or environmental damage borne by public authorities’ that involves ‘implications for the development of international and national law on liability for damage’ (Birnie et al. 2009). The application of the PPP has two dimensions. First, polluters bear the costs of their pollution, including the cost of measures taken to prevent, control and remedy pollution, and are therefore encouraged to search for a more efficient internalisation of costs through the development of

 WTO, Report of Appellate Body, European Communities  - Measures Concerning Meat and Meat Products (Hormones), WT/DS26/AB/R, 16 January 1998, https://www.wto.org/english/ tratop_e/dispu_e/hormab.pdf 32  ECHR, Tătar v. Romania (application no. 67021/01), Judgment on the Merits, 27 January 2009. 33  Eco Oro Minerals Corp. v. Republic of Colombia, ICSID Case No. ARB/16/41, Decision on Jurisdiction, Liability and Directions on Quantum, (9 September 2021), para. 460. 34  Eco Oro Minerals Corp. v. Republic of Colombia, para. 655. 35  David R. Aven and Others v. Republic of Costa Rica, ICSID Case No. UNCT/15/3, Award (18 September 2018), para. 444. 36  Ibid., para. 552. 31

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environmentally friendly practices. Secondly, the polluter will be liable for environmental damage (Sands 2012, 228–233).37 The PPP originated from a series of recommendations issued by the Organization for Economic Co-operation and Development (‘OECD’) in the period 1970–1989 (OECD 1972; OECD 1974). It did not receive international recognition until 1972, when it was incorporated into the Rio Declaration on Environment and Development: National authorities should endeavour to promote the internalisation of environmental costs and the use of economic instruments, taking into account the approach that the polluter should, in principle, bear the cost of pollution, with due regard to the public interest and without distorting international trade and investment.38

The same definition, or a definition similar to Principle 16, has been included in numerous international treaties, such as the 1994 ECT; the 1992 Convention for the Protection of the Marine Environment of the North-East Atlantic39; the Protocol to the Convention on the 1996 Prevention of Marine Pollution by Dumping Wastes and Other Matter,40 and the 1992 Convention on the Protection and Use of Transboundary Watercourses and International Lakes.41 The TFEU also refers to the PPP in article 191.42 Indeed, the PPP is one of the key EU environmental policy principles guiding EU legislation,43 with its implementation among Member States is dependent upon national authorities which can choose between different schemes, such as liability laws, taxation, charges, emission limit values and licensing procedures.44 The PPP and the no-harm rule were first articulated in the Trail Smelter Arbitration. In that case, the tribunal asserted the now accepted international law principle that state sovereignty over natural resources is subject to certain

 European Court of Auditors, Special Report: The Polluter Pays Principle: Inconsistent application across EU environmental policies and actions, 2021, https://www.eca.europa.eu/Lists/ ECADocuments/SR21_12/SR_polluter_pays_principle_EN.pdf 38  Rio Declaration on Environment and Development (United Nations Environment Programme [UNEP]) UN Doc A/CONF.151/5/Rev1, UN Doc A/CONF.151/26/Rev1, Vol. 1, Annex I, Principle 16. 39  Convention for the Protection of the Marine Environment of the North-East Atlantic 2354 UNTS 67, UKTS 14 (1999), Cm 4278, UNTS Reg No I-42279. 40  Protocol to the Convention on the Prevention of Marine Pollution by Dumping of Wastes and Other Matter (2006) ATS 11. 41  Convention on the Protection and Use of Transboundary Watercourses and International Lakes (United Nations Economic Commission for Europe [UNECE]) 1936 UNTS 269, UN Reg No I-33207, [1995] OJ L186/44. 42  Treaty on the Functioning of the European, Title XX Environment, Art. 191. 43  Directive 2010/75/EU of the European Parliament and of the Council of 24 November 2010 on industrial emissions (integrated pollution prevention and control), L 334/17; Directive 2008/98/EC of the European Parliament and of the Council of 19 November 2008 on Waste and Repealing Certain Directives L 312/3; Directive 2004/35/CE of the European Parliament and of the Council of 21 April 2004 on Environmental Liability with Regard to the Prevention and Remedying of Environmental Damage, 2004. 44  European Court of Auditors, Special Report: The Polluter Pays Principle: Inconsistent Application across EU Environmental Policies and Actions, 2021, 9. 37

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environmental obligations to guarantee that activities occurring within the territory of a country do not cause damage to other States.45 In practice, the PPP has formed the basis for the construction of liability regimes on grounds of strict liability that are primarily regulated by national legislation.46 Currently, and despite widespread acceptance of the PPP by the international community, there is no sufficient indication that the PPP has been recognised as customary international law (Heine et al. 2020, 94–115), the main reason being residual uncertainty concerning the scope and consequences of the principle (Sands 2003, 280). One of the main problems associated with the PPP, is the frequent lack of clarity as to who the polluter is, and consequently who carries liability. The Draft Principles on Allocation of Loss in the Case of Transboundary Harm arising out of Hazardous Activities of the International Law Commission (‘ILC’) and the OECD refer to the polluter as the party who operates a hazardous installation (operator).47 The ‘operator’ incurs primary liability according to Principle 4 of the ILC Draft Articles. However, at the same time liability may be shifted onto some other persons or entities ‘where appropriate.’ Another problematic issue is the allocation of costs. According to state practice, costs associated with pollution are not necessarily borne by the polluter alone.48 There is no general rule concerning the internalisation of environmental costs. This is usually case-specific and depends on the nature of the risk and ‘the economic feasibility of internalization of environmental costs in industries, whose capacity to bear them will vary’ (Birnie et al. 2009, 95). The definition of the PPP in article 19 of the ECT is consistent with the ‘aspirational’ and somewhat ‘vague’ language in Principle 16 of the Rio Declaration. The effectiveness of the PPP mentioned in article 19 is diminished by the wording that the PPP should apply ‘in principle’, with regard to ‘public interest’ and ‘without distorting investment in the energy cycle or international trade.’ The chosen phrasing lacks in enforcement potential and does not provide any incentive for the contracting parties to support green investment in order to comply with their obligations under article 19. As one commentor noted in regard to the application of the PPP under article 19: ‘companies which are required by national legislation, or which choose to internalize environmental costs at production stage will be placed at a competitive disadvantage in the absence of any meaningful obligation for all Contracting Parties to implement the principle’ (Shine 1996, 528).  This has been confirmed in UN General Assembly Resolution 2996 (XXVII) (1972), reiterated in Principle 2 of the Rio Declaration on the Environment and Development, June 1992 (UNCED UN Doc A/CONF. 151/5 (1992); Trail Smelter Arbitration (United States v. Canada) Arbitral Trib., 3 U.N. Rep. Int’l Arb. Awards 1905 (1941). 46  Draft Principles on the Allocation of Loss in the Case of Transboundary Harm Arising out of Hazardous Activities (International Law Commission [ILC]) UN Doc A/61/10, GAOR 61st Session Supp 10, 74. 47  Ibid., 106. Recommendation of the Council concerning the Application of the Polluter-Pays Principle to Accidental Pollution (Organisation for Economic Co-operation and Development [OECD]). 48  The Rhine Chlorides Arbitration concerning the Auditing of Accounts (The Netherlands/France), Arbitral Award, 12 March 2004, https://pcacases.com/web/sendAttach/78 45

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5.3 Application and Interpretation of the Energy Charter Treaty’s Environmental Provisions in Climate Disputes As estimated by a study conducted by the Climate Change Council, 75 ECT awards were issued in 2021. Out of these awards, 20 concerned fossil fuel and 34 related to renewable energy investment (Ipp et al. 2022, 6). Despite a significant number of cases involving an environmental component, only in a tiny fraction of recent awards were environmental provisions considered by arbitral tribunals. While the latter are limited; they demonstrate firstly the potential for application of ECT articles 19 and 24 in future climate change and other environmental disputes. According to article 19 of the ECT, the contracting parties ‘shall strive to take precautionary measures to prevent or minimise environmental degradation.’ This provision requires the State to undertake the best efforts (that is, ‘striv[e]’) to implement precautionary measures. The fact that in recent years the precautionary principle has become part of customary international law and domestic law may play an important role in interpreting the objectives of the ECT,49 or in the assessment of the proportionality of a State measures, as per Eco Oro and Aven. Notably, the precautionary principle might assert its significance in the growing body of climate change cases where there is no scientific certainty on the effects of environmental harm (Peel 2021, 318). Nonetheless, article 19 is of limited applicability. Firstly, although the language employed in article 19 ECT is mainly imperative in nature (the State parties ‘shall’), this sense of obligation is subsequently reduced by the use of permissive terms such as ‘strive,’ ‘promote,’ and ‘encourage.’ Secondly, this provision is addressed solely to States, not to investors. Thirdly, arbitral tribunals constituted in accordance with the provisions of ECT part III have no jurisdiction to hear disputes arising out of article 19 ECT. According to ‘the understanding’ of the contracting parties with respect to Article 19(1)(i), disputes arising out of Article 19 can either be resolved by ‘other appropriate international fora’ or reviewed by the Charter Conference at the request of a contracting State. To this end, a commentary on the ECT provides that ‘international fora’ implies ‘dispute resolution provisions in other environmental treaties which the Contracting Parties have signed and/or ratified’ (Hobér 2020, 352). So far, however, no known environmental disputes have arisen on the basis of article 19. However, despite the jurisdictional limitations integrated in the text of that article, tribunals or parties to the dispute have still mentioned it in interpreting FET provisions and determining the overall objectives of the treaty. Article 19 ECT has been considered in four arbitral decisions to date (each

 The ECT also refers to the 1992 United Nations Framework Convention on Climate Change (UNFCCC). Article 3.3 of the UNFCCC incorporates the precautionary principle by referring to ‘cost-effective measures to prevent environmental degradation’. 49

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pertaining to reneable energy): Blusun v. Italy,50 NextEra Energy v. Spain,51 Eiser v. Spain,52 and Stadtwerke München v. Spain.53 In NextEra Energy v. Spain, the claimant, in asserting that Spain should guarantee sustainable energy development, argued that the FET standard should be applied in ‘light of the [European Energy Charter]‘s commitment to legal stability and the environmental protection goals explicitly identified in the ECT’s Preamble, Article 2 and Article 19.’54 Spain disagreed with the claimant’s argument that the ‘purpose of the ECT is stated in Article 2, and that Article 19 on environmental protection is of minor importance.’55 The respondent further explained that ‘while Article 19 provides that the ECT contracting parties shall ‘have particular regard to Improving Energy Efficiency’ and ‘to developing and using renewable energy sources,’ it does not mandate the granting of ‘petrified’ public subsidies, and the ECT respects the State’s regulatory power in the area of State aid.’56 The tribunal did not uphold the claimant’s argument, noting that ‘while the objectives of the ECT may enter into interpretative process this does not require an overall perspective by the Tribunal of the objectives of the ECT.’57 Article 19 ECT, cited in the context of the objective of the ECT, was also mentioned by the tribunal in Eiser v. Spain. Explaining the objective of the ECT referred to article 19 (1) ECT, the tribunal emphasised that the ECT was focused ‘on developing secure long-term energy cooperation is coupled with provisions addressing the environmental aspects of energy development.’58 The arbitral tribunal in Stadwerke München v. Spain further mentioned article 19, providing background for a case concerning the revocation of incentives for renewable energy producers. The tribunal set the factual scene by explaining key developments that had prompted States to increase their generation of energy from renewable sources. In this regard, the tribunal mentioned the 1992 UNFCCC, which contains an international commitment by States to reducing climate change, and EU Directive 2001/77/EC of the European Parliament and of the Council on the Promotion of Electricity Produced  Blusun S.A., Jean-Pierre Lecorcier and Michael Stein v. Italian Republic, ICSID Case No. ARB/14/3, Final Award (27 December 2016). 51  NextEra Energy Global Holdings B.V. and NextEra Energy Spain Holdings B.V. v. Kingdom of Spain, ICSID Case No. ARB/14/11, Decision on Jurisdiction, Liability and Quantum Principles (12 March 2019). 52  Eiser Infrastructure Limited and Energía Solar Luxembourg S.à r.l. v. Kingdom of Spain, ICSID Case No. ARB/13/36, Final Award (4 May 2017). 53  Stadtwerke München GmbH, RWE Innogy GmbH, and others v. Kingdom of Spain, ICSID Case No. ARB/15/1, Award (2 December 2019). 54  NextEra Energy Global Holdings B.V. and NextEra Energy Spain Holdings B.V. v. Kingdom of Spain, para. 393. 55  NextEra Energy Global Holdings B.V. and NextEra Energy Spain Holdings B.V. v. Kingdom of Spain, para. 408. 56  Ibid., para. 408. 57  Ibid., para. 580. 58  Eiser Infrastructure Limited and Energía Solar Luxembourg S.à r.l. v. Kingdom of Spain, para. 100. 50

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from Renewable Energy Sources in the Internal Electricity Market. The tribunal also briefly discussed the adoption of the ECT as an ‘important and relevant multilateral initiative of the 1990’s to foster cooperation in the energy sector.’ In this respect, the tribunal emphasised the objectives of the ECT by referring to the preamble, and articles 2 and 19, which: [s]et out various general obligations with respect to the environment, including that the Contracting Parties shall “…have particular regard to Improving Energy Efficiency, to developing and using renewable energy sources, to promoting the use of cleaner fuels and to employing technologies and technological means that reduce pollution.59

In the renewable energy dispute Blusun v. Italy, article 19 of the ECT was discussed in the context of obligations relating to the environmental impact assessments (‘EIAs’). In this case the respondent argued that the claimants lacked clean hands/ good faith because of their failure to conduct an EIA under article 19 of the ECT. The claimants disputed Italy’s argument that article 19 ECT would lie outside of the scope of the tribunal’s jurisdiction. The tribunal concurred with the claimants that article 19 operates not at the level of individual investors but at the interstate level. In so far as there is any requirement for private parties to carry out an EIA for any proposed project, this can only arise under the relevant national law.60 In articulating its argument the tribunal referred to the ‘understating’ of the contracting parties appended to article 19(1)(i), where it is provided that it is ‘for each Contracting Party to decide the extent to which the assessment and monitoring of Environmental Impacts should be subject to legal requirements, the authorities competent to take decisions in relation to such requirements, and the appropriate procedures to be followed.’61 The tribunal explained that the existence and extent of the EIA imposed on private parties should be determined by the specific legal requirements under the host State’s laws. However, the tribunal briefly investigated Italy’s EIA requirements. The tribunal concluded that there was ‘some uncertainty as to the applicability of the screening procedure’ to the disputed project and that the time frame for asserting that an EIA was ‘really required’ had expired.62 The only investment case in which article 24 ECT (2)(i) was mentioned is the renewable energy case of RWE v. Spain. In this dispute, the claimants cited article 24 (2)(i) of the ECT when explaining their position regarding the interpretation of an FET standard. The claimants argued that investor protection under the ECT had been prioritised over measures ‘necessary to protect human, animal or plant life or health’ due to the exclusion of this exception from the jurisdiction of arbitral tribunals. Although the RWE tribunal rejected the claimants’ argument, it did confirm that the article 24 exception does not apply to the provisions set forth in ECT part

 Stadtwerke München GmbH, RWE Innogy GmbH, and others v. Kingdom of Spain, para. 53.  Blusun S.A., Jean-Pierre Lecorcier and Michael Stein v. Italian Republic, para. 275. 61  Ibid., para. 275. 62  Ibid., para. 276. 59 60

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III.63 In addition, the tribunal made several important observations. Firstly, it considered article 24(2) to be ‘of importance’ and part of the relevant context. Secondly, the tribunal mentioned that the drafters of article 24(2) took ‘Article XX GATT as their starting point’ and that ‘the doctrine and cases with respect to Article XX may shed light on the intention behind Article 24(2)’, although no such overview of Article XX GATT cases had been presented by the claimants in support of their argument. Thirdly, in respect of the interpretation of the FET standard, the tribunal noted that ‘Article 24(2) ECT militates against any expansive concept of [the] FET standard under Article 10(1) and supports an interpretative approach that, where a term in Article 10(1) can be seen as referable to customary international law, it is more likely that this is what the Contracting Parties intended’.64 It is notable that the tribunal mentioned the significance of the general exception clause and emphasised that article 24(2) may have a preventive function against an expansive interpretation of an FET.  The tribunal even considered that, in a situation where regulation is adopted to protect human life (in the sense of ECT Article 24(2)), it would not be regarded ‘as unfair and inequitable unless it was arbitrary or discriminatory or in some other way contrary to customary international law.’65 Eventually, these cases demonstrate that, even though both are pursuant to ECT chapter III, each of articles 19 and 24(2)(i) do not fall under the jurisdiction of arbitral tribunals, and that such provisions may still have a supporting function in: 1) emphasising the environmental objectives of the ECT; and 2) construing the meaning of the FET standard under article 10(1), or other substantive investment protection standards. Articles 19 and 24(2)(i), in combination with the ECT’s preambular statements and the European Energy Charter (cited in article 2 of the ECT), can be helpful in interpreting the ECT’s objectives and the meaning of the FET standard. According to the analysis of the preambular statements of the ECT, article 19 ECT, the European Energy Charter and the Protocol on Energy Efficiency and Related Environmental Aspects, it can be assumed that environmental protection and energy efficiency are explicit ECT objectives.

5.4 Conclusion This Chapter analysed the ECT’s environmental provisions—notably articles 19 and 24 (2)), and the preamble—in the light of existing jurisprudence in order to assess their potential for invocation in emerging climate disputes by State parties. Arguably, despite the limited direct applicability of articles 19 and 24(2) of the ECT in ISDS, a few tribunals have referred to these provisions either to underscore the

 RWE Innogy GmbH and RWE Innogy Aersa S.A.U. v. Kingdom of Spain, ICSID Case No. ARB/14/34, Award (18 December 2020), para. 445. 64  Ibid., para. 447. 65  Ibid., para. 447. 63

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environmental objectives of the ECT in combination with its preambular statements, or to interpret the meaning of the FET standard under ECT article 10(1). For example, the tribunal in RWE v. Spain underscored that ECT article 24(2) may have a preventive function against an expansive interpretation of the FET.66 In the context of growing climate litigation and arbitration, this might prompt courts and tribunals to develop a compelling interpretation of the objectives under the ECT preamble in order to overcome the environmental limits of the ‘old’ treaty.

References Ayalew D (2020) Shall we accept the precautionary principle in all fields of environmental protection? Testing the customary international law status of the precautionary principle of international environmental law. Working paper. https://ssrn.com/abstract=3759145 or https:// doi.org/10.2139/ssrn.3759145 Birnie P et al. (2009) International law and the environment, 3rd edn. Oxford University Press, Oxford Boisson de Chazournes L (2022) The European Union–Korea free trade agreement sustainable development proceeding: reflections on a ground-breaking dispute. J World Invest Trade 23:329–346 EURACTIV (2022a) Another blow for Energy Charter Treaty as Luxembourg announces exit. https://www.euractiv.com/section/energy/news/another-­blow-­for-­energy-­charter-­treaty-­as­luxembourg-­announces-­exit/ EURACTIV (2022b) Brussels calls for pause in ECT reform talks after losing key EU vote. https://www.euractiv.com/section/energy/news/brussels-­c alls-­f or-­p ause-­i n-­e ct-­r eform­talks-­after-­losing-­key-­eu-­vote/ European Union (2020) EU text proposal for the modernisation of the Energy Charter Treaty (ECT). https://trade.ec.europa.eu/doclib/docs/2020/may/tradoc_158754.pdf Heine D et al (2020) The polluter-pays principle in climate change law: an economic appraisal. Climate Law 10(1):94–115. https://doi.org/10.1163/18786561-­01001004 Hobér K (2020) The energy charter treaty. Oxford University Press, Oxford. https://www.iisd.org/ system/files/2022-07/energy-charter-treaty-agreement-analysis.pdf IISD (2022) Uncertain climate impact and several other questions. https://www.iisd.org/ publications/report/energy-charter-treaty-agreement-analysis Ipp A et al (2022) The energy charter treaty, climate change and clean energy transition: a study of the jurisprudence. Climate Change Council Kazhdan D (2011) Precautionary pulp: pulp Mills and the evolving dispute between international tribunals over the reach of the precautionary principle. Ecol Law Quart 38:529 OECD (1972) Recommendation of the council on guiding principles concerning international economic aspects on environmental policies OECD (1974) Recommendation of the council on the implementation of the polluter-pays principle Peel J (2021) Precaution. In: Rajamani L, Peel J (eds) The Oxford handbook of international environmental law, 2nd edn, 302–C18.S11. Oxford University Press, Oxford. https://doi. org/10.1093/law/9780198849155.003.0018 Sands P (2003) Principles of international environmental law, 2nd edn. Cambridge University Press, Cambridge, UK

 The precautionary principle was invoked in Rockhopper Italia v. Italian Republic. However, the award has not been made public. 66

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Sands P (2012) Principles of international environmental law, 3rd edn. Cambridge University Press, Cambridge Shine C (1996) Environmental protection under the energy charter treaty. In: Wälde TW (ed) The energy charter treaty: an east- west gateway for investment and trade. Kluwer Law International, pp 520–545 UNCTAD (2022) International investment agreements issues note. Treaty-based investor-state dispute settlement cases and climate action, issue 4:1–22. https://unctad.org/system/files/ official-­document/diaepcbinf2022d7_en.pdf

Chapter 6

Unsustainable Investment: Scoping Expropriation without Compensation Pascale Accaoui Lorfing

Contents 6.1  Introduction 6.2  Expropriation and the Right to Regulate: Theoretical Approaches 6.3  Treaty Provisions on the Right to Regulate 6.4  Conditions and Limits 6.5  Conclusion References

   96    97    98    102    105    106

Abstract  The regulatory measures that States takes in areas of public interest may have an impact on the rights of foreign investors, which are protected by international investment agreements (‘IIAs’) from expropriation and unfair and inequitable treatment. Provisions establishing the State right to regulate without compensation vis-avis foreign investors have been inserted into IIAs, particularly post-2010. They aim to recalibrate the conflicting interests of the State with investors’ rights. Often drafted generally (with general and security exceptions), such provisions are becoming more and more specific to certain areas, including corporate social responsibility, the environment, and most recently even climate change. In the light of sustainability, the conditions of the implementation of the right to regulate and the limits encountered in its interpretation by arbitrators reveal the importance of a better drafting of relevant provisions, reflecting the scope that the parties wish to give to such clauses. Keywords  Right to regulate · Expropriation · Compensation exceptions · Arbitration P. Accaoui Lorfing (*) Researcher at CREDIMI (Research Centre for International Market and Investment Law), University of Burgundy, Dijon, France Lecturer at ESCP Business School, Paris, France e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 O. Quirico, K. Kwapisz Williams (eds.), The European Union and the Evolving Architectures of International Economic Agreements, https://doi.org/10.1007/978-981-99-2329-8_6

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6.1 Introduction The adoption of several international conventions related to climate change, such as the Paris Agreement, has raised awareness about reducing the adverse effect of climate change. According to article 2 of the 1992 United Nation Framework Convention on Climate Change (‘UNFCCC’), climate change means ‘a change of climate which is attributed directly or indirectly to human activity that alters the composition of the global atmosphere and which is in addition to natural climate variability observed over comparable time periods.’ Article 1 further defines the adverse effects of climate change as ‘changes in the physical environment or biota resulting from climate change which have significant deleterious effects on the composition, resilience or productivity of natural and managed ecosystems or on the operation of socio-economic systems or on human health and welfare.’ These definitions point out the adverse effect of climate change on the ecosystem, including the socio-economic, health and welfare dimensions, that may be mitigated via the adoption by States of targeted climate policies, such as reducing greenhouse gas (‘GHG’) emissions, removing GHG from the atmosphere and helping to adapt to climate change by avoiding aggravated impacts on society. To that end, States bear an obligation to comply with international duties by translating obligations into national law or by adopting specific measures on climate-related issues. State laws and measures have an impact on the rights of foreign investors, duly triggering climate change-related disputes. Climate-related disputes are defined in broad terms so as ‘to include any dispute arising out of or in relation to the effect of climate change and climate change policy, the UNFCCC and the [Paris Agreement]’ (ICC Commission Report 2019, 8), including disputes related to climate change in sectors such as energy (in particular, the solar and wind energy sectors). International claims based on IIAs in relation to measures taken by States have indeed seen an increase in numbers (UNCTAD 2022), which raises the question of the necessity of reforming the investor-State dispute settlement (‘ISDS’) system (Tienhaara 2018; Brauch 2020, 3). According to the UNCTAD Report on IIA-based ISDS cases (UNCTAD 2022, Issue 4), 175 cases pertain to the environment, 192 to fossil fuels, and 80 to renewable energy (noting, of course, that some cases may relate to more than one issue at the same time). These claims have been advanced notably under treaty provisions such as those on expropriation and fair and equitable treatment (‘FET’). For instance, claims concerning a governmental plan to phase out coal by 2030 allegedly in breach of the Energy Charter Treaty (‘ECT’) (Uniper v. Netherlands, 2015), or measures affecting the renewable energy sector that allegedly violate investors’ rights under the ECT (PV Investors v. Spain) or the revocation of the claimant’s permit for oil and gas exploration (Lone Pine v. Canada), or even a State’s energy reform of the renewable sector that impacts the rights of foreign investors (Isolux v. Peru; 9REN Holding v. Spain), or finally a cut off of incentives for solar power plants (CEF Energia v. Italy; Eskosol v. Italy) and photovoltaic plants (Greentech and NovEnergia v. Italy). Where States face investors’ claims against measures taken in the public interest, there are typically costly consequences

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for governments and climate action (Bernasconi-Osterwalder 2018, 1). The question is what tools States can invoke to support their right to regulate and protect the public interest for which they are responsible. Such tools should exclude State liability vis-à-vis foreign investors, such as (for example) that the right of the State to regulate should not oblige the compensation of foreign investors, even if the latter’s rights are affected.1 Our analysis shows the evolution of the approach on the right of the State to adopt measures in the public interest by considering in the first place theoretical approaches justifying the concept of the expropriation (1), then moving to specific treaty provisions on the right to regulate (2), to finally assessing the conditions and limits of the right to regulate (3).

6.2 Expropriation and the Right to Regulate: Theoretical Approaches The concept of expropriation is related to the impact of a measure adopted by a given State. The arbitral tribunal’s characterisation of State measures as ‘expropriation’ implies the payment of compensation to a foreign investor. Hence the importance of drafting the clause that sets out the criteria and consequences of such a concept. ‘Indirect expropriation’ is defined in comparison to the concept of ‘expropriation’. What qualifies indirect expropriation is the impact of a measure taken by the State on the rights of a foreign investor, depending on whether it involves ‘total or near total deprivation of an investment but without a formal transfer of title or outright seizure’ (UNCTAD on Expropriation, 7). Three approaches have been adopted by arbitral tribunals in assessing the fate of State measures: the sole effects doctrine (2.1), the police power doctrine (2.2), and the proportionality test (2.3). The sole effects doctrine considers the degree of interference of an impugned State measure with the rights of the foreign investor. This jurisprudence qualifies a measure as indirect expropriation without considering the nature of the measure taken by the State. The measure is thus deemed expropriatory if it interferes ‘with property rights to such an extent that these rights are rendered so useless that they must be deemed to have been expropriated.’ (Starett Housing Corporation v. Iran, 4 Iran-US Cl. Trib. Rep. 154 (1983)) or if ‘it affects the entire investment or only part of it, as long as the operation of the investment cannot generate a commercial return’ (Burlington Resources Inc v. Republic of Ecuador, para. 398), which excludes the diminution of the value of the investment (National Grid v. Argentina para. 154; Pope & Talbot Inc v. Canada, para. 100). For a measure to be considered a form of expropriation, its impact on the rights of the investor should have a ‘permanent character’ (Pope & Talbot, paras 96–98; LG&E v. Argentina, para. 200; Enron Corporation and Ponderosa Assets LP v.  See the chapter by Ottavio Quirico on the EU and investment in this volume.

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Argentine Republic, para. 245). The qualification of what constitutes a substantial deprivation is done on a case-by-case basis (Tokios Tokele’s v. Ukraine, para. 120). The approach that assesses the impact of a State’s measure on investors’ rights leave little place to the nature of the measure, that is, ‘[t]he intent of the government is less important than the effects of the measures on the owner, and the form of the measures of control or interference is less important than the reality of their impact’ (Tippets, Abbett, McCarthy, Stratton v. TAMS-AFFA Consulting Engineers of Iran, 6 Iran-US para. 226). This approach was upheld in Compañia del Desarrollo de Santa Elena SA v. Republic of Costa Rica, when that State took measure for the protection of the environment; there, the arbitral tribunal established (at para. 71) that: While an expropriation or a taking for environmental reasons may be classified as a taking for a public purpose, and this may be legitimate, the fact that the Property was taken for this purpose does not affect either the nature or the measure of the compensation to be paid for the taking. That is, the purpose of protecting the environment for which the Property was taken does not alter the legal character of the taking for which adequate compensation must be paid. The international source of the obligation to protect the environment makes no difference.

The police powers doctrine further recognises the State right to regulate with limitations as concerns the specific commitments that the State may impose on the investor, provided the measure is adopted for a public purpose, is non-discriminatory, and is made in accordance with principles of due process, as per relevant case law (Accaoui Lorfing and Burghetto, 2018, 115 ff.; Erkut Bulut 2022, 585). Henceforth, the State’s measure is not deemed a form of expropriation and therefore does not require compensation. A specific commitment accepted by the State vis-à-vis the foreign investor, for instance, to adopt measures that impact the rights of a foreign investor, is deemed, however, to create the legitimate expectation of a stable and unchanged environment (Accaoui Lorfing and Burghetto 2018, 118). In any case, the proportionality test, which derives from the human rights case law of the European Court of Human Rights (‘ECtHR’) (James v. United Kingdom, 1986) and to which some recent IIAs refer, requires a case-by-case analysis that takes into account all relevant factors determining ‘when an action or a series of actions is extremely severe or disproportional in light of its purpose or effect’ (per annex 11-B of the 2010 South Korea-USA FTA). Such a theory is to be accepted, according to some scholars, only if it is explicitly mentioned in IIA provisions (Dolzer et al. 2022, 99; Linderfalk 2020, 27).

6.3 Treaty Provisions on the Right to Regulate An exception requires a specific treatment related to a particular situation, usually governed by a general rule (Viñuales 2020, 67). It introduces a certain degree of flexibility into a treaty by allowing the State to pursue its own objectives (Harrison 2020, 327). IIAs typically include some exceptions, notably the general exception

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(‘GE’) and the security exception (‘SE’), sometimes including environmental protection and, more recently, climate change. Provisions embedding general exceptions regulate the right of the State to take measures that are necessary to achieve legitimate purposes and objectives. Such norms allow the State to take measures that are otherwise inconsistent with substantive protection afforded to foreign investors (Henckels 2020, 360). The general wording of a provision often encompasses the right of the State to regulate every issue that relates to public interest, including environmental protection, climate change and health. For instance, article 23(1) (on GEs) of the 2020 India-Brazil BIT states: Nothing in this Treaty shall be construed to prevent the adoption or enforcement by a Party of measures of general applicability applied on a non-discriminatory basis that are necessary to:

(a)

protect public morals or maintaining public order; ( b) protect human, animal or plant life or health; (c) ensure compliance with law(s) and regulations that are not inconsistent with the provisions of this Treaty; (d) protect and conserve the environment, including all living and non- living natural resources; or (e) protect national treasures or monuments of artistic, cultural, historic or archaeological value.

As its name indicates, the SE provision relates to more specific matters that the State considers to be part of its safety. It thus excludes State liability even if investors’ rights are affected by the measure taken to protect security. For instance, article 10(15) of the Regional Comprehensive Economic Partnership (‘RCEP’) agreement (2020) provides: Notwithstanding Article 17.13 (Security Exceptions), nothing in this Chapter shall be construed to: (a) require a Party to furnish or allow access to any information the disclosure of which it determines to be contrary to its essential security interests; or (b) preclude a Party from applying measures that it considers necessary for:

(i) the fulfilment of its obligations with respect to the maintenance or restoration of international peace or security; or (ii) the protection of its own essential security interests.

Bearing in mind that such measures may be of essential interest for ‘security’, an expression which no longer concerns only military and defence matters (Scobbie 2020), it goes without saying that the broad wording of this provision gives a State the latitude to count among the measures it takes any type of provisions to protect the environment, rather than public health. This is confirmed by awards delivered by different arbitral tribunals (Kabra 2019, 730). Besides general exceptions and security exceptions, specific treaty provisions have been included in IIAs since 2010 (UNCTAD 2021) referring to the necessity of ensuring more sustainable investment as concerns its conditions and implementation. Specific treaty provisions thus

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govern issues relating to corporate social responsibility (‘CSR’) (2.1.1) and the environment (2.1.2). Treaty provisions on CSR emphasise the responsibility of foreign investors for the consequences of their activities in the place where the investment is made. This provision is absent in older IIAs, but is relatively common in more recent agreements. Its wording has evolved, with a detailed focus on all the human aspects that an investment must take into account as lately illustrated by article 12 of the 2020 India-Brazil BIT, which recalls the contribution of investment to the sustainable development of the host State and the local community, by respecting human rights, health, and security: [12.1] Investors and their investments shall strive to achieve the highest possible level of contribution to the sustainable development of the Host State and the local community, through the adoption of a high degree of socially responsible practices, based on the voluntary principles and standards set out in this Article and internal policies, such as statements of principle that have been endorsed or are supported by the Parties. [12.2] The investors and their investments shall endeavour to comply with the following voluntary principles and standards for a responsible business conduct and consistent with the laws adopted by the Host State: (a) contribute to the economic, social and environmental progress, aiming at achieving sustainable development; (b) respect the internationally recognized human rights of those involved in the companies' activities; (c)  encourage local capacity building through close cooperation with the local community; (d) encourage the creation of human capital, especially by creating employment opportunities and offering professional training to workers; (e) refrain from seeking or accepting exemptions that are not established in the legal or regulatory framework relating to human rights, environment, health, security, work, tax system, financial incentives, or other issues[.]

The specific importance of environmental issues has become apparent after the environmental effects of investment on the host state have been identified, as reflected in the most recent IIAs. Thus, environmental protection is recalled in the preamble to the BIT between Myanmar and Singapore, ‘reaffirming the Parties’ right to regulate and to introduce new measures such as health, safety, and environmental safeguards relating to investments in their territories in order to meet legitimate public policy objectives’ (Myanmar-Singapore BIT, 2019). The same approach is adopted in the 2021 Colombia-Spain BIT, ‘Reaffirming the right of each Contracting Party to regulate investments made in its Territory to meet legitimate public welfare objectives, which can be achieved without lowering its generally applicable health, public order and safety, labour rights and environmental standards.’2 Some BITs, such as that concluded between Morocco and Nigeria in

 ‘Reafirmando el derecho de cada Parte Contratante a regular las Inversiones hechas en su Territorio para cumplir objetivos legítimos de bienestar público, que se pueden lograr sin disminuir sus estándares de salud, orden público y seguridad, derechos laborales y de medio ambiente de aplicación general.’ Free translation by the author. 2

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2016, provide definitions on the assessment of the impact of the investment on the environment, for example (per article 1 of that BIT): ‘Environmental Impact Assessment’ means the process used to predict the environmental consequences (positive or negative) of a plan, policy, program, or project prior to move forward with the proposed action…[whereas] ‘Social Impact Assessment’ means the process of assessing or estimating in advance the social consequences that are likely to follow from specific actions project development, particularly in the context of appropriate national, State or provincial environment policy legislation.

The importance of environmental protection may be also seen in specific provisions on the environment, such as article 8(4) of the 2020 People’s Republic of China (PRC)-Cambodia FTA (which entered into force in 2022), emphasising the importance of investment in promoting green growth and ensuring compliance with environmental standards, without derogating from them: Recognising the importance of promoting investment for green growth, the Parties shall refrain from encouraging investment by investors of the other Party by relaxing environmental measures. To this effect each Party should not waive or otherwise derogate from such environmental measures as an encouragement for the establishment, acquisition or expansion of investments in its territory.

A broader provision is found in treaties, such as the 2020 India-Brazil BIT, which mention the environment, labour affairs, and health in their title or text: [22(1)] Nothing in this Treaty shall be construed to prevent a Party from adopting, maintaining, or enforcing any measure it deems appropriate to ensure that investment activity in its territory is undertaken in a manner according to labo[u]r, environmental and health law of that Party, provided that this measure is not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction. [22(2)] The Parties recognize that it is inappropriate to encourage investment by lowering the standards of their labo[u]r, environmental or health law. Therefore, each Party shall not amend or repeal, nor offer the amendment or repeal of such law to encourage the establishment, maintenance, or expansion of an investment in its territory, to the extent that such amendment or repeal involves decreasing their labo[u]r environmental or health standards. If a Party considers that another Party has offered such an encouragement, the issue shall be addressed through consultations with the other Party.

A specific chapter is dedicated to the environment in the United States-Mexico-­ Canada (‘USMCA’) Treaty in chapter 24. That chapter includes 32 subparagraphs and two annexes that reflect the importance of the issue and the necessity of providing definitions, objectives, and a fundamental level of protection for issues such as the ozone layer, marine environment and air quality, as well as procedural matters, CSR, and flexible mechanisms to enhance environmental performance, such as committees, contact points, and consultations at the ministerial level. These examples show the awareness of the parties as concerns environmental protection and recall the rights of the State to regulate for public purposes to achieve legitimate objectives. Such provisions are however relatively new in IIAs, meaning that any claim that is legally based on IIAs that have been signed prior to the adoption of the new norms will not be subject to such high standards of environmental protection. These include, by way of example, the last claim brought by the German

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investor Encavis against France under the ECT on 2 September 2022, following a change in feed-in tariffs for photovoltaic electricity in 2020 (Encavis 2020).

6.4 Conditions and Limits In light of the way in which relevant provisions are typically drafted, the right to regulate goes as far as to justify otherwise unlawful State conduct, as specified by the arbitral tribunal in Eco Oro v. Colombia (Henckels 2020, 365 ff.). Along these lines, a provision on investment and regulatory measures embedded in the 2017 Colombia Model BIT establishes that: The Contracting Parties reaffirm their right to regulate within their territories, in order to achieve legitimate public policy objectives such as those enshrined in their Constitutions or in international agreements that promote and protect human rights, public health, safety and security, natural resources, the environment, sustainable development and other public policy objectives. The mere fact that the adoption, modification or enforcement of a Measure negatively affects a Covered Investment or interferes with a Covered Investor’s expectations, including its expectation of profits, does not amount to a breach of any obligation under this Agreement.

This norm clearly reflects the purpose of the right to regulate, as enshrined both constitutionally and in international agreements, that the State may act in the public interest—that is, by advancing and protecting human rights, public health, safety, natural resources, the environment, sustainable development and other public policy objectives. These measures do not constitute a breach of any treaty obligations, even though they have an impact on the investor’s expectations, including profit. It can be noted that the word ‘other’ allows the State to extend the scope of the provision. However, when they fall within the sovereign right of the State to adopt public policy measures, IIAs provisions on the right to regulate excluding compensation are usually not unrestrained, but subject to specific conditions and limits. Among the conditions that trigger the right to regulate, considering the measure taken by the State a question of merit entails an assessment of the right to regulate in light of conventional instruments. Conditions on the merit relating to the exercise of the right to regulate generally relate to the meaning of conventional terms (1), as well as to the link between a measure and its aim and the nature of the measure adopted (2). The meaning of the terms of a provision is to be outlined by an arbitral tribunal— interpreting the meaning of a provision entails defining the approach that the arbitral tribunal will take. The question is therefore ‘do you determine whether the criteria for indirect expropriation are met, and then determine whether the exception applies or vice versa?’, as clearly underscored by the arbitral tribunal in Eco Oro v. Colombia (para. 627). Considering the treaty provisions of an IIA, the arbitral tribunal may find indication of the agreement between the parties, on the right to regulate, in the norms of relevant terms, such as article 1 on definitions on environmental and social impact

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assessment of the 2016 Morocco-Nigeria BIT.  Otherwise, the tribunal can find a definition in the provision on a specific provision on the right to regulate itself, such as article 22 of the 2020 India-Brazil BIT cited above. Furthermore, tribunals can also define the right to regulate based on annexes to an IIA; for instance, annex A of the 2022 Switzerland-Indonesia Agreement (not yet in force) on the reciprocal promotion and protection of investments, provides clarification on direct and indirect expropriation: [b] It is understood that, except in rare circumstances where the impact of a measure or series of measures is so severe in relation to their purpose as to appear manifestly excessive, non-discriminatory regulatory measures of a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, do not constitute indirect expropriation.3

Similarly, the 2017 Colombia Model BIT provides: Non-discriminatory Measures adopted by a Contracting Party, designed, applied or maintained for the protection of public objectives such as the protection of public health and safety, the environment, consumer and competition protection, amongst others, do not constitute indirect expropriation.

The expression of the will of the parties should be considered by the competent tribunal in assessing the right to regulate. The wording used by the parties thus plays an important role as it may give a direction for the competent tribunal to determine what the parties have agreed upon (Choer Moraes and Mendonça Cavalcante 2022, 315). In the still pending Uniper case (Uniper SE, Uniper Benelux Holding BV, Uniper Benelux NV v. Kingdom of the Netherlands), the claimants set out their competing interpretations of ECT article 24 in comparison with NAFTA article 1114. The latter provides that the parties are not prevented from ‘adopting, maintaining or enforcing any measure’ they consider ‘appropriate’ to ‘ensure that investment activity is undertaken in a manner sensitive to environmental concerns’, thus allowing ‘measures that would otherwise contravene the provisions relating to investment protection including those relating to national treatment, most-favoured nation treatment, and expropriation and compensation’ (Uniper v. Netherlands, para. 371). The plaintiffs in Uniper v. Netherlands claim this is not the case for ECT provisions, as ‘the scope for a Contracting Party’s regulatory freedom is deliberately much narrower under the ECT than other investment treaties, and various controls are placed on it within the text of the ECT itself’ (Uniper v. Netherlands, para. 372). A non-­ disputing party submission can also help to elucidate the scope of the right to regulate. Indeed, any IIA signatory can provide its own understanding of a treaty for the arbitral tribunal to consider and arbitral tribunal may thus rely on such ex post facto interpretation brought to its attention, not unlike the mechanism for third State

 ‘(b) Il est entendu que, sauf dans de rares circonstances où l’impact d’une mesure ou d’une série de mesures est si grave au regard de leur but qu’elles semblent manifestement excessives, les mesures réglementaires non discriminatoires d’une Partie qui sont conçues et appliquées afin de protéger des objectifs légitimes de bien-être public, tels que la santé publique, la sécurité et l’environnement, ne constituent pas une expropriation indirecte.’ 3

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declarations of intervention before the International Court of Justice. For instance, the non-contentious submission of Canada on the interpretation of the Canada– Colombia FTA in Eco Oro v. Colombia (para. 380) helped the arbitral tribunal in that ruling to conclude that the provision on expropriation incorporates customary international law, before deciding whether a valid vested property right had been expropriated and assessing the threshold that determines the ‘taking of fundamental ownership rights, either directly or indirectly that causes a substantial deprivation of economic value of the investment’ (Eco Oro v. Colombia, para. 617). The non-­ contentious submission of Canada on the interpretation of the 2008 Canada-­ Colombia FTA also helped the arbitral tribunal to affirm that the assessment of the provision on exceptions applies after a determination of a ‘breach of primary investment obligations (Eco Oro v. Colombia, para. 380). Within this framework, it is particularly important to determine the link between a State measure implementing the right to regulate and the aim pursued. As an example, the conditions set out in article 23(1) GE of the 2020 India-Brazil BIT clearly establish the need for a link between the measures taken and the necessity of such measures, providing that ‘[n]othing in this Treaty shall be construed to prevent the adoption or enforcement by a Party of measures of general applicability applied on a non-discriminatory basis that are necessary’ to achieve an enumerated list of objectives, including environmental protection. In other words, if the measure taken does not fall within one of the listed aims—particularly sustainability—the measure affecting an investor’s rights will not be justifiable under the right to regulate. The question is therefore determining what can be qualified as ‘necessary’ and assessing such a qualification. The recognition of the State’s right to regulate without compensation to the investor is obviously limited when an IIA embeds no specific provision on the right to regulate or when a provision exists but is interpreted in a way that does not provide sufficient scope to adopt derogatory measures. In the absence of a provision in IIAs on the power of the State to adopt measures in areas of public interest, the State will not be absolutely prevented from adopting such measures, but will be obliged to compensate private investors for the consequences that those measures have on their rights. IIAs whose purpose is the promotion and protection of investments have indeed been drafted in the investor’s interests to protect them from possible confiscatory actions by the State. This is particularly the case with so-called old generation IIAs (UNCTAD 2021). Furthermore, consideration will be given to certain expressly provided features that set limits on the State’s right to regulate. This is particularly the case for general and security exceptions, which are usually drafted in a broad manner but whose wording specifically provides that a derogatory measure must not constitute a means of arbitrary and discriminatory treatment against the investor. The proportionality of the measure in relation to the objective pursued and the requirement that the measure not be arbitrary in relation to the targeted investment is what the competent tribunal will constantly assess. A measure of general interest will also only be taken into account to the extent that it is not intended to disguise a restriction favouring a

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domestic investor to the detriment of a foreign investor whose rights are protected by IIAs. These provisions usually recall the right of the State to regulate, as in the case of article. 22 of the 2020 India-Brazil BIT on Provisions on Investment and Environment, Labor Affairs and Health, and article 2201(3) of the 2008 FTA between Canada and Colombia. Institutionally, the question of compensation raises the issue of whether a tribunal has jurisdiction over regulatory matters. Some scholars hold that the State’s right to regulate is inalienable, and cannot be limited by any instrument so long as the State acts within the remit of its sovereign power in the general interest of which it is the guarantor. In this case, the action of the State will not be evaluated against the yardstick of a treaty and will therefore not be limited by its norms (Henckels 2020). According to this view, arbitral tribunals should have no jurisdiction over the right to regulate and the investor should not benefit from treaty protection, and thus from any compensation rules contained therein. This is usually the position of the respondent State facing a claim brought by an investor alleging a treaty breach concerning expropriation and legitimate expectations. Recently, Colombia raised the jurisdictional question in Eco Oro v. Colombia, objecting to the competence of an arbitral tribunal to adjudicate a dispute on measures taken under the right to regulate that, according to Colombia, did not fall within the scope of article 2201(3) of the 2008 Colombia-Canada FTA (Eco Oro v. Colombia, para. 361). The arbitral tribunal, however, rejected the argument of the claimant, holding that the listed measures and their detailed purpose instead supported the jurisdiction of the tribunal (Eco Oro v. Colombia, para. 380). The competence of arbitral tribunals over the exercise of the right to regulate has also been affirmed in the application of both general and security exceptions, and the meaning of what an arbitral tribunal considers to be covered by these provisions, in Devas v. India (2016), where it was held that ‘if a State properly invokes a national security exception under an investment treaty, it cannot be liable for compensation of damages going forward’ (at para. 293), as confirmed in other awards (CMS Gas Transmission Co v. Argentina, para. 129; Continental Casualty Co v. Argentina, para. 236). Along these lines, a specific CSR rule dedicated to investors in some IIAs explicitly provides: A Claimant Investor shall accept the aforementioned prohibitions as mandatory throughout the making of its investment and its operation in the Host Party’s Territory in order to submit a claim to a Court or an Arbitral Tribunal [per Article on Investors’ Social Responsibility in Colombia Model BIT, 2017].

6.5 Conclusion Policies adopted by States for reasons of public interest and in the application of its international commitments may have an impact on the rights of foreign investors. Such competing interests are reflected in IIAs including provisions on the State’s right to regulate on issues of public interest, such as the environment, health, and

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labour rights, in order to recalibrate rules on the promotion and protection of foreign investment. IIAs adopted since 2010 sometimes include provisions on the right to regulate for climate purposes. For such measures to be effective, their implementation should not, in principle, lead to (fully) compensating a foreign investor whose rights have been affected by the exercise of the right to regulate. To this end, a careful drafting of the provisions, their articulation, and a clear understanding of the meaning of IIAs and their drafting, including treaty annexes, will help to clarify the scope of the right to regulate, bearing in mind that this right is also limited by principles such as proportionality and good faith.

References 9REN Holding S.a.r.l. v. Kingdom of Spain, ICSID Case N° ARB/15/15, award 31 May 2019. https://www.italaw.com/cases/7374 Accaoui Lorfing P, Burghetto M-B (2018) The evolution and current status of the concept of indirect expropriation in investment treaties and arbitration. Indian J Arb L 6(2):98–123 Bernasconi-Osterwalder N (2018) How the Energy Charter Treaty could have costly consequences for governments and climate action. International Institute for Sustainable Development. https://www.iisd.org/articles/insight/ how-­energy-­charter-­treaty-­could-­have-­costly-­consequences-­governments-­and-­climate Brauch MD (2020) Reforming international investment law for climate change goals. Colum Center Sustain Invest. https://doi.org/10.7916/d8-­300v-­7h63 Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on liability, 14 December 2012. https://www.italaw.com/cases/181 CC/Devas (Mauritius) Ltd, Devas Employees Mauritius Private Limited and Telecom Devas Mauritius Limited v. India, UNCITRAL, PCA Case No 2013–09, Award on Jurisdiction and Merits 25 July 2016; Dissenting opinion of David R. Haig. https://www.italaw.com/cases/1962 CEF Energia BV v. Italian Republic, SCC Case N° 158/2015, Award, 16 January 2019. https:// www.italaw.com/cases/7364 Choer Moraes H, Cavalcante PM (2022) The Brazil-India investment co-operation and facilitation treaty: giving concrete meaning to the right to regulate in investment treaty making. ICSID Review 36(2):304–318 CMS Gas Transmission Co. v. The Republic of Argentina, ICSID Case No. ARB/01/8, Award, 12 May 2005, Decision on Annulment 25 September 2007. https://www.italaw.com/cases/288 Compañia del Desarrollo de Santa Elena S.A. v. Republic of Costa Rica, ICSID Case No. ARB/96/1, Award 17 February 2000. https://www.italaw.com/cases/3413 Continental Casualty Co. v. The Argentine Republic, ICSID Case No ARB/03/9, Award, 5 September 2008. https://www.italaw.com/cases/329 Deutsche Telekom AG v. India, UNCITRAL, PCA Case No 2014–10, Interim Award, 13 December 2017, Final Award 27 May 2020. https://www.italaw.com/cases/2275 Dolzer R, Kriebaum U, Scheurer C (2022) Principles of international investment law. Oxford University Press, Oxford Eco Oro Minerals Corp. v. Republic of Colombia, ICSID Case N° ARB/16/41, Decision on jurisdiction, liability and directions on quantum, 9 September 2021. https://www.italaw.com/ cases/6320 Encavis AG and others v. French Republic, ICSID Case No. ARB/22/22, https://www.italaw. com/cases/9726; https://icsid.worldbank.org/node/91921; Encavis AG and others v. France Encavis AG, Capital Stage Solar IPP GmbH, Société Centrale Photovoltaique d’Avon les Roches SAS and Le Communal Est Ouest SARL v. French Republic, ICSID Case No.

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ARB/22/22. https://jusmundi.com/fr/document/decision/en-encavis-ag-capital-stage-solaripp-gmbh-societe-­c entrale-photovoltaique-davon-les-roches-sas-and-le-communal-estouest-sarl-v-french-­­republic-party-representatives; 2020 Encavis and others v. Italy Encavis AG, Fano Solar 1 S.r.l., DE Stern 10 S.r.l. and others v. Italian Republic (ICSID Case No. ARB/20/39) https://investmentpolicy.unctad.org/investment-dispute-settlement/cases/1085/ encavis-and-others-v-italy Enron Corporation & Ponderosa Assets L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Award 22 May 2007. https://www.italaw.com/cases/401 Erkut Bulut O (2022) Drawing boundaries of police powers doctrine: a balanced framework for investors and states. J Int Disput Settl 13:583–607 Eskosol S.p.A. in liquidazione v. Italian Republic, ICSID Case N° ARB/15/50, Award, 4 September 2020. https://www.italaw.com/cases/5895 Greentech Energy Systems A/S, v. Italian Republic, SCC Case N° V 2015/095, Final award, 23 December 2018. https://www.italaw.com/cases/7138 Harrison J (2020) Exceptions in multilateral environmental agreements. In: Bartels L, Paddeu F (eds) Exceptions in international law. Oxford University Press, Oxford, pp 327–343 Henckels C (2020) Scope limitation or affirmative Defence? The purpose and role of investment treaty exceptions clauses. In: Bartels L, Paddeu F (eds) Exceptions in international law. Oxford University Press, Oxford, pp 360–371 ICC Commission Report (2019) Resolving climate change related disputes through arbitration and ADR, ICC Publication 999. https://iccwbo.org/content/uploads/sites/3/2019/11/icc-­arbitration-­ adr-­commission-­report-­on-­resolving-­climate-­change-­related-­disputes-­english-­version.pdf Isolux Netherlands, BV v. Kingdom of Spain, SCC Case, V2013/153, final award 17 July 2016 with dissenting opinion of Guido Santiago Tawil. https://www.italaw.com/cases/5893 Kabra R (2019) Return of the inconsistent application of the ‘essential security interest’ clause in investment treaty arbitration: CC/Devas v. India and Deutsche Telekom v India. ICSID Review 34(3):723–753 LG&E Energy Corp., LGE&E Capital Corp., and LG&E International, Inc. v. Argentina Republic, ICSID Case No. ARB/02/1, Decision on liability, 3 October 2006. https://www.italaw.com/ cases/621 Linderfalk U (2020) Good faith and the exercise of treaty-based discretionary powers. In: Bartels L, Paddeu F (eds) Exceptions in international law. Oxford University Press, Oxford, pp 256–270 Lone Pine Resources Inc. v. The Government of Canada, ICSID Case N° UNCT/15/2, registered 6 September 2013. https://www.italaw.com/cases/1606 National Grid plc v. The Argentine Republic, UNCITRAL, award, 3 November 2008. https://www. italaw.com/cases/732 Pope & Talbot Inc. v. The Government of Canada, UNCITRAL (NAFTA), Interim Award 26 June 2000. https://www.italaw.com/cases/863 Scobbie I (2020) Exceptions: self-Defence as an exception to the prohibition on the use of force. In: Bartels L, Paddeu F (eds) Exceptions in international law. Oxford University Press, Oxford, pp 150–178 Starett Housing Corp. v. Iran, 4 Iran-US Cl. Trib Rep 154 (1983) The P.V.  Investors v. Spain, PCA Case N° 2012–14, UNCITRAL Arbitration, Final award, 28 February 2020, with concurring and dissenting opinion of Charles N.  Brower. https://www. italaw.com/cases/2119 Tienhaara K (2018) Regulatory chill in a warming world: the threat to climate policy posed by investor-state dispute settlement. Transnatl Environ Law 7(2):229–250 Tippets, Abbett, McCarthy, Stratton v. TAMS-AFFA consulting engineers of Iran, 6 Iran-U.S. Cl Trib Rep (1984) Tokios Tokele’s v. Ukraine, ICSID Case No. ARB/02/18, Award, 26 July 2007. https://www.italaw. com/cases/1099 UNCTAD, Investment treaty regime needs reforms to support climate action, 6 September 2022. https://unctad.org/news/investment-­treaty-­regime-­needs-­reforms-­support-­climate-­action

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UNCTAD, EXPROPRIATION, UNCTAD series on issues in international investment agreements II, United Nations, New  York & Geneva, 2012). https://unctad.org/system/files/ official-­document/unctaddiaeia2011d7_en.pdf UNCTAD, Recent developments in the IIA regime: accelerating IIA reform, IIA Issue 3, August 2021. https://unctad.org/system/files/official-­document/diaepcbinf2021d6_en.pdf UNCTAD N, The international investment treaty regime and climate action, IIA Issue 3, September 2022. https://unctad.org/system/files/official-­document/diaepcbinf2022d6_en.pdf UNIPER SE, Uniper Benelux Holding B.V. and Uniper Benelux N.V. v Kingdom of the Netherlands, ICSID Case N° ARB/21/22, registered 30 April 2021. https://www.italaw.com/ cases/9146 United Nations Framework Convention on Climate Change (UNFCCC), New York, NY (US), 9 May 1992, in force 21 Mar. 1994. https://unfccc.int/resource/docs/convkp/conveng.pdf Viñuales JE (2020) Seven ways of escaping a rule: of exceptions and their avatars in international law. In: Bartels L, Paddeu F (eds) Exceptions in international law. Oxford University Press, Oxford, pp 67–89

Chapter 7

Screening Foreign Direct Investment in Europe: Having a Tiger by the Tail? Ivana Damjanovic and Nicolas de Sadeleer

Contents 7.1  I ntroduction 7.2  Why a New Regulatory Mechanism? FDI as a Double-Edged Sword 7.3  EU Constitutional Framework in the Field of Foreign Investment 7.3.1  Between EU External Trade/Investment and Free Movement of Capital 7.3.2  The Choice of the Legal Basis for Regulation 2019/452 7.4  Regulatory Framework of the EU FDI Screening Mechanism 7.4.1  The Scope of the Regulation: FDI and Essential Functions of EU Member States 7.4.2  Substantive Criteria: Sectors and Factors Triggering FDI Screening 7.4.3  The EU Cooperation Mechanism 7.5  Implementation of the Regulation and Policy Trends 7.6  Conclusion References

                 

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Abstract  In response to emerging national security risks in global trade, screening of foreign investment has become an important autonomous tool for States in international economic regulation. The European Union (‘EU’) is a latecomer in the field in comparison with its trading partners such as the United States (‘US’) and Australia, due to its more liberal stance towards free movement of capital among the four fundamental market freedoms. This chapter analyses the EU foreign direct investment (‘FDI’) screening mechanism and vertical and horizontal relations within this legal framework. It reviews its key aspects in relation to the EU internal constitutional framework and external obligations under trade and investment I. Damjanovic (*) University of Canberra, Bruce, ACT, Australia ANU Centre for European Studies, The Australian National University, Canberra, ACT, Australia e-mail: [email protected] N. de Sadeleer UCLouvain St. Louis University, Brussels, Belgium e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 O. Quirico, K. Kwapisz Williams (eds.), The European Union and the Evolving Architectures of International Economic Agreements, https://doi.org/10.1007/978-981-99-2329-8_7

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agreements with third countries. Due to the specific nature of involved competences under EU law, the EU’s FDI regulatory framework does not lead to harmonisation but to primarily procedural coordination of national screening mechanisms, leaving to the Member States the final decision on the admission of FDI into their territories. Nevertheless, placing the EU mechanism within the Common Commercial Policy should give to the European Commission more leverage in carrying out the EU’s external trade and investment agenda. Keywords  European Union · Investment screening · Security

7.1 Introduction The global economy has moved away from a largely collaborative game into a multiplayer ‘zero-sum’ game, in which multilateral solutions are difficult, if not impossible. Instead of reaching the ‘end of history’ as predicted by Francis Fukuyama in 1989, a multipolar world with a new constellation of relations has been created (Thurow 1996). In particular, globalisation has led to the economic decline of the West and the rise of the People’s Republic of China (‘PRC’). However, the PRC’s economic growth has been accompanied by political influence over the economy, particularly through PRC State-owned enterprises (‘SOEs’) and their overseas investment. Consequently, issues of economic security and foreign investment have gradually turned into issues of national security, further exacerbated by the COVID-19 pandemic. International economic law has failed to keep pace with these rapid changes. Instead, States have responded to a more competitive and hostile international context by adopting unilateral trade measures and autonomous legislation, with different effects on international trade. The EU, as one of the most liberal FDI regimes in the world, has been alarmed by the rise of PRC investment in Europe following the global financial crisis in 2008. These concerns have been fuelled by foreign State control or ownership in key national sectors and industries through investors subsidised or owned by State authorities. The treatment of third country investors in the EU has been largely left to the Member States, and has only narrowly been regulated by secondary EU legislation, through the control of concentrations or mergers between undertakings1 and a prudential assessment in the financial sector.2 At the same time, EU major trading partners have already had comprehensive FDI screening mechanisms in place, which they have reformed to address emerging national security risks stemming from foreign ownership of FDI.  Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (OJ L 24, 29.1.2004, 1). 2  Directive 2007/44/EC of the European Parliament and of the Council of 5 September 2007 as regards procedural rules and evaluation criteria for the prudential assessment of acquisitions and increases in holdings in the financial sector (OJ L 247, 21.9.2007, 1). 1

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In order to fill this gap, the EU adopted Regulation (EU) 2019/452 (‘the Regulation’) establishing a framework for screening of FDI into the Union, which has been in operation since October 2020.3 This chapter provides a comprehensive legal analysis of the key provisions of the EU Regulation, placed in the broader context of the EU constitutional framework internally and of EU trade and investment relations externally. First, the chapter considers the political context of the Regulation, explaining the rationale for its adoption. The analysis then proceeds to explore the regulatory complexity of FDI screening in the EU, stemming from foreign investment multi-faceted legal and political nature and the scope of competences within the EU context. It considers the Regulation in relation to EU and Member States’ international obligations. Further, it explains key legal aspects and procedures of the Regulation, and horizontal and vertical relationships within this legal framework. The final part of the chapter examines policy implications of the Regulation, particularly the EU practice and relevance of the FDI screening mechanism for EU external trade and investment agreements. It concludes by contemplating further developments in the field, which are likely to foster EU-wide harmonisation efforts in the longer term, despite the current complexities.

7.2 Why a New Regulatory Mechanism? FDI as a Double-Edged Sword The function of FDI in the economy places regulators before a dilemma. On the one hand, FDI is a factor of economic growth. The first recital of the preamble to Regulation 2019/452 emphasises that FDI contributes to the EU’s growth ‘by enhancing its competitiveness, creating jobs and economies of scale, bringing in capital, technologies, innovation, expertise, and by opening new markets for the Union’s exports’. On the other hand, by means of FDI, foreign SOEs are able to acquire strategic assets that allow them to control European companies whose activities are critical to national security and public order. Third-country investors can also target companies operating in strategically sensitive areas such as high-tech, armament, software, and energy infrastructure. Accordingly, whenever FDI might be seen as a vehicle for political interference, the strategic interests of the Union and its Member States must be protected (European Commission 2019, 5). The European Commission (‘EC’) proposed an EU-wide regulation on a request from France, Germany, and Italy (Le Guernigou et al. 2017). These Member States voiced their concerns about a growing number of European companies in strategic sectors acquired by non-EU investors and the lack of reciprocity for European companies in third countries (Bourgeois and Malathouni 2020). In particular, the PRC

 Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union (OJ L 79I, 21.3.2019, 1). 3

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has exercised a much stronger investment presence in Europe since the launch of the Belt and Road Initiative (‘BRI’) and so-called ‘17 + 1 Initiative’, aimed at enhancing the PRC’s economic relations with Greece and Eastern Europe.4 Investment data also indicates that, in 2017, Germany, Italy, France, Finland, the Netherlands (and previously the United Kingdom) accounted for the largest share of all PRC investment in the EU (Seaman et al. 2017).5 While not targeting the PRC specifically, the EU Regulation aimed at addressing its  growing role on the European continent, which had potential not only to undermine European unity but also the strategic position of traditional players such as the US (European Commission 2017a, b). Further, the EU proposal aimed at avoiding the circumvention of national screening mechanisms, which was possible through freedom of establishment, after taking control of a company in a Member State that had no screening mechanism. At the time, only 14 Member States had some sort of screening mechanism in place to protect their public order and security. An EU-wide legal act was thus deemed to be necessary. The new Regulation was adopted in accordance with the ordinary legislative procedure by the European Parliament (‘EP’) and the Council in March 2019, but its application only started in October 2020.6 However, the Regulation does not entail harmonisation and it only adopts a ‘light-touch’ approach (Hindelang and Moberg 2020). Indeed, by virtue of article 3(1), EU Member States may maintain or adopt a screening mechanism, but there is no express obligation placed upon them to do so. Nevertheless, the Regulation encourages Member States to adopt related provisions as there is an implicit requirement for States to have some review mechanism in place. The need for screening mechanisms has been further emphasised through political means. For example, the Commission took the momentum of new health risks posed by the COVID-19 pandemic. In its communication from March 2020, it highlighted ‘an increased risk’ of attempts to acquire healthcare capacities or related industries, such as research establishments, through FDI (European Commission 2020, 1). These risks were clearly related to other threats, particularly a loss of critical assets and technology, and EU’s broader strategic capacities, calling upon Member States to fully utilise and set up their own FDI screening mechanisms. The Russian invasion of Ukraine only served to endorse the EU’s strategic autonomy in its external trade and investment relations (European Commission 2022a), as already articulated in its ‘Open, Sustainable and Assertive’ trade policy (European Commission 2021). As a result, the vast majority of EU Member States now have some kind of a national screening mechanism in place, with only one Member State—Bulgaria— with no developments aimed at setting up such a mechanism. The Regulation has

 In the meantime, three Baltic countries have left the 17 + 1 initiative. Its importance has been losing ground since COVID-19 pandemic. 5  Total Chinese investment to Europe peaked in 2016 with €47.4 billion. 6  Art. 17 Regulation 2019/452. 4

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thus served to encourage Member States, with FDI screening ‘increasingly gaining momentum in the EU’ (European Commission 2022b, 8–9). These developments have also contributed indirectly to expanding EU powers in the field of foreign investment, given the ways in which the new mechanism operates. Before analysing the new framework, we first turn to considering EU competence in the field of foreign investment, and related competing horizontal and vertical interests within the EU constitutional framework.

7.3 EU Constitutional Framework in the Field of Foreign Investment Identifying the foundation of the EU Regulation 2019/452, as the key element for determining its legal basis, has proven particularly difficult. On the one hand, the subject-matter of the Regulation concerns the EU’s exclusive competence with respect to the Common Commercial Policy and on the other, Member States’ shared competence in the field of free movement of capital. Consequently, the choice of article 207(2) of the Treaty on the Functioning of the European Union (‘TFEU’) as the legal basis for the Regulation has led to political and academic debates.

7.3.1 Between EU External Trade/Investment and Free Movement of Capital Article 207(2) TFEU covers outward and inward investment, thus placing the FDI screening framework within the scope of the Common Commercial Policy, which is an exclusive competence of the EU.7 In order to fall within this scope, an EU act must fulfil different conditions. It must relate specifically to trade with third countries ‘in that it is essentially intended to promote, facilitate or govern such trade and has immediate effects on it’.8 The act must also pursue one of the objectives of the Common Commercial Policy under article 206 TFEU. While under the Regulation, Member States may restrict FDI, this does not counter the objectives of the Common Commercial Policy, which are not exclusively related to trade liberalisation. Under article 207(6) TFEU, the exercise of the competences conferred to the EU in the field of the Common Commercial Policy preserves the internal powers of the Member States, as long as they comply with their general EU law obligations.

 Opinion 2/17, ECLI:EU:C:2019:341, para. 82.  Opinion 2/15, ECLI:EU:C:2017:376, para. 36

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Last, pursuant to Article 207(1) TFEU, the Common Commercial Policy must also integrate ‘other principles and objectives of the EU’s external action’.9 Internal market rules are also applicable to FDI. However, a number of internal market provisions had to be excluded from the Commission’s Regulation proposal. Freedom of establishment in article 49 TFEU does not apply to non-EU investors. It therefore does not preclude the application of domestic restrictions (specific thresholds of national ownership or control) to non-EU investors. At the same time, recourse to article 114(1) TFEU regarding the functioning of the internal market was perhaps unnecessary given the absence of harmonisation of substantive and procedural standards. In particular, national screening mechanisms are restrictions on free movement of capital guaranteed in article 63 TFEU, which unlike other EU freedoms, also applies between Member States and third countries. The extension to capital movements from third countries is explained by the treaty framers’ wish to encourage foreign investment. However, as Member States are more sensitive to the impact of capital exports on national economies, liberalisation of capital generally took longer than liberalisation of other freedoms (Barnard 2019, 519). Early in its case law the Court of Justice of the European Union (‘CJEU’) recognised that the obligation to liberalise capital movement exists only ‘to the extent necessary to ensure the proper functioning of the internal market’ (emphasis added),10 recognising that complete freedom of movement might ultimately impair proper market functioning by undermining Member States’ economic policies.11 In the meantime, capital movements have been liberalised, but additional Treaty restrictions continue to apply, in particular with respect to extra-EU movements of capital.12 For example, under article 64(2), the Parliament and the Council may adopt, in accordance with the ordinary legislative procedure, restrictive measures regarding four types of capital movements: direct investment, establishment, the provision of financial services and the admission of securities to capital markets. Specific reservations regarding public security in Treaty law (articles 36, 45, 52, 58 and 65 TFEU), which have been further developed by the CJEU case law, also apply in relation to free movement of capital. By way of illustration, a national measure ensuring secure energy supply in a case of crisis, war or terrorism may constitute a ground of public security and may thus justify an obstacle to free movement of capital.13 However, these reservations can only be invoked in the case of absence or partial harmonisation of measures to protect public order (such as money

 Opinion 2/15, para. 147.  Case 203/80 Casati [1981] ECR 2595, para. 10 (emphasis added). 11  Casati, para. 9. 12  Art. 64 TFEU. This in particular concerns four types of capital movements, with respect to which any restrictions under EU and Member States’ national laws that existed on 31 December 1999 have been grandfathered: Art. 64(1) TFEU. 13  See Case C-274/06 Commission v. Spain [2008] para. 38, and Case C-171/08 Commission v. Portugal, para. 72; Case C-543/08 Commission v. Portugal, para. 84. 9

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laundering and terrorism financing).14 Further, the scope of these derogations cannot be determined unilaterally by each Member State without any control by the European Commission. Accordingly, public policy and public security may be relied on only if there is ‘a genuine and sufficiently serious threat to a fundamental interest of society’.15 Importantly, the ‘general financial interests of a Member State’ or ‘economic policy objectives’ are not adequate justifications.16 In the context of investment, of relevance is also the requirement of legal certainty. Accordingly, any prior authorisation for FDI must be precise regarding the specific conditions in which authorisation is required, in order to indicate to investors the extent of their rights and obligations guaranteed by article 63 of the TFEU. A requirement for prior authorisation ‘for every FDI which is “such as to represent a threat to public policy [and] public security”, without any more detailed definition’ would be illegal.17 Any reference formulated in general terms, such as ‘the protection of national interest’, gives ‘a wide discretionary power’ to the executive in granting prior authorisation: it ‘constitutes a serious interference with the free movement of capital, and may have the effect of excluding it altogether’.18 Criteria must be objective and subject to judicial review in order to satisfy the requirements of legal certainty.19 It follows that, in order to be compatible with article 63 TFEU, any restrictions aiming at protecting national security and public order must be necessary and proportionate. A restrictive approach of the CJEU in assessing Member States’ measures, which prohibits any arbitrary decisions based on uncertain or political criteria, provides confidence to investors that their rights will be guaranteed (Damjanovic 2023, 135–138).20 Before turning to the choice of legal basis for EU Regulation, the following table summarises and compares  the main features of the Common Commercial Policy and the internal market aspect of free movement of capital, as two areas relevant for the EU’s foreign investment screening policy (Table 7.1).

7.3.2 The Choice of the Legal Basis for Regulation 2019/452 Given the byzantine structure of treaty law in the EU with its diversification of legal bases and the cross-cutting nature of investment issues, the choice of the legal basis for Regulation 2019/452 was far from being self-evident. It is settled case law that  Case C-212/11 Jyske Bank Gibraltar ECLI:EU:C:2013:270, paras 61–64; Case C-190/17 Zheng ECLI:EU:C:2018:357, para 38; Case C-78/18 Commission v. Hungary ECLI:EU:C:2020:476, paras 89–90. 15  Case C-54/99 Église de Scientologie [2000] ECR I-1335, para. 17. 16  Case C-367/98 Commission v. Portugal [2002] ECR I-4731, para. 52. 17  Église de Scientologie, paras 21–22. 18  Case C-483/99 Commission v. France [2002] ECR I-4781, paras 50–52. 19  Case C-503/99 Commission v. Belgium [2002] ECR I-4809, para. 52. 20  See also discussion in Sect. 7.4.1 below. 14

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Table 7.1  Comparison between the Common Commercial Policy and free movement of capital in EU law Category Type of investment Territorial scope Nature of EU competence Conditions and derogations

Common Commercial Policy (article 207 TFEU) Trade FDI Extra-EU Exclusive EU

Free movement of capital (article 63 TFEU) Portfolio investment FDI Intra- and extra-EU Shared with Member States

Conditions:  Intended to promote, facilitate, or govern trade + have direct and immediate effect on trade  Common Commercial Policy objectives: Article 206 TFEU  Principles and objectives of EU external action: Article 21 Treaty on European Union (‘TEU’)

Derogations (article 65 TFEU):  General derogations: Public policy or public security  Imperative requirements in the general interest: Nondiscrimination + proportionality  Specific derogations: Taxation

‘the choice of the legal base for a measure may not depend simply on an institution’s conviction as to the object pursued’.21 Instead, the determination of the legal basis is amenable to judicial review, which includes in particular the aim and the content of the measure.22 In principle, an act should be adopted on a sole legal basis, namely that required by the main or predominant purpose or component—the centre of gravity of the act—rather than its effects.23 However, it may be the case that the twin objectives and the two constituent parts of an act are ‘inseparably’ or inextricably linked without one being secondary and indirect in relation to the other. In such a case, it is impossible to apply the predominant aim and content test. Exceptionally, the CJEU accepts that such a measure must be founded on the corresponding legal bases and applicable legislative procedures.24

 Case C-300/89 Commission v. Council (Titanium Dioxide) [1991] ECR I-2867, para. 10.  See, inter alia, Titanium Dioxide‘, para. 10; Case C-269/97 Commission v. Council [2000] ECRI-2257, para. 43; and Case C-211/01 Commission v. Council [2003] ECR I-3651, para. 38; and Case C-338/01 Commission v. Council [2004] ECR I-4829, para. 54 23  See, inter alia, Case C-155/91 Commission v. Council [1993] ECR I-939, paras 19 and 21; Case C-36/98 Spain v. Council [2001] ECR I-779, para. 59; and Case C-211/01 Commission v. Council, cited above, para. 39; and Case C-281/01 Commission v. Council [2002] ECR I-12049, para. 57; Case C-338/01 Commission v. Council, para. 55; and Case C-91/05 Commission v. Council, para. 73. 24  Titanium Dioxide, para. 13; Case C-336/00 Huber [2002] ECR I-7699, para. 31; Case C-281/01 Commission v. Council [2002] ECR I-12049, para. 35; Case C-211/01 Commission v. Council [2003] ECR I-8913, para. 40, Case C-91/05 Commission v. Council, para. 75; and Opinion 2/00 [2001] ECR I-9713, para. 23. In the case C-491/01 British American Tobacco (Investment) Ltd [2002] ECR I-11453, the CJEU held that the internal market Article 114 TFEU legal basis was appropriate to adopt the directive on production, marketing and labelling of tobacco products and that the Common Commercial Policy legal basis was unnecessary and should not have been used. See paras 81–91. 21 22

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The exclusive competence related to the Common Commercial Policy eschews the principle of subsidiarity enshrined in article 5(3) TEU.25 In other words, there is no need to demonstrate that the objectives of the measure can be better achieved at the EU level. By contrast, where the internal market’s shared competence forms the basis for EU action, it must be shown that the envisioned measure complies with the principle of subsidiarity. In this respect, EU ‘action’ must satisfy two tests. First, EU institutions must demonstrate that the objectives of the proposed action cannot be sufficiently achieved by the Member States, ‘either at central level or at regional and local level’ (or the ‘sufficiency test’). Secondly, it must be proven that the proposed action ‘can be better achieved at Union level’ by reason of its scale or effects. According to this second test, the lawmaker is required to demonstrate that the proposed action has an added value in terms of effectiveness (the ‘value-added test’). In particular, the focus is on whether the EU is the most appropriate decision-maker. With this in mind, the question arose whether the Common Commercial Policy objectives and the components of the Regulation were prevailing over its internal market dimension or whether they were ancillary to the internal market dimension of the screening framework. Had it been impossible to apply the predominant aim and content test because the objectives and components of both policies were intertwined, would have it been possible to base the Regulation on both articles 207 and 64(2) TFEU? Several authors have supported the view that Regulation 2019/452 has been correctly grounded in article 207 TFEU. It has been argued that, had the Regulation aimed at circumscribing EU Member States’ restrictive powers, it would have had to be grounded in article 64(2) TFEU (Cremona 2020, 37). However, the Regulation only performs a function that is complementary to domestic screening mechanisms and does not replace them (Bourgeois and Malathouni, 2020, 176). In fact, the final decision to restrict investment for public order and security is left to each Member State. The goal of the Regulation is thus not to enhance the functioning of the internal market. Since the Regulation does not regulate Member States’ restrictive powers, but rather coordinates them, it has been correctly based on article 207(2) TFEU. However, Hindelang and Moberg (2020) have argued that the choice of article 207(2) TFEU could undermine the principle of the balance of powers. In contrast to the ordinary legislative procedure established under article 64(2) TFEU regarding the adoption of ‘measures on the movement of capital to or from third countries involving direct investment’, article 64(3) prescribes a special legislative procedure, with respect to the adoption of measures ‘which constitute a step backwards in Union law as regards the liberalisation of the movement of capital to or from third countries’ (Hindelang and Moberg 2020, 1438–1443). In their view, the Regulation could potentially undermine the Council’s right to veto (special legislative procedure) any proposed restrictions on the free movement of capital, and thus ultimately that of the Member States. Therefore, article 207(2) TFEU would fall short of

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safeguarding the Council’s procedural rights whenever screening measures amount to a step backwards in the light of article 64 TFEU (Hindelang and Moberg 2020, 1459). By contrast, Bismuth (2020, 111) takes the view that article 64(2) would have afforded a more appropriate legal basis on the ground that the substance of the Regulation deals with national screening for security and public order, which have so far been the sole responsibility of Member States. The legal basis of article 207(2) TFEU is likely to empower the EU position in trade and investment negotiations with third countries. For instance, in seeking to achieve, on the basis of reciprocity, better access for EU investors to third country markets, the European Commission could in return propose to limit EU screening (Schill 2020, 58). Accordingly, while likely to curb the internal power of the Member States, the choice of the Common Commercial Policy – an exclusive EU competence – as the legal basis for EU FDI screening regulation should ultimately contribute to a more effective EU external trade agenda.

7.4 Regulatory Framework of the EU FDI Screening Mechanism The use of exclusive EU competence under the Common Commercial Policy does not call into question the right of Member States under article 4(2) TEU to exercise their ‘essential functions’ with respect to public order and national security. In order to strike a balance between exclusive Common Commercial Policy competence and Member States’ essential functions, Regulation 2019/452 ‘establishes a framework’ for the screening by Member States of FDI into the Union on the grounds of security or public order.26 This framework thus regulates the flow of FDI from third countries into the territory of the 27 Member States—as long as companies respect the limits of the framework, they can act freely on the market. Despite exclusive EU competence being the legal basis for the Regulation, the final word belongs to the Member States. Prima facie, the added value of the Regulation with respect to capital movement is not significant. In fact, the Regulation codifies the principles set forth by the CJEU in its case law on free movement of capital. It neither increases the Member States’ ability to control non-EU FDI, nor compels them to do so. This is logical, as the Regulation (secondary law) cannot undermine the principle of free movement of capital that is embedded in primary EU law. However, the Regulation has an added value in relation to national screening procedures as it provides for a coordination mechanism regarding an individual Member State’s action vis-à-vis third-country investors, with a view to reducing the risk of conflicting stances between Member States. It thus allows, beyond the existing requirements under the TFEU, for any Member State to voice concerns through cooperation mechanisms in situations 26

 Art. 1(1) Regulation 2019/452.

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when it is likely that the Member State would be adversely impacted by the FDI in another Member State. The remaining parts of this section provide an analysis of the scope and key substantive and procedural elements of the EU FDI regulatory framework in the context of EU law and EU international obligations, before turning to policy implications in the final part of the chapter.

7.4.1 The Scope of the Regulation: FDI and Essential Functions of EU Member States Regulation 2019/452 establishes a framework for FDI screening, which incorporates the definition of FDI under EU law. On the other hand, the Regulation is ‘without prejudice’ to each Member State’s sole responsibility for its essential functions and national security.27 These two elements determine the scope of application of the Regulation, and will be considered in turn. In its jurisprudence, the CJEU has distinguished between ‘direct’28 and ‘non-­ direct’, or ‘portfolio’ investments,29 and concluded that only direct investments fall within the scope of the Common Commercial Policy and article 207(1) TFEU.30 Accordingly, such investments also fall within the scope of the Regulation. The definition of ‘FDI’ in the Regulation codifies the case law of the CJEU, and refers to an ‘investment of any kind’, which is made with an intention of carrying out ‘an economic activity in a Member States’, thus satisfying two criteria: (i) establishment or maintenance of lasting and direct links between persons providing the capital and the undertaking to which the capital is made available; and (ii) effective participation in the management or control of the undertaking.31 This definition is similar to the definition of the CJEU in Opinion 2/15, and excludes portfolio investment, which remains subject to competence shared with Member States, constituting free movement of capital for the purposes of article 63 TFEU.32 While FDI falls within the scope of the Regulation, the Regulation expressly clarifies that ‘national security’ and ‘essential security interests’ remain the ‘sole responsibility’—and thus within the exclusive competence—of Member States. These concepts are relevant in light of the purpose of Regulation 2019/452, which seeks to establish a framework within which Member States exercise their essential functions, stemming from Article 4(2) TEU.  According to this provision, public order and national security are essential functions of the State that are inherent to its  Art. 1(2) Regulation 2019/452.  C-194/06, Orange European Smallcap Fund [2008] ECR I-3747, para. 100. 29  Opinion 2/15, para 80. 30  Opinion 2/15, para 83. 31  Art. 2(1) Regulation 2019/452 (emphasis added). 32  Opinion 2/15, para. 277. See also recital 9 Preamble Regulation 2019/452. 27 28

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national identity. In La Quadrature du Net, the CJEU clarified that national security, as the ‘sole responsibility’ of each Member State, corresponds to their primary interests in ‘protecting the essential functions of the State and the fundamental interests of society’. It therefore encompasses a range of State actions, such as ‘the prevention and punishment of activities capable of seriously destabilising the fundamental constitutional, political, economic or social structures of a [Member State] and, in particular, of directly threatening society, the population or the State itself, such as terrorist activities’.33 Articles 346 to 348 TFEU further clarify the scope of article 4(2) TEU.  However, these provisions do not have the effect of generally excluding from the scope of Union law any measure taken in the interest of public security.34 Finally, the use of these reservations must always be subject to judicial review.35 As the Regulation does not determine the content of public order and security, national screening mechanisms of Member States regarding these Regulation requirements must comply with the case law of the CJEU on free movement of capital.36 The Preamble to the Regulation also indicates that it ‘is without prejudice to the right of Member States to derogate from the free movement of capital as provided for in point (b) of Article 65(1) TFEU’.37 Accordingly, the Regulation does not broaden Member States’ powers to restrict free movement of capital (Hindelang and Moberg 2020, 1453). Public order and security in the Regulation must also comply with the EU’s international obligations, which are part of the EU legal order and in principle rank below primary obligations under the EU founding treaties.38 Of relevance are the EU’s World Trade Organisation (‘WTO’) obligations, as well as its obligations under EU trade and investment agreements concluded with third countries. As regards the former, investment falls within Mode III of the supply of services under the General Agreement on Trade in Services (‘GATS’)—commercial presence by a service supplier of one Member, through commercial presence in the territory of any other Member.39 Interpretations of the concepts of security and public order  Cases C-511/18 and C-512/18, La Quadrature du Net [2020] ECLI:EU:C: 2020:791, para. 135.   Case C-300/11, ZZ [2013] ECLI:EU:C:2013:363, para. 38; Case C-187/16 Commission v. Austria [2018] ECLI:EU:C:2018:194, paras 75–76; Cases C-715/17, C-718/17 and C-719/17 Commission v. Poland, Hungary and Czechia, ECLI:EU:C: 2020:257, paras 143 and 170. 35  ZZ, para 57. 36  See discussion in Sect. 7.3.1 above. 37  Recital 4 Preamble Regulation 2019/452. In virtue of Art. 65 TFEU, restrictions must not amount to ‘a means of arbitrary discrimination or a disguised restrictions on the free movement of capital’. 38  Case C-301/08 Irène Bogiatzi, married name Ventouras v. Deutscher Luftpool and Others [2009] ECR I-10185, para. 23; Art. 216(2) TFEU. EU secondary legislation (including the Regulation on FDI screening) must be interpreted harmoniously with the international agreement: Case C-61/94 Commission v. Germany [1996] ECR I-3989, para. 52. Art. 216(2) TFEU serves as a legal basis for declaring invalid secondary legislation that is inconsistent with a binding international treaty. 39  Art. I(2)(c) General Agreement on Trade in Services, Marrakesh Agreement Establishing the World Trade Organization, Annex 1B (signed 15 April 1994, entered into force 1 January 1995) 1869 UNTS 183, 33 ILM 1167. 33 34

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should thus be consistent with articles XIV(a) and (1)(b) GATS, which allow WTO members to take measures necessary for the protection of their public order and their essential security interests respectively.40 The public order exception, while covering different legitimate objectives, involves an objective standard and may be invoked only ‘where a genuine and sufficiently serious threat is posed to one of the fundamental interests of society’.41 The CJEU’s jurisprudence regarding the public order exception is interpreted consistently with these GATS requirements.42 In addition, the CJEU treats these obligations as independent international obligations that bind Member States under WTO law, and which the Commission may use to compel Member States’ compliance through infringement proceedings under EU law. In other words, the GATS binds Member States not only as matter of international law but also of EU law (Nagy 2021). In contrast to the public order exception, the national security exception in WTO law also relies on subjective criteria, allowing WTO members to take any action ‘which they consider necessary’ to protect their ‘essential security interests’.43 This involves the assessment of the overall context with rather wide discretion left to the States regarding actual threats as well as preventive action in relation to specific situations (Weber and Baisch 2018), which inter alia include ‘war or other emergency in international relations’.44 Despite its self-judging nature, the provision is justiciable and in any case excludes arbitrariness.45 While it is left to WTO members to define what constitutes their ‘essential security interests’, this concept is interpreted narrowly and objectively—being limited to ‘quintessential functions of the State, that is, the protection of its territory and its population from external threats, and the maintenance of law and public order internally’.46 Therefore, trade interests cannot be reframed as essential security interests. Members must provide sufficient details in explaining their essential security interests and act in good faith, demonstrating that measures are ‘not implausible’ as being protective of states’ essential  These are general exceptions aimed at achieveing certain non-trade objectives. Under GATS, members are allowed to decide in which sectors and to what extent they want to liberalise their services. General exceptions thus allow members to impose restrictions on the level of liberalisation of services to which they agreed in their Schedule of Specific Commitments. 41  Footnote 5 to Art. XIV GATS. 42  See Case C-54/99 Église de Scientologie [2000] ECR I-1335, para. 17 and Sect. 7.3.1 above. See also Case C-66/18 Commission v Hungary ECLI:EU:C:2020:792, paras 130–132. 43  See the wording of Art. XIV bis (1)(b) GATS. 44  War involves not only an armed conflict but also a ‘latent’ armed confict, such as the situation between Ukraine and Russia after 2014 but before February 2022. However, political or economic differences between members cannot in itself constitute an emergency: see WTO, Russia  – Measures concerning Traffic in Transit, WT/DS512/R, Report of the Panel (5 April 2019), para. 7.76. This case concerned the identical provision on national security exception in Art. XXI(b) GATT.  Other situations in which exception can be invoked are supply of services, which are directly or indirectly carried out for the purpose of a military establishment; or when they relate to fissionable and fusionable materials. 45  See also Sect. 7.4.3. 46  Russia – Measures concerning Traffic in Transit, para. 7.130. 40

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security interests.47 However, unlike EU law, the requirement of proportionality does not apply—it is sufficient that members deem a measure ‘necessary’ for the protection of their essential interests. Finally, exceptions included in EU trade and investment agreements are modelled on WTO law with additional grounds and interpretative explanations. For example, in the EU-Canada Comprehensive Economic and Trade Agreement (‘CETA’), public security and public order are included in the general exception provision under article 28(3), specifying that exceptions apply to the establishment of investments and the most-favoured nation (‘MFN’) and national treatment (‘NT’) but must not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on trade in services. It is clarified, in line with jurisprudence, that these exceptions may only be invoked ‘where a genuine and sufficiently serious threat is posed to one of the fundamental interests of society’.48 In addition, article 28(6) introduces a national security exception reflecting the GATS article XIV provision, but further specifying ‘essential security interests’ and the right of the parties to withhold the disclosure of information that would be contrary to their essential security interests.49 Similar provisions are found in EU Investment Protection Agreements (‘IPAs’), for example as an exception to specific provisions (for example, NT)50 or as a general security exception.51 EU agreements thus in essence integrate a WTO approach to public order and national security exceptions. The relevant question is therefore whether the invocation of Regulation 2019/452 by EU Member States is consistent with WTO and international requirements. The Regulation only notes in its preamble that ‘it is possible for the Union and Member States’ to adopt restrictive measures relating to FDI on the grounds of security or public order, ‘subject to certain criteria’.52 While the Regulation does not address any further the compatibility with these criteria, which will depend on the particular circumstances of each case, the Regulation conceptually seems to be consistent with EU and Member States’ international obligations.

7.4.2 Substantive Criteria: Sectors and Factors Triggering FDI Screening Regulation 2019/452 provides a list of sectors and factors that may be taken into consideration in determining whether intended investment is likely to affect security or public order. Whereas the EP favoured a more elaborate list, the Council wanted  Russia – Measures concerning Traffic in Transit, para. 7.138.  Footnote 33, Art. 28.3 CETA. 49  See Art. 28.6(a) and (b) CETA. 50  See Art. 2.3.3(a) EU-Singapore IPA, and related clarification in footnote 1. 51  See Art. 4.5 EU-Singapore IPA. 52  Recital 3 Preamble Regulation 2019/452. 47 48

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a shorter and less detailed list (Neergaard 2020, 155). The listed factors are non-­ exhaustive, leaving to Member States autonomy in carrying out the screening. This approach also indicates that the EU lawmaker did not intent to harmonise the scope of the different national screening mechanisms. Rather, listed criteria serve to improve the transparency of Member States’ screening mechanisms for investors that consider investing in the Union.53 Potential investment is subject to risk assessment including two steps. Of relevance is determining first how vulnerable the targeted company is (vulnerability analysis) and secondly, whether the investor poses a threat to security or public order (threat analysis). The vulnerability analysis involves a risk assessment of the targeted company, in particular, whether it is engaged in sensitive activities, how critical it is for the proper functioning of these activities in the Member State or across the EU, and what effects its disappearance would have on security and public order in the Member State. Regulation 2019/452 lists the following criteria to be taken into account: (1) whether the company operates in the sphere of critical infrastructure (e.g. energy, transport, water, health, data processing or storage, electoral or financial infrastructure, sensitive facilities etc.); or (2) if the company is active in the area of critical technologies (AI, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies, nanotechnologies, biotechnologies); or (3) whether it concerns the supply of critical inputs (energy, raw materials, food security); or (4) if has access to or controls sensitive information (e.g. personal data); or (5) if its operation concerns the freedom and pluralism of the media.54 These sectors are defined broadly and there is no de minimis rule. The core question is whether, with respect to the covered nature of its activities, the targeted company plays a critical role for the security or public order in the Member State(s). Regulation 2019/452 is also innovative as it aims at protecting projects and programmes of Union interest, which involve a substantial amount or a significant share of EU funding, or are covered by EU law regarding critical infrastructure, critical technologies or critical inputs essential for security or public order.55 The list of such projects or programmes is set out in an Annex, which may be amended by delegated acts adopted by the European Commission.56 The EP has been supportive of a non-exhaustive list of projects or programmes of Union interest (Neergaard 2020, 158). On the other hand, the threat analysis focuses on the potential investor, and it is particularly aimed at understanding the strategy and motivation of the prospective investor—namely whether its planned investment is purely commercial, or is it intended to interrupt the supply of goods and services with respect to critical sectors in which the targeted company operates. The Regulation lists factors which the

 Recital 12 Preamble Regulation 2019/452.  Art. 4(1) Regulation 2019/452 (emphasis added). 55  Art. 8(3) Regulation 2019/452. 56   Art. 8(4), Recital 20 Preamble Regulation 2019/452. Regarding delegated acts, see Art. 290 TFEU. 53 54

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Members States and the Commission may take into consideration in their risk assessment, notably: (1) whether the potential investor is owned or controlled by a third State—directly or indirectly, including through subsidiaries or significant funding; or (2) whether the investor has already been involved in any activities that have affected security or public order in a Member State; or (3) whether it is engaged in illegal or criminal activities which pose a serious risk.57 In addition, the preamble to the Regulation also mentions that Member States may assess risks to security or public order arising from significant changes to the ownership structure or key characteristics of a foreign investor.58 Economic operators, civil society organisations, and social partners such as trade unions may forward to Member States or the Commission information in relation to an investment likely to affect security or public order.59 The core question is whether, with respect to a potential investor, the envisaged investment is a threat for the security or public order in the Member State(s). The question is when these analyses are conducted and how the EU cooperation mechanism works in practice. We turn to these procedural aspects next.

7.4.3 The EU Cooperation Mechanism The EU regulatory framework is rather lax given that screening mechanisms are national and not routed via some central European agency. Article 6 of Regulation 2019/452 regulates situations in which an investment is undergoing screening in a Member State, while article 7 addresses situations when investment is not undergoing screening in a Member State but any other Member State considers that such investment would likely affect their own security or public order. These cooperation procedures are thus complementary to national screening mechanisms. In addition, article 7 allows the Commission to carry out ex-officio screenings in situations when FDI is likely to affect security or public order in more than one Member State. In accordance with article 4(3) TEU, these procedures are underpinned by the principle of loyal cooperation. The Regulation thus imposes an obligation of both horizontal and vertical cooperation. Member States are therefore obliged to notify the other Member States and the European Commission of ‘any foreign direct investment in their territory that is undergoing screening’,60 through their contact point.61 Other Member States may send comments to the Member State undertaking  Art. 4(2) Regulation 2019/452 (emphasis added). The EP also wanted to include risks of different natures such as risk to intellectual property rights and human rights. However, this amendment was not accepted, and arguably it would go beyond the scope of the public order and national security exceptions under international law. 58  See Recital 11 Preamble Regulation 2019/452. 59  See Recital 14 Preamble Regulation 2019/452. 60  Art. 6(1) Regulation 2019/452. 61  To be established under Arts 6(10) and 11 Regulation 2019/452. 57

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the screening as well as to the Commission, when they consider that FDI is likely to affect their security or public order, or when they have information relevant to such screening.62 Comments and opinions must be duly justified.63 Where a Member State considers that FDI planned or completed in another Member State which is not undergoing screening in that Member State is likely to affect its security or public order, or has relevant information in relation to that FDI, it may also provide comments to that other Member State.64 In order to provide these comments and opinions, Member States may request additional information.65 In both cases (investment undergoing and not undergoing screening), the Commission may request information from Member States and issue non-binding opinions where it considers that FDI is of ‘Union interest’.66 Where a third of Member States consider that FDI is likely to affect their security or public order, the Commission is obligated to issue an opinion.67 Furthermore, where a Member State duly considers that FDI in its territory is likely to affect its security or public order it may request the Commission to issue an opinion.68 The Regulation requires a domestic authority only to take into account both information requests and the comments of other Member States as well as the opinion issued by the EC.69 Tight time limits provided for in the Regulation must be respected by the Member State carrying out the screening.70 However, exceeding these time limits will not be easily subject to sanctions. In any case, a Member State cannot be obliged to follow either the opinion of the Commission or the comments of other Member States, as under article 288(5) TFEU the opinion of the Commission is not binding.71 Thus, the final screening decision shall be taken by the Member State undertaking the screening.72 The Commission is not endowed with the same competence as the Committee on Foreign Investment in the US (‘CIFIUS’) since it does not have de jure power to block an acquisition on the grounds of public order or security. It therefore has no power to vet foreign acquisitions on strategic grounds. However, the obligation to take ‘due consideration’ of the opinion of the Commission implies that the final decision must be adopted after the opinions and comments have been received. In the case of FDI which is likely to affect projects or programmes of Union interest,

 Art. 6(2) Regulation 2019/452.  Art. 6(5) Regulation 2019/452. 64  Art. 7(1) Regulation 2019/452. 65  Arts 6(4) and 7(3) Regulation 2019/452. 66  Arts 6(3) and 7(2) Regulation 2019/452. 67  Arts 6(3) and 7(2) Regulation 2019/452. 68  Arts 6(4) and 7(3) Regulation 2019/452. 69  Arts 6(9), 7(7), 8(2)(c) Regulation 2019/452. 70  Arts 6(6)–(8) and 7(6)–(8) Regulation 2019/452. 71  See by analogy the non-binding nature of the Commission opinions under Art. 37 EURATOM. See in particular, Case 187/87 Saarland v. Minstères de l’Industrie [1988] ERC I-5013. 72  See Recital 17 Preamble and Art. 6(9) Regulation 2019/452. 62 63

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the obligation goes even further, requiring the Member State not following the Commission’s opinion to provide an explanation.73 However, in any case, the final decision is made by the Member State where the FDI is being admitted. The duty of loyal cooperation also requires that Member States ensure that the cooperation mechanism and screening decisions are not circumvented.74 Finally, Member States are obliged under EU law to comply with several administrative and procedural requirements aimed at ensuring the procedural and substantive fairness of the decision-making process—these being transparency,75 time limits,76 confidentiality,77 non-discrimination,78 and recourse against decisions of national authorities.79 The Regulation does not specify the nature of a possible recourse against screening decisions—whether administrative or judicial. Arguably, the CJEU requires recourse to national courts.80 Within this framework, while investors cannot challenge the validity of national decisions before the CJEU, domestic courts could request preliminary rulings on the compatibility of national decisions with EU primary law. These procedural requirements are also in line with EU and Member States’ international obligations. Under the GATS, the right to adopt general exceptions measures is subject to the general principles in the chapeau of article XIV, as these must be applied in a manner which would not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade.81 Exceptions on national security grounds, although self-judging in several respects, remain justiciable under WTO law.82 Based on the preceding analysis, the following table summarises EU cooperation mechanism procedures (Table 7.2).

7.5 Implementation of the Regulation and Policy Trends Having explained the key substantive and procedural features of the EU FDI screening framework in light of EU law and EU and Member States’ international obligations, the final part of this chapter analyses the policy implications of the new mechanism and its implementation trends since the start of its application in October 2020.

 Art. 8(2)(c) Regulation 2019/452.  Art. 3(6) Regulation 2019/452. 75  Arts 3(2), 3(7)–(8) Regulation 2019/452. 76  Art. 3(3) Regulation 2019/452. 77  Art. 3(4) Regulation 2019/452. 78  Art. 3(2) Regulation 2019/452. 79  Art. 3(5) Regulation 2019/452. 80  Case 222/86 Unectef v. Heylensand Others [1987] ECR 4097, paragraphs 14 and 15. 81  Art. XIV GATS. 82  See Russia – Measures concerning Traffic in Transit case and Sect. 7.4.1 above. 73 74

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Table 7.2  EU FDI screening cooperation mechanism Procedures Cooperation mechanism in relation to FDI undergoing screening  Article 6 Regulation

Duties of the host Member State Notification to the EC and other Member States of any FDI undergoing screening in its territory Responding to information requests Taking into consideration Member State comments/ EC opinion received Final decision on admission of FDI

Cooperation mechanism in relation to FDI NOT undergoing screening in another Member State  Article 7 Regulation

Taking into consideration comments received by other Member States concerned for their own public order or security Taking into consideration EC opinion Responding to information requests Final decision on admission of FDI FDI likely to affect Projects or programmes of projects or programmes Union interest in Annex I to of union interest the Regulation  Article 8 Regulation Notification to the EC and other Member States Must take ‘utmost account’ of the EC opinion Must provide explanation if the EC opinion not followed Final decision on admission of FDI

Powers of the EC Risk assessment (vulnerability and threat analysis across directorates-general [‘DGs’]) Notification about Member States’ comments to other Member States Right to issue an opinion addressed to the Member State undertaking the screening (must be issued if 1/3 of the Member States are concerned) and right to request additional information

Ex-officio risk assessment (vulnerability and threat analysis across DGs) Notification about Member States’ comments to other Member States Right to issue an opinion addressed to the Member State in which FDI is not undergoing screening (must be issued if 1/3 of the Member States are concerned) Providing recommendations to the host Member State (e.g. mitigating measures) Risk assessment (vulnerability and threat analysis across DGs) Issuing an opinion addressed to the Member State where the FDI is planned Providing recommendations to the host Member State (e.g. mitigating measures)

Member States must provide the European Commission with an annual report that includes information on total FDI in their territory and information on requests from other Member States by virtue of articles 6(6) and 7(5) of Regulation 2019/452. The Commission provides an annual public report on the implementation of the Regulation to the Parliament and Council.83 With a view to enhancing political scrutiny, the Parliament may invite the Commission to explain systemic issues related to the implementation of the Regulation.84 However, the Parliament cannot interfere 83 84

 Art. 5(3) Regulation 2019/452.  Art. 5(4) Regulation 2019/452.

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with individual cases (Neergaard 2020, 162). The procedure complements the ongoing dialogue between the Commission and the EP on economic governance, which commenced with the introduction of the so-called ‘European Semester’ (De Sadeleer 2012). FDI has proven important for post-COVID-19 recovery globally, but Europe has not been able to follow these trends. The US remains the EU’s top investor, with the UK closely following. The level of the PRC’s investment keeps decreasing although its value has overall increased compared to 2020. The EC’s second annual report on the screening of foreign direct investment (2022b) attributes this to ‘strict [PRC] capital controls and concentration of investment activities in core industry sectors’. The most popular Member State for PRC investment is the Netherlands, followed by Germany and France, with consumer products and automotive (electric vehicle batteries) as top sectors. However, the share of PRC investment by SOEs has decreased to a 20-year low and the nature of PRC investment has overall been changing—from mergers and acquisitions to greenfield projects, with a majority focusing on European tech start-ups (Kratz et al. 2022). It is unclear to what extent the Regulation has influenced these trends, but its core objectives seem to be met. While PRC investment accounts for only 7% of all notified cases under the Regulation (European Commission 2022b, 18), the origin of the investor remains an important consideration for Member States’ risk assessment. In terms of the activities at the Member States’ level, the EC’s second annual report (2022b, 11–13) clearly indicates discrepancies between Member States’ screening mechanisms, the number of authorisation requests (concentrated in four Member States) and reporting methodology. The overall trend demonstrates an increase in the proportion of formally screened cases with a majority of transactions still authorised without any conditions; however, there is an upward trend in cases entailing mitigating measures. Nevertheless, only 1% of FDI authorisations has been blocked (down from 2% in the previous year) and 3% has been withdrawn by the parties themselves. About 71% of all applications have been deemed ineligible or have not attracted formal national screening because they do not have potential to impact on the security or public order of a Member State. Therefore, informal review remains the prevalent approach. As concerns the cooperation mechanism at the EU level (European Commission 2022b, 16–19), the vast majority of total cases have been concluded in the so-called Phase 1—with no requests for further information (86%). The remaining cases involve requests for further information and thus likely entail delays, mostly concerning FDI in manufacturing (critical infrastructures and/or technologies, particularly defence and aerospace), the information and communication technology sector (raising drastically compared to the first EC Report in 2021) and financial services. Interestingly, 28% of all cases concern several Member States. There is also a trend towards notification of higher value investment, particularly in excess of €500 m. The Commission has used its right to issue an opinion in only 3% of all notified cases, with no ex-officio screening under article 7, indicating that the Commission has been careful to intervene only when necessary, while focusing its role on the overall oversight of the mechanism.

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The Commission’s overall assessment of the Regulation implementation is positive, emphasising the exchange of best practices with third-country partners, particularly the US, and confidentiality in information sharing internally, as important aspects of trust building. Looking ahead, the EU will continue encouraging Member States to introduce or improve their national screening mechanisms and will attempt to ensure a higher degree of conformity across Member State practices. By October 2023, the evaluation of the Regulation and its potential revision can also be expected (European Commission 2022c, 7–8). It is thus likely that the cooperation mechanism will only be further developed, and its enforcement enhanced in light of the implementation practice and general trends in EU trade policy towards strategic autonomy.

7.6 Conclusion The EU FDI screening regulatory framework is a sui generis instrument of cooperation among Member States, as well as between Member States and the Commission. It does not aim at establishing an EU-wide investment screening process, but it relies on existing and forthcoming national screening mechanisms, as well as a number of policy and enforcement institutions. As such, it is different to centralised screening mechanisms that exist in other countries and federal States such as the US and Australia. While novel for the EU, the screening mechanism is grounded in exclusive competence under the Common Commercial Policy and is in principle consistent with the international obligations of the Union. The question, however, is whether the Regulation has added value from a legal perspective. It does not compel Member States to screen FDI.  Furthermore, neither the Commission nor other Member States have a veto power over the host State. Member States retain their power to regulate inward FDI in their territory, in accordance with Treaty rules and the general principles of EU law. They are endowed with considerable leeway to define issues such as the scope of security concerns, the circumstances triggering the screening procedure, grounds for screening, identification of the sectors under threat, timeframes, data to be delivered by the investor and confidentiality of the information. No secondary law obliges the Member States to screen FDI with a view to protecting national interests. However, the Regulation does permit other Member States and the Commission to intervene in cases when FDI activities are not screened, which can carry political if not legal weight. The Regulation must primarily be seen as an instrument additional to the EU Common Commercial Policy, which continues to expand through the conclusion of EU trade agreements including investment provisions. It goes beyond the free movement of capital judicial requirements by giving the European Commission new soft powers in overseeing FDI flows into the Union, particularly in relation to EU programmes and actions. The Commission can now also use the mechanism in requiring lower investment screening thresholds for EU investors in third countries,

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likely to be included in new EU trade and investment agreements. The mechanism therefore does give more political leverage to the Commission in carrying out the EU external trade and investment agenda and it complements other Common Commercial Policy instruments. An assessment of the implementation of the Regulation in the first two years since its adoption indicates that the Regulation has encouraged Member States to screen more strictly and effectively their inward FDI in critical sectors. Although significant divergences remain between Member States’ national implementation instruments, it is likely that the Regulation will be used as a tool towards more policy and practice convergence of FDI national screening procedures within the EU, particularly in light of ever-expanding security threats.

References Barnard C (2019) The substantive law of the EU: the four freedoms, 6th edn. Oxford University Press, Oxford Bismuth R (2020) Reading between the lines of the EU regulation establishing a framework for screening FDI into the Union. In: Bourgeois Jacques HJ (ed) EU framework for foreign direct investment control. Wolters Kluwer, Alphen aan den Rijn, pp 103–114 Bourgeois J, Malathouni E (2020) The EU regulation on screening foreign direct investment: another piece of the puzzle. In: Bourgeois Jacques HJ (ed) EU framework for foreign direct investment control. Wolters Kluwer, Alphen aan den Rijn, pp 169–191 Cremona M (2020) Regulating FDI in the EU legal framework. In: Bourgeois Jacques HJ (ed) EU framework for foreign direct investment control. Wolters Kluwer, Alphen aan den Rijn, pp 31–55 Damjanovic I (2023) The European Union and international investment law reform: between aspirations and reality. Cambridge University Press, Cambridge De Sadeleer N (2012) The new architecture of the European economic governance: a leviathan or a flat-footed colossus? Maastricht J Comp EU Law 19(3):354–382 European Commission (2017a) Explanatory memorandum to COM(2017) 487 – framework for screening of foreign direct investments into the EU. COM(2017) 487 final European Commission (2017b) Welcoming foreign direct investment while protecting essential interests. COM(2017) 494 final European Commission (2019) Commission staff working document on foreign direct investment in the EU. SWD(2019) 108 final European Commission (2020) Guidance to the Member States concerning foreign direct investment and free movement of capital from third countries, and the protection of Europe’s strategic assets, ahead of the application of regulation (EU) 2019/452 (FDI screening). COM(2020) 1981 final European Commission (2021) Trade policy review – an open, sustainable and assertive trade policy. COM(2021) 66 final European Commission (2022a) Guidance to the Member States concerning foreign direct investment from Russia and Belarus in view of the military aggression against Ukraine and the restrictive measures laid down in recent Council regulations on sanctions (Council Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine (OJ L 229, 31.7.2014, 1) and its amendments and Council Regulation (EC) No 765/2006 of 18 May 2006 concerning restrictive measures concerning restrictive measures in view of the situation in Belarus (OJ L 134, 20.5.2006, 1) and its amendments. 2022/C 151 I/01

131 European Commission (2022b) Second annual report on the screening of foreign direct investments into the Union. COM(2022) 433 final European Commission (2022c) Commission work programme 2023. COM(2022) 548 final Fukuyama F (1989) The end of history? Nat Interest 16:3 Hindelang S, Moberg A (2020) The art of casting political dissent in law: the EU’s framework for screening of foreign direct investment. Common Mark Law Rev 57(5):1427–1460 Kratz A et  al (2022) Chinese FDI in Europe: 2021 update. Rhodium Group https://rhg.com/ research/chinese-­fdi-­in-­europe-­2021-­update Le Guernigou, Y et al (2017) France, Germany, Italy urge rethink of foreign investment in EU. Reuters February 15, 2017. https://www.reuters.com/article/uk-­eu-­trade-­france-­idUKKBN15T1ND Nagy C (2021) Case C-66/18. Am J Int Law 115(4):700–706. https://doi.org/10.1017/ajil.2021.45 Neergaard A (2020) The adoption of the regulation establishing a framework for screening of FDI into the EU. In: Bourgeois Jacques HJ (ed) EU framework for foreign direct investment control. Wolters Kluwer, Alphen aan den Rijn, pp 151–167 Schill S (2020) Foreign direct investment control in the EU: rising protectionism or instrument for further investment liberalization? In: Bourgeois Jacques HJ (ed) EU framework for foreign direct investment control. Wolters Kluwer, Alphen aan den Rijn, pp 57–75 Seaman J et al (2017) Chinese investment in Europe: a country-level approach. European think-­ tank network on China. https://merics.org/sites/default/files/2020-­04/171216_ETNC%20 Report%202017_0.pdf Thurow L (1996) The future of capitalism: how the today’s economic forces will shape tomorrow’s world. William Morrow, New York Weber RH, Baisch R (2018) Revisiting the public moral/order and the security exceptions under the GATS. Asian J WTO Int Health Law Policy 13(2):375–394

Chapter 8

Trade in Services and Mutual Recognition of Professional Qualifications in the EU and International Systems: Multilateralism à la Carte? Jonathan Boscarato

Contents 8.1  8.2  8.3  8.4  8.5  8.6 

Introduction  n Overview of Trade in Services A Regulating Professional Services: Consumer Protection or Protectionism? The Stalling of Multilateral Efforts Features of Professional Qualifications MRAs The European Union: From Harmonisation to Equivalence, and Partial Return to Harmonisation 8.7  Mutual Recognition in the Australia-New Zealand Closer Economic Relations Trade Agreement 8.8  Professional Qualifications: Mutual Recognition Agreements in the EU’s Free Trade Agreements with Australia and NZ 8.9  Conclusion References

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Abstract  At the multilateral level, the General Agreement on Trade in Services (‘GATS’) seeks to create a competitive playing field for international trade services just as the General Agreement on Tariffs and Trade (‘GATT’) does for goods. However, the liberalisation of services does not simply rely on removing barriers at the border, but requires much deeper efforts at smoothing out behind-the-border technical barriers. Mutual Recognition Agreements (‘MRAs’) for professional qualifications are an important enabling framework that help to liberalise international trade in services. However, very few provisions of World Trade Organisation (‘WTO’) agreements deal with such mutual recognition frameworks. For this reason, regulation is mostly found in bilateral and regional preferential free trade agreements (‘FTAs’), with the notable exceptions of the EU and the Australia-New J. Boscarato (*) Trade Policy Professional, Australia-EU FTA Negotiations, Canberra, ACT, Australia © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 O. Quirico, K. Kwapisz Williams (eds.), The European Union and the Evolving Architectures of International Economic Agreements, https://doi.org/10.1007/978-981-99-2329-8_8

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Zealand Closer Economic Relations Trade Agreement (‘ANZCERTA’) frameworks. The EU has been engaged in separate FTA negotiations with Australia and New Zealand for the last few years, with the former now reaching its conclusion, and the latter inked in June 2022. Both the European Union (‘EU’) and ANZCERTA having very ambitious and far-reaching frameworks for the recognition of professional qualifications, it may be expected that similarly ambitious provisions might be struck in the context of their FTA negotiations. While this does not appear to be the case, this contribution examines these negotiations, and the parallel negotiations each of these parties have with the United Kingdom, as useful examples to contrast different approaches to the recognition of professional services, and explore what a broader professional qualifications recognition framework may look like in the future—how is regulation evolving in areas such as accountancy, health and legal services, and what, if any, is the impact of the divide between common law and civil law countries on the mutual recognition of qualifications? Keywords  European Union · ANZCERTA · UK · Professional qualifications · Mutual recognition agreement

8.1 Introduction A large number of preferential FTAs have been negotiated and concluded between developed, service-based economies. However, many barriers remain to the liberalisation of international trade in services, and many of the barriers are regulatory, which makes them conceptually similar to the negotiation of technical barriers to trade (‘TBTs’) in the trade of goods. Unlike the GATT, which developed over the course of many rounds of multilateral negotiations throughout the second part of the twentieth century, the equivalent agreement on the international trade in services, the GATS, is a relatively recent phenomenon with a lower level of liberalising ambition. Facilitating international trade in services has therefore been a focus of many bilateral and regional FTAs. One emergent provision within FTAs seeking to facilitate international trade in services is the inclusion of MRAs for professional qualifications.1 However, detailed negotiations of MRAs on professional qualifications have traditionally been the responsibilities of the various professional bodies of different countries, rather than their governments. How do the government authorities of the negotiating parties encourage the negotiation of MRAs between their respective professional bodies, and what form can these frameworks take? How do MRAs achieve their fundamental conceptual components: firstly, the recognition of foreign qualifications, and secondly, in a mutual, reciprocal way? Further, how can  For the purposes of this chapter, the term ‘qualifications’ shall mean all formal educational, practical experience, examinations, licensing procedures, ongoing professional development and training, and other regulatory requirements necessary in order to practice in a professional sector in a given jurisdiction. 1

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provisions in FTAs translate to professional bodies negotiating and concluding MRAs effectively? This chapter will firstly examine the multilateral framework of the GATS, which despite its shortfalls and notable lack of detail on professional services, sets a common framework for widely accepted definitions of trade in services. Next, it will examine how the setbacks in multilateral and plurilateral efforts to liberalise and facilitate international trade in services serve as the catalyst for the emergence of MRAs on professional services in FTAs. This will be followed by an examination of the two models of professional qualifications in MRAs held to be examples of global best practice—firstly, the EU model of mutual recognition for qualifications, its FTA negotiating practices, and attempts to place mutual recognition of qualifications on the services trade agenda internationally, and secondly, the MRA model under the ANZCERTA, which could be considered an extension of Australia’s domestic regulatory framework to its very close political and economic partner, New Zealand. Finally, this chapter will conclude by examining the opportunities for enhanced cooperation in professional services in the simultaneous FTA negotiations between the EU and both Australia and New Zealand.

8.2 An Overview of Trade in Services There is an apparent contradiction in the composition of world trade when disaggregated between: (1) goods, on the one hand; and (2) services, on the other. About half of world trade occurs between developed economies,2 with these economies being predominantly services-based  (World Bank 2021),3 yet services represent only about 20% of the trade between them (WTO 2021).4 Why do economies underpinned by services carry out so little trade in these services that underpin them? The classic explanation in trade theory is that most goods are much more easily transportable, and therefore, tradeable, than services. It is difficult to imagine, for instance, services such as a freshly brewed coffee, a three-course meal or a haircut being delivered across an international border in the same way as coffee beans, fresh produce, or hair styling products. However, technology has rapidly increased the tradability of both goods and services. For goods, the rise of refrigeration, containerisation, and air freight from the middle of the twentieth century have allowed many previously non-tradeable, perishable goods to be traded across the globe. For services, massive advances in information and communications technology (‘ICT’) have facilitated the technical and logistical feasibility of cross-border trade in 2  Relying on figures from the WTO Trade Statistical Review 2021 for the United States, Canada, the European Union, Japan, Australia, and New Zealand: https://www.wto.org/english/res_e/ statis_e/wts2021_e/wts21_toc_e.htm 3  Services account for 71.8% of GDP for high income countries (World Bank Open Data – Services, value added (% GDP) https://data.worldbank.org/indicator/NV.SRV.TOTL.ZS). 4  Ibid. (WTO Trade Statistical Review (2021)).

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services in the three decades since the conclusion of the GATS.5 Lund et al. (2020) also suggested that the experience of COVID-19 is likely to have further accelerated this trend, by forcing the adoption of ICT-enabled remote service delivery for many sectors and individuals which had previously been unable or unwilling to adopt the practice. The implications for cross-border service delivery are clear—an international and remote labour market is now potentially able to respond to demand for services on a much greater scale than was previously possible, potentially providing consumers with greater choice and competition. According to the WTO’s 2019 World Trade Report focusing on services: The services share of world trade has grown from just 9 per cent in 1970 to over 20 per cent today, and is expected to grow to 50 percent by 2040...services currently account for around three quarters of GDP in developed economies, up from 40 per cent in 1950. [WTO 2019]

It can therefore be posited that, as the importance of services grows in international trade, so too will demands for greater liberalisation. A second reason is that methodological approaches to quantifying international trade in services are still inadequate to fully capture their true value. While the definition of a traded good is relatively uncontroversial, and indeed, well-standardised at a multilateral level in the WTO (for example, the 1988 Harmonized Commodity Description and Coding System, or HS Convention), the very definition of trade in services has been subject to much conceptual debate. In this respect, one of the major achievements of the Uruguay Round was the first-ever multilateral agreement on services, the GATS, article I(2) of which defines four modes of service delivery6: • Mode I: Cross-Border Trade in Services (‘CBTS’) In this case, the service is delivered remotely, with neither the service provider nor the client needing to cross an international border. At the time that GATS was concluded in the 1990s, this type of service delivery was relatively limited, and relatively inefficient. However, massive advances in ICT since adoption of the GATS have greatly facilitated this mode of service delivery, while the COVID-19 pandemic has further increased its uptake. • Mode II: Consumption Abroad In this case, the client travels across an international border to the jurisdiction where the service is provided. The typical example is tourism, but other notable forms include international education and so-called ‘healthcare tourism’. • Mode III: Commercial Presence This mode of service delivery involves the supply of services by a foreign-owned affiliate, branch, agency, subsidiary or similar in the client’s country. The typical example is when a client purchases a service from a large foreign-owned company in the former’s own country. According to some estimates, this mode of delivery accounts for the vast majority of trade in services (Mann 2017). However, it is perhaps conceptually the least obvious, and also a mode of delivery that is difficult to accurately quantify (DFAT 2019); exports of such services can be relatively easily

 Here, cross-border trade in services is conceived narrowly as Mode I trade in services, as defined in the GATS. 6  The academic origin of this conceptualisation can be traced back to the work of Sampson and Snape (1985), which was later endorsed by the Group of Negotiations on Services during the Uruguay Round (see for example the Uruguay Round negotiating document MTN.GNS/W/9, 19 June 1987: https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=Q:/UR/GNS/W9. PDF&Open=True 5

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estimated through tax reporting of local companies with activities abroad (known as inward Foreign Affiliates Trade in Services; ‘FATS’), whereas imports are considered more difficult to estimate (Reister 2005). • Mode IV: Movement of Natural Persons (‘MNP’) In this mode of service delivery, the provider travels to the country where the client is located. The GATS distinguishes between this type of service and permanent migration; the GATS Annex on the Movement of Natural Persons, states that this mode of delivery is not designed to apply to ‘natural persons seeking access to the employment market of a Member, nor...measures regarding citizenship, residence or employment on a permanent basis’. Though this theoretically differentiates Mode IV service delivery from the politically sensitive topic of migration, there is nevertheless a potential link between the two concepts (Bhatnagar 2014).

It should be noted that these modes of service delivery are neither discrete nor complete. There is significant potential for overlap, for example, a service may be delivered by a foreign subsidiary (Mode III), may involve contributions by foreign staff based in a local office (Mode IV) as well as input from staff based at foreign headquarters (Mode I). Further, from a theoretical perspective, these modes are neither conclusive, nor definitive. Much recent work on estimating the value of services in international trade focuses on the value-added services that are embodied in traded goods, which has been conceptualised as a fifth mode of services trade, and is indeed experiencing rapid growth (Antimiani and Cernat 2018)—when this fifth mode of service provision is included, the value of trade in services rises to represent about half of international trade (WTO 2019). However, while agreeing on a common definition of international trade in services was a major achievement of the GATS, another serious hurdle poses a methodological and practical challenge, in that standard measurements of international trade in services normally only include Modes I, II, and IV, with Mode III often completely unquantified. Mode IV is also somewhat difficult to measure, since there is no clear delineation between the movement of natural persons for the purpose of service delivery and longer-term migration. The result is that estimates of international trade in services tend to be skewed towards more ‘measurable’ services (Modes I and II), whereas the other modes (Mode III in particular) are likely to be much more important. With a view to overcoming these challenges and better quantifying global trade in services, the OECD and the WTO co-launched the Trade in Value Added (‘TiVA’) database in 2013,7 quantifying value-added as a proxy for the many services inputs that go into modern, complex, international supply chains (the proposed ‘Mode V’; see above), while the WTO began publishing its Trade in Services by Mode of Supply (‘TISMOS’) database in 2019, although the WTO still describes this dataset as ‘experimental’.8 In addition to the methodological challenges in quantifying the international trade in services described above, identifying and quantifying the barriers to trade in services is also more difficult than for goods. This is in large part because barriers  https://www.oecd.org/sdd/its/tiva-nowcast.htm  https://www.wto.org/english/res_e/statis_e/trade_datasets_e.htm

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to the trade in goods now typically lie at the border in the form of tariffs and other charges, thanks in large part to efforts during the GATT negotiating rounds to ban or reduce non-tariff barriers and convert them into tariffs (in a process known of ‘tariffication’ (Moschini 1991). In contrast, the majority of barriers to international trade in services are not border fees and charges. Although some costs may be imposed on trade in services (such entry visas and air ticket taxes), these are typically not prohibitive of international trade in services. Rather, most barriers take the form of behind-the-border regulatory restrictions, making these barriers conceptually similar to TBTs for goods.9 For services, these can take a variety of forms, from domestic ownership and board membership requirements for companies, to nationality requirements for professionals in certain sectors. The OECD has made some attempts to quantify the impact of regulatory restrictions on international trade in services through the Services Trade Restrictiveness Index (‘STRI’).10

8.3 Regulating Professional Services: Consumer Protection or Protectionism? In most jurisdictions, up to a quarter of the workforce is employed in professions that are subject to regulations of some form, placing conditions such as registration or qualifications on professional practice (Productivity Commission 2015). Government authorities normally justify these regulatory measures citing consumer protection concerns, as the former has an imperative to only allow sufficiently well-­ qualified and competent professionals to practice in sectors with potential public health and safety implications. However, these regulations can also create barriers to international service provision, by preventing foreign-qualified skilled professionals from practising in their speciality areas. The fundamental stumbling block is a lack of trust between countries’ regulatory authorities and frameworks and an unwillingness to recognise foreign qualifications for fear that the latter may be inadequate with respect to domestic regimes, and that foreign-qualified professionals will therefore deliver a lower standard of service (McNaughton and Lo 2017). While some highly skilled professionals are not subject to specific regulation (such as musicians and graphic designers), many of the most consequential highly skilled professions (chiefly fields like health, law, architecture, engineering, and accounting) are subject to domestic regulation to ensure the safety of consumers and broader society as a whole. Consumer protection concerns may not even relate to the quality of foreign qualifications, but to local specificities that may impact the ability of foreign-qualified professionals to practice their professions locally, such as local

 Article 6 of the Agreement on Technical Barriers of Trade includes provisions similar to Article VI–VII of GATS, but its scope does not extend to professional services. 10  https://stats.oecd.org/Index.aspx?DataSetCode=STRI 9

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climatic conditions (such as for architects), legal structures and systems (lawyers), and medical standards (health professionals), among others (Nicolaïdis 1997). The GATS does not require members to automatically recognise all foreign qualifications (which would be akin to requiring that all professions be completely unregulated). Rather, article VI(4) recognises the legitimate interest that governments have in regulating the provision of services, and only requires that members regulating professional services ensure that qualifications and licensing do ‘not constitute unnecessary barriers to trade in services...[are] not more burdensome than necessary’, and do ‘not in themselves [constitute] a restriction on the supply of the service’. The question for regulatory authorities is therefore not whether they can regulate professions, but to what degree they may do so, balancing consumer protection and competition, whereby the crux of the definition lies in the interpretation of the terms ‘unnecessary barriers’ and ‘more burdensome than necessary’, both of which remain untested in WTO Appellate Body (‘WTOAB’) jurisprudence.11 The sectors facing the highest levels of regulation tend to correspond to those that require the highest levels of qualifications, the highest-value services, and therefore the sectors with the greatest potential gains for international services trade. Conversely, the restriction of their trade internationally potentially poses the greatest opportunity cost in terms of trade forgone. For a fully qualified professional in one jurisdiction to obtain accreditation to practice in another may involve a number of additional qualifications. Completing all of the necessary requirements again in the new jurisdiction is prohibitively lengthy, burdensome, and costly, in proportion to the level of qualification. Hence the recognition, full or partial, of the skills and qualifications of a professional accredited to practice in the like sector of a foreign jurisdiction can greatly reduce the barriers to the international provision of professional services. There are, however, potentially competing interests between the existing qualified professional service providers in a jurisdiction (whose numbers are limited) on the one hand, and the pool of foreign-qualified professionals (who could potentially offer their services in this jurisdiction but for regulatory constraints) on the other. The former exercise a certain degree of market power in a given jurisdiction, and any increase in the supply of foreign-qualified professionals delivering the service would constitute a dilution of this market power. The incumbent professionals may therefore not support (or may indeed oppose) efforts to seek recognition of their foreign counterparts’ qualifications, as to do so would increase competition in their sector. The incumbent professionals may even have an interest in lobbying government authorities, if the expected benefits of preserving their market power is greater than the expected costs of lobbying efforts—a case of the dispersed losses (to the public) versus concentrated gains (for the lobbies) that have plagued efforts at trade liberalisation in other areas. In many jurisdictions, industry representatives from regulated professions are not only very well-organised in professional bodies, but also enjoy substantial

11

 No dispute involving either article VI(4) or article VII has ever been examined by the WTOAB.

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power in shaping the regulatory policy. In many of these regulated industries, representatives are often delegated a certain degree of regulatory power from governments to determine the requirements necessary to practise a particular profession. Their level of power can range from complete self-regulation, where there is no government role, to quasi-regulation, where the government has an informal regulatory role (such as voluntary professional codes of conduct), to co-regulation, where legally binding regulation is developed jointly between industry bodies and government (Government of Victoria 2011). At the opposite end of this spectrum is pure government regulation, whereby government authorities set qualification requirements through legislation or regulatory measures, with little industry involvement. Given their prominent role in the regulation of professional services, governments must therefore engage professional bodies in the process of negotiating international professional qualifications via MRAs, which entails, in a sense, a corporatist approach to trade policy (Jahn 2016). In this context, professional bodies play a very powerful role, and potentially suffer from a conflict of interest as they are often delegated extensive powers by governments to self-regulate their industry, but also often have a vested interest in maintaining the monopoly over the labour markets of their sector. How, given the conflicting interests of professional bodies (to maintain market power), consumers (their assumed desire for greater choice and competition), and government authorities (a need to balance quality assurance and greater competition), can policymakers strike a balance that achieves the widely-accepted long-­ term welfare gains of trade liberalisation?12 From a game-theory perspective, the risks of offering concessions to a trade partner that are not reciprocated can be mitigated by various forms of enforcement (such as through the phasing-in of concessions with some form of mutual assurance)—indeed, this was the primary impetus for international multilateral trade negotiations over the second half of the twentieth century.

8.4 The Stalling of Multilateral Efforts The GATS sought to provide a basic framework for WTO members to liberalise their service sectors, with the concepts developed in the GATS being inspired by those in GATT for trade in goods, such as the MFN and national treatment principles for service providers. However, it was also recognised by the drafters of GATS (that is, the GATS working group) that the treaty was somewhat incomplete at the time of signature, and that there was work that was left unfinished. Thus, sector-­ specific annexes recognising the specificity of different services industries have

12

 This is widely accepted by mainstream trade theorists; see, for example, Leamer (1995).

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been agreed at a later stage, such as specific annexes dealing with telecommunications (1996) and financial services (1997). Tellingly, parties to the Uruguay Round only committed to extending MFN treatment for services (unless a member listed an exception in its services schedule), with national treatment only accorded if a specific commitment was made in their services schedules, according to the so-called ‘positive-list’ approach. Further, since the establishment of the WTO, progress on services liberalisation at the multilateral level has been extremely slow. For example, the recent conclusion of negotiations on services domestic regulation in late 2021 was the first outcome on trade in services under the auspices of the WTO in almost a quarter of a century. Yet, in the almost three decades since the creation of the WTO, the importance of services in the global economy has only grown to now represent about half of world trade when measured in value-added terms, up from about a third in 1980 (Heuser and Mattoo 2017). Professional qualifications are dealt with in article VI(4)–(6),13 and article VII, which provides for the possibility that members can recognise qualifications. However, article VII effectively only requires members to extend concessions relating to procedural aspects of recognition to other members, so much so that the latter should be granted the opportunity to demonstrate their qualification frameworks and standards are equivalent to the former’s, including the possibility of negotiating recognition agreements similar to those that a member has already concluded with other members. MFN treatment, the sacrosanct concept that underpinned GATT, is almost impossible by definition. There is therefore no obligation for members to extend MFN treatment under these agreements.14 While the Working Party on Professional Services of the Council on Trade in Services did commit to a multilateral approach to sector specific MRAs, and there was some initial success in the early days of the WTO in the MRA guidelines in the accountancy sector,15 further progress in other professions would not be viable (Nielson 2004). The stalling of multilateral approaches to the liberalisation of trade in services, as well as the stalling of the Doha round more broadly, has gained importance and led to the governments of major economies seeking alternative channels to progress work on services trade liberalisation. The most prominent of these was the emergence of the ‘very good friends of services’ group within the WTO which led to the launch of TiSA negotiations in a plurilateral manner (Fefer 2017). However these negotiations were criticised by civil society groups for several reasons (AFTINET 2017; Mucci 2016), including the secretive nature of their negotiation, with a number of provisions being detailed in a leaked text. Negotiations eventually stalled in late 2016. The other notable avenue for trade liberalisation has been through bilateral and regional FTAs, and indeed, there has been a proliferation of these from the 2000s,

 See above.  For an explanation of the reasons, see Nicolaïdis (2000). 15  See WTO media release: https://www.wto.org/english/news_e/pres97_e/pr73_e.htm 13 14

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largely between developed economies. Given that services form a large part of developed economies and international trade in services have the potential to be a large source of gains from trade,16 the liberalisation of trade in services has become an increasingly prominent part of these FTAs (including provisions on recognition of professional qualifications). The next section will examine the features of a professional qualifications MRA framework before returning to the role that FTAs can play in facilitating them.

8.5 Features of Professional Qualifications MRAs The recognition of foreign professional qualifications has the potential to significantly reduce barriers to the international trade in services, by allowing skilled professionals to practice internationally in their respective fields of expertise. This is because services requiring professionals to be highly qualified are also the services with the highest level of value adding, and are extremely important in most developed, service-based economies, also often in great demand internationally. This is not difficult to imagine given that, the greater the level of qualifications required to practice in a given profession, the lower the corresponding level of substitutability of the individual professionals, and the greater the likelihood for there to be shortages in the supply of these services—all leading to greater potential demand. Allowing these highly skilled and highly valuable services to be delivered internationally could potentially alleviate bottlenecks in the flow of this factor of production, thereby potentially offering the greatest allocative efficiency gains. However, unlike the relatively simple and linear approach to tariff reduction for goods, liberalisation of services through MRAs is much more complicated, and requires some level of deeper behind-the-border regulatory integration, due to the specificity of each jurisdiction’s regulatory system for each profession. This section will consider some models of MRAs, both in theory and in their practical implementation. At the most basic level, recognition means acknowledgement of a certain degree of equivalence, or substantial similarity, of qualification regimes, between two or more jurisdictions. Nicolaïdis (1997), one of the foremost scholars of MRAs, suggests several important facets of this. The recognition may be unilateral or mutual; professional qualifications obtained in another jurisdiction can be considered equivalent in the host jurisdiction, without being reciprocated. Recognition may be complete and automatic or partial and conditional upon satisfying some elements that are deemed to be lacking in the foreign qualifications framework, known as ‘compensatory’ measures (for example, a bridging course, or a practical component, or a period of probationary or supervised practice). Kortese (2016) notes the important distinction between the recognition of only academic qualifications (such as the EU’s Bologna process), and the next step of recognition of professional

16

 See above.

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qualifications defined more broadly—that is, all the necessary requirements allowing an individual to practice in a regulated profession. Note that fully automatic mutual recognition (‘AMR’) is rare and may sometimes not even be applicable between sub-national jurisdictions.17 For example, this lack of recognition was a driving factor in the development of an MRA scheme in the Australian domestic context in the 1990s, while in the EU MRA regime there are some sub-sectors where professions benefit from almost-complete AMR.18 Finally, the most ambitious approach is a regime where two or more jurisdictions have common harmonised standards and professions are jointly regulated, which has been the case in some sub-sectors that share a joint professional regulatory body (such as some healthcare specialisations in Australia and New Zealand). One important consideration for authorities considering entering into an MRA is the potential that it may constrain authorities’ future efforts at reforming professional standards, the former’s ability to introduce more stringent standards, which may create a degree of reluctance for regulatory authorities from a consumer protection perspective. It should also be apparent that MRA negotiations can be time- and labour-intensive processes, with governments and professional bodies needing to study others’ regulatory regimes in great depth, identifying equivalencies and divergences, and, if necessary, devising appropriate compensatory measures. For professional bodies, the benefits of their constituencies being able to practice in a foreign jurisdiction may not justify the cost of this investment, which often entails many years of negotiations and benchmarking the foreign country’s regulatory framework. How, in this situation, could governments overcome market failure, and how can they do so within FTA frameworks? The standard approach is to structure sector-­specific MRA negotiations with a certain level of commitment and accountability (timelines, reporting requirements), including structured meetings between government authorities and professional bodies committing to negotiating sector-­ specific MRAs. This can provide much-needed policy certainty and overcome the inertia described above, and serve as a bridge towards deeper regulatory harmonisation (WTO 2011; Laurenza and Matthis 2013). It is worth noting that MRAs on professional qualifications are not only to be found in the context of trade negotiations. Indeed, regulatory authorities and professional bodies have cooperated to establish mutual recognition frameworks outside of, and even prior to, the creation of a multilateral trading system. From the early twentieth century, for example, there has been mutual recognition of diplomas between colonial powers and [former] colonies, and between Latin American countries (Nielson 2004). However, the disadvantage of this type of ‘organic’ mutual recognition is that it often proceeds in an ad hoc and unstructured manner, and can leave governmental authorities outside the negotiation process. In the absence of incentives for professional bodies to enter into such agreements (such as lucrative

 While it could also be argued that a jurisdiction in which a profession is completely unregulated is an example of AMR, this is not at is in the present case. 18  See below. 17

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professional opportunities in a certain service sector), there may be little impetus for them to invest resources in negotiations with their counterparts in other jurisdictions, especially in the absence of any guarantee of reciprocity or success. The next two sections will examine innovative approaches to negotiating MRAs in the two models held as international best practice in turn: the EU professional qualifications framework and the Trans-Tasman Mutual Recognition Arrangement (‘TTMRA’) as part of ANZCERTA.

8.6 The European Union: From Harmonisation to Equivalence, and Partial Return to Harmonisation The European Union’s current MRA framework on professional services is encapsulated in the Directive on the Recognition of Professional Qualifications (2005/36/ EC), amended in 2013, but its origins lie in its founding document—article 57(1) of the 1957 Treaty of Rome (now article 53(1) of the Treaty on the Functioning of the European Union, or ‘TFEU’), which stated: In order to make it easier for persons to take up and pursue activities as self-employed persons, the Council shall, on a proposal from the Commission and after consulting the [European Parliament], acting unanimously during the first stage and by a qualified majority thereafter, issue directives for the mutual recognition of diplomas, certificates and other evidence of formal qualifications.

This rule recognised that mutual recognition of qualifications would be vital to remove obstacles to the freedom to provide services in the then-European Economic Community (‘EEC’), and to fully realise the freedom of movement for workers (per article 48). However, the Treaty of Rome itself did not itself create a mutual recognition regime, but rather, called for directives to be issued to achieve this. The operational means to achieve this goal would prove challenging, and refined over the next few decades. Nicolaïdis (1997) provides an in-depth analysis of the European Commission’s early efforts to develop far-reaching and extremely detailed harmonised standards for specific professions across its (then) six member States, in order to achieve automatic mutual recognition. This was inspired by efforts to harmonise standards for goods within the EU, which largely proved successful. However, the process for services eventually proved too burdensome and laborious, and with the addition of three additional Member States in 1973,19 it became clear that a new paradigm was needed. The General System Directives, first introduced in 1988 (Directive 89/48/EEC),20 would automatically recognise higher-education diplomas of at least 3 years in duration as equivalent across Member States, unless Member States’ professional associations listed exceptions and prescribed compensatory measures to bridge the gap. To avoid excessively burdensome levels of 19 20

 Denmark, Ireland, United Kingdom.  See https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:31989L0048

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compensatory measures effectively creating new regulatory barriers by stealth, there are some limits to the types of compensatory measures that are permitted (for example, as regards language skills). This was followed 3 years later by a second directive,21 which extended to those regulated professions not requiring a minimum three-year diploma, but through which equivalence was established by work experience and other qualifying criteria. Also known as the ‘horizontal’ approach to mutual recognition, this effectively equated to a negative list approach for professional qualifications. This model, which Nicolaïdis has labelled ‘managed mutual recognition’ (Nicolaïdis 1997;  Nicolaïdis and Shaffer 2005) proved to be a very elegant solution indeed: By replacing ex-ante harmonisation with conditional access and the reliance on mechanisms for ex-post cooperation, the EU achieved in three years what had not been achieved in the previous thirty years while at the same time alleviating—to some degree—member states' fears of sub-standard competition [Nicolaïdis 1997].

This solution is able to achieve negotiated outcomes much more quickly, as it requires far less ex-ante centralised regulatory harmonisation of the type that the European Commission abandoned in the 1980s. However, this comes at the cost of more ex-post regulatory cooperation, with professional associations needing to study the regulatory regimes of their counterparts in other countries, identify regulatory gaps, and prescribe appropriate compensatory measures. This dialogue and engagement between various Member States’ professional associations, Nicolaidis argues, would eventually lead to greater harmonisation. The scheme is therefore not an example of instant AMR (for example, via complete deregulation) for all professions, which would be unacceptable on consumer protection grounds, but rather, the MRA framework can be seen as creating bridges between different regulatory frameworks. This concept of managed mutual recognition is, in a sense similar to the way preferential tariffs in FTAs rarely entail complete liberalisation, but rather manage the process of tariff liberalisation between trading partners.22 The next stage in the development of an MRA framework was in the Professional Qualifications Directive (‘PQD’) of 2005,23 later updated in 2013.24 This instrument further refined some of the concepts, such as distinguishing between freedom of provision (the temporary provision of services) on the one hand, and freedom of establishment (provision of services in a host country in a more permanent capacity) (Kortese 2016). The PQD also detailed minimum provisions between seven regulated professions that benefit from AMR (subject to minimal requirements such as language skills), which is, in a sense a return to the harmonisation model that had eluded EU policymakers half a century prior, validating Nicolaidis’ prediction of greater harmonisation in the longer term.  92/51 /EEC https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A31992L0051  The only difference for professional services being of course that the comparable state of complete tariff liberalisation for goods does not exist, short of complete deregulation of professions. 23  2005/36/EC. 24  2013/55/EU. 21 22

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Amid the flurried acceleration of FTA negotiating activity among advanced economies which began in the early 2000s,25 the EU has been one of the most proactive in promoting their model of professional qualifications MRAs, of which, the Comprehensive and Economic Trade Agreement (‘CETA’) concluded with Canada is regarded as the most ambitious (Davies 2020). It is clear that the MRA provisions in CETA do not create a definitive end-state framework, but merely a process towards greater regulatory cooperation. In particular, article 11(3) of the agreement provides for the creation of a Joint Committee on Mutual Recognition of Professional Qualifications, which then engages in MRAs negotiations with professional associations on a sector-by-sector basis. It should be apparent that this sector-by-sector approach is much more tedious and time-consuming than the GSD and the PQD’s blanket approach, and not nearly as ambitious. This is to be expected, as the framework only encourages regulatory cooperation between professional associations of each respective partner, rather obliging their engagement (as in the GSD and PQD). Indeed, Nicolaidis notes, with regard to the EU’s MRAs with Canada, Japan, Australia, and New Zealand that ‘these agreements do not reach nearly as deep as what prevails inside the EU’ (Nicolaïdis 1997). Despite being heralded as one of the most ambitious MRAs within an FTA, at the time of writing, 5 years after the provisional application of the CETA, only one MRA for architects has been negotiated and concluded within this framework (Government of Canada 2022).

8.7 Mutual Recognition in the Australia-New Zealand Closer Economic Relations Trade Agreement The other example recognised as world-leading is the TTMRA in ANZCERTA. In fact, Australia’s Productivity Commission (2015) considered it to be the only other example of a truly deeply integrated MRA framework for professional qualifications in existence at the time of writing.26 This framework originated in Australia’s own domestic reform process in the late 1980s, which sought to harmonise the then-­ fragmented regulation of professions across its own sub-federal States and Territory jurisdictions. After several years of negotiation, in 1992, the heads of the States and Territories signed a wide-ranging agreement, the Agreement on Mutual Recognition, which effectively meant that any qualification, in the broad sense as defined in this chapter, in one sub-federal territory would be recognised in another, subject to exceptions (Commonwealth of Australia 2006).27  See Sect. 8.4 above.  This was prior to the EU-UK TCA, which is exceptional because it is perhaps the only FTA that has established a trade relationship less liberal than the previous status quo, rather than more liberal (a free trade ‘disagreement’, perhaps?). 27  Medical professions were a notable exception, but much deeper regulatory harmonisation already exists in the professional bodies of medical professions, many of which are joint Australian-New Zealand associations. 25 26

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Given the extremely close economic cooperation between Australia and New Zealand through ANZCERTA, discussions quickly turned to including New Zealand in the TTMRA. To that end, and following 3 years of negotiations, New Zealand joined the regime with the conclusion of the TTMRA in 1998. In fact, this arrangement bypassed attempts at regulatory harmonisation altogether (Nicolaïdis 1997), unlike the EU approach (possibly having learnt lessons thereof), even in the context of a federal State such as Australia. The Productivity Commission (2015) estimated that two decades after the entry into force of the scheme, approximately 5% of annual registrations in regulated industries in the two countries benefited from MRAs, although there is a relatively wide range between sectors; from less than 1% for the gambling industry, to over 13% in construction-related professions, which is quite significant, given this is a yearly figure. In an earlier study, the Productivity Commission had estimated that labour mobility in regulated occupations increased by between 26–33%, in contrast to unregulated professions, which rose by a much more modest 13.4% (though the latter form a much greater proportion of the workforce). In parallel to the development of an MRA regime within the close and unique ANZCERTA relationship, Australia began extending MRA policies abroad as it started to embark actively on FTA negotiations in the early part of the twenty-first century, corresponding to slow progress at the multilateral level. The first such agreement to include provisions on MRAs was that negotiated with the US in 2005, annex 10-A of which commits negotiating parties to ‘encourage the relevant bodies in their respective territories to develop mutually acceptable standards and criteria for licensing and certification of professional services suppliers’.28 Australia’s FTA with Singapore (2003) did not include a similar provision, but rather an arrangement between the two parties to explore avenues for mutual recognition in the engineering and accountancy sectors in a review of the agreement in 2016.29 Some later FTAs included some forms of MRAs, while others did not.30 Australia has also participated in the Asia-Pacific Economic Cooperation’s work on professional qualifications,31 and is a party to a number of sectoral MRAs, most of which concern accountancy, other financial services sectors, and engineering. What should be clear from the preceding is that even the most ambitious MRAs contained in Australia’s preferential FTAs with its trading partners fall well short of the ambition

 https://www.dfat.gov.au/about-us/publications/trade-investment/australia-united-states-freetrade-agreement/Pages/chapter-ten-cross-border-trade-in-services 29  DFAT (2016) Side Letter on Mutual Recognition Arrangements for Accountants and Engineers, 11 October 2016 https://www.dfat.gov.au/sites/default/files/side-letter-on-mutual-recognition.pdf 30  For example, Australia’s FTA with Thailand (2005) made little mention of professional services recognition, while the FTA with Chile (2009) had a much less ambitious provision. Australia’s FTA with Malaysia, a fellow member of the Commonwealth, included a stronger MRA provision, as did that with Korea (2014), while the FTAs with Japan and China (both concluded in 2015) had more limited MRA provisions. 31  The Australian APEC Study Centre (2020–2021) Online Course - Digital Credentials and the Mutual Recognition of Professional Services https://www.apec.org.au/mra-online-course 28

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of the TTMRA (just as CETA did not reach the level of ambition of the GSD or Professional Services Directive in the EU).

8.8 Professional Qualifications: Mutual Recognition Agreements in the EU’s Free Trade Agreements with Australia and NZ Having examined MRA regimes in general, and the EU and ANZCERTA MRA frameworks as global best-practice regimes in particular, this final section focuses on the MRA provisions of FTAs that the EU has been negotiating in parallel with both Australia and New Zealand, and explores possibilities for the future. Recall that MRAs can be considered a solution to the problem of completely establishing regulatory harmonisation, essentially achieving the aim without requiring the same degree of laborious work ex ante. The role for the governmental authorities of each negotiating party is therefore an important one, in creating the conditions that allow professional bodies to negotiate in their respective sectors. But, thus far, the scope has been limited to creating the conditions to facilitate MRAs, rather than a more active role in shaping them. Prior to these negotiations, neither the EU nor the ANZCERTA parties have concluded FTAs which have included measures to implement the highly ambitious reforms in recognising professional qualifications that each economy was able to achieve internally. Certainly, for the FTAs that these parties negotiate with other trading partners, there is little reason to expect ambitions to be much greater than they have previously been in the context of FTA negotiations. However, the EU and the ANZCERTA have MRA regimes that are considered world-leading in terms of deep integration, and therefore it is reasonable to expect very high levels of ambition in their negotiations with each other, at least with respect to professional qualifications (Kerneis 2017). At the time of writing, only the EU-NZ FTA negotiations have been concluded at a technical level, although the texts are yet to be signed, and are subject to legal revision. It is therefore somewhat surprising that the MRA provision in the EU-NZ FTA appears to contain a slightly less ambitious provision on MRAs as compared to CETA, with a slightly less prescriptive process for negotiating sectoral MRAs. On the other hand, although the Australia-EU FTA negotiations have not yet been concluded at the time of writing, there are clear indications that trade in services in general, and provisions on professional services in particular, have formed an important part of these discussions.32 It is therefore possible that the provisions on MRAs for professional qualifications may differ in scope and ambition in each of

 See for example, DFAT’s media release following the 11th round of negotiations, which describes ‘a framework for mutual recognition of professional services’ https://www.dfat.gov.au/trade/ agreements/negotiations/aeufta/news/australia-eu-fta-report-negotiating-round-eleven1-11-june-2021 32

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these FTAs. Should this be the case, an interesting question would arise relating to the transitivity of recognition, as to whether α recognising β, and β recognising γ, necessitates α recognising γ). Specifically, if the MRA provisions are less ambitious in one of the FTAs, but there is a strong MRA framework between other ANZCERTA parties, then how will transitivity affect the recognition of qualifications? In other words, if a professional practices in an ANZCERTA jurisdiction (γ) that has a less ambitious MRA framework with the EU (α) than with another other ANZCERTA jurisdiction (β), but wishes to practice in the EU, and their professional qualifications are recognised in the other ANZCERTA jurisdiction (β), they may be able to have qualifications recognised in a two-step process; firstly, in jurisdiction β, and then in the EU (jurisdiction α) which confers more favourable treatment to professions from jurisdiction β than γ. While it is not clear how the parties may choose to manage such a situation (if at all) should it arise, this will be a distinct possibility following the conclusion and implementation of these two FTAs. Further, similar professional associations in both Australia and New Zealand, which already cooperate closely on regulatory matters, may contemporaneously request to enter into MRA negotiations with their EU counterparts, in which case, there may be efficiency gains for such negotiations to be combined. An additional dimension of the transitivity of recognition of professional qualifications arises from the UK’s unique status and its parallel FTAs with the EU, Australia, and New Zealand. The MRA provisions in the EU-UK TCA are seen to approximate the level of CETA and are significantly less ambitious than the status quo ante, when the UK was an EU Member State. The UK has very close historical, political, legal, and (albeit to a lesser extent) economic ties with both Australia and New Zealand, and MRA provisions exist in the two parallel FTAs recently concluded between them. It is not beyond the realm of possibility to imagine contiguous and contemporaneous MRA negotiations in a given professional sector between and among each of the UK, New Zealand, Australia, and the EU. Further, noting that some professional associations in the UK, Australia and New Zealand already enjoy extensive cooperation, there may indeed be scope and a desire for the parties to combine negotiations.33 If such an arrangement were to eventuate, how far could they proceed? Is there any reason for Canadian professional associations not to also wish to enter joint MRA negotiations? Could a ‘very good friends of professional qualifications’ group emerge to establish a plurilateral stream of negotiations on the topic in the same way that a ‘very good friends of services’ group emerged and established the TiSA negotiations? The present situation, however, seems very far from lending itself to that hypothetical future scenario. Indeed, only one MRA—in the area of architecture— has thus far been concluded under the auspices of CETA, and that has not yet entered  Note, somewhat ironically, that it was argued by the Australian General Practitioners’ Association that the EU Professional Qualifications Directive restricted the possibility of AUS doctors getting their qualifications recognised in, and seeking registration in the UK in order to provide medical services – which could be considered a case of ‘services trade diversion’. See Hays (2007). 33

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into force. The inherent costs of traveling and delivering services in jurisdictions as geographically and linguistically disparate as Australia and New Zealand on the one hand, and EU Member States on the other, may mean that there is a vanishingly small likelihood that professionals in regulated sectors will regularly practise across multiple, bordering jurisdictions as they do between, say, Australian States and Territories and New Zealand. Meanwhile, the uptake of MRAs negotiated under the auspices of FTAs will likely be slower and less widespread than is the case within each of the EU and ANZCERTA’s internal MRA frameworks.

8.9 Conclusion Governments are somewhat limited in the scope of ambition they can achieve through MRA provisions in the context of FTAs. MRAs for professional qualifications can offer significant gains for professionals wishing to practise in other jurisdictions, but MRA provisions in FTAs do not create MRAs as such—rather, they only facilitate and encourage professional bodies to negotiated them ex post, sector by sector. That is not to detract from the valuable trade facilitating role of such MRA provisions, which can help to overcome the resistance that professional bodies may have in entering into substantive MRA negotiations. The two notable exceptions are the exceptionally far-reaching cooperation on professional qualifications in the EU on the one hand, and in the ANZCERTA economic area on the other. These economic blocs are soon expected to conclude FTAs with each other, which will open the door to sectoral MRA negotiations, which is likely to capture the attention of trade policy theorists for years to come. Overlaid to this, and in parallel, are the relationships between each of these preceding parties and the UK, in its unique position as a former Member State of the EU also having strong ties to both Australia and New Zealand. On the other hand, the mere existence of an MRA framework is no guarantee that further MRAs will be negotiated, especially if the relative scarcity of MRAs concluded under MRA provisions in recent FTAs is a guide. For now, it appears that the traditional sector-by-sector negotiating approach will prevail, even where they are facilitated by ambitious MRA frameworks in FTAs between economic blocs with world-leading MRAs regimes internally.

References AFTINET (2017) Ten things you need to know about TiSA. http://aftinet.org.au/ cms/10-­things-­about-­TiSA-­17 Antimiani A, Cernat L (2018) Liberalizing global trade in mode 5 services: how much is it worth? J World Trade 52(1):65–83. https://doi.org/10.54648/TRAD2018004 Bhatnagar P (2014) GATS mode 4: movement of natural persons and protection of migrant workers’ rights. ILO decent work across borders migration notes

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Commonwealth of Australia (2006) A users guide to the Mutual Recognition Agreement (MRA) and the Trans-Tasman Mutual Recognition Arrangement (TTMRA). https://www.mbie.govt. nz/dmsdocument/1513-­users-­guide-­to-­the-­trans-­tasman-­mutual-­recognition-­arrangement-­pdf Davies H (2020) Recognition of professional qualifications. European University Association. https://www.eua.eu/resources/publications/924:recognition-­o f-­p rofessional-­q ualifica tions.html DFAT (2016) Side letter on mutual recognition arrangements for accountants and engineers. https://www.dfat.gov.au/sites/default/files/side-­letter-­on-­mutual-­recognition.pdf DFAT (2019) Trade in services Australia 2018–19. https://www.dfat.gov.au/sites/default/files/ trade-­in-­services-­australia-­2018-­19.pdf Fefer RF (2017) Trade in Services Agreement (TiSA) negotiations: overview and issues for congress. https://sgp.fas.org/crs/misc/R44354.pdf Government of Canada (2022) Ninth round of negotiations on an agreement between the EU and Canada on the Mutual Recognition (MRA) of professional qualifications of architects. https:// www.international.gc.ca/trade-­commerce/trade-­agreements-­accords-­commerciaux/agr-­acc/ ceta-­aecg/2022-­03-­10-­joint-­report-­rapport-­conjoint.aspx?lang=eng Government of Victoria (2011) Victorian guide to regulation. Department of Treasury and Finance. https://www.dtf.vic.gov.au/funds-­programs-­and-­policies/victorian-­guide-­regulation Hays R (2007) Moving to the UK as a GP – the process explained. Aust Fam Physician 36(9):3 Heuser C, Mattoo A (2017) Services trade and global value chains. Policy research working paper no. 8126. World Bank Group. https://doi.org/10.1596/1813-­9450-­8126 Jahn D (2016) Changing of the guard: trends in corporatist arrangements in 42 highly industrialized societies from 1960 to 2010. Soc Econ Rev 14(1):47–71. https://doi.org/10.1093/ser/mwu028 Kerneis P (2017) Gains for trade in services in an EU–Australia free trade agreement: a European perspective. In: Elijah A, Kenyon D, Hussey K, van der Eng P (eds) Australia, the European Union and the new trade agenda. ANU Press, pp  139–162. https://www.jstor.org/stable/j. ctt1sq5ttx.13 Kortese L (2016) Exploring professional recognition in the EU: a legal perspective. J Intl Mobil 4(1):43–58. https://doi.org/10.3917/jim.004.0043 Laurenza EC, Mathis J (2013) Regulatory cooperation for trade in services in the EU and US trade agreements with the Republic of Korea: how deep and how compatible? Melb J Int Law 14:1–34 Leamer EE (1995) The Heckscher-Ohlin model in theory and practice. International Finance Section, Department of Economics, Princeton University. https://ies.princeton.edu/pdf/S77.pdf Lund S et al (2020) The future of remote work: an analysis of 2,000 tasks, 800 jobs, and 9 countries. McKinsey Global Institute. November 23 2020. Retrieved 26 September 2022. https:// www.mckinsey.com/featured-­i nsights/future-­o f-­work/whats-­n ext-­f or-­r emote-­work-­a n-­ analysis-­of-­2000-­tasks-­800-­jobs-­and-­nine-­countries Mann M (2017) Exploratory estimates of U.S. international services by mode of supply. https:// www.bea.gov/system/files/papers/WP2017-­6.pdf McNaughton A, Lo J (2017) ‘Mutual evaluation’: a new policy tool for dealing with ‘behind the borders’ barriers. In: Elijah A, Kenyon D, Hussey K, van der Eng P (eds) Australia, the European Union and the new trade agenda. ANU Press, pp 163–182. https://www.jstor.org/ stable/j.ctt1sq5ttx.14 Moschini G (1991) Economic issues in Tariffication: an overview. Agric Econ 5(2):101–120 Mucci A (2016) The most important free trade agreement you’ve never heard of, Politico, 7 July 2016. https://www.politico.eu/article/the-­most-­important-­free-­trade-­agreement-­youve-­never-­ heard-­of (Accessed 26-09-2022). Nicolaïdis K (1997) Managed mutual recognition: the new approach to the liberalization of professional services. https://users.ox.ac.uk/~ssfc0041/managemr.htm Nicolaïdis K (2000) Non-discriminatory mutual recognition: an oxymoron in the new WTO lexicon? In: Cottier T, Mavroidis PC (eds) Regulatory Barriers and the Principle of Non-­

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discrimination in World Trade Law: Past, Present, and Future. University of Michigan Press, pp 267–301 Nicolaïdis K (2017) Mutual recognition: promise and denial, from sapiens to Brexit. Curr Leg Probl 70(1):227–266. https://doi.org/10.1093/clp/cux009 Nicolaïdis K, Shaffer G (2005) Transnational mutual recognition regimes: governance without global government. Law and Contemporary Problems, Summer-Autumn 2005, 68(3/4):263–317 Nielson J (2004) Short cut or long road? Equivalence, international standards and the GATS. WTO Workshop on Domestic Regulation, Geneva. https://www.wto.org/english/tratop_e/serv_e/ workshop_march04_e/sess2_nielson_oecd1_e.ppt Productivity Commission (2015) Mutual recognition schemes. https://www.pc.gov.au/inquiries/ completed/mutual-­recognition-­schemes/report/mutual-­recognition-­schemes.pdf Reister M (2005) Inward and outward Foreign affiliate trade in services statistics  – “FATS.” Workshop on Statistics of International Trade in Services, Panama City. https://unstats.un.org/ unsd/tradeserv/Workshops/Panama/ESA-­STAT-­AC-­107-­17.pdf Sampson GP, Snape RH (1985) Identifying the issues in trade in services. World Econ 8(2):171–182 World Bank (2021) Services, value added (% of GDP). https://data.worldbank.org/indicator/ NV.SRV.TOTL.ZS World Trade Organization (2011) The WTO and preferential trade agreements: from co-existence to coherence. World Trade Report. https://www.wto.org/english/res_e/booksp_e/anrep_e/ world_trade_report11_e.pdf World Trade Organization (2019) The future of services trade. World Trade Report. https://www. wto.org/english/res_e/booksp_e/00_wtr19_e.pdf World Trade Organization (2021) World trade statistical review. https://www.wto.org/english/ res_e/statis_e/wts2021_e/wts21_toc_e.htm

Chapter 9

The EU Carbon Border Adjustment Mechanism: Customary International Law? Joshua Woodyatt and Ottavio Quirico

Contents 9.1  I ntroduction 9.2  Climate Policy and the General Agreement on Tariffs and Trade: Shrimp Products, Solar Cells, and the Importance of Coordination 9.3  Border Carbon Adjustments and the EU 9.3.1  The EU Carbon Border Adjustment Mechanism 9.3.2  Carbon Border Adjustment Mechanisms in EU FTAs 9.4  Are CBAMs Progressing Towards Customary International Law? 9.4.1  Paris Agreement Imperatives 9.4.2  State Practice 9.4.3  CBAMs as Universal versus Regional Custom 9.5  Conclusion References

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Abstract  The challenge of squaring effective climate policy and its attendant costs with the realities of international trade has driven several novel solutions. Among them, Carbon Border Adjustment Mechanisms (‘CBAMs’) have emerged as the preeminent option, evening the trading environment by quelling the problem of J. Woodyatt (*) ANU Centre for European Studies, The Australian National University, Canberra, ACT, Australia e-mail: [email protected] O. Quirico Department of International Humanities and Social Sciences, Perugia University for Foreigners, Perugia, Italy Law School, University of New England, Sydney, NSW, Australia ANU Centre for European Studies, The Australian National University, Canberra, ACT, Australia Department of Political Science, University of Pisa, Pisa, Italy Law Department, European University Institute, Fiesole, Italy e-mail: [email protected]; [email protected]; [email protected]; [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 O. Quirico, K. Kwapisz Williams (eds.), The European Union and the Evolving Architectures of International Economic Agreements, https://doi.org/10.1007/978-981-99-2329-8_9

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emission ‘leakage’ via trade from less ambitious to more ambitious States. As the European Union (‘EU’) finalises the implementation of its CBAM, pushes ahead with its Green Deal, and continues to write so-called ‘climate clauses’ into its free trade agreements (‘FTAs’), the question of CBAMs as a matter of international law is rapidly growing in importance and relevance. This contribution analyses and contrasts EU practice with that of other States and argues that, though so-called ‘climate clubs’ are emerging among major economies, the customary development of CBAMs is still in its relative infancy as a matter of universal practice. It will ultimately fall to the momentum of other major economic actors, among them the United States (‘US’) and the so-called ‘BRICS’ economies of Brazil, Russia, India, the People’s Republic of China (‘PRC’), and South Africa, to meaningfully solidify this fledgling custom. Keywords  European Union · Carbon border adjustment mechanism · Climate clubs · Regional customary practice · Universal customary practice

9.1 Introduction It is a rare sight indeed to see FTAs headlining Australian commercial news. For the most part, matters of international trade are dealt with swiftly—either in a passing reference during the three minute ‘finance’ bulletin, or in the ticker below the screen announcing some new development in negotiations. Perhaps, on occasion, the conclusion of such an agreement with another major economy like the PRC or the United Kingdom (‘UK’) might lead the headlines. It was therefore something of a surprise when, on 11 March 2021, Australian televisions were awash with trade reporting (Besser 2021; Galloway and Harris 2021). The domestic media flurry had been set in motion by a vote of the European Parliament the previous day to move towards a World Trade Organisation (‘WTO’)-compatible carbon border adjustment mechanism (European Parliament 2020)—or, as swathes of the Australian press simply put it, ‘carbon tariffs’. As the operator of the single largest emissions trading system (‘ETS’) in the world, whereby all European products are taxed according to their carbon emissions to disincentivise those which are environmentally damaging, Europe is uniquely vulnerable to a phenomenon dubbed ‘leakage’. In essence, this occurs where high-­ emitting producers move their operations beyond ETS-imposing jurisdictions to avoid punitive taxation, before selling their products back across the border to benefit from lower pricing. Carbon emissions leaking out of the EU in this way presents a massive obstacle to the achievement of climate policy goals. The solution, the European Parliament has concluded, is a robust CBAM. Decried by some governments as ‘protectionism’ (Stayner 2021), and defended in European circles as essential to achieving the objectives of both the flagship Green Deal and eventual net zero emissions (Parrock 2021), the EU CBAM debate demonstrates the extent to which climate change has emerged as a central priority of European law and policymaking.

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This chapter will critically engage with this development, exploring the ways in which climate change objectives have been pursued, and are being pursued, in FTAs negotiated by the EU.  It will begin by exploring the WTO framework, and how States have made use of the ambiguous wording of the subsections of article XX of the General Agreement on Tariffs and Trade (‘GATT’) to advance climate-positive trade measures. It will then evaluate, in light of 2015 landmark Paris Agreement, how the EU is developing its CBAM as a means to level differences between its progressive climate policy as outlined in the so-called ‘Green Deal’, and that of other, less ambitious States and international organisations. Finally, it will chronicle the incorporation of border carbon adjustments into recent EU trade agreements, and argue that between these agreements and the EU CBAM itself, EU practice might be signalling the emergence of a general right to adopt CBAMs under customary international law. In order to assess the viability of this hypothesis, the chapter will consider whether EU practice is matched by that of other sovereign entities in international relations, particularly in the light of proposed reforms to the WTO.

9.2 Climate Policy and the General Agreement on Tariffs and Trade: Shrimp Products, Solar Cells, and the Importance of Coordination Much like the litany of other foundational international agreements signed in the wake of World War Two, including the United Nations (‘UN’) Charter, the GATT is a distinct product of its time. Conceived in the swell of internationalism that accompanied the UN Charter, the GATT was originally envisaged as a waystation between unregulated international trade and an eventual International Trade Organisation (‘ITO’), with a view to reducing tariffs between State parties. Even as the Havana Charter failed to achieve US Congressional approval, however, consigning the ITO to history before it had seen the light of day, the GATT was adapted to suit burgeoning global trade in the absence of a more effective alternative. In doing so, it has imposed the era of its drafting on modern trade, which is self-evidently vastly different. Among other revolutions in global trade such as e-commerce, of which the GATT’s drafters could never have conceived, the existential threat of climate change was unfathomable in 1947. As such, neither climate change nor environmental protection are robustly provided for among the exhaustive ‘General Exceptions’ to Most-Favoured Nation or National Treatment contained in article XX. The closest in wording that that article comes to is at sub-s XX(b), which states that State parties shall be free to adopt or enforce measures ‘necessary to protect human, animal or plant life or health’. Much more relevant however is sub-s XX(g), which permits measures ‘relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption’, and which has been extensively tested in WTO litigation. Some have

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argued that these two clauses speak to a deliberate decision by the drafters of the GATT to include environmental objectives, if obliquely, rather than a later construction of the text for modern purposes (Zleptnig 2010, 183). Recent, and more direct, references to environmental ends in the Preamble to the WTO Agreement and the 1994 Ministerial Declaration on Trade and Environment, have bolstered the latter interpretation of the GATT as an environmental tool (Zleptnig 2010, 183).1 In order to understand green exceptions to free trade, it is first necessary to summarise some decisions of the WTO Appellate Dispute Settlement Bodies, particularly the Appellate Body’s (‘WTOAB’) jurisprudence on article XX. That Body in United States  — Import Prohibition of Certain Shrimp and Shrimp Products (‘Shrimp Products’) provided a two-tiered test for those circumstances where an otherwise violation of the GATT may validly be exempted.2 Firstly, one of the specific exemptions at (a)–(j) must be met by necessary and proportional measures (Kaufmann and Weber 2011, 511). Secondly, such measures must be in conformity with the chapeau of article XX—that is to say, they must not apply in such a way as to create arbitrary or unjustified discrimination (Kaufmann and Weber 2011, 511). The WTOAB has handed down several decisions recognising the creative avenues available to States defending environmental protection under sub-ss XX(a)–(j). Shrimp Products is arguably the most well-known among them, where it was held that sea turtles were validly ‘exhaustible natural resources’ according to sub-s XX(g). The WTOAB has also held other biological resources like fish stocks (Kaufmann and Weber 2011, 512), as well as inanimate resources like clean air (Kaufmann and Weber 2011, 512), to be within the scope of sub-s XX(g). Though the US case in Shrimp Products ultimately failed, the WTOAB’s reasoning suggests that imposing environmental regulatory standards on foreign importers could be legitimised by the negotiation and conclusion of an international agreement encompassing those importing States (Quick 2008). In the context of the Paris Agreement, which now counts 197 States (194 ratifying) and the EU among its signatories, this is an important concession. In Brazil — Measures Affecting Imports of Retreaded Tyres, the WTOAB found that measures for the protection of Brazil’s environment were also justifiable under sub-s XX(b).3 Recent WTOAB litigation has extended the climate-positive repurposing (as it were) of article XX beyond sub-ss (b) and (g), with the India — Certain Measures Relating to Solar Cells and Solar Modules (‘Solar Cells’) dispute testing sub-ss XX(d) and (j) in the climate policy context for the first time.4 For reference, sub-s  See also Marrakesh Agreement Establishing the World Trade Organisation, opened for signature 15 April 1994, 1867 UNTS 154 (entered into force 1 January 1995) Preamble; Decision on Trade and Environment (15 April 1994). 2  Appellate Body Report, United States  — Import Prohibition of Certain Shrimp and Shrimp Products, WTO Doc. WT/DS58/AB/R (12 October 1998). 3  Appellate Body Report, Brazil — Measures Affecting Imports of Retreaded Tyres, WTO Doc. WT/ DS332/AB/R (3 December 2007). 4  Appellate Body Report, India — Certain Measures Relating to Solar Cells and Solar Modules, WTO Doc. WT/DS456/AB/R (16 September 2016). 1

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XX(j) permits qualified measures ‘essential to the acquisition or distribution of products in general or local short supply’, while XX(d) generally allows those measures ‘necessary to secure compliance with laws or regulations…not inconsistent with the provisions of [the GATT]’, including customs enforcement, antitrust law, patent law, and the prevention of deceptive practices. Solar Cells involved a challenge to Indian efforts to rapidly establish a domestic solar industry by the US which, though supportive of the general tenor of India’s policy, felt that its practical implementation would harm global cooperation, raise solar energy costs, and undermine progress in the field (Karttunen and Moore 2018, 216–217). As in Shrimp Products, the WTOAB in Solar Cells ultimately ruled against India’s domestic measures, though the decision nonetheless offers hope in the eyes of some scholars that claims under sub-ss XX(d) and (j) might be sustained in the future. On sub-s (d), the WTOAB rejected India’s argument that statements in international agreements fell sufficiently within ‘laws and regulations’, holding that only explicit implementation in domestic law or (in those States where international law is so treated) binding normative obligations stemming from ratification would suffice (Karttunen and Moore 2018, 221–222). This opens the way for those States which have made the Paris Agreement partly or wholly enforceable at a domestic level to potentially defend measures akin to India’s domestic content requirements for photovoltaic manufacture. With regards to sub-s (j), India argued that its production standards were necessary to spur a domestic solar panel industry, as without this requirement, solar panels produced domestically would remain in short supply. The WTOAB again rejected this, finding that ‘short supply’ should be understood as meaning an imminent risk of shortage, not a localised situation of shortage in the sense that India advanced it (that is, that India’s lack of indigenous photovoltaic production capacities constituted a ‘shortage’) (Karttunen and Moore 2018, 220–221). India’s contention that protecting the supply of renewable energy was a vital social objective was not challenged, however, offering another article XX avenue which could prove consequential in the context of the EU CBAM. Several qualifiers stand to the article XX exceptions under the GATT, one of which is particularly relevant to the EU’s push towards implementing the CBAM: the requirement that jurisdictions ‘enter into appropriate procedures in cooperation’ rather than resorting immediately to unilateral measures.5 In US — Standards for Reformulated and Conventional Gasoline (‘US  — Gasoline’), Venezuela had objected to the effect of the 1990 Clean Air Act amendments on its petroleum imports. That Act, introduced in response to significant ozone pollution in major US urban centres, provided for a mechanism to keep automotive (petroleum) emissions below 1990 levels while reducing pollution in said urban centres. Two classes of petroleum were provided for: ‘reformatted’ and ‘conventional’. Reformatted fuel had to meet certain criteria for NOx emissions, oxygen, benzene, and heavy metal

 Appellate Body Report, US  — Standards for Reformulated and Conventional Gasoline, WTO Doc. WT/DS2/AB/R (29 April 1996) 27 (‘US — Gasoline’). 5

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content, and was to be sold exclusively in listed areas like urban centres.6 Conventional fuel, while excluded from sale in such areas, also had to fall below the 1990 baseline, but had more leeway in how it did so (to prevent the ‘dumping’ of pollutants extracted from reformulated fuel into conventional stocks).7 The WTOAB, finding that the measures could not be justified under any of the sub-ss (b), (d), or (g) exceptions to article XX, took particular issue with the unilateral nature of the US regulation. In the WTOAB’s view: The [US] must have been aware that for these established techniques and procedures to work, cooperative arrangements with foreign refiners and foreign governments concerned would have been necessary and appropriate…the [US] had not pursued the possibility of entering into cooperative arrangements with the [affected parties] or, if it had, not to the point where it encountered governments that were unwilling to cooperate.8

With the EU’s CBAM facing down multiple accusations of unilateral protectionism, the US — Gasoline requirement of broad-based cooperation during the setting of contentious trade policy stands as an important precondition to the mechanism’s proposed 2026 start date (Quick 2020).

9.3 Border Carbon Adjustments and the EU 9.3.1 The EU Carbon Border Adjustment Mechanism Europe’s pivot in the last decade towards ‘norm entrepreneurship’ in the realm of climate policy—moulding the rules of the international climate order by the force of its own normative action—has extended to all areas of EU competency, including trade (see, on ‘norm entrepreneurship’ in international law, Brunée and Toope 2018, 263–264). Under the auspices of the European Green Deal, which stands as the foundation upon which the von der Leyen Commission’s climate action is to be built, trade has emerged as a central feature. Alongside such efforts as the long-­ standing EU ETS, the world’s first scaled carbon pricing system, and the so-called ‘hydrogen strategy for a climate-neutral Europe’, which seeks to forge a viable international hydrogen economy according to European rules (European Commission 2020; Prest et al. 2021, 34–39), the Commission has advanced proposals for a carbon border adjustment mechanism (‘CBAM’) spanning the common market area, dubbed the EU CBAM (European Commission 2021a). Though much has been said about CBAMs, as a ‘revolutionary’ or ‘protectionist’ step forward for climate policy, in practice they are complementary to the existing

 An Act to Amend the Clean Air Act to Provide for Attainment and Maintenance of Health Protective National Ambient Air Quality Standards, and for Other Purposes, Pub L 101–549, § 219, 104 Stat 2399, 2492–2500 (1990). 7  US — Gasoline, 5. 8  US — Gasoline, 27. 6

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policy matrix. Existing policies targeted at incentivising lower emissions, and conversely penalising and/or disincentivising higher emissions, such as ETS, have at their heart the goal of subordinating carbon emissions to market forces. The weakness in these strategies is that market forces can only be impressed upon emissions so far as one’s jurisdiction stretches. Emissions trading struggles or entirely fails to govern emissions produced beyond such jurisdiction, with leakage the result. CBAMs are thus best understood as a leveller, applied to ensure an even playing field between those producers that are subject to domestic carbon pricing (whose costs are necessarily higher) and those which are not (who would otherwise reap the windfall gain of selling their products into carbon priced jurisdictions without incurring emission costs domestically). CBAMs can take the form of either duties levied on non-carbon priced imports, or, less commonly, rebates for exports to destinations without carbon pricing. Importantly, both the export and import forms of CBAMs are only applied when trading with jurisdictions that do not apply equivalent carbon pricing. The goal being to ‘adjust’ for competitive disadvantage, and eliminate the economic incentive for producers to shift their production beyond the carbon pricing jurisdiction, CBAMs do not need to be applied (or at least, need to be applied to a much lesser degree) to trade with jurisdictions already imposing equivalent local penalty on emissions. According to the EU’s proposal, the EU CBAM stands as an essential component of the so-called ‘Fit for 55’ strategy, an ambitious European drive to reduce carbon emissions by 55% by 2030 (as compared to 1990 levels: European Commission 2021b). The EU CBAM is to commence in 2026, following a three-year transition period, and would cover a list of specific goods at risk of carbon leakage across a diversity of sectors (among them electricity, cement, fertilizer, and several categories of metal and metal products: European Commission 2021b). In doing so, it will replace the present system of ‘free allowances’ operating under the EU ETS, which extends free emission allowances to those EU producers at the greatest risk of competition from leakage, these allowances being phased out between 2026 and 2035. EU importers of non-EU products will bear the cost of the EU CBAM levy, duly disincentivising imports from high-emitting jurisdictions. European Free Trade Association members (Switzerland, Liechtenstein, Norway, and Iceland) will be exempted, given their participation in the EU ETS, however, with the likelihood that other countries with equivalent carbon pricing mechanisms will receive similar exemption as the EU CBAM fully rolls out. Carbon emissions under the CBAM would be determined by national authorities based on the carbon footprint of a given good’s production (European Commission 2021b). The EU CBAM is easily the largest-scale carbon border adjustment proposed to date, and, somewhat like phase one of the ETS between 2005–2007, is likely to serve as a regulatory exemplar for other early CBAM adopters, publicly road-­testing policy settings in search of those that work best. Unlike the ETS, however, which stood alone in 2005 in addressing the leakage phenomenon by economic means, the EU CBAM will be slotting into a veritable policy matrix. This includes an ETS which has now been refined to its fourth phase, and which includes sophisticated levers such as the so-called ‘Market Stability Reserve’ that adjusts for market

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shocks to the emission allowance system by reference to the targeted emission reduction rate with limited corrective input (by either the Commission or EU member States). Necessarily, therefore, the EU CBAM will be much more sophisticated than phase one of the ETS was expected to be. In addition to the challenge of ensuring consistency with a highly developed European carbon market and its attendant regulation, the EU CBAM must also be compliant with WTO requirements (European Commission 2021a, 13). To this end, following repeated pronouncements of the imperative of addressing climate change, and intertwined with a sketch of the EU CBAM’s mechanics, the explanatory memorandum expressly states that ‘the [EU CBAM] should not establish quantitative limits to import, so as to ensure that trade flows are not restricted’ (European Commission 2021a, 19). Dialogue with affected third countries is also signalled, on a footing of ‘even handed[ness] and [consistency] with the international obligations of the EU’ (European Commission 2021a, 53–54). This calibration is already playing out in real time— via EU FTA negotiations.

9.3.2 Carbon Border Adjustment Mechanisms in EU FTAs Recent EU trade and investment agreements, whether concluded in the near past or currently being negotiated, for the most part include so-called ‘climate clauses’. Concerning treaties already concluded by the EU, this is the case for the EU-Singapore Free Trade Agreement,9 the EU-Japan Economic Partnership Agreement,10 the EU-Vietnam Trade and Investment Agreement,11 the EU-Mexico Trade Agreement,12 and the newly-minted EU-New Zealand Free Trade Agreement.13 Of those still under negotiation, this is also the case for the EU-Australia FTA,14 as well as the EU-Mercosur Association Agreement.15 Taking the EU-Australia FTA as an example, that negotiation’s draft clause acknowledges  Signed on 19 October 2018, Chapter on Trade and Sustainable Development, art. 12(6), https:// eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:22019A1114(01)&from= EN#page=96 10  Entered into force 1 February 2019, Chapter on Trade and Sustainable Development, art. 16(4), http://trade.ec.europa.eu/doclib/docs/2018/august/tradoc_157228.pdf#page=440 11  Signed 30 June 2019, Chap. 13 (Trade and sustainable Development), art. 13(6), https://trade. ec.europa.eu/doclib/docs/2018/september/tradoc_157373.pdf 12  Agreement in Principle, Chapter on Trade and Sustainable Development, art. 5, https://trade. ec.europa.eu/doclib/docs/2018/april/tradoc_156822.pdf 13  See Key elements of the EU-New Zealand Trade Agreement, pt 17, https://policy.trade.ec. europa.eu/news/key-elements-eu-new-zealand-trade-agreement-2022-06-30_en 14  EU-Australia Trade Agreement Negotiations, Chapter on Trade and Sustainable Development, art. X(5), https://trade.ec.europa.eu/doclib/docs/2019/april/tradoc_157865.pdf 15  Latest Round Reports and EU Proposals for the Trade Agreement with Mercosur, Chapter on Trade and Sustainable Development, art. 5, https://trade.ec.europa.eu/doclib/press/index. cfm?id=1769 9

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the importance of taking ‘urgent action to combat climate change and its impacts’ and ‘the role of trade in pursuing this objective’, consistent with the United Nations Framework Convention on Climate Change (‘UNFCCC’), Kyoto Protocol, Paris Agreement, and other multilateral instruments in the area of climate change. Such clauses follow a model embedded in the UNFCCC, Kyoto Protocol, and Paris Agreement. CBAMs could be seen as a means to fulfil the ambition of such climate clauses in EU trade agreements. Indeed, they allow for an effective implementation of nationally determined contributions made under the UNFCCC and the Paris Agreement. They also promote trade and climate policies which contribute to the transition to a low-emission, resource-efficient economy replete with climate-­ resilient development, while facilitating trade and investment in goods and services, such as renewable energy, with particular relevance to climate change mitigation and adaptation. This trend possibly signals the EU’s intention to establish a new practice within international relations. It might indeed be argued that the climate clauses embedded in EU international agreements fulfil the requirements established by the WTO dispute settlement bodies in US — Gasoline to undertake negotiations prior to the adoption of measures under GATT sub-s XX(b). It might also be argued that, in the light of Solar Cells, CBAMs are valid measures ‘necessary to secure compliance with laws or regulations…not inconsistent with the provisions of [the GATT]’, particularly obligations arising out of the UNFCCC and Paris Agreement. Furthermore, within the context of the same WTOAB jurisprudence, and in accordance with GATT sub-s XX(j), CBAMs could potentially qualify as measures ‘essential to the acquisition or distribution of products in general or local short supply’. It ultimately falls to the WTOAB to resolve this ambiguity. Recent EU climate policy practice raises the question of whether sufficient consensus has been achieved to establish a general custom, and, thereby, universal obligations incumbent upon other States. Indeed, if EU practice were representative of a generalised diuturnitas crystallised into binding opinio juris, the fundamental requirements of customary international law as recognised by the International Court of Justice in the North Sea Continental Shelf cases would be satisfied (North Sea 1969).16 In such a case, the adoption of CBAMs could be considered fully lawful under international law and no objection could be raised against States and supranational organs like the EU resorting to CBAMs to level differences between their climate policies and less advanced climate policies adopted by other sovereign entities.

 North Sea Continental Shelf (Federal Republic of Germany v. Denmark, Federal Republic of Germany v. The Netherlands) (Judgment) [1969] ICJ Rep 3, paras 74 and 77. 16

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9.4 Are CBAMs Progressing Towards Customary International Law? 9.4.1 Paris Agreement Imperatives The Paris Agreement has, by its ambitious and relatively imperative language (when compared with the majority of international climate agreements), changed the international legal environment surrounding CBAMs. Prior to its entry into force in November 2016, State parties to previous environmental agreements such as the 1997 Kyoto Protocol were not bound in any significant respect to emissions reduction. To the extent that there were commitments to emissions reduction, these were relatively weak. Indeed, such was Australia’s guile during the Kyoto negotiations that it managed to negotiate an 8% increase in emissions above 1990 levels by 2008–12 under a loophole in article 3(7) (Crowley 2010, 201–203). Though it was the only ‘annex 1’ (industrialised and transitioning economies) party to take this route (Crowley 2010, 203), subsequent Conferences of the Parties (‘COPs’) to the UNFCCC failed to stipulate clear emissions reduction targets to succeed Kyoto, with international ambition generally remaining low. The Paris Agreement changed this in two related ways. The first was by introducing a system of Nationally Determined Contributions (‘NDCs’), which, though promissory and non-binding, compelled signatories to clearly publicise their emissions reduction ambitions for the first time. The second was by installing a so-called ‘ratchet mechanism’, whereby NDCs are required to be updated at least quinquennially with an improved level of ambition. Even as some States undermine this with lax carbon accounting (the recording and reporting of emissions, for which there is no single agreed system) and target-setting (for example, by setting targets in accordance with 2005 emission levels, not the accepted 1990 baseline used by most States), the twin effect of NDCs and the ratchet mechanism have generally spurred greater climate ambition (Peters et  al. 2017, 120–121). The imperative of ever more drastic climactic events has played a role here too (see, in the Australian context, Satherley and May 2022). One major result of Paris has been that several major economies which had previously been hesitant to meaningfully adopt economic instruments have since been spurred to do so. Where in 2005 only the EU had an operational ETS of any significant scale, ETS are now also in effect in eight countries (alongside the EU), 18 subnational jurisdictions, and six cities, with a further 14 regions or jurisdictions applying some pricing system (Emma Krause et al. 2021, 26). Despite only covering 16% of global greenhouse gas emissions, the combination of proof-of-concept by the EU ETS (now in its fourth iteration, and spanning 18.524% of global GDP) and international inertia mean that even holdouts like Russia, which had previously been opposed to ETS (Moscow Times 2019), have later countenanced their adoption (Reuters 2021). As ETS spread, so too must CBAMs, else the problem of leakage will undermine their efficacy. Though the EU CBAM is currently the most advanced exemplar, several States are now following the EU’s policy lead.

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9.4.2 State Practice 9.4.2.1 Support and Opposition for CBAMs Although the EU is the only economy currently realising a fully fleshed-out CBAM, other States are beginning to take up the idea. As has been mentioned, this progress is contingent upon having some other form of climate-based price mechanism in effect (most commonly a carbon price or ETS), so it is realistically only those States which already boast relatively advanced climate policies in which implementing a CBAM makes sense. Among G7 economies, the one most readily considering a CBAM is Canada, with Prime Minister Justin Trudeau (if marginally) renewing his electoral mandate on the back of promises for steeper climate action in mid-2021 (Wherry 2021). To that end, a ‘consultation’ on a CBAM was announced in August of that year (Government of Canada 2021), having been signposted in both the 2020 Fall Economic Statement and the 2021 Budget. Canada has history with ETS, with the provinces of Quebec (2007) and British Columbia (2008) being early adopters of carbon pricing. With the passing of the Greenhouse Gas Pollution Pricing Act, a bipartite pricing system was introduced, imposing charges on certain classes of fossil fuel and waste on the one hand (pt 1), and a cap-and-trade pricing mechanism for industry on the other (pt 2).17 With a constitutional challenge to the Act being struck down by a 6:3 majority of Canada’s highest court in March 2021,18 the path was thus cleared for a CBAM, with the discussion paper Exploring Border Carbon Adjustments for Canada contemplating both export and import CBAM models. Though the paper offers very little detail in terms of potential scope or emissions calculations (see Government of Canada 2021), broad pre-election consensus between Trudeau’s Liberals and opposition Conservatives suggests that the resulting CBAM will be swiftly implemented (iAffairs Canada 2021). Another early mover in the long path to adopting a CBAM is the UK, which has shown something of a cooler interest than Canada in taking the first steps. The Environmental Audit Committee of Parliament has launched an inquiry to consider ‘the role a [CBAM] could play in addressing potential carbon leakage and meeting the UK’s environmental objectives…[alongside] the wider impacts, risks and opportunities which might arise if the UK Government were to introduce…[a] unilateral [CBAM]’ (UK Parliament 2021). As with Canada, this is proceeding on the basis of an established suite of climate policies, including a post-Brexit ETS introduced in 2021 to replace the EU scheme. Despite enthusiasm among rank-and-file government Members of Parliament, however, then-Minister for Business, Energy and Clean Growth Kwasi Kwarteng expressed the government position cautiously: this is an important subject but it has to be treated as part of a multilateral effort. We are responsible for 1% of carbon emissions globally, and if we impose a tax unilaterally on

17 18

 SC 2018, c 12, s 186.  References re Greenhouse Gas Pollution Pricing Act [2021] SCC 11.

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carbon-emitting products coming into this country, we may well be disadvantaging our own consumers if others around the world are not placing such a tax. The Government feel that multilateral co-operation in this regard is by far the best way to prevent carbon leakage. (Kwarteng 2020)

Though this support is promising, it is nowhere near broad-based enough to underpin the push for customary status on its own. Widespread acceptance of CBAMs depends in large part on whether the world’s largest economies, in the US and the PRC, follow suit. While some States have embraced CBAMs as a policy tool, others are resolutely opposed to their adoption. This staunch opposition deals a harsh blow to the prospect that CBAMs might come to be accepted as general customary international law. Among opponents, including the ‘grave[ly] concern[ed]’ ‘BRICS’ States of Brazil, Russia, India, the PRC, and South Africa (South African Government 2021), few have been as vociferous as Australia. Some critiques, such as that made by former Trade Minister Dan Tehan, questioned the WTO compatibility of the EU’s CBAM (Aarup and Moens 2021). Others were sharper still, with former Deputy Prime Minister Barnaby Joyce calling the CBAM ‘just a tariff…arbitrary tariff barrier’ (Merzian and Muller 2021), and former Minister for ‘Energy and Emissions Reduction’ Angus Taylor decrying ‘a new wave of protectionism now threaten[ing] to sweep across the world’ (Iannuci 2021). A change in government at the May 2022 federal election, replacing the Liberal-National coalition with a Labor majority, accompanied by a suite of so-called ‘climate independents’, has largely done away with this recalcitrance (Parkinson 2022). In its place, the new government has committed to achieving 43% emissions reduction on 2005 levels by 2030, net zero emissions by 2050, and legislation to enshrine both targets at the federal level (Climate Action Tracker 2022; Australian Labor Party 2022). Though these natural, political oscillations between competing climate policy visions have the power to impede custom formation, it is the practice of major economies such as the US and PRC which is likely to exert the greatest influence. 9.4.2.2 Major Economies: The US and the PRC Though the ambition of the EU CBAM, the economic span of which encompasses some 18% of global GDP (World Bank 2021a), is a significant step towards the legitimisation of CBAMs, the support of other major economies will be essential to their acceptance as custom. This is particularly so in the case of the US and PRC, respectively the world’s first and second largest economies (World Bank 2021b). The US’ progress towards adopting a CBAM at the federal level must necessarily be set against a backdrop of deep and sustained political divides. To be sure, legislation has already been advanced in the 117th Congress to amend the Internal Revenue Code and introduce a CBAM on imports,19 with qualifications provided (similarly

19

 26 IRC (1986).

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to the European proposal) for covered fuels and certain products.20 Though there is no federal-level US ETS currently in force, with the most recent proposal failing to be voted upon in the (Democrat-controlled) 111th Congress,21 several subnational jurisdictions and regions (together comprising roughly one-third of US States) have had trading systems in place since as early as 2009 (Krause et al. 2021, 64–95). In redressing this, a so-called ‘Green New Deal’ has been proposed in the sweeping style of the EU Green Deal (Friedman 2019), with President Biden’s special presidential envoy for climate John Kerry signalling cautious US support for the EU CBAM, and foreshadowing that a CBAM ‘may be a tool that [the US has] no choice but to employ if other countries are not going to be serious enough about reducing carbon’ (Simon 2021). By contrast, of course, the administration of Biden’s predecessor, Donald Trump, was staunchly opposed to climate action, withdrawing the US from the Paris Agreement and rolling back reams of domestic environmental regulation (The Guardian 2020). The Trump administration also displayed a ready propensity to deploy trade as an offensive tool against other States as it saw fit, a feature likely to persist in the American foreign policy catalogue going forward (Anderson 2021). So too the conservative Supreme Court majority delivered by Trump looks set to bear upon climate politics into the future, most recently ruling 6:3 to circumscribe the EPA’s powers in West Virginia v. Environmental Protection Agency (Staley and Guo 2022). As such, even though the Democratic administration has signalled its openness to CBAMs as a policy tool, the US position on CBAMs depends almost entirely on the political balance of future Congressional and Presidential elections. Despite not being beset by anything like the domestic political turmoil of US democracy, there also remain structural obstacles to the world’s second largest economy—the centralised and autocratic PRC—adopting CBAMs as a policy tool. Like the US, the PRC has implemented some carbon pricing subnationally, with eight regional pilot programmes, though it went one step further in 2021 by introducing a national-level ETS. Spanning around 40% of national carbon emissions (equivalent to some four billion tonnes of CO2), the relatively ambitious ETS operates under an intensity-based cap which shifts ex-post as production levels fluctuate, though critics have already begun pointing out its shortcomings (Barrett 2021). Like the US, the PRC is also not averse to using trade as an economic lever, having imposed stinging tariffs on several Australian goods in reply to what it considered ‘smearing’ by the previous Federal Government (Dziedzic 2021). Nominally, therefore, the preconditions lie for PRC adopting a CBAM. In practical terms, however, government spokespeople have made Beijing’s opposition to the EU CBAM well-­ known. According to Ecology and Environment Ministry spokesman Liu Youbin:

 Bill to amend the Internal Revenue Code of 1986 to Establish a Border Carbon Adjustment for the Importation of Certain Goods, HR 4534, 117th Congress (2021) § 9904–9905. 21  An Act to Create Clean Energy Jobs, Achieve Energy Independence, Reduce Global Warming Pollution and Transition to a Clean Energy Economy, HR 2454, 111th Congress (2009). 20

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[The EU] CBAM is essentially a unilateral measure to extend the climate change issue to the trade sector. It violates WTO principles…and seriously undermine[s] mutual trust in the global community and the prospects for economic growth[.] (Xu and Stanway 2021)

In and of itself, however, the PRC has less of an issue with CBAMs as a policy tool as it does with what it sees as the ‘unilateral’ nature of the EU CBAM in particular. Overwhelmingly negative perceptions of the EU CBAM among PRC government and industry figures should not necessarily be conflated with a wider disinclination towards adopting CBAMs. That said, the PRC does not currently have any public plans to implement a CBAM of its own, and has historically been slow to implement international climate policy trends at the national level.

9.4.3 CBAMs as Universal versus Regional Custom The practice of the US and PRC (as the two most significant global economies alongside Europe) is particularly relevant to determining whether CBAMs are indeed becoming normalised in global trade negotiations, or whether the EU is merely charting a course to becoming ‘a low-carbon island’ (Tsafos 2020). Both within and outside the operational remit of the GATT, State practice points to the latter—only the EU has at present advanced a serious CBAM proposal with majority political support. Those developing BRICS economies in opposition to the CBAM could well be considered persistent objectors (for international legal purposes) to the establishment of a general or particular customary practice on CBAMs. By contrast, that the US, UK, and Canada are in various (if early) stages of consideration for CBAMs of their own does suggest a slowly developing legal momentum. Within such a fractious context, scholars have noted that the consistency of Multilateral Environmental Agreements (‘MEAs’) with the GATT is questionable (Falkner and Jaspers 2012). One of the major obstacles is the difficulty of establishing an internationally agreed carbon accounting system. While, on the one hand, accurately determining carbon emissions is a complex administrative task, on the other, relying on common or country-specific emissions data might breach the most-favoured nation principle (Matthes 2021, 13). The Information Technology and Innovation Foundation has underscored that, rather than adopting CBAMs, States should foster flexible open-trade benefits for nations adopting ambitious and transparent climate targets (Koester et al. 2021). In addition to the thorny question of carbon accounting, CBAMs lie at the heart of another debate, over a suite of potential climate-driven reforms of the WTO (Wolff 2021). Any such reform requires a high degree of consensus (Sait Akman 2020), with CBAMs far from boasting the unanimity required. Indeed, whilst there is certainly consensus that some trade-restrictive measures are required to effectively implement climate policies, there is no agreement as to whether these should take the form of CBAMs, or rather other options such as greater transparency in supply chains. Some consider that CBAMs could validly fulfil the preconditions for

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lawfulness as a national security exception under GATT article XXI (Rashish 2021, 22). Conversely, in light of the theory of climate clubs, CBAMs could well be implemented by like-minded countries adopting similar climate policies vis-à-vis other countries that do not adhere to the same climate standards (Rashish 2021, 22). The notion of such clubs has been advanced by several prominent figures, not least German (then-Vice) Chancellor Olaf Scholz, who signalled the importance of building a climate club with major economies like the US, UK, PRC, Canada, and Japan while mapping out the EU CBAM (EURACTIV 2021). As he described it, ‘it’s a good idea to discuss about having a sort of a club, of people willing to do similar things and not competing [with] each other, but fighting for a better climate development in the world.’ It could therefore be argued that CBAMs generate particular—as opposed to universal—customary practices; however, whilst this applies ‘internally’ (that is, within such climate clubs) (EURACTIV 2021), it does not justify in law the adoption of CBAMs vis-à-vis countries outside a specific club. Outsiders could indeed (if implicitly) be considered persistent objectors. This theory of climate clubs thus confirms that CBAMs do not presently reflect a generalised customary practice under international law. Furthermore, whilst the argument has been put forward that CBAMs are essential to the implementation of party obligations under the UNFCCC, it has also been argued that they might affect the capacity of States to ‘nationally determine’ their contributions in accordance with the voluntary approach that underpins the Paris Agreement (Rashish 2021, at 14). The obstacle is not an insurmountable one, as the revenues generated by CBAMs could be devoted to fulfilling the US$100 billion commitment that developed countries have made under the Paris Agreement to support climate measures in least-developed economies. Such disagreement makes for a perfect illustration of the type of discourse surrounding the adoption of CBAMs, at least for the time being.

9.5 Conclusion The imperative of implementing effective climate policy under the UNFCCC has prompted the EU to advance its CBAM as a key instrument in the future of emissions reduction. Within the context of the Green Deal and the ‘Fit for 55’ package, the EU has advanced a carbon tariff levied vis-à-vis countries out of step with its climate ambition in order to ensure a competitive economic playing field. Along these lines, the EU has included ‘climate clauses’ consistent with the Paris Agreement in recently negotiated FTAs. In light of this overarching trend, it is legitimate to wonder whether EU practice might signal the fledgling emergence of a custom allowing for the adoption of CBAMs on a universal scale under general international law. Indeed, and although controversial, the jurisprudence of the WTOAB does not exclude derogations from trade obligations for environmental purposes. However, whilst some States, such as Canada and the UK, have begun exploring initiatives similar to the EU CBAM, others, such

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as the BRICS economies and Australia (at least under the previous coalition government), have been variously more hostile to the adoption of such measures. Within the context of the discussion on the reform of the WTO, CBAMs are crucial, but they are not the only means envisaged towards the implementation of climate policies. Further, economic theories such as that of climate clubs question the scope of acceptance of such measures. Given these controversies, for the time being at least it is impossible to hold that CBAMs have reached a degree of consensus sufficient to establish the opinio juris necessary to found them as universal international rights. Nonetheless, in line with the theory of climate clubs, recent practice on CBAMs could signal their acceptance as particular (regional) customary international practices. This might also represent the infancy of a process which, in time, could develop into a general customary practice under international law, even beyond the scope of UNFCCC and WTO strictures.

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Prest J, Woodyatt J, Pettit J (2021) Comparing the hydrogen strategies of the EU, Germany, and Australia: legal and policy issues. Oil Gas Ener Law 19(2):1 Quick R (2008) Border tax adjustments in the context of emission trading: climate protection or ‘naked protectionism’? Global Trade Customs J 3:163–175 Quick R (2020) Carbon border adjustment: a dissenting view on its alleged GATT-compatibility. Zeitschrift für Europarechtliche Studien 4:551–597 Rashish PS (2021) The trade-climate nexus and the future of the global trading system. American Institute for Contemporary German Studies. https://www.aicgs.org/2021/11/ the-­trade-­climate-­nexus-­and-­the-­future-­of-­the-­global-­trading-­system Reuters (2021) Russia’s Putin signs law to curb greenhouse gas emissions’. Reuters, 3 July. https://www.reuters.com/business/environment/russias-­putin-­signs-­law-­curb-­greenhouse-­ gas-­emissions-­2021-­07-­02 Satherley T, May D (2022) Natural disasters and climate risk. Australian Parliamentary Library. https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_ Library/pubs/BriefingBook47p/NaturalDisastersClimateRisk Simon F (2021) John Kerry: carbon border tariffs are ‘a legitimate idea to have on the table’. Eur Secur 10 December. https://www.euractiv.com/section/emissions-­trading-­scheme/interview/ john-­kerry-­carbon-­border-­tariffs-­are-­a-­legitimate-­idea-­to-­have-­on-­the-­table South African Government (2021) Joint statement issued at the conclusion of the 30th BASIC ministerial meeting on climate change hosted by India on 8th April 2021, 8 April. https://www. gov.za/nr/speeches/joint-­statement-­issued-­conclusion-­30th-­basic-­ministerial-­meeting-­climate-­ change-­hosted Staley T, Guo J (2022) West Virginia v, Environmental Protection Agency. https://www.law.cornell.edu/supct/cert/20-­1530 Stayner T (2021) Australia labels the European Union’s push for a carbon border tax “Protectionist”. SBS News. https://www.sbs.com.au/news/australia-­labels-­the-­european-­union-­ s-­push-­for-­a-­carbon-­border-­tax-­protectionist The Guardian (2020) 75 ways trump made America dirtier and the planet warmer. The Guardian, 20 October. https://www.theguardian.com/us-­news/ng-­interactive/2020/oct/20/ trump-­us-­dirtier-­planet-­warmer-­75-­ways The Moscow Times (2019) Russia rejects climate change plan after business uproar. The Moscow Times, 17 October, https://www.themoscowtimes.com/2019/10/17/russia-­rejects-­ climate-­change-­plan-­after-­business-­uproar-­a67780 Tsafos N (2020) How can Europe get carbon border adjustment right? Center for Strategic & International Studies, 7 August. https://www.csis.org/analysis/how-­can-­europe-­get-­carbon-­ border-­adjustment-­right UK Parliament (2021) Carbon border adjustment mechanisms – inquiry. https://committees.parliament.uk/work/1535/carbon-­border-­adjustment-­mechanism US Congress (1986) Internal revenue code of 1986 to establish a border carbon adjustment for the importation of certain goods, HR 4534 Wherry A (2021) The Trudeau Era continues – for now. CBC, 21 September. https://www.cbc.ca/ news/politics/federal-­election-­2021-­trudeau-­liberals-­wherry-­1.6183518 Wolff AW (2021) Saving the WTO: a roadmap to the future of the World Trade Organization. https://www.piie.com/sites/default/files/documents/wolff-­4-­29-­2021speech.pdf World Bank (2021a) GDP (current US$) – European Union, World. https://data.worldbank.org/ indicator/NY.GDP.MKTP.CD?locations=EU-­1W World Bank (2021b) GDP (current US$) – United States, China. https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=US-­CN Xu M, Stanway D (2021) China says EU’s planned carbon border tax violates trade principles. Australian Financial Review, 26 June. https://www.afr.com/world/asia/china-­says-­eu-­s-­ planned-­carbon-­border-­tax-­violates-­trade-­principles-­20210726-­p58d2o Zleptnig S (2010) Non-economic objectives in WTO law: justification provisions of GATT, GATS, SPS and TBT agreements. Martinus Nijhoff, Leiden

Chapter 10

The EU-US Transatlantic Trade and Technology Council: Shifting Multilateralism Through Bilateralism and Institutions? Elaine Fahey

Contents 10.1  Introduction 10.2  A History of Failing to Cooperate and Disputes 10.3  The Law and Governance of EU-US Trade Relations and Its Forums 10.4  Background to the TTC 10.5  TTC and Global Law-Making? 10.6  Conclusion References

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Abstract  The European Union (‘EU’)-United States (‘US’) Trade and Technology Council (‘TTC’) is a key element of current global law-making in trade and technology, however imperfect it might be. Its soft law structures and formulations contrast considerably with certain developments in EU data governance, but it aligns well with broader new regimes in international economic law. This chapter considers the relationship between bilateralism and multilateralism in the field of trade and technology taking place in light of the new EU-US TTC recently taking effect. It considers a history of transatlantic failures in cooperation, the history of law and governance in EU-US relations in trade and technology and the evolution of the TTC, followed by a series of conclusions. The TTC raises the question as to the place of bilateralism and multilateralism in the complex transatlantic relationship spanning many decades. It forms a unique study of considerable global law-making ambitions and objectives in contemporary times, against a fraught backdrop of complex transnational cooperation. Yet the context of transatlantic relations, itself a rich tapestry of E. Fahey (*) Institute for the Study of European Law, City Law School, University of London, London, UK e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 O. Quirico, K. Kwapisz Williams (eds.), The European Union and the Evolving Architectures of International Economic Agreements, https://doi.org/10.1007/978-981-99-2329-8_10

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innovations in the area of data transfers between two of the largest global players in trade and technology, may lend the case study of the TTC more gravitas and significance than other forms of bilateralism. Keywords  Trade · Technology · EU-US · Trade and technology council · Soft law · Multilateralism

10.1 Introduction Many transatlantic trade agreements have seemed ‘doomed to failure’ through non-­ compliance, plagued by sub-optimal remedies (Petersmann 2003, 1–62; Petersmann 2015; Pollack and Shaffer 2009; Petersmann and Mayr 2017; Gardner 2020, 105–148). Many Mutual Recognition Agreements (‘MRAs’) have been alleged to have failed on account of undue power and influence of US federal authorities (Pollack 2003). As the former EU Trade Commissioner Sir Leon Brittan famously stated, ‘governments proved to be more eager than their agencies to cooperate’. Indeed, many EU-US agreements have arguably defied legal characterisation or comprise highly complex efforts at global governance —e.g. the US-EU MRA and its six sectoral annexes of 1997, the US-European Community (‘EC’) MRA on marine safety (June 2001), and the US-EC understanding on safe harbour principles for data privacy protection (of 2000). Indeed, several post-9/11 bilateral EU-US agreements in security have been argued to add little to existing agreements between individual Member States and the US (see also Mitsilegas 2003; Fahey 2013). While there has been little effort to harmonize standards on a purely transatlantic basis, the EU and US have negotiated bilateral mutual recognition agreements. For example, the 1997 US-EC MRA was based largely on the mutual recognition of test results by ‘Conformity Assessment Bodies,’ which were evaluated pursuant to international standards set forth in International Organisation for Standardisation/ International Electrotechnical Commission guides. The National Security Agency surveillance saga triggered by Edward Snowdon also caused many to consider the question of the value and merits of transatlantic cooperation through law. Nonetheless, the influence of EU standards as principles caused certain commentators to suggest that EU law had a complex but palpable impact upon US law (see also Vogel 2012; Bradford 2020; Scott 2009). It is a seemingly endless tale of decades of complex bilateralism and multilateralism efforts, marked by a dominance of soft law and hybrid governance. A Transatlantic TTC, as proposed by the EU in late 2020 to the then-new Biden administration and already in place by Autumn 2021, could provide an important bedrock from which multilateral ecommerce developments can flourish via the new so-called ‘Pittsburgh Statement’ (European Commission 2021a). The TTC has significant global law-making objectives as will be outlined. It constitutes a similar entity or development to that taking place in EU-India relations, where another

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so-called Trade and Technology Council has also just been established via soft law (see European Commission 2022a). This chapter considers the relationship between bilateralism and multilateralism in the field of trade and technology taking place in the new EU-US TTC recently taking effect as a significant development, albeit through soft law, as a meaningful example of regionalism engaging with broader frameworks and themes. The most contemporary and cutting-edge digital trade agreement globally is a soft law non-­ binding partnership, the 2020 Digital Economy Partnership Agreement (‘DEPA’) between Chile, New Zealand, and Singapore (see Burri 2021). It is not formulated as a trade agreement, but rather intended to address the broader issues of the digital economy through a soft law agreement. Its breadth and flexibility are significant in so far as it purported to traverse a range of contemporary issues. DEPA’s ‘soft’ approach to rulemaking and norm-setting is alleged to have been effective in an Asian context, such as the Asia-Pacific Economic Cooperation (‘APEC’) forum (including on digital governance) and worthy of replication (Goodman 2021). Its purpose is to enable shaping rules and norms in this critical area otherwise than by the long and arduous process of negotiating trade agreements. It is notably not couched in much multilateralism. Yet, such a framework contrasts considerably with the very different type of debate taking place across the Atlantic in the context of the post-Privacy Shield Agreement negotiations, reaching an agreement on a Trans-Atlantic Data Privacy Framework in 2022 which includes a binding transatlantic court, discussed below. It raises the question as to the future of bilateralism and multilateralism in trade and technology. The TTC forms a unique study of global law-making as to complex contemporary fields of trade. The place of an institution here to propel law-making is of note. Yet the dominance of soft law and complex governance in EU-US relations operates to cloud its successes and actions. This chapter considers the relationship between bilateralism and multilateralism in the field of trade and technology taking place in the new EU-US TTC recently taking effect. It considers a history of transatlantic failures in cooperation, the history of law and governance in EU-US relations in trade and technology and the evolution of the TTC, followed by conclusions. It thus evaluates a time period which spans a very short range of time of less than a year at the time of writing. Yet it is still a very rich study of a period of time of extraordinary actions and ambitions.

10.2 A History of Failing to Cooperate and Disputes A broad range of attempts at transatlantic governance have been characterised as unsuccessful in scholarship, raising the question as to what the history of transatlantic governance indicates to us in terms of the expectations and realities of transatlantic cooperation. Petersmann sought to demonstrate how so many transatlantic agreements seemed doomed to failure through non-compliance, plagued with sub-­ optimal remedies (Petersmann 2015). The 1997 MRA between the EC and US is viewed as having been hampered by a multiplicity of actors involved in its

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implementation, as well as certification issues and the general dominance of private economic actors (see also Petersmann 2015; Nicolaidis and Shaffer 2005). The most significant transatlantic digital trade cooperation, the EU-US Privacy Shield Agreement, arguably was not adequately ‘policed’ by the US Federal Trade Commission (Terpan 2018; Fahey and Terpan 2021). Yet we may note that, Krisch sought to challenge the characterisation of almost a decade of work by Pollock and Shaffer of the infamous EU-US Genetically Modified Organisms (‘GMOs’) regulatory dispute, as ‘failed’ transatlantic cooperation (Pollack and Shaffer 2009). Instead, he argued it was an example of both horizontal and legal pluralism, which indicated a very high degree of cooperation between legal orders (Krisch 2010). Similarly, in the 1990s, positive comity arrangements were entered into between the EU and US enabling extra-territorial enforcement in competition law so as to avoid transatlantic disputes. They are largely perceived as successful arrangements, albeit with highly publicised yet limited disagreements (Bradford 2020). At the time of writing, there were a number of high-profile and longstanding disputes between the EU and US at the World Trade Organisation (‘WTO’) only recently resolved, outside of the multilateral institutional system—that is, the WTO. For example, there was an ongoing dispute between the EU and US as to Airbus and Boeing and the subsidies provided to the companies, initially resulting in an agreement in 1992 on trade in large civil aircraft.1 The US withdrew from this agreement in 2004 on the basis of support given to Boeing, and the EU followed suit with claims as to support granted to Boeing. The WTO was asked by the EU to rule on countermeasures in 2012 and hearings commenced in 2013.2 Similarly, a poultry dispute has been ongoing since 1997 relating to the WTO Agreement on the Application of Sanitary and Phytosantitary SPS Measures. Many longstanding disputes between the EU and US, however, have been swiftly resolved, paused, or halted, at the outset of the Biden administrationagain mainly outside of institutions (Zalan 2021; Fahey 2021). The European Commission has sought to emphasise the benefits of the TTC as enabling more constructive dialogues on open disputes and cases eg steel and aluminium tariffs, thereby widening its strategic operations, benefits and outcomes. The idea of a new Council with bilateral and multilateral goals is thus difficult to fathom but is also evidence of considerable ambitions, explored here. First, however, the chapter turns to the framing of law and governance in EU-US trade relations and their forums.

 Measures Affecting Trade in Large Civil Aircraft (second complaint) – AB-2011-3 – Report of the Appellate Body U 12/03/2012, http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds353_e.htm 2  Dispute DS392 United States — Certain Measures Affecting Imports of Poultry from China (WTO). 1

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10.3 The Law and Governance of EU-US Trade Relations and Its Forums Many landmarks in the history of EU-US relations in trade and technology and other areas date to the transatlantic declaration of 1990, expanded through the New Transatlantic Agenda (‘NTA’) in 1995, and have taken soft law form (Pollack 2005). Traditionally, political science accounts have contended that EU-US relations are both law- and institution-light (Pollack 2005, 916; Fahey 2014, 370). The advent of the Trump administration appeared to give effect to an unprecedented shift in transatlantic relations since before World War II. Prior to this, the Obama-era Transatlantic Trade and Investment Partnership (‘TTIP’) negotiations had brought the EU and US closer to much deeper forms of cooperation (Bartl and Fahey 2014). Countless trade wars ensued which already appears to have changed with the Biden administration, for example already with the EU-US TTC proposed immediately by the European Commission and quickly taking effect- to be discussed here below (European Commission and High Representative of the Union for Foreign Affairs and Security Policy 2020; European Commission 2021a, b; White House 2021). Yet its law-light, institution-light characteristics are beyond dispute and evidence a new era of negotiation, law, policy and governance of trade and technology. There have been many so-called transatlantic soft law dialogues over the years (Fahey 2014). Certain dialogues appear more permanent or high-profile whereas others have been less than transparent and their business dominance has been heavily criticized (Green Cowles 2001, 231; Bignami and Charnovitz 2001, 255–286). The Transatlantic Consumer Dialogue (‘TACD’) has become increasingly highprofile in the age of ‘Big Tech’ assessing the need for voluntary and transparency exchanges between regulators and involvement of all stakeholders and sharing best practice, particularly as to privacy (TACD 2021). Many other formal law-making processes take place against this difficult backdrop (Fahey 2014; Jančić 2015). One of the most significant sites of transatlantic ‘law-making’ if one can use that term has been until recently at the WTO. Most disputes between the EU and US have taken place before the WTO Dispute Settlement Body (‘WTODSB’) in recent times, at least until the demise of that organ in late 2020 (Library of the European Parliament 2013; Pollack and Shaffer 2009; Petersmann 2015). There, the EU and US have historically been involved in the most disputes (European Commission 2021c. See also European Commission 2021d). The resolution of such WTO disputes, eg the Airbus-Boeing large civil aircraft dispute in 2021, is highly significant but perhaps an important side-issue to the main ‘act’. It can be easily suggested that the history of transatlantic relations shows a fine line between cooperation and conflict. The engagement of the EU and US on the future reform of WTODSB has reached a critical juncture, with the failure of the US to nominate judges to the body and to increasingly be opposed to this forum in its existing format with respect to the rules-based system of multilateralism that both the US and EU have long subscribed to (European Commission 2018; US

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Trade Representative 2010). The Biden administration appears to have located WTO dispute settlement reform within broader EU cooperation. The EU and 15 WTO members established contingency appeal arrangement for trade disputes in March 2020, with the number trebling a year later (European Commission 2020). The extent to which the US will join the EU as to shared visions of the WTO reform remains to be seen. This dimension of ordinary law and governance of EU-US relations in trade, beyond the WTO, remains thus a complex issue.

10.4 Background to the TTC Transatlantic data flows amount to some of the most significant for the global economy (US Chamber of Commerce 2021). Even in the midst of a global pandemic, in 2021, the transatlantic economy amounted to one third of global GDP (Hamilton and Quinlan 2021; Hamilton and Quinlan 2022). At the announcement recently of a transatlantic data privacy framework, the US Government stressed that more data flows between the US and Europe than anywhere else in the world, enabling the US$7.1 trillion US-EU economic relationship (White House 2022). The TTIP, the largest-scale transatlantic collaboration in recent history, expressly excluded data flows from its negotiations. Its negotiation of e-commerce could have been pivotal given the gap between the TPP and EU agreements emerging as to data flows (European Commission 2015a, b, c; European Parliament 2020. See Burri 2017). The US shift towards the need for federal privacy laws has considerably altered this debate, as discussed below. The EU-US Joint Agenda for Global Change included a transatlantic TTC, putatively developing a loose institutionalisation of key global challenges. The EU proposed as part of its global change agenda a TTC—centred upon multiple working groups. Notably, seven of the ten working groups address themes that refer to technology either with a security angle or from a competition perspective (Demertzis 2021). Whether it will generate global lawmaking in any of these fields remains to be seen. As to working group 10 on global trade challenges, industry and academia were united on the need for WTO reform to be prioritised as a transatlantic goal, emphasising the acute necessity of multilateralism within this bilateral engagement (Bonefeld-Dahl 2022). The initial TTC meeting was nonetheless plagued by allegations of a lack of transparency for its accordance of excessive influence to the US, allegations that have beset many contemporary bilateral and multilateral engagements in the field of trade and technology (TACD 2021). Civil society responded adversely to its creation and its initial working phases despite its development to avoid the challenges of the EU-US TTC as a ‘megaregs’-era agreement, creating upset among civil society as to investment issues, secret courts and a lack of participation (TACD 2021). Outside of the context of trade specifically, before the General Data Protection Regulation (‘GDPR’), many depicted a convergence arising between the EU and US legal orders on data standards (Bach and Newman 2004; Bach and Newman 2007).

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This appears increasingly the case in the post-GDPR era, where more US states have adopted GDPR-esque laws, such as the California Consumer Privacy Act passed in that State in 2018. This form of ‘Brussels Effect’, however limited, shows the rising significance of the EU as a global data actor (Bradford 2020). After the Court of Justice of the European Union struck down the EU-US Privacy Shield Agreement in its Schrems II decision,3 the EU and US finally agreed in March 2022 a new Transatlantic Data Privacy Framework principle in March 2022, to include a ‘trans-Atlantic court’ and independent oversight (European Commission 2022b). The framework appears to be understood as a pre-condition for the TTC to evolve, taking place prior to the second meeting in Paris-Saclay in May 2022. Its evolution takes place against a curious regulatory backdrop. The capacity for this convergence to evolve and to align bilaterally, particularly through institutions, could become pivotal going forward. Its global effects, however, remain to be seen.

10.5 TTC and Global Law-Making? The TTC is also predicated upon multiple working groups that align with this formula of flexibility, such as technology standards cooperation, export controls cooperation, and investment screening cooperation, among others. It remains to be seen the extent to which the working groups evolve to become successful. Moreover, the degree of engagement of civil society and Big Tech with the respective working groups is a matter for further analysis in due course given that the personal experience of the author following the working groups appears to suggest uneven engagement across platforms, possibly related to issues, staffing, capacity and the nature of the platform itself. International agreements and standards have heavily informed the work of the TTC. For instance, the Organisation for Economic Cooperation and Development (‘OECD’) Guidelines for Recipient country Investment Policies Relating to National Security, the 2009 General Agreement on Trade in Services (‘GATS’), the Global Partnership on AI, the First Movers Coalition, the Green Digital coalition, OECD AI Recommendation, WTO Government Procurement Agreement (GPA), and the Universal Declaration of Human Rights among many others are all referenced. A very rough estimate (with counting complicated by multiple divergent references deployed) suggests that at least 55 international agreements, instruments or standards are referenced. Whatever about the accuracy or methodology, it appears a very significant effort to locate the multilateral at the heart of this bilateral effort and in need of future research. The first post-meeting consensus was that the TTC was off to a ‘promising start’, but observers also noted that the bar for success in the first meeting was low (Van

 Data Protection Commissioner v. Facebook Ireland Ltd and Maximillian Schrems (C-311/18) [2020] ECLI:EU:C:2020:559. 3

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Der Loo et al. 2021; Hillman and Grundhoefer 2021; European Commission and High Representative of the Union for Foreign Affairs and Security Policy 2020; Demertzis 2021). The second meeting already appeared ready for significant policy shifts. In fact, the external regulatory landscape was understood to be an advantage for the EU in taking the lead—perhaps so much so as to make the rule-making exercise together questionable bilaterally. The TTC has concrete and broad ambitions to align standards in times of geopolitical shift, with the EU and US coming together to align technical standards and enable joint mapping for certain key goods supply chains. The question as to global standards and objectives remains complex. Some have even sought to moot a so-called possible ‘TTC effect.’ Yet can strategic partners follow up to align inside and outside of multilateral values? It can be said that the challenges, such as digitisation or greening, are all global challenges, but cannot per se be resolved by standards alignment alone by like-minded cooperation (however noble minded). The TTC raises questions as to whether reform of the WTO should be the key focus. Whether the working groups outcomes align well more broadly with the WTO agenda also remains to be seen. The challenges for civil society engaging with the breadth of the issues proposed and, in this fashion, could arguably be more salient than ever (Hamilton 2022).

10.6 Conclusion The EU-US TTC is a key element of current global (soft) law-making in trade and technology, however imperfect it might be. Its structures and formulations contrast considerably with certain developments in EU data governance, but align well with broader new regimes in international economic law. The TTC raises the question as to the place of bilateralism and multilateralism in the complex transatlantic relationship spanning many decades. It forms a unique study of considerable global law-­ making ambitions and objectives in contemporary times, against a fraught backdrop of complex transnational cooperation. Yet the context of transatlantic relations, itself a rich tapestry of innovations in the area of data transfers between two of the largest global players in trade and technology, may lend the case study of the TTC more gravitas and significance than other forms of bilateralism. It is a considerable area of interest as a future research agenda and a useful case study as concerns the thin line between cooperation and conflict in global partnerships on key global challenges of our times. The objectives are considerable and far-reaching, despite the regular failures of negotiation, law, policy and governance. Trade and technology appear intertwined as the new ‘oil’ of the global economy, and yet considerable work needs to be done on understanding the place of major global law-making initiatives outside of the WTO context. The EU-US relationship is no doubt esoteric, but also possibly significant as to the place of framing and institutions of the future of global governance if soft law is to continue to dominate, shrouded in the lexicon of multilateralism and law-making.

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European Commission (2022b) European commission and United States joint statement on trans-­ atlantic data privacy framework. Press Release. https://ec.europa.eu/commission/presscorner/ detail/en/IP_22_2087 European Commission and High Representative of the Union for Foreign Affairs and Security Policy (2020) Joint communication to the European parliament, the European council and the council: a new EU-US agenda for global change. JOIN (2020) 22 final European Parliament (2020) TTIP legislative train schedule. www.europarl.europa.eu/ legislative-­train/theme-­international-­trade-­inta/file-­ttip-­services-­investment-­and-­e-­commerce Fahey E (2013) Law and governance as checks and balances in Transatlantic security: rights, redress and remedies in EU-US passenger name records and the terrorist finance tracking program. Yearb Eur Law 32:1–21 Fahey E (2014) On the use of law in Transatlantic relations: legal dialogues between the EU and US. Eur Law J 20(3):368–384 Fahey E (ed) (2021) The future of Transatlantic trade. EU Law Live Special Issue 52:1–5 Fahey E, Terpan F (2021) Torn between institutionalisation and Judicialisation: the demise of the EU-US privacy shield. Indiana J Glob Leg Stud 28(2):205–244 Gardner A (2020) Stars with stripes: the essential Oartnership between the EU and US. Palgrave Macmillan, Cham Goodman MP (2021) DEPA and the path back to TPP.  CSIS. https://www.csis.org/analysis/ depa-­and-­path-­back-­tpp Green Cowles M (2001) The Transatlantic business Dialogue: transforming the new Transatlantic Dialogue. In: Pollack M, Shaffer G (eds) Transatlantic governance in the global economy. Rowman & Littlefield, Washington, pp 213–235 Hamilton D (2022) Getting to yes: making the U.S.–EU trade and technology council effective (summary brief). Transatlantic. https://www.transatlantic.org/wp-­content/uploads/2022/03/ TTC-­summary-­brief-­final-­March-­6-­2022.pdf Hamilton D, Quinlan J (2021) The transatlantic economy 2021. US Chamber of Commerce, Washington. www.amchameu.eu/sites/default/files/publications/files/ transatlanticeconomy2021_fullreporthr.pdf Hamilton D, Quinlan J (2022) The transatlantic economy 2022. Washington, US Chamber of Commerce. https://www.uschamber.com/assets/documents/TE2022_Report_LR.pdf Hillman J, Grundhoefer S (2021) Can the U.S.–EU trade and technology council succeed? Council on foreign affairs. www.cfr.org/blog/can-­us-­eu-­trade-­and-­technology-­council-­succeed Jančić D (2015) Transatlantic regulatory interdependence, law and governance: the evolving roles of the EU and US legislatures. Cambridge Yearb Euro Leg Stud 17:334–359 Krisch N (2010) Pluralism in post-national risk regulation: the dispute over GMOs and trade. Transnatl Leg Theory 1:1–29 Library of the European Parliament (2013) Principal EU-US disputes. www.europarl.europa.eu/ RegData/bibliotheque/briefing/2013/130518/LDM_BRI(2013)130518_REV1_EN.pdf Measures Affecting Trade in Large Civil Aircraft (second complaint) – AB-2011-3 – Report of the Appellate Body U 12/03/2012. http://www.wto.org/english/tratop_e/dispu_e/cases_e/ ds353_e.htm Mitsilegas V (2003) EU-US co-operation in criminal matters post-9/11: extradition, mutual legal assistance and the exchange of police data. Eur Foreign Aff Rev 8:515–536 Nicolaidis K, Shaffer G (2005) Transnational mutual recognition regimes: governance without global government. Law Contemp Probl 68:263–318 Petersmann E-U (2003) Prevention and settlement of Transatlantic economic disputes: legal strategies for EU/US leadership. In: Petersmann E-U, Pollack MA (eds) Transatlantic economic disputes. The EU, the US and the WTO. Oxford University Press, Oxford, pp 1–62 Petersmann E-U (2015) Transformative Transatlantic free trade agreements without rights and remedies of citizens? J Int Econ Law 18(3):579–607

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Petersmann E-U, Mayr S (2017) CETA, TTIP, TiSA, and their relationship with EU law. 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 Pollack M (2003) The political economy of the Transatlantic partnership. Working Paper EUI. https://www.eui.eu/Documents/RSCAS/e-­texts/200306HMTMvFReport.pdf Pollack M (2005) The new Transatlantic agenda at ten: reflections in an experiment in international governance. J Common Mark Stud 43(5):899–919 Pollack M, Shaffer G (2009) When cooperation fails: the international law and politics of genetically modified foods. Oxford University Press, Oxford Scott J (2009) From Brussels with love: the Transatlantic travels of European law and the chemistry of regulatory attraction. Am J Comp L 57(4):897–942 Terpan F (2018) EU-US data transfer from safe harbour to privacy shield: Back to square one? European Papers 3:1045–1059 The White House (2021) U.S.–EU trade and technology council inaugural joint statement. www. whitehouse.gov/briefing-­room/statements-­releases/2021/09/29/u-­s-­eu-­trade-­and-­technology-­ council-­inaugural-­joint-­statement The White House (2022) Fact sheet: United States and European commission announce trans-atlantic data privacy framework. https://www.whitehouse.gov/briefing-­room/ statements-­releases/2022/03/25/fact-­sheet-­united-­states-­and-­european-­commission-­announce-­ trans-­atlantic-­data-­privacy-­framework Trans Atlantic Consumer Dialogue (TACD) (2021) Lack of transparency could thwart the strong consumer safeguards that must be the goal of EU-US cooperation dialogues. TACD. https:// tacd.org/eu-­us-­organisations-­transparency-­ttc-­pr United States Trade Representative (2010) Report on the WTO Appellate body of the World Trade Organization. https://ustr.gov/sites/default/files/Report_on_the_Appellate_Body_of_the_ World_Trade_Organization.pdf US Chamber of Commerce (2021) Transatlantic data flows: moving data with confidence. https:// www.uschamber.com/technology/data-­privacy/transatlantic-­dataflows Van Der Loo G, Vandenbussche T, Aktoudianakis A (2021) The EU-US trade and technology council: mapping the challenges and opportunities for transatlantic cooperation on trade, climate, and digital. Egmont Paper 113:1–5 Vogel D (2012) The politics of precaution: regulating health, safety, and environmental risks in Europe and the United States. Princeton University Press, Princeton Zalan E (2021) EU and US reach steel truce in effort to reset relations. EU Observer. https:// euobserver.com/world/151870?utm_source=euobs&utm_medium=email

Part III

Foundational Rights and Procedures

Chapter 11

TRIPS+ IP Privileges for Pharmaceuticals and Agricultural Chemicals: EU and US Treaties Hazel V. J. Moir

Contents 11.1  I ntroduction 11.2  Competing Interests in Patent Policy: Searching for the Right Balance 11.2.1  TRIPS and the New Patent Privileges 11.2.2  Cost to Consumers Versus Benefit to Patent Holders 11.2.3  TRIPS Articles Favouring Consumers 11.3  TRIPS and TRIPS+ Patent Privileges for Pharmaceuticals 11.3.1  The US Patent Agenda 11.3.2  Very Low Standards for Granting Patents 11.3.3  The EU Patent Agenda 11.3.4  Term Extensions for Marketing Approval Delays 11.3.5  Extending Patent Duration Through WTO DSBs 11.4  Data ‘Protection’ for Pharmaceuticals and Agricultural Chemicals 11.4.1  The Purpose and Ethics of Marketing Approval for Medicines 11.4.2  The Design of Clinical Trials and Access to the Data 11.4.3  Data Protection Trade Agenda 11.4.4  Agricultural Chemicals and Protections for Animals 11.5  Should IP Chapters Remain in Trade Agreements? References

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Abstract  Intellectual property (IP) privileges are one of the most contentious areas of international economic regulation. This chapter uses the example of pharmaceuticals to consider the question of balance in patent policy and how this is impacted by international trade negotiations. It reviews key provisions in TRIPS from the contrasting perspectives of inventors of new medicines and users of such medicines. A critical issue identified is the breadth of privilege granted to patent holders and the H. V. J. Moir (*) ANU Centre for European Studies, The Australian National University, Canberra, ACT, Australia e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 O. Quirico, K. Kwapisz Williams (eds.), The European Union and the Evolving Architectures of International Economic Agreements, https://doi.org/10.1007/978-981-99-2329-8_11

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removal of prior social safeguards in TRIPS. Evidence from recent trade treaties and their negotiation shows how the interests of patent holders often prevail against the interests of patients and society. Closely related to patent privileges for pharmaceuticals are privileges regarding the use of clinical trial data to obtain marketing approval for medicines. Such privileges are also provided in TRIPS, and subsequent treaties, for agricultural chemicals. An interesting aspect emerging from the comparison of data protection privileges for these two product categories is that treaties embody protections to protect unnecessary testing on animals but not on humans. Keywords  IP privileges · TRIPs agreement · Pharmaceuticals · Agricultural chemicals

11.1 Introduction Intellectual property (‘IP’) provisions have become a standard feature of trade treaties since the conclusion of the Trade Related Intellectual Property Agreement (‘TRIPS’), which formed part of the 1994 Marrakesh Agreement, concluding the Uruguay Round of trade negotiations.1 The inclusion of TRIPS in the Uruguay package was hotly contested (Drahos 2002; Sell 2003), not least because IP provisions generally provide for monopolies and restraints on trade, and thus are the antithesis of free trade. Medicines were a key issue in this contest—before TRIPS most nations did not allow patents to be granted on pharmaceutical products (Shadlen et al. 2020), yet TRIPS required the grant of such patents as a condition of membership of the World Trade Organization (‘WTO’). While pharmaceutical companies are heavy users of the trademark system, aiming to retain consumer loyalty well beyond the expiry of their patents (Dutfield 2021), this chapter looks only at patent policy and data protection policy. These two types of policies form the core of the monopoly privilege granted for the invention of new medicines. The chapter begins with a consideration of the different interests which need to be balanced if patent policy is to meet all societal needs—both incentives for the creation of new medicines and the need to provide good health care to all at affordable prices (Sect. 11.2). There is insufficient room here to discuss how balancing between these competing interests has been handled at different times and in different countries, but for a useful summary see Chang 2001. The discussion of balance in Sect. 11.2 identifies the new privileges for patent holders created in the TRIPS Agreement. For the pharmaceutical industry there are several critical policy settings that strengthen the value of pharmaceutical patents. These are drawn out in Sect. 11.3 together with the agenda for achieving TRIPS+ patent policy. TRIPS+ patent policy involves more extensive protections for patent

1  Available at https://www.wto.org/english/docs_e/legal_e/04-wto_e.htm (‘Marrakesh Agreement’) and https://www.wto.org/english/tratop_e/trips_e/trips_e.htm (‘TRIPS Agreement’).

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holders than in TRIPS and/or restrictions to flexibilities provided in TRIPS. Despite the many new privileges for patent holders embodied in TRIPS, pharmaceutical exporting nations have sought yet further privileges through trade negotiations. They have also sought to limit the use of TRIPS flexibilities, both through trade negotiations and WTO disputes. For extensions to both patent privileges and data protection, the discussion focuses on treaties involving the European Union (‘EU’) and the United States of America (‘USA’). The EU treaties assessed are eight concluded post-2006 treaties,2 as well as the proposed text for treaty currently being negotiated with Australia.3 The US treaties considered are the 2004 Australia-United States Free Trade Agreement (‘AUSFTA’) and the 2015 final text of the proposed Trans-Pacific Partnership Agreement (‘TPPA’).4 Attention is turned to the newer IP privilege of exclusive rights over clinical trial data in Sect. 11.4. Here, different questions of balance arise. The regulatory requirement for official authorisation before a new medicine can be marketed arises directly from the need to protect the public from medicines that are either dangerous or ineffective. Marketing approval authorities require data to demonstrate that these two conditions are met. Whether such data are public (they are required by public authorities for public purposes) or private (as argued by pharmaceutical companies) is a moot question. Limitations on the use of such data for approving generic medicines raise a number of questions, including whether the public is adequately protected from unnecessary clinical trials. This is where the issue of similar protection of test data for agricultural chemicals comes in. Recent treaties—including those made by the EU with Canada, Mexico and the UK and under consideration with Australia—require that such protection include ‘rules to avoid duplicative testing on vertebrate animals’. There are no provisions to avoid duplicative testing on humans. The chapter concludes with a consideration of whether IP chapters should continue to feature in treaties that are not multi-lateral. Bi-lateral and regional treaties privilege certain interests and the result has been the ratcheting up of patent and data protection privileges, particularly as these affect pharmaceuticals (Drahos 2001; Sell 2010). Within nations, there are fora to ensure that competing interests are at least considered before particular rules are created. In international trade negotiations, however, domestic and consumer interests are often swept aside in the

 The EU-South Korea Free Trade Agreement; the EU-Canada Comprehensive Economic and Trade Agreement (‘CETA’); the EU-Singapore Free Trade Agreement and Investment Protection Agreement; the EU-Vietnam Trade Agreement and Investment Protection Agreement; the EU-Japan Economic Partnership Agreement; the EU-United Kingdom (‘UK’) Trade and Cooperation Agreement; the EU-Mexico Trade Agreement and the EU-New Zealand Trade Agreement. 3  https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/negotiations-andagreements_en 4  This treaty never came into effect, being replaced by the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (‘CPTPP’) after the US withdrawal. But the TPPA text was dominated by the USA and the final agreed text shows this influence. As does the dropping of certain IP provisions in the CPTPP. 2

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single-­minded focus on gaining export advantages for specific industries. Consumer interests are not well represented at trade negotiation tables.

11.2 Competing Interests in Patent Policy: Searching for the Right Balance Society can benefit considerably from the invention of new products and processes. In respect of new processes to make goods and services there is a resultant gain in productivity, which benefits society as a whole. In respect of new products, a clear example is genuinely new medicines which effectively improve the treatment of diseases, a valuable social benefit. What is less clear is whether patent policy is either efficient or effective in encouraging the development and commercialisation of such new products and processes. To determine this one must delve further into just how patent policy is designed, and just when a monopoly grant is needed to ensure that a specific invention is commercialised. It is not well known, for example, just how very low the inventiveness standard for grant of a patent really is. Economic texts often suggest that new inventions can be swiftly and cheaply copied, arguing on this theoretical basis that patent monopolies are essential. This ignores the realities of tooling up production to imitate a patented invention. Such imitation costs are real and can be significant, and they delay the entry of competing products through normal market mechanisms (Levin et al. 1987; Mansfield et al. 1981). Where the delay allows inventors to recoup their costs and to make a profit on their inventions, there is no need for any monopoly. Given this, the first condition for patent policy to be of value to a society is that patents should be granted only when normal market mechanisms will not provide sufficient time for the inventors to recoup their costs and make a profit. This condition can be proxied by variables such as the cost of development and commercialisation and the relative ease and cost of imitation.5 Another good proxy is how inventive it is—the more inventive (that is, different from what we already know), the more likely that high development and commercialisation costs will be incurred. Any history of innovation and invention is replete with examples where patents were not a key part of the story of technological progress. Pray and colleagues show that, for sorghum and pearl millet development, in a system where patent protection was not available, significant returns were achieved by all parties—a 17% return to the investor, and significant benefits to both farmers and distributors (Pray et  al. 1991). Given that agricultural products are often held up as a quintessential field where patents are needed, this example presents a significant challenge to the argument that patents are essential. Similarly, Boldrin and Levine, in their analysis of

 Note, however, that imitation often includes improvements, so limitations on imitation need to be carefully managed or such improvements can be lost to society. 5

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patents and the pharmaceutical industry, identify 46 top selling pharmaceuticals and find that patents had little to do with the development of 20 of these (Boldrin and Levine 2008, Chap. 9). Further, patent standards were very low during the industrialisation of Europe and the USA (Chang 2001). A second condition for patent policy to be of benefit to society is that the new product or process must be socially valuable—in particular, that there should be positive ‘spillover benefits’. Spillover benefits are those benefits which third parties gain from the action of another party (here, the inventor). In the field of patent policy, most such benefits take the form of technology diffusion. A patent system that simply encouraged new ways of killing people, or new ways of avoiding tax (both have been patented), would be of little use to society. Traditionally, the economic perspective on the social benefits of patents focuses on the development of new technology and its spread through society. Here, however, is the challenge. The central mechanism of patent policy—a 20-year monopoly—is directly designed to significantly delay the new technology from spreading through society. So there is a massive conflict at the heart of patent policy. This is why balance between the needs of inventors and users (society) is so important. Historically patent policy resolved this internal policy conflict in two ways. Firstly, the duration of a patent monopoly was much shorter—around 14 years. Secondly, there was a requirement that the patented invention be produced in the country granting the patent. This meant that workers absorbed both the new technology and its associated know-how allowing the new knowledge to diffuse through the economy and society.

11.2.1 TRIPS and the New Patent Privileges If patent policy were designed to focus only on inventions that genuinely needed a patent privilege in order to be commercialised, and provided such privileges only where there were positive spillover benefits to society, then it would be both efficient and effective. Because TRIPS prevents the local working requirement, the likelihood of spillover benefits from patents granted to overseas producers is minimal. This means that, in many countries, the grant of the patent no longer brings the benefits of technology diffusion. TRIPS also requires a minimum 20-year duration for patent monopolies—a massive ratcheting up for most WTO members compared to their previous patent policies. These two rule changes alone significantly reduce the likelihood that TRIPS patent policy is welfare-enhancing at the national level. The new privileges for patent holders created in TRIPS were: • a significant increase in the duration of the patent monopoly period (article 33); • a requirement that patents be provided in all fields of technology, together with very limited bases for excluding particular things from patentability (article 27); • removal of the requirement for local working for the patent to remain valid (article 27);

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• very broad patent rights—‘making, using, offering for sale, selling, or importing’ (article 28), not modified to take account of removing the local working requirement; and • reversal of the burden of proof (presumption of innocence) in infringement suits for process patents (article 34). Given that the argument for free trade agreements is based on the importance of competition in promoting healthy economies, it is fascinating that, for over 25 years, economists and trade negotiators have largely accepted the ‘need’ for patent monopolies. Such acceptance does not mean that patents make good or efficient policy. Indeed, there are substantial studies showing that patents operate largely like tariffs—they raise the price of goods for consumers by considerably more than the benefit provided to the producers (discussed further below). It would be far cheaper to simply subsidise patent holders than it is to grant them 20-year monopolies, just as it is far more efficient to subsidise producers than to impose tariffs. Writing during the Uruguay Round negotiations, Deardorff demonstrated the lack of any sound basis for global patent policy, concluding that ‘[p]atents are therefore an imperfect method of fostering invention, both because they lead to monopoly distortions of consumer choice, and because they fail to foster all worthwhile inventions’ (Deardorff 1992, p. 38). It is interesting how often such basic propositions need to be restated—Penrose’s seminal work on patents, published in 1951, indicates clearly that technology-importing countries lose from a strong patent system (Penrose 1951). It is not even clear that a technology-exporting country such as the USA benefits from current patent policy (Maskus 2006).6 Certainly the now high-income countries provided only relatively weak patent protection until the mid-twentieth century (Chang 2001).

11.2.2 Cost to Consumers Versus Benefit to Patent Holders Until TRIPS, most countries excluded pharmaceutical products from patentability (Shadlen et al. 2020). Several recent empirical studies look at the social costs of granting patents for pharmaceutical products. All demonstrate that pharmaceutical

 Fritz Machlup’s 1958 evidence to the US Congress included the famous conclusion: ‘[i]f one does not know whether a system as a whole (in contrast to certain features of it) is good or bad, the safest “policy conclusion” is to “muddle through”—either with it, if one has long lived with it, or without it, if one has lived without it. If we did not have a patent system, it would be impossible, on the basis of our present knowledge of its economic consequences, to recommend instituting one. But since we have had a patent system for a long time, it would be irresponsible, on the basis of our present knowledge, to recommend abolishing it. This last statement refers to a country such as the United States of America—not to a small country and not to a predominantly nonindustrial country, where a different weight of argument might well suggest another conclusion.’ (Machlup 1958, p. 80). Usually this quotation is given without the context-providing first sentence or the equally important conclusion of the last sentence. 6

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product patents operate very like tariffs. They lead to consumer losses that are at least six to seven times greater than the corresponding gains to producers. It would be far more efficient to subsidise pharmaceutical companies rather than to grant product patents. Using Indian data on quinolones, Chaudhuri et  al. (2006) estimate the annual consumer welfare loss as US$144–450 million compared to a producer gain of US$20–53 million. Using data on 43 medicines in the Indian market, Dutta estimates an average consumer welfare loss of US$9 million compared to patent owners’ gain of US$1.4 million per medicine (Dutta 2011). These two studies suggest that the benefit to producers from these monopolies is only some 11% to 15% of the cost to consumers and health systems. There are, of course, welfare gains from the introduction of genuine and effective new medicines—but this depends on the enhanced therapeutic effect (Bokhari and Fournier 2013) and the price (Chatterjee et al. 2015). Using US data on generic entries for hypertension drugs from 1987 to 2008, Branstetter et al. (2011) estimate consumer gains from earlier generic entry at US$92 billion compared to producer losses of some US$114 million—a massive difference.

11.2.3 TRIPS Articles Favouring Consumers There are two TRIPS articles that are drafted to protect the needs of society or users of new technology. Article 7 (objectives) provides a statement that IP rights should be designed to contribute ‘to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and economic welfare, and to a balance of rights and obligations’. Article 8 (principles) allows countries to adopt measures to protect public health and other vital public interests and to prevent the abuse of IP by rights holders. Article 8 did not, however, prevent a major international dispute over the issue of exporting pharmaceuticals to meet the needs of countries which had issued compulsory licenses for specific high need medicines, but which had no domestic production capability. This led to the 2001 WTO Doha Declaration on the TRIPS Agreement and Public Health (‘Doha Declaration’) reaffirming rights to make full use of TRIPS flexibilities to protect public health and maximise access to medicines. While the sentiments in that Declaration sound good, the specifics of how the Doha Declaration can be implemented are so tortuous that to date there is only one case of production for export of a medicine with a compulsory licence (Beall and Kuhn 2012; Drahos 2007; Sell 2007). Frankel (2000) argues that neither article 7 nor article 8 has been used by WTO Dispute Settlement Bodies (‘DSBs’) to determine disputes over TRIPS provisions. TRIPS article 30 allows governments to make limited exceptions to the broad article 28 privileges conferred on patent holders. This article has been very narrowly interpreted by DSBs. As discussed below (Sect. 11.3) a Canadian provision to allow generic companies to start preparing for market entry (but not yet actually entering

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the market) up to 6 months before a patent expired, was considered beyond the exceptions provided in article 28. Clearly the TRIPS Agreement lacks balance—it massively preferences privileges for patent holders and has no offsets for any of the new privileges. For example, the removal of the local working requirement should have been accompanied by a narrowing of the breadth of the article 28 privileges. Further, the increase in the scope of patentable subject matter (article 27) should have been accompanied by a re-introduction of a requirement of genuine inventiveness—in the normal meaning of the word—before patent grant. Despite the imposition of this unbalanced patent policy on all WTO members, pharmaceutical-exporting nations have sought yet further privileges for patent holders through trade negotiations, and have often been successful in this endeavour. There have been efforts to achieve fora that are more balanced—for example, the 2016 United Nations (‘UN’) Secretary-General’s High-Level Panel on Access to Medicines7 – but these have as yet had little effect in terms of achieving more balanced patent and data protection policy.

11.3 TRIPS and TRIPS+ Patent Privileges for Pharmaceuticals All of the new TRIPS patent privileges specifically benefit the pharmaceutical industry. The main pharmaceutical exporting nations are key players asserting an agenda of furthering monopoly privileges and limiting TRIPS’s few flexibilities. Constraints on TRIPS flexibilities have focused on compulsory licensing and parallel importing. Extensions in monopoly privileges focus on patentable subject matter; delays to generic entry through patent term extensions and data protection privileges; and patenting standards. Data protection issues are discussed separately in Sect. 11.4, below. The discussion in this section focuses on extensions to patent privileges.8 The USA has been particularly active in working to extend monopoly privileges for patent holders. After concluding treaties with relatively smaller countries—Jordan, Singapore, Chile—the US moved on to the stronger and more mature Australian economy in 2004.9 The US IP Advisory Committee on the AUSFTA—the Industry Functional Advisory Committee on Intellectual Property Rights for Trade Policy Matters—considered that it would now ‘prove much easier to convince future FTA countries that strong intellectual property protection is in the interest of all countries

 Available at https://www.unsgaccessmeds.org  The agenda to limit use of TRIPS flexibilities is well covered by Tenni and colleagues (Tenni et al. 2022). 9  See Correa (2004) for a perspective on why small economies are chosen for bilateral treaties extending patent privileges. 7 8

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regardless of their economic circumstances’ (IFAC 2004, 4). The text of the IFAC-3 report enumerates the many clarifications and improvements of TRIPS standards gained in the treaty, such as broad availability of patents, including on plants and animals and for uses and methods of using known products; prohibition of international exhaustion of patent rights; restrictions on how clinical trial data can be used for marketing approval; adherence to the Patent Cooperation Treaty; restrictions to the grounds for revoking a patent; conditions for grant of compulsory licences; public disclosures and grace periods (IFAC 2004, 11–13).

11.3.1 The US Patent Agenda The most recent text which illustrates the US patent agenda is the 2015 final text of the proposed TPPA.10 The text was effectively agreed between all 12 negotiating countries in October 2015, but the USA withdrew in January 2017 following a change in government. The final text strongly reflects the US patent agenda, and the role of the pharmaceutical industry in developing this agenda (Gleeson et al. 2017). The remaining 11 countries changed parts of the agreed treaty, particularly the much-contested IP chapter, before concluding the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (‘CPTPP’). The TPPA text makes it possible to see behind the US patent agenda. The report on the final draft TPPA by the US Industry Trade Advisory Committee on IP Rights is interesting reading. Inter alia, it indicates that some industry representatives dispute TRIPS articles 7 and 8—the major articles which provide any balance in the TRIPS Agreement.11 ITAC-15 commended the requirement for patentability of new uses of known products, new methods of using known products or new processes of using known products as well as for plant innovations (TPPA Article 18.37).12  Available at https://ustr.gov/trade-agreements/free-trade-agreements/trans-pacific-partnership/ tpp-full-text 11  ‘ITAC-15 notes that the TPP Agreement includes Objectives and Principles drawn from the General Principles of the WTO’s TRIPS Agreement [articles 7 and 8]. … While some members endorsed them without reservation, believing that they introduced a useful and productive sense of balance, there were significant concerns expressed within ITAC-15 that these provisions reflected scepticism of the very foundational role that intellectual property plays in promoting innovation in technology and creativity, in promoting dissemination of technology, knowledge, and creative works, in promoting public health through investments in new and better medical technologies, advancing the interests of users and consumers who benefit from the innovation and creativity and diversity of distribution models made possible by strong intellectual property systems.’ (ITAC-15 2015, 5). There is little empirical evidence to support any of these claims as to the role of IP in promoting innovation and a large literature showing such claims are simply wrong. 12  The specification that patents be available for new uses, methods of using and processes of using known products was suspended in the CPTPP, as was patentability for inventions derived from plants. Other IP articles were also suspended (Upreti 2018). For a view from government, see the Canadian page: https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/cptpp-ptpgp/sectors-secteurs/ip-pi.aspx?lang=eng. An official list of suspended 10

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Subject, of course, to normal patent standards of novelty, inventive step and industrial application. A moment’s reflection indicates that new uses of known products are likely to be much less inventive than actual new products.

11.3.2 Very Low Standards for Granting Patents The very low inventiveness standard for grant of a patent is a concern for users of patents but not for patent applicants or patent attorneys. The TPPA – for the first time in an international trade agreement – mandates the use of a very low inventiveness standard (TPPA, article 18(37), footnote 30): In determinations regarding inventive step, or non-obviousness, each Party shall consider whether the claimed invention would have been obvious to a person skilled, or having ordinary skill in the art, having regard to the prior art.

Unfortunately, the text mandating a low inventiveness standard continued through to the final CPTPP. These very low standards are critical in allowing the grant of multiple patents surrounding a patent for a genuinely new chemical entity (‘NCE’). Specifying a standard that requires almost no inventiveness for grant of a patent is a new departure in extending TRIPS privileges and is particularly valuable for the pharmaceutical industry. Genuinely new medicines have monopoly privileges for the 20-year patent term and from the broad article 28 privileges. Despite these benefits, pharmaceutical companies surround NCE patents with a plethora of very low standard patents, designed to substantially extend the time before the new medicine faces genuine generic competition (Moir  forthcoming). The key to this strategy of trying to extend (‘evergreen’) profits is the non-obviousness test. The non-obviousness test, and its component parts, have been criticised in a wide body of academic research about the very low standards created by this definition. Much of this research is based on US data. The shift to this low standard started with the US Patent Act of 1952, when patent attorneys successfully overrode the previous requirement for inventiveness and replaced this with a test for non-obviousness. This then triggered a worldwide spread, starting with the 1973 European Patent Convention (Kingston 2004, 451). But ‘inventive’ and ‘non-obvious’ are not synonyms, just as ‘beautiful’ and ‘not ugly’ are not synonyms. There is a vast body of things which are not obvious, yet are not inventive, just as there are many people who are neither ugly nor beautiful. So the inventiveness test for grant of a patent is not whether the alleged invention is sufficiently inventive to merit a 20-year monopoly. It is not even whether there is any new knowledge disclosed in the application. Rather, it is whether a person of limited imagination, using a very limited sub-set of existing knowledge, would have provisions is available from https://www.mfat.govt.nz/en/trade/free-trade-agreements/free-tradeagreements-in-force/cptpp/comprehensive-and-progressive-agreement-for-trans-pacificpartnership-text-and-resources

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virtually automatically done something closely similar. The consequence is that the bulk of granted patents do not reach a standard of ‘inventive’ in the normal meaning of the word (Moir 2013). All these elements of how the non-obviousness test is operationalised have been widely criticised. The doctrine of the person having ordinary skill in the art was overturned in the USA in 2006,13 but for decades the stylised judge of non-­ obviousness was not the kind of person who would have worked in a leading-edge laboratory, but a pedestrian worker of limited to no imagination. The older doctrine of a person with limited imagination continues in other jurisdictions.14 The use of highly proscribed existing knowledge has many elements, ranging from definition of the breadth of the technology field (‘art’) to the definition of ‘obvious’ under patent law.15 In regard to relevant technological knowledge, Bagley (2001) demonstrates considerable narrowing of what is considered relevant technology in the USA. In Australia the High Court determined, in 2007, that it was not reasonable to use knowledge from storeroom locks in determining the inventiveness of a rim-­ mounted lock.16 When closely relevant knowledge is excluded, it becomes easier to see why the meaning of ‘obvious’ in patent law departs so strongly from its ordinary meaning.

11.3.3 The EU Patent Agenda Given the strong US patent agenda in trade negotiations, it has been unnecessary for the EU to seek similar extensions in the strength of patent holder privileges. Instead, the EU patent agenda in trade negotiations has focused on term extensions to offset delayed marketing approval and on data protection privileges. The EU has, however, also used the WTO dispute mechanism to extend the reach of the article 28 patent privileges. This is discussed below.

 KSR Int’l Co v Teleflex Inc, U.S. 1028 US Supreme Court, 550 U.S. 398 (2007). There is a large academic literature on the various elements of the non-obviousness test in the USA and on the impact of the KSR decision. 14  For example in Australia the skilled worker must be ‘led directly as a matter of course to try a particular approach with a reasonable expectation of success’ if an ‘invention’ is to be seen as obvious (IP Australia 2009, 12). Even IP Australia considered this test too low and recommended adoption of the marginally higher European question ‘would the invention have been obvious to try with a reasonable expectation of success?’—a test endorsed by the US Supreme Court in the 2007 KSR decision (see footnote 13). 15  Expert evidence in patent infringement suits in Australia has been rejected on the grounds that the expert witnesses did not understand the meaning of the word ‘obvious’ in patent law (Welcome Real-Time SA v. Catuity Inc, [2001] FCA 445 (17 May 2001)). 16  Lockwood Security Products Pty Ltd v Doric Products Pty Ltd (№ 2) [2007] HCA 21. 13

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11.3.4 Term Extensions for Marketing Approval Delays In trade negotiations the EU has pushed strongly for patent term extensions where marketing approval for new medicines has been delayed.17 It should be noted that these patent term extensions are only to offset unusual delays in marketing approval for the associated product. In most countries there are complex formulas for determining this. Some have embedded in them an explicit standard as to the actual monopoly period provided to a medicine—the period between marketing approval and the end of the patent life.18 In the USA this is 14 years; in Australia, it is 15 (Harris et al. 2013, 214). The major issue in this trade agenda is the scope of what medicines might be granted such term extensions. In many countries such extensions are limited to NCEs—that is, they target genuinely new medicines. But pharmaceutical exporting nations would like the scope to be extended. The USA, Europe and Japan all allow such term extensions not only for NCEs, but also for new uses of medicines and methods for their manufacture (Harris et al. 2013, 93). The EU has achieved very broad definitions of what kinds of patents may get such term extensions, for example in their treaty with South Korea.19 Their Singapore treaty (article 10(31)) notes that the EU defines pharmaceutical products as medicinal products, for purposes of term extensions, while Singapore undertakes to include ‘substances for diagnosis or testing’—quite a significant extension beyond NCEs. The EU-Japan treaty does not specifically define the scope of term extensions in Japan (article 14(35)). The scope of term extensions is also not specifically defined in the EU-Vietnam treaty, but such extensions apply only to the ‘first marketing authorisation’ (article 8(3)).20 The EU-Mexico treaty provides for term extensions for ‘pharmaceutical products, including biologic products’ (article X(46)), allowing

 The US also pursues term extensions to offset marketing delays. AUSFTA requires parties to adjust the patent term to compensate for unreasonable delays in marketing approval (Article 17.9 (8b)). Interestingly the final TPPA text had a single article on term extensions and this dealt only with minimising marketing approval delays and defining what constitutes a delay (Article 18.46). 18  Patent applications are lodged early, and commercial development takes place following this. So the effective monopoly for all patented products is less than 20 years. Simple, very uninventive, products can be launched quickly, but markets move on and for most such products the patent will be allowed to lapse well before the end of the possible 20 years. More complex products, such as genuinely new medicines, take much longer to develop and the effective monopoly period for such products is around 14–16 years. 19  ‘Pharmaceutical products means any substance or combination of substances which may be administered to human beings with a view to making a medical diagnosis, to treating or preventing diseases or to restoring, correcting or modifying physiological functions or structures. Pharmaceutical products include, for example, chemical drugs, biologics/ biologicals (vaccines, (anti)toxins, blood, blood components, blood derived products), herbal drugs, radiopharmaceuticals, recombinant products, gene therapy products, cell therapy products and tissue engineered products’ (EU-Korea treaty Annex 2-D, Article 6(1)). 20  This could be variously interpreted as a first authorisation of a genuinely new medicine or as a first authorisation for any specific variant of any medicine. 17

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this to take either the form of ‘an additional sui generis protection’ or an extension to patent life. CETA is the only other text where term extensions are discussed in terms of a sui generis system. The EU-UK treaty provision covers ‘medicinal products and plant protection products’ in a single article (251). In other treaties, the EU has gained term extensions only for a narrower range of products, for example in their agreement with Canada, where only ‘basic patents’— ‘the active ingredient or combination of active ingredients of a pharmaceutical product’—are covered (CETA article 20(27)). The text does not precisely limit term extensions to NCEs, but it does at least exclude particular uses and methods of manufacture. It does however open the door to term extensions for combination products—for example, clopidogrel and aspirin,21 which are often prescribed to treat cardiovascular disease as the two medicines work in complementary ways. Patent offices in many countries have granted new patents for combining these two known compositions, even though prescribing practices suggest such a combination is obvious, in the normal meaning of the word ‘obvious’. The proposed EU treaty with Australia also defines ‘medicinal products protected by a patent’ as falling within the scope for term extensions. Current Australian legislation effectively limits the grant of patent term extensions to patents with claims to active ingredients or new formulations of a known active ingredient. The duration of a patent monopoly is important to the pharmaceutical industry as, when generics enter the market after patent expiry, prices can fall significantly.22 As soon as the patent ends competitors can enter the market. Thanks to a WTO DSB, competitors are not allowed to enter the market on the day following patent expiry.

11.3.5 Extending Patent Duration Through WTO DSBs In 1997 the EU commenced a WTO complaint about Canadian legislation allowing pharmaceutical manufacturers to gear up production so that they could enter the market with generic products the day after the relevant patent expired (case DS114). It is important to note that Good Manufacturing Practice regulations for pharmaceuticals not only require normal engineering timelines for gearing up, but also require specific regulatory approval of the specific manufacturing conditions.23 So delays between being allowed to commence preparing for production and actually entering the market can be considerable.  Aspirin per se was first successfully synthesized in 1899 so is outside the patent system.  Though there is US evidence demonstrating a reduction in competition between generics for many products (see OECD 2018, 29). 23  For the USA, see https://www.fda.gov/drugs/pharmaceutical-quality-resources/current-goodmanufacturing-practice-cgmp-regulations and for Australia see https://www.tga.gov.au/good-manufacturing-practice-overview. Such regulations are standard and are usually administered by the marketing approval authority. 21 22

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The EU alleged, however, that such preparations to enter the market at the first legal opportunity breached the broad article 28 privilege of making and using as well as selling. The case was settled in the EU’s favour in 2000.24 The DSB clearly understood that their decision extended the effective duration of patents, but considered this was not a problem compared to protecting patent holder rights over making and using. While article 30 allows nations to provide limited exceptions to patent privileges, the DSB effectively considered that allowing competitors to be ready to enter the market the day after patent expiry was unreasonable compared to the making and using rights of patent holders. This interpretation means that the article 28 privilege is also used to prevent manufacturing for export to countries where the patent is not in force. This impacts negatively on generic manufacturers, while providing only a very indirect benefit to patent holders. In 2019, the EU amended their regulation for term extensions to offset marketing approval delays to allow manufacturers of generics or biosimilars to manufacture for export or to stockpile during the final 6 months of the relevant monopoly.25 It was able to do this because the EU’s Supplementary Protection Certificates (‘SPCs’) create a sui generis form of monopoly outside the patent system. The sui generis monopoly provisions prohibit competition with respect to the authorised medicinal product, but do not technically extend the duration of the underlying patent.26 Other countries, such as Australia and the USA provide term extensions by actually extending the term of the granted patent. This means that the broad article 28 privileges—as interpreted at the EU’s request in 2000—apply throughout the extended patent period. It would be sensible for these countries to review the way in which they implement term extensions, so that they maximise allowable competition. By shifting to an EU style sui generis system, medicines with monopoly extensions could no longer prevent reasonable making and use of the patented product. This would reduce the harm done by the longer and stronger privileges already granted to patent holders.

 Details of case DS114 are available at https://www.wto.org/english/tratop_e/dispu_e/cases_e/ ds114_e.htm 25  Regulation (EU) 2019/933 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EC) No 469/2009 (https://ec.europa.eu/growth/industry/strategy/intellectual-property/patent-protection-eu/supplementary-protection-certificates-pharmaceutical-andplant-protection-products_en). 26  SPCs can run for up to 5 years with an additional 6 months if there is a pediatric indication. 24

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11.4 Data ‘Protection’ for Pharmaceuticals and Agricultural Chemicals Protection of clinical trial data is a relatively new form of restraint on trade which emerged in the political bargaining in the USA which led to the Hatch-Waxman Act of 1984.27 That legislation authorised the use of clinical trial data for marketing approval for generic medicines (the so-called ‘Bolar exception’).28 But it also prevented such use for the first five years after marketing approval for the original medicine. In the USA, the very large pharmaceutical market means that not only are relevant patents filed there but that companies also move to market products as soon as possible. In such situations, the period of data protection for clinical trial data usually falls within the unexpired patent term. TRIPS provides for data protection (article 39), but the protection is limited to being ‘against unfair commercial use’—a phrase which is subject to wide interpretation. The article also requires that ‘considerable effort’ has gone into creating the data. TRIPS does not mention any specific period for such protection. Article 39 provides similar protection for ‘undisclosed test or other data’ required for marketing approval for agricultural chemicals. There are similar qualifications, and again the period of such ‘protection’ is unspecified. Because of the qualifications embedded in TRIPS article 39, it creates few imbalances between producers and users of inventions. Since then, however, producer interests have pushed for stronger ‘protection’ through trade negotiations—specified durations and wider scope for what kinds of pharmaceuticals can be covered (Correa 2004). Before considering these, it is useful to step back and look at the whole issue of regulating the entry of pharmaceuticals and chemicals onto markets and thus into society.

11.4.1 The Purpose and Ethics of Marketing Approval for Medicines Government regulatory agencies such as the US Food and Drug Administration (‘FDA’), the European Medicines Agency (‘EMA’) and the Australian Therapeutic Goods Administration control the entry of new medicines into their national markets. To do this they require scientific data from originator companies demonstrating the safety and efficacy of the proposed medicine. Safety is demonstrated in a  The 1984 US Drug Price Competition and Patent Term Restoration Act (Public Law 98–417) is known as the Hatch-Waxman Act. See https://tinyurl.com/UKThomsonReuters-Hatch-Waxman. There is a substantial literature on this legislation and its consequences. 28  In terms of the TRIPS article 28 patent privileges, the Bolar exception allows the use of clinical trial data—which would otherwise be seem as infringing a patent—only for purposes of gaining marketing approval. 27

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series of tests carried out in laboratories before testing on humans. Effectiveness has traditionally been done through randomised placebo-controlled trials. The ethics of data protection to delay use of clinical trial data by generic companies are highly questionable. A generic medicine is identical to the original medicine in terms of the active ingredients.29 So safety and efficacy issues have already been resolved for generics. It would be irresponsible to require generic companies to undertake new trials—this would be ethically dubious and a waste of resources. The whole argument for data protection/exclusivity has little economic merit. It is simply a bargaining loss from international trade negotiations. It is quite extraordinary, then, that the pharmaceutical industry has been able to persuade governments to delay the use of the clinical trial data for generic marketing approval. Especially as the industry has already achieved an increased 20-year patent duration through TRIPS and term extensions when there are regulatory delays through trade negotiations.

11.4.2 The Design of Clinical Trials and Access to the Data It is also questionable whether data provided to demonstrate safety and efficacy should be confidential at all (apart, of course, from not identifying trial participants). Ensuring that all clinical trial data undertaken on any medicine marketed in any country be available to medical researchers for comparative studies would substantially increase trust in the pharmaceutical development system. Some doctors and public health professionals have been advocating for years for clinical trial data to be made widely available to support broad epidemiological research into specific medicines. The pharmaceutical industry has resisted this, though the pressure has finally led some companies to start their own programs to release clinical trial data on their own terms. After years of consultation, the EMA finally introduced a broad program of access to clinical trial data in 2016, though it substantially wound this back in 2018, citing resource pressures (Doshi 2018a). The FDA resisted pressures to release clinical study reports for years before commencing a pilot program for their release in 2018 (Doshi 2018b). Another important issue in clinical trials is the basis for determining effectiveness. Traditionally randomised placebo trials were used. This is fine for genuinely new medicines—NCEs—where an alternative treatment is not available. But where a ‘new’ medicine is in fact a variant—indeed often a very close variant—of an existing medicine, the use of a placebo is highly questionable. There are now moves, for example by the FDA, to prefer trials which involve a comparator medicine rather than a placebo. Where an existing medicine is available to treat the condition, it would be unethical not to use a comparator rather than a placebo.  Dutfield also notes that ‘drug regulatory requirements for generic drugs stipulate that they not be just chemically equivalent to the original drug, but that their interaction with the human body is sufficiently equivalent that they are effectively adequate substitutes’ (Dutfield 2021, 9). 29

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The World Medical Association has a set of Ethical Principles for Medical Research Involving Human Subjects (the Helsinki Declaration).30 The various iterations of that Declaration make for interesting reading about physicians’ responsibilities in regard to research on humans. Comparing the 2008 and 2013 versions, both state that, for research studies involving humans, they should be ‘confident that the risks have been adequately assessed and can be satisfactorily managed.’ The 2008 version went on to say (at article 20, emphasis added): Physicians must immediately stop a study when the risks are found to outweigh the potential benefits or when there is conclusive proof of positive and beneficial results

But the 2013 (current) version backs off this strong ethical position (article 18, emphasis added): When the risks are found to outweigh the potential benefits or when there is conclusive proof of definitive outcomes, physicians must assess whether to continue, modify or immediately stop the study

The 2013 version, although substantially reducing physicians’ responsibilities for trials where there is ‘conclusive proof of definitive outcomes’, does have a new, lengthy, article on the use of placebos where there is another ‘best proven intervention’ (article 33). When pharmaceutical companies are trialling drugs designed to continue market monopolies by using chemical variants such as metabolites or isomers, the choice between a placebo and a comparator medicine is critical. In the case of desvenlafaxine—the metabolite of the successful anti-depressant drug venlafaxine—it is clear from the EMA’s consideration that no comparator trials of venlafaxine and desvenlafaxine were undertaken.31

11.4.3 Data Protection Trade Agenda Returning to the agenda of pharmaceutical exporting nations in pushing for stronger controls on the use of clinical trial data for approving generic and biosimilar medicines, there are three aspects to the EU’s data protection agenda: • the removal of article 39 qualifiers ‘considerable effort’ and ‘unfair commercial use’; • specifying and increasing the period during which clinical trial data cannot be used to gain marketing approval for generic medicines; and

 Available at https://www.wma.net/policies-post/wma-declaration-of-helsinki-ethical-principlesfor-medical-research-involving-human-subjects/ 31  Wyeth (now owned by Pfizer) provided nine studies to the EMA to gain marketing approval for desvenlafaxine: two included venlafaxine. The EMA notes that ‘the studies were not designed to compare the two medicines’ (Withdrawal Assessment Report EMA/H/C/932, 22 January 2009, available at http://www.ema.europa.eu/docs/en_GB/document_library/Medicine_QA/2010/01/ WC500064247.pdf). 30

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• extending the scope of patents eligible for such extended ‘protection’. The TRIPS qualifications—that creating the data required considerable effort and that the protection is against unfair commercial use—are removed in the EU-South Korea treaty (article 10(36)), the EU-Singapore treaty (article 10(33)) and the EU-Japan treaty (article 14(37)). The EU-Mexico treaty (article X(50)) includes the considerable effort qualification, but appears to drop the broad unfair commercial use qualification. In contrast, the EU-Vietnam treaty sticks closely to the TRIPS wording and includes both qualifiers. Further the text refers to Article 10bis of the Paris Convention,32 from which TRIPS article 39 derives (article 9). The final New Zealand text is also closer to the TRIPS wording, though it does not refer to ‘considerable effort’ (article 18(43)).33 The relevant term is 5  years in the EU’s treaties with each of South Korea, Singapore Vietnam and New Zealand. The EU-Singapore treaty also binds the parties to future discussions of a possible extension to the five-year duration.34 The relevant term is 6 years in the agreements made with Japan and Mexico. The EU-UK treaty uses quite different language—chiefly that it does not specify times for non-use of clinical trial data. It does require patent linkage—that is, notification to the originator company prior to any grant of generic marketing approval (article 253).35 By international standards the EU has one of the longest terms for the protection of clinical trial data. Known as ‘8 + 2 + 1’, the EU policy provides for a period of 8 years before a generic company can use clinical trial data to apply for marketing approval.36 However a further 2  years must elapse before any such marketing approval is granted. If there is a paediatric indication for the data, then a further year of market exclusivity is granted. In CETA, the EU gained a ‘6 + 2’ period of data protection (article 20.29). That is, clinical trial data cannot be used for a generic marketing application until at least 6 years after the original marketing approval and marketing authorisation for the generic cannot be provided until at least 8  years after the original marketing approval. The EU bid in the Australian treaty context, currently under negotiation, is for the full EU-style ‘8 + 2 + 1’ period for data protection. As with the EU’s treaties  Paris Convention for the Protection of Industrial Property (Stockholm Act 1967).  The discussion here focuses solely on EU treaties, but a similar agenda is evident in some US treaties—for example that with Costa Rica, El Salvador, Guatemala and Nicaragua (see Correa 2004). 34  The five year period commences from the date of the original marketing application in Singapore, but from the date of the first marketing approval in the EU (article 10.33). 35  Patent linkage provides originator companies with official advice about the upcoming entry of generic medicines. It is a controversial policy, offering substantial advantages to originator companies, and is well beyond the limits of this chapter. 36  See presentation by Sonia Ribeiro, Head of Regulatory Affairs Office, Human Medicines Evaluation Division, EMA, available at https://www.ema.europa.eu/en/documents/presentation/ presentation-data-exclusivity-market-protection-orphan-paediatric-rewards-s-ribeiro_en.pdf 32 33

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with Korea, Singapore and Japan, the proposed treaty wording drops the TRIPS qualifiers of considerable effort and unfair commercial use. It is notable that final outcome in the EU-New Zealand treaty provided for ‘at least five years’, with unfair commercial use as a key concept (article 18(43)) —the original EU proposal was for a ‘8 + 2 + 1’ period for data protection.

11.4.4 Agricultural Chemicals and Protections for Animals Turning to the question of data protection for agricultural chemicals, there are two major differences to note. Firstly, trade negotiations have generally resulted in periods of 10 years ‘data protection’ for agricultural chemicals compared to 5 years for pharmaceuticals. Secondly, in recent EU trade texts, a concern to prevent unnecessary testing on vertebrate animals emerges. This agenda is managed in the EU by the European Food Safety Authority and the European Chemicals Agency. The EU’s 2012 Biocidal Products Regulation prohibits repeating tests on vertebrates for the purposes of the regulation.37 The EU’s treaty language on data protection for agricultural chemicals contrasts sharply with that for pharmaceuticals. The wording is expansive rather than restrictive in intent and specifically requires the sharing of proprietary information, ‘so as to avoid duplicative testing on vertebrate animals’. So in CETA, negotiated between 2009 and 2017, the wording (article 20(30)) is: Each Party shall establish rules to avoid duplicative testing on vertebrate animals. Any applicant intending to perform tests and studies involving vertebrate animals should be encouraged to take the necessary measures to verify that those tests and studies have not already been performed or initiated.

Similar wording—requiring parties to take action to avoid duplicative testing on vertebrate animals—appears in the UK, Mexico and proposed Australian treaties. The Singapore treaty, negotiated between 2010 and 2019, has less prescriptive text—‘[w]here a Party provides for measures or procedures to avoid duplicative testing on vertebrate animals with respect to agricultural chemical products, that Party may …’ (article 10(34)). The New Zealand treaty also uses the word ‘may’ rather than ‘shall’, providing a lower level of commitment to avoiding duplicative testing. There is no mention of avoiding duplicative testing on vertebrate animals in the South Korean treaty (negotiated from 2007 to 2015), the Vietnam treaty (negotiated 2012–2020), or the Japan treaty (negotiated 2013–2019). Interestingly, in the EU-Japan treaty, the requirement for considerable effort in the production of the trial data is retained for agricultural chemical products though it is dropped for pharmaceuticals.  See https://echa.europa.eu/documents/10162/1276600/pg_on_bpr_12_data_sharing_en.pdf/ff14 63d2-a44a-437f-9511-088f7874c8a4 37

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The proposed text for the Australia treaty has new wording describing agricultural chemicals—referred to in the draft text as ‘plant protection products’ at the EU’s request. There are many parallels to such a shift in wording, one being calling civilians killed by armed forces ‘collateral damage’. It is not helpful for trust in government to have plain language converted to elliptical phrases designed to hide the core issues. Overall, comparing treaty texts on test data protection for pharmaceuticals and agricultural chemicals we see, from EU texts at least, a real contrast. While the term of ‘protection’ for agricultural chemicals is longer—10 years compared to five for pharmaceuticals—stronger rules ensuring generics can use existing test data are now being written into treaties for agricultural chemicals. How the balance between longer duration and greater care to avoid duplicate testing works out in terms of the timing of generic entry is a question that will need to be assessed empirically. It does however throw into relief the promotion of protection for vertebrate animals and the absence of any such care for humans. As discussed above, it has not been easy to achieve open access to clinical test data for pharmaceuticals. Indeed, it appears that the EU can budget sufficient funds to prevent duplicate testing for animals, but not to ensure maximum access to clinical trial results for humans.

11.5 Should IP Chapters Remain in Trade Agreements? If the EU and the USA were genuine in their commitment to multilateralism, they would not insist on IP chapters in trade treaties, as IP policy remains hotly contested. Clearly, however, the interests of pharmaceutical exporters trump any alleged commitment to balance, good consumer outcomes or the WTO. TRIPS significantly increased the privileges provided to patent holders, to the substantial benefit of pharmaceutical manufacturers. While TRIPS has some protections for consumers and users of technology, these have proved inadequate, even in multi-lateral fora— for example the Doha Declaration. TRIPS protections have also proved inadequate in the face of persistent bargaining by pharmaceutical exporting nations to increase the already strong privileges for patent holders and to reduce the already limited TRIPS flexibilities. There have been efforts to achieve a return to balance—for example the 2016 UN Secretary-General’s High-Level Panel on Access to Medicines. But this seems to have achieved few, if any, real changes. There are continuing efforts to achieve greater balance, for example by the South Centre and the Max Planck Institute (Ido and Tellez 2020). Nonetheless it remains the case that TRIPS, and subsequent trade negotiations, have seen the introduction of many elements which make patent policy highly favourable to pharmaceutical manufacturers at a substantial cost to consumers and taxpayers. One of the most socially damaging features is the requirement for pharmaceutical product patents, which cost consumers and taxpayers many times more than the benefit received by companies. Others are very long patent duration and the

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broad reach of patent privileges, not modified in recognition of the removal of the local working requirement. New data protection privileges are also potentially damaging for consumers. The heart of the patent mechanism is to allow producers to charge very high prices. When it comes to critical health products this means that people can die when they cannot afford the medicines they need. I had the interesting experience of meeting the negotiators of the TPPA’s IP chapter when they convened in Canberra in October 2014. I talked with as many as possible, and was struck by how little each knew about the details of how patent policy worked in their own countries. It is therefore unlikely that they had any real understanding of the implications of the IP concessions made. The public face of trade treaty negotiations is all about export gains, not about overall outcomes for a country. So it is not surprising, that countries agree to the demands of larger blocs or nations like the EU and the USA when they know so little about the consequences of what they give away. The Australian Productivity Commission has carefully considered the issue of IP chapters in bilateral and regional trade agreements (‘BRTAs’). Its conclusions remain as relevant today as they were a decade ago (Productivity Commission 2010, 264): Australia’s participation in international negotiations in relation to IP laws should focus on plurilateral or multilateral settings...Australia should not generally seek to include IP provisions in further BRTAs…any IP provisions that are proposed for a particular agreement should only be included after an economic assessment of the impacts, including on consumers, in Australia and partner countries. To safeguard against the prospect that acceptance of ‘negative sum game’ proposals, the assessment would need to find that implementing the provisions would likely generate overall net benefits for members of the agreement.

Recently Covid-19 has led to public discussion of patent policy and pharmaceuticals (see, for example, Drahos 2021). Current patent policy settings, including in the USA and the EU, do not encourage a focus on diseases in critical need of new medicines and treatments. Rather they reward the development of close substitutes to existing high-value medicines and the development of treatments for conditions that affect large numbers of people which can be medicalised, but which are not really illnesses. Beyond this, patent policy is highly inefficient—direct subsidies to producers would provide far greater public good at a very much lower cost. Any nation that wants an ethical basis to its dealings with its trading partners could start by removing IP chapters from trade treaties altogether.

References Bagley M (2001) Internet business model patents: obvious by analogy. Mich Telecommun Technol Law Review 7:253–288 Beall R, Kuhn R (2012) Trends in compulsory licensing of pharmaceuticals since the Doha declaration: a database analysis. PLoS Med 9(1):1–9 Bokhari FAS, Fournier GM (2013) Entry in the ADHD drugs market: welfare impact of generics and me-too’s. J Ind Econ 61(2):339–392

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Boldrin M, Levine DK (2008) Against intellectual monopoly. Cambridge University Press, Cambridge Branstetter LG, Chatterjee C, Higgins M (2011) Regulation and welfare: evidence from paragraph IV generic entry in the pharmaceutical industry. http://www.nber.org/papers/w17188 Chang H-J (2001) Intellectual property rights and economic development: historical lessons and emerging issues. J Hum Dev 2(2):287–309 Chatterjee C, Kubo K, Pingali V (2015) The consumer welfare implications of governmental policies and Frm strategy in Markets for Medicines. J Health Econ 44:255–273 Chaudhuri S, Goldberg P, Jia P (2006) Estimating the effects of global patent protection in pharmaceuticals: a case study of quinolones in India. Am Econ Rev 96(5):1477–1514 Correa CM (2004) Bilateralism in intellectual property: defeating the WTO system for access to medicines. Case West Reserve J Int Law 36(1):79–94 Deardorff AV (1992) Welfare effects of global patent protection. Economica, New Series 59(233, Feb):35–51 Doshi P (2018a) EMA scales back transparency initiatives because of workload. Br Med J 362:k3513. https://doi.org/10.1136/bmj.k3513 Doshi P (2018b) FDA to begin releasing clinical study reports in pilot Programme. Br Med J 360. https://doi.org/10.1136/bmj.k294 Drahos P (2001) BITs and BIPs bilateralism in intellectual property. J World Intellect Prop 4(6):791–808 Drahos P (2002) Information feudalism: who owns the knowledge economy. Earthscan, London Drahos P (2007) Four lessons for developing countries from the trade negotiations over access to medicines. Liverpool Law Rev 28(1):11–39 Drahos P (2021) Public lies and public goods: ten lessons from when patents and pandemics meet. European University Institute Working Papers, Law 2021/5, Florence Dutfield G (2021) Not just patents and data exclusivity: the role of trademarks in pharmaceutical life cycle management strategy – where lies the public interest? In: Ragavan S, Vanni A (eds) Intellectual property law and the right to health: a history of TRIPs and access to medicine. Routledge, London Dutta A (2011) From free entry to patent protection: welfare implications for the Indian pharmaceutical industry. Rev Econ Stat 93(1):160–178 Frankel S (2000) Some consequences of misinterpreting the TRIPS agreement. WIPO J 1(1):35–42 Gleeson DH, Neuwelt PM, Monasterio E, Lopert R (2017) How the transnational pharmaceutical industry pursues its interests through international trade and investment agreements: a case study of the trans Pacific partnership. In: De Jonge A, Tomasic R (eds) Research handbook on transnational corporations. Edward Elgar, Northampton, MA Harris T, Nicol D, Gruen N (2013) Pharmaceutical patents review report. https://www.ipaustralia. gov.au/sites/g/files/net856/f/2013-­05-­27_ppr_final_report.pdf Ido VHP, Tellez VM (2020) The South Centre-max Planck global forum on IP, innovation and access to medicines. GRUR Int 69(11):1130–1140 IFAC (2004) The U.S.  – Australia Free Trade Agreement (FTA): the intellectual property provisions. http://www.ustr.gov/archive/assets/Trade_Agreements/Bilateral/Australia_FTA/ Reports/asset_upload_file813_3398.pdf IP Australia (2009) Getting the balance right: toward a stronger and more efficient ip rights system. http://web.archive.org/web/20120324111252. ITAC-15 (2015) The trans-pacific partnership agreement. https://ustr.gov/sites/default/files/ ITAC-­15-­Intellectual-­Property.pdf Kingston W (2004) Why harmonization is a Trojan horse. Eur Intellect Prop Rev 26(10):447–460 Levin RC, Klevorick AK, Nelson RR, Winter SG (1987) Appropriating the returns from industrial research and development. Brookings Pap Econ Act Special Issue on Microecon 1987(3):783–831 Machlup F (1958) An economic review of the patent system. Study No.15 of the U.S.  Senate Subcommittee on Patents, Trademarks and Copyrights, Washington, D.C.

11  TRIPS+ IP Privileges for Pharmaceuticals and Agricultural Chemicals: EU and US… 207 Mansfield E, Schwartz M, Wagner S (1981) Imitation costs and patents: an empirical study. Econ J 91(364):907–918 Maskus KE (2006) Reforming U.S. patent policy getting the incentives right. Innov Technol Gov Glob 1(4):127–153 Moir HVJ (2013) Fabricating invention: the patent malfunction of Australian patent law. Agenda 20(2):21–38 Moir HVJ (forthcoming) Pharmaceutical patents and evergreening. In: Bonadio E, Goold P (eds) The Cambridge handbook of investment-driven intellectual property. Cambridge University Press, Cambridge OECD (2018) Excessive prices in pharmaceutical markets. Background note (DAF/COMP(2018)12 (2018)) by the Competition Committee Secretariat, Directorate for Financial and Enterprise Affairs. https://www.oecd.org/daf/competition/excessive-­prices-­in-­pharmaceutical-­ markets-­2018.pdf Penrose ET (1951) The economics of the international patent system. The Johns Hopkins Press, Baltimore Pray CE, Ribeiro S, Mueller RAE, Rao PP (1991) Private research and public benefit: the private seed industry for sorghum and pearl millet in India. Res Policy 20(4):315–324 Productivity Commission (2010) Bilateral and regional trade agreements. http://www.pc.gov.au/ inquiries/completed/trade-­agreements/report Sell SK (2003) Private power, public law: the globalization of intellectual property rights. Cambridge University Press, Cambridge Sell SK (2007) TRIPS-plus free trade agreements and access to medicines. Liverpool Law Rev 28(1):41–75 Sell SK (2010) The global ip upward ratchet, anti-counterfeiting and piracy enforcement efforts: the state of play. In: PIJIP research paper no. 15. American University Washington College of Law Shadlen KC, Sampat BN, Kapczynski A (2020) Patents, trade and medicines: past, present and future. Rev Int Polit Econ 27(1):75–97 Tenni B, Moir HVJ, Towsend B, Keegel T, Gleeson D (2022) What is the impact of intellectual property rules on access to medicines? A systematic review. Glob Health 18(40):40 Upreti PN (2018) From TPP to CPTPP: why intellectual property matters. J Intellect Prop Law Pract 13(2):100–101

Chapter 12

Compulsory Licences During the COVID-­19 Pandemic: A European and International Perspective Enrico Bonadio and Magali Contardi

Contents 12.1  I ntroduction 12.2  The International Legal Framework 12.3  Compulsory Licences During the COVID Pandemic 12.3.1  Israel 12.3.2  Hungary 12.3.3  Russia 12.3.4  Bolivia and Canada 12.3.5  India 12.4  COVID Triggered Amendments of National Laws 12.5  Conclusion References

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Abstract  The chapter explores the expansion of compulsory licensing during the Covid crisis. Arguably, such an approach has not been effective within and outside the EU, especially because flexibility may prove insufficient to transfer underlying technology. Despite these drawbacks, the availability of compulsory licences may have some merit, as keeping pressure on pharmaceutical companies high may convince recalcitrant patent owners to lower prices or grant generics’ producers voluntary licences, with further implications for bilateral and multilateral trade agreements that the European Union is signing with different countries.

E. Bonadio (*) Reader in Intellectual Property Law, City, University of London, London, UK e-mail: [email protected] M. Contardi Sant’Anna School of Advanced Studies of Pisa, Pisa, Italy University of Alicante, Alicante, Spain © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 O. Quirico, K. Kwapisz Williams (eds.), The European Union and the Evolving Architectures of International Economic Agreements, https://doi.org/10.1007/978-981-99-2329-8_12

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Keywords  Patents · Compulsory licensing · COVID-19

12.1 Introduction At the time of finalising this chapter, the world has been battling the coronavirus pandemic for 3 years. Within this context, intellectual property (‘IP’) rights, especially patents, have proven to be both the good and evil for an effective COVID-19 response. On the one hand, the unprecedentedly rapid development and availability of COVID vaccines, and related medical technologies, have certainly shown the importance of a robust IP environment—the possibility to rely on strong IP regimes has indeed incentivised the development of anti-COVID technologies which have helped, and still help, face an unprecedented health emergency, particularly in developed States. On the other hand, many developing countries have struggled to access such knowledge and technologies. Several commentators have pointed out that these difficulties have been exacerbated by the ability of IP owners to rely on IP rights, in particular patents, to keep prices up. This has reinvigorated the debate on the role of IP for the development of, and equitable access, to essential medicines during health crises. At the same time, the need to strike a fair balance between the interests of the research-based pharmaceutical industry and the public interest to access COVID-­ related technologies has also been highlighted (see, inter alia, Hilty et  al. 2021). More specifically, in June 2022 the World Trade Organisation (‘WTO’) Ministerial Conference issued a decision largely backing an IP waiver for COVID technologies.1 The waiver was initially proposed in October 2020 by India and South Africa, and then endorsed by more than 100 developing and least-developed countries. It would allow countries to derogate from several obligations under the Agreement on Trade-Related Aspects of Intellectual Property Rights (‘TRIPS’)2 over patent and other IP rights related to drugs, vaccines, diagnostic devices and other anti-COVID technologies—a regime of derogation which would last until the end of the emergency (the version of the waiver finally adopted by the WTO Ministerial Conference in June 2022 is narrower than that proposed by India and South Africa).3  Ministerial Conference of the World Trade Organization (2022).  Waiver from Certain Provisions of the TRIPS Agreement for the Prevention, Containment and Treatment of Covid-19. Revised decision text IP/C/W/669/Rev.1. (Proposal); Agreement on Trade-­ Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex IC, 1869 U.N.T.S. 299. 3  See Ministerial Conference of the World Trade Organization (2022). The decision benefits 46 developing countries, allowing them to use patents ‘required for the production and supply of COVID-19 vaccines’ without the consent of the right holder. The authorization is limited to ‘the extent necessary’ to address the pandemic and subject to Article 31 TRIPS. As to the term of the waiver, unlike the initial proposal by India and South Africa (‘until the pandemic ends’), the decision sets a fix term, limited to 5 years from 17 June 2027: Waiver from Certain Provisions of the TRIPS Agreement for the Prevention, Containment and Treatment of COVID-19, revised 1 2

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Furthermore, some compulsory licences for patents have been granted or applied for with the aim of allowing producers of generic drugs to manufacture and supply COVID vaccines and medicines at a price lower than that charged by patent owners. This chapter focuses on such measures. After providing a short overview of compulsory licences under the WTO TRIPS Agreement (Sect. 12.3), it highlights recent cases of such licences granted or applied for in Israel, Hungary, India and Bolivia (Sect. 12.4). The chapter moreover reviews the recent legislative amendments adopted by some WTO countries (that is, France, Hungary, Italy, Chile and Ecuador) aimed to facilitate the (compulsory) transfer of vaccine’s technologies (Sect. 12.5).

12.2 The International Legal Framework Compulsory licences notoriously allow third parties to exploit a patented invention without the consent of the patent holder. Article 31 TRIPS addresses them by generally referring to ‘Other Uses without Authorization of the Right Holder’. The use of such convoluted terminology is probably due to political reasons and in particular the fact that those who drafted the TRIPS Agreement during the Uruguay round of trade negotiations (which led to the creation of the WTO), wanted to avoid using a strong word. Indeed, the term ‘compulsory licence’ might have been perceived, especially in the industrialised and research- and development-intensive countries of the time, as synonymous with the expropriation of property rights (Maggiore 1998, 167). Yet, the term in question no longer constitutes a taboo in the WTO context, as it has been used in the Doha Declaration on the TRIPS Agreement and Public Health—a soft law instrument adopted in 2001 by the WTO Ministerial Conference which has strongly reaffirmed the rights of WTO Member States to use the flexibilities envisaged by TRIPS with a view to guaranteeing enhanced access to essential medicines.4 Article 31 TRIPS does not limit the grounds upon which the licences can be granted, thus leaving States free to establish such grounds. This has also been confirmed by paragraph 5(b) of the above Doha Declaration, according to which ‘each member has the right to grant compulsory licences and the freedom to determine the grounds upon which such licences are granted’. Yet, it has been noted that this freedom should not allow the issuance of compulsory licences in an arbitrary and

decision text IP/C/W/669/Rev.1. (Proposal); Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex IC, 1869 U.N.T.S. 299. 4  WTO Ministerial Conference (2001). For a global overview of countries that have incorporated in their national laws compulsory licensing as a limit to exclusive rights of patent holders, see: World Intellectual Property Organization (WIPO) 2019. For an European perspective, see: ‘Compulsory Licensing in Europe  - A Country-by-Country Ovreview’ (Munich, Germany: European Patent Office (EPO), 2018), www.epo.org/compulsory-licensing

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unjustified way (Pires de Carvalho 2005).5 Moreover, article 31 TRIPS subjects compulsory licences to a set of detailed conditions. For example, patent owners should receive ‘adequate remuneration’—whose value should arguably be less than what the patent owner could ask in the context of negotiations for a voluntary licence. Furthermore, the aspiring licensee shall first attempt to obtain a voluntary licence ‘on reasonable commercial terms’, except when there is ‘a national emergency or other circumstances of extreme urgency’, in which case it is sufficient to notify the patent holder ‘as soon as reasonably possible’, without the need to attempt prior negotiations. It is important to remind that the Doha Declaration on the TRIPS Agreement and Public Health set in motion a WTO legislative process (envisaged by paragraph 6 of said Declaration),6 which has eventually led the introduction of article 31-bis into TRIPS. Under this provision, a State which needs a specific pharmaceutical product, and does not have the manufacturing capabilities to manufacture it, can import it under a compulsory licence from an eligible exporting country (this was not allowed under the previous Article 31).7 Not many compulsory licences have been granted after TRIPS. This is probably due to the introduction into TRIPS of the above detailed requirements which make more difficult to obtain these licences than it was the case in the pre-TRIPS era. A widely reported compulsory licence was the one granted by India to Natco in 2012 and covering Sorafenib, a medicine useful to treat liver and kidney cancer. The licence was issued after the Indian patent office ruled that Bayer, the patent owner, had not done enough to make the drug available to patients in India. Natco had earlier unsuccessfully sought a voluntary license from the German concern (see Bonadio 2012).

 Yet, it should be noted that the US has entered into several free trade bilateral or multilateral treaties with other countries, these agreements limiting the grounds upon which compulsory licences can be granted: e.g., just in cases of national emergencies, circumstances for extreme urgency and unfair competition. See, for example, the treaties signed between US and Australia in 2004 (art. 17 para. 9.7) and between US and Singapore in 2003 (art. 16 para. 7.6). 6  Paragraph 6 Doha Declaration on the TRIPS Agreement and Public Health provides that ‘We recognise that WTO Members with insufficient or no manufacturing capacities in the pharmaceutical sector may have difficulties in making effective use of ex officio licensing under the TRIPS Agreement. We instruct the TRIPS Council to find an expeditious solution to this problem and to report to the General Council before the end of 2002.’ 7  Yet, the procedure envisaged under Article 31-bis has been criticised for being difficult to use in practice. Suffice it to mention that it was only used once in 2007 to authorise exports to Rwanda of the antiretroviral combination Apo-TriAvir, produced by the Canadian company Apotex. Also, the final supply of the medicine took more than a year to reach the country of destination (Ramanujam and Goyal 2014, 369). 5

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12.3 Compulsory Licences During the COVID Pandemic What about compulsory licences during the COVID emergency? In this section we look at compulsory licences filed and/or granted in various developing countries, namely Israel, Hungary, Russia, Bolivia and India.

12.3.1 Israel In March 2020, at the beginning of the pandemic, the Israeli Minister of Health and Attorney General granted a compulsory licence under Sections 103–104 of Israeli Patent Law to allow the importation from India of a generic version of AbbVie Inc’s patent-protected drug Kaletra, a medicine traditionally used for the treatment of HIV which reportedly could also be used to treat coronavirus.8 AbbVie’s patent for Kaletra in Israel expires in 2024, while in some other countries, such as India, it has already expired. More specifically, the pharmaceutical company K.S.  Lim International Ltd. has been authorized to import into Israel Kaletra from Indian manufacturer Hetero, if only for experimental treatment in COVID patients.9 After the compulsory licence was issued, AbbVie Pharmaceuticals stated that it would not enforce its patent rights worldwide for the use of Kaletra against COVID, as the efficacy of the drug was being evaluated in several clinical trials to treat coronavirus patients (Mancini and Kuchler 2020). The authorization stated that ‘the permission to exploit is necessary in the interest of the maintenance of essential supplies and services’ (Litzman 2020).

12.3.2 Hungary The Hungarian government granted in early 2020 a compulsory license for Remdesivir—a COVID treatment conditionally approved by the EMA, and protected in several countries by patents owned by Gilead. While this licence has received less media attention, it has been criticized by the US Chamber of Commerce and other stakeholders such as the Pharmaceutical Research and Manufacturers Association and the Biotechnology Innovation Organization, which argued that Hungary was already obtaining the medicine via the European Union’s (‘EU’) Joint Procurement Agreement negotiated with the patent holder, and that the licence was issued with only a day’s notice to the patentee (Thiru 2021). By October 2020, the  Israeli Patent law N° 5727 /1967. https://www.wipo.int/edocs/lexdocs/laws/en/il/il040en.pdf  See Israel Health Ministry approves experimental treatments for coronavirus, March 2019, https://www.jpost.com/Israel-News/Health-Ministry-approves-experimental-treatmentsfor-coronavirus-621209 8 9

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licensee, the local drug manufacturer Richter, was able to produce enough Remdesivir to treat 3000 patients and began clinical trials (Reuters 2022).

12.3.3 Russia Another compulsory licence over Remdesivir was granted in Russia, where Gilead owns several patents protecting the medicine. In 2020 the generic manufacturer Pharmasyntez JSC sought a voluntary licence agreement to produce and sell it at a lower price—a proposal which was refused by the patent owner. Pharmasyntez then filed a request for compulsory licence with the Russian Government, based on article 1360 of the local Civil Code (Malakhov 2021). That rule, amended in April 2021, entitles the Government to grant a compulsory licence by administrative order, in the interest of public security, life and health, or protection of the population, without the consent of the patent holder.10 The licence was granted via a governmental order,11 giving a one-year non-exclusive right to use five Eurasian patents owned by Gilead.12 While it imposes a requirement upon the licensee to pay Gilead an adequate compensation within 3 months, the amount payable under this requirement initially remained uncertain.13

 Гражданский кодекс Российской Федерации (часть четвертая) (с изменениями, внесенными в соответствии с Федеральным конституционным законом № 107-ФЗ от 30.04.2021 г.) (Federal law no. 107-FZ (30 April 2021)). The amendment adds the grounds of ‘life and health protection of the population’ to the already mentioned ‘interest of defence and security’ grounds for granting the compulsory licence. The amendment also adds a second paragraph stating that ‘[T]he methods for assessing the amount of the compensation and determining the procedure for the payment of it should be approved by the Russian Government.’ 11  Order n. 3718-p of 31 December 2020. See Распоряжение Правительства Российской Федерации от 31.12.2020 № 3718-р (Decree of the Government of the Russian Federation No. 3718-r of 31.12.2020), http://publication.pravo.gov.ru/Document/View/0001202101050003 12  An Eurasian Patent is a patent granted under the Eurasian Patent Convention by the therein established Eurasian Patent Organization (EAPO). With one single filing, once granted, a Eurasian paten is valid in all EAPO Member States (Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Russian Federation, Tajikistan and Turkmenistan). See Eurasian Patent Convention, September 9, 1994 (in force since August 12, 1995). 13  The government announced the adoption of a methodology for determining the amount of compensation to be paid for the emergency use of a patented invention in Постановление Правительства Российской Федерации от 18.10.2021 № 1767 Об утверждении методики определения размера компенсации, выплачиваемой патентообладателю при принятии решения об использовании изобретения, полезной модели или промышленного образца без его согласия, и порядка ее выплаты (Resolution 1767 of 18 October 2021). The resolution establishes that this is to be calculated as 0.5% of the gross revenue associated with use of the invention. With regard to subsequent amendments to the calculation methods with regard to ‘unfriendly states’, see Morgan Lewis, ‘Russian Decree Undermines Value of Certain Patents; USPTO Cuts All Ties with Russian Patent Office’, JD Supra, 8 April 2022, https://www.jdsupra. com/legalnews/russian-decree-undermines-value-of-1649002 10

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The order was then challenged by Gilead before the Russian Supreme Court.14 The patentee argued there was no ‘national defence’ or ‘security’ justifications to grant the licence.15 It also challenged the existence of an unsatisfied need of the drug in Russia, as well as the approach adopted to assess the cost of the medicine. The Supreme Court rejected the claim, by clarifying that the Constitution of the Russian Federation allows for the restriction of legal rights to the extent that such restrictions are essential for the protection of the foundations of the constitutional order, morality, health and the legitimate interest of other persons. In support of its decision, the Supreme Court cited article 8 of the European Convention for the Protection of Human Rights and Fundamental Freedoms of 1950 (‘ECHR’) and article 31 of the TRIPS Agreement (which, as we have seen, allows for compulsory licences). The Court also held that the amendment to article 1360 of the Civil Code had not changed its core meaning, but merely specified in which cases compulsory licences can be granted, without affecting the grounds. Thus, it concluded that the order had been adopted in line with the core principles of Russian law as well as the Eurasian Patent Convention.

12.3.4 Bolivia and Canada In February 2021 Bolivia officially notified the WTO of its intent to exercise the compulsory licensing mechanism under Article 31-bis TRIPS to address the vaccine supply shortages.16 It later notified to the WTO the need to import 15 million doses of Johnson & Johnson patented vaccine (Ad26.COV2.S) under this procedure,17 following an agreement signed with Biolyse—a Canadian based generic manufacturer of sterile injectable medicine (Biolyse 2022). While Biolyse had the capacity to produce and supply the 15 million single-dose vaccines, it obviously required either the grant of a voluntary licence from the US patentee Johnson & Johnson, or a compulsory licence for export under the Canada’s Access to Medicines Regime (‘CAMR’) (Lock 2021). CAMR was adopted in 2004 and implements Paragraph 6  The Order can be challenged before the Supreme Court of the Russian Federation in accordance with article 21 of the Russian Code of Administrative Judicial Procedure. 15  It shall be recalled that the Order precedes the amendment of article 1360 Civil Code. 16  Council for Trade-Related Aspects of Intellectual Property Rights  - Notification under the amended TRIPS Agreement  - Notification of intention to use the special compulsory licensing system as an importing Member, IP/N/8/BOL/1, 19 February 2021, https://docs.wto.org/dol2fe/ Pages/SS/directdoc.aspx?filename=q:/IP/N/8BOL1.pdf&Open=True 17  ‘Consejo de Los Aspectos de Los Derechos de Propiedad Intelectual Relacionados Con El Comercio - Notificación En Virtud Del Acuerdo Sobre Los ADPIC Enmendado - Notificación de La Necesidad de Importar Productos Farmacéuticos al Amparo Del Sistema de Licencias Obligatori[...]Estado Plurinacional de Bolivia, IP/N/9/BOL/1’, 11 May 2021, https://docs.wto.org/ dol2fe/Pages/FE_Search/FE_S_S006.aspx?Query=(%20@ Symbol=%20ip/n/9/*%20)&Language=SPANISH&Context=FomerScriptedSearch&languageUI Changed=true#. 14

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of the Doha Declaration domestically in Canada (Crombie 2021). Yet, the procedure under CAMR to produce and export the Johnson & Johnson vaccine produced no tangible outcome. Indeed, only patented drugs or technology listed in schedule 1 of the Canadian Patent Act are potentially eligible for compulsory licensing. Having the vaccine included in schedule 1 is a necessary step for even discussing the possibility of granting the licence.18 Schedule 1 can only be amended through an order by the Governor-in-Council, on the recommendation of Canada’s Minister of Industry and of Health, however. As such, it has only been amended three times to-­ date.19 Nevertheless, Biolyse requested that the Canadian Government add the COVID vaccine to the schedule,20 with this request receiving the support of forty-­ three Canadian scholars (Schouten 2021a, b). At the time of writing, the Ad26. COV2.S has not yet been scheduled, thus precluding any chance for Biolyse to obtain the licence in spite of the written recommendation advanced by the Standing Committee on Foreign Affairs and International Development Committee (Ehsassi 2022). Bolivia is not the only country that has tried to use the flexibility under 31-bis TRIPS, however. In May 2021 Antigua and Barbuda also notified the WTO of its intent to use the export-based compulsory licensing scheme.21 At the time of writing, there is no news on the developments of this request.

12.3.5 India In May 2021, Natco Pharma—an Indian-based generic drug manufacturer—filed an application for a compulsory licence for Baricitinib, a drug used to treat rheumatoid arthritis. The patent owner is the US pharmaceutical company Eli Lilly, with the  It should be noted that adding a COVID vaccine to Schedule 1 would not automatically allow a compulsory licence for the production and export of the vaccines. It would just mean that the company seeking authorisation shall be able to manufacture the drug and conduct the necessary trials to establish that the drug meets Canadian safety and efficacy requirements. 19  This happened in August 2005 when Apo-TriAvir (zidovudine, lamivudine and nevirapine), a medicine indicated for the treatment of HIV-1 infection, was added to the list as requested by Apotex Inc. It also occurred in September 2006 when the oseltamivir phosphate, an oral anti-viral drug approved for the treatment of acute, uncomplicated flu (influenza), was added to the list upon Biolyse’s request. It also happened in May 2015 when the tenofovir disoproxil and two combination drugs containing tenofovir disoproxil (indicated in combination with other antiretroviral agents for the treatment of HIV-1 infection) were added to such list following a request by Teva Canada Limited. See in this regard Arianna Schouten, ‘KEI Briefing Note 2021:2 Canadian Experience with Compulsory Licensing under the Canadian Access to Medicines Regime’, Knowledge Ecology International (blog), 31 March 2021, https://www.keionline.org/bn-2021-2 20   The authors of this chapter have the letter on file at https://www.dropbox.com/sh/ mb3lufmb8kb96ej/AABcnAXU3nRpEfESOt_kZk2na?dl=0&preview=Request+to+amend+Sche dule+1+for+Ad26.COV2.S+(1).pdf 21  Council for Trade-Related Aspects of Intellectual Property Rights  - Notification under the Amended TRIPS Agreement - Notification of Intention to Use the Special Compulsory Licensing System as an Importing Member, IP/N/8/ATG/1, 12 May 2021. 18

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medicine being patented in nearly fifty countries, including India,22 and other lowand middle-income countries (such as those in Latin America).23 The drug has also been recommended by the WHO as an alternative treatment for hospitalized COVID patients. Natco had failed to obtain a voluntary licence after negotiating with Eli Lilly (in December 2020 Natco asked for such authorisation, offering a 7% royalty on net profits, but Eli Lilly refused; Viswanath 2021) and applied for the compulsory licence under section 92 of the Indian Patent Act, citing circumstances of national emergency amongst other reasons. Remarkably, the mere filing of the compulsory licence application by Natco convinced the patent holder to eventually offer a royalty-free licence for the production and sale of Baricitinib, not only to Natco, but also to other six generic manufacturers—Cipla, Lupin, Sun Pharmaceutical industries, Dr. Reddy’s, MSN Laboratories and Torrent Pharmaceuticals (The Hindu 2021; Bharadwaj 2021). In May 2021, Natco duly withdrew its application for the compulsory licensing. A similar approach was later taken by drug manufacturer Bajaj Healthcare Limited, which sought a voluntary license from Eli Lilly offering up to 7% of net profits as royalty, but the patent holder refused as it already had other given licences (as mentioned). Bajaj Healthcare applied to the Patent Office for a compulsory license to manufacture Baricitinib under section 84 of the Indian Patent Act, which requires the licensee to prove one of three grounds: (1) unavailability to the public; (2) unaffordability for the public; or (3) the patent not extending to India. In its application, Bajaj Healthcare stated that the price charged by Eli Lilly for Baricitinib in India is not affordable to the public and that it could manufacture the same drug at a lower price. The dispute was finally settled via a voluntary licence agreement in favor of Bajaj Healthcare (Samal 2022).

12.4 COVID Triggered Amendments of National Laws During the COVID emergency some countries have introduced and/or amended laws, paving the way to facilitated procedures for granting compulsory licences. This is the case in Germany, which adopted in March 2020 the Law on the Prevention and Control of Infectious Diseases in Humans (‘IfSG’). This new legislation aims to speed up the grant of compulsory licences ‘in the interest of public welfare or public safety’ in all cases where the German Parliament declares a national

 In India, the Baritinib is protected under App no/Grant no IN270765 (1863/MUMNP/2010), filed on 01/09/2010 and granted on 22/01/2016. The patent protection term is expected to expire on 10/03/2029. 23  These patents would start expiring in 2029. For an overview of the patent status of baricitinib, see Médecins Sans Frontières (2022). 22

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epidemic.24 It empowers the Federal Health Ministry to issue these licences to ensure the supply of important products such as pharmaceuticals and medical devices, but they can no longer be in force when the epidemic situation ceases.25 Similarly, in March 2020 France enacted Law No. 2020–290 introducing Article L.3131–15 into the French public health code,26 which allows the Prime Minister to temporarily control product prices and ‘take the necessary measures’ to make relevant medicines available to patients, including the possibility of authorising—if necessary—the marketing of generic products in France before the expiry of patents (which de facto amounts to a compulsory licence; Dhenne 2020). Furthermore, early in 2021 the French parliament discussed a bill, which has proposed extending the scope of compulsory licensing so as to include patent applications, as well as to all know-how necessary for the manufacture of the medicine.27 In Hungary, in 2020, the Government issued Decree No. 212/2020 empowering the Hungarian Intellectual Property Office (‘HIPO’) to enact, if necessary, a compulsory license justified on public health grounds.28 Specifically, HIPO can now grant non-exclusive compulsory licences with regards to patented medicinal products, medical technology or patented procedures or equipment necessary to manufacture healthcare products related to a public health crisis and to the extent necessary to satisfy the domestic needs. HIPO is also responsible for determining the duration of the licence and the patent owner’s appropriate remuneration. The decree moreover provides that healthcare products manufactured under the licence shall be distinguished from those produced by the patent holder via a unique marking, with the packaging and related documents clearly indicating that such products are manufactured pursuant to the licence. Interestingly, the decree introduces transparency provisions such as the requirement of registration in the HIPO’s patent registers of the granted compulsory licence, as well as its publication in HIPO’s Official Journal. Italy has also been active in this area. In July 2021 it passed a decree amending the Italian Intellectual Property Code (‘IPC’) to enable the issuance of compulsory

 Gesetz zur Verhütung und Bekämpfung von Infektionskrankheiten beim Menschen, https:// www.gesetze-im-internet.de/ifsg/index.html?_sm_au_=iVVvns5WHQ11sMDPvMF ckK0232C0F 25  Section 12.5, Paragraph 4 IfSG. 26  LOI n° 2020–290 du 23 mars 2020 d’urgence pour faire face à l’épidémie de covid-19, https:// www.legifrance.gouv.fr/codes/id/LEGIARTI000042103698/2020-07-11 27  Text n° 524, 2020–2021 proposed by Senator Ronan Le Gleut on 8 April 2021, https://www. senat.fr/leg/exposes-des-motifs/ppl20-524-expose.html. Yet, it remains to be seen how a judge’s order to disclose confidential information (vis-a’-vis a manufacturer) could effectively be enforced. For a proposal to issue compulsory licences of confidential information to facilitate the production of generic COVID vaccines, see Gurgula and Hull 2021. 28   212/2020. (V.16.) Korm. r. a Belföldi Hasznosításra Szolgáló Közegészségügyi Kényszerengedélyről (Governmental Decree No. 212/2020 (V. 16.) on Public Health Compulsory Licenses for Exploitation Within Hungary). This emergency legislation was the basis of the compulsory licence issued by Hungary with respect to the Remdesivir (n. 15). 24

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licences in case of emergencies.29 Specifically, the newly introduced article 70-bis IPC allows compulsory licences aimed to overcome difficulties in the supply of essential medicines or medical devices in the event of a declared national health emergency. Licences would cover the non-exclusive and inalienable right to exploit the relevant patents for producing drugs and medical technology in Italy. They would be valid for the entire duration of the emergency period or up to a maximum of twelve months from its end. The licence should be granted by decree, which in turn will determine an adequate compensation to the patent owner, the amount of which must take into account the economic value of the authorisation. The measure would also need to be assessed by the Italian Minister for Health, in agreement with the Minister for Economic Development, after hearing the right holder and obtaining the opinion of the Italian Medicines Agency in case of medicinal products, or the National Agency for Regional Health Services in case of medical devices. With this reform, Italy aims at shortening the procedural steps and at softening some requirements to obtain compulsory licences under the IPC—for instance, the requirement of not having exploited the patent for 3 or 4 years.30 A more cautious approach was instead taken by Belgium, which undertook an extensive study to review whether their intellectual property legislation must be revised to support the pandemic response (Van Zimmeren et al. 2022). Legislative actions have also occurred outside the EU. Canada for example has amended its legislation to facilitate the issuance of compulsory licences in cases of health emergencies, allowing the Minister of Health to grant a licence without first negotiating with the patentee, and subject to the payment of an adequate remuneration. And even if the patent holder is able to make, use and sell the patented invention, the compulsory licence may still be granted. The amendment has been brought by the COVID-19 Emergency Response Act, adopted in March 2020.31 Under the Act, the authorisation ceases to have effect on the day on which Canada’s Minister of Health notifies the Commissioner that the authorisation is no longer necessary to respond to the public health emergency set out in the application, or one year after the day on which it is granted, whichever expires earlier. It should be noted that this amendment has been in force for a limited period of time—and no authorisation under the Act could be issued after September 2020. The issue of compulsory licences during the COVID pandemic has also kept policy makers busy in Latin America. The public outcry about the negative effects  Decreto- legge 31 maggio 2021, n. 77, Governance del Piano nazionale di ripresa e resilienza e prime misure di rafforzamento delle strutture amministrative e di accelerazione e snellimento delle procedure, GU Serie Generale n.129 del 31.05.2021. The unsuitability of the Italian compulsory licence scheme has been heavily debated in Italy during the COVID emergency (Contardi and Vidal 2021). On the debate over the Italian compulsory licensing scheme during the COVID crisis, see Galli 2021. 30  Decreto Legislativo 10 febbraio 2005, n. 30, Codice della Proprietà Industriale, emanato con l’articolo 15 della legge 12 dicembre 2002, n. 273, GU n. 52 del 04.03.2005, Article 70. 31  Canadian Law C-13 COVID-19 Emergency Response Act, 25 March 2020. https://www.parl.ca/ DocumentViewer/en/43-1/bill/C-13/royal-assent?_sm_au_=iVVvns5WHQ11sMDPvMF ckK0232C0F 29

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of patents on access to COVID medicines and treatments and the debate about the imbalanced distribution of vaccines, led certain Latin American countries to adopt resolutions in support of compulsory licences. In Chile, for example, in March 2020, the Chamber of Deputies adopted Resolution N° 896/202. This measure urges Chile’s Ministry of Health to declare the existence of a national emergency,32 in order to facilitate the grant of compulsory licences of patent applications or granted patents that may affect vaccines, medicines, diagnostics, devices, supplies and other technologies useful for the surveillance, prevention, detection, diagnosis and treatment derived from the rapid spread of coronavirus.33 A similar resolution was passed in Ecuador by the National Assembly Commission on Education, Culture, Science and Technology, requiring the Minister of Health to issue compulsory licences over COVID-related vaccines, medicines, diagnostics, devices, supplies and other technologies useful for the surveillance, prevention, detection, diagnosis and treatment of persons infected by the virus), as well as access to test data on pharmaceutical products for the manufacture, importation or use in Ecuador of such technologies.34 Yet, despite such legislative initiatives and proposals, no compulsory licence has been issued so far in these countries as part of the COVID response (Matthews 2022).

12.5 Conclusion In this chapter we have focused on compulsory licensing during the COVID crisis, highlighting cases where such licences have been granted or simply applied for within and outside the EU. Yet, there have been speculations that several of these licences have not been effective, especially because the underlying drug has not proved effective to treat COVID: this would be the case of Kaletra and Remdesivir. While the issuance of compulsory licences during the COVID emergency has been encouraged by several commentators (Correa 2021; Gurgula 2021; Zaheer 2021, 2022; Kumar 2022) and non-governmental organisations (MSF 2021), the point has also been made that such flexibility may prove insufficient to transfer the underlying technology, especially when it comes to COVID vaccines. Indeed, even where these licences are granted, information on how the patented medicine can be produced effectively can be kept confidential by pharmaceutical companies and is

 As envisaged in Article 51° N° 2 of Chilean Law N° 19. 030 on Intellectual Property.  INAPI, Instituto Nacional de Propiedad Intelectual de Chile. (2020). Resolución N° 896, https:// www.keionline.org/wp-content/uploads/resolucioncoronavirus.pdf 34  Asamblea Nacional Republica de Ecuador, Resolución para requerir al Gobierno Nacional el establecimiento de licencias obligatorias y otras medidas que permitan garantizar el acceso gratuito y a costos asequibles de los productos farmacéuticos y tecnologías médicas en la Declaratoria de Emergencia Sanitaria por la pandemia del Coronavirus (COVID-19) y demás variaciones, así como los protocolos e instrumentos de bioseguridad para el personal de salud, posgradistas y estudiante del Sistema de salud público (2020), https://www.keionline.org/wp-content/uploads/ ES-Ecuador-CL-resolution.pdf 32 33

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not easily retrievable. Take the Pfizer/BioNTech mRNA vaccines. This technology has been developed recently thanks to revolutionary know-how—no generic-­ manufacturing company could replicate it quickly, let alone effectively. Further, producing vaccines and other crucial technologies is inherently complex.35 Pharmaceutical companies whose patents are subject to a compulsory licence could lawfully engage in being obstructive by refusing to disclose the know-how necessary to manufacture the vaccine. It would be difficult, if not impossible, to require pharmaceutical companies to reveal that secret, because even if these companies were dragged into courts, judges would not necessarily know (or be able to effectively divine in all cases) which information should be disclosed. The bottleneck is thus not just IP protection, but the underlying processes around the protected technology. Yet, despite these drawbacks, the chapter has made the point that the availability of compulsory licences may still have some merit. Indeed, by keeping the pressure on pharmaceutical companies high, maintaining such an option on the table may convince recalcitrant patent owners to lower prices or grant generics’ producers’ voluntary licences. As we have seen, this has happened in India. All it took was for the generic manufacturer Natco to make a formal request for a compulsory licence over Baricitinib, which caused the patentee Eli Lilly to eventually grant other seven voluntary licences in favour of local manufacturers. Similarly, at the height of the pandemic in Israel, a few days after the issuance of the compulsory licence over AbbVie Pharmaceuticals Inc’s patent-protected drug Kaletra, the patent owner announced that it would waive its exclusive rights to the drug at global level. This demonstrates once again that compulsory licences—and sometimes even the mere threat of granting them—may be effective in obtaining the desired result, that is, the relaxation of the patentee’s monopolistic rights and consequent reduction of prices for crucial drugs, which turn this TRIPS flexibility into a potentially powerful political weapon (see Minssen and Wested 2017). These developments may have an impact on bilateral and multilateral trade agreements that the EU has signed with several countries. It shall be recalled that Article 20.3 (Public health concerns) of the EU-Canada Comprehensive Economic and Trade Agreement36 states that the Parties recognise the importance of the Doha Declaration on the TRIPS Agreement and Public Health and undertake to implement the rights and obligations of the Agreement in accordance with the Doha Declaration, as well as to respect the Decision regarding its paragraph 6. A similar

 Producing a vaccine is a long and costly process, requiring the use of highly specialised facilities and equipment to achieve an optimal result. The development of a vaccine involves several actors who must invest time in research, bear the costs of developing active ingredients, procure the necessary infrastructure to produce them, conduct clinical trials, and follow complex packaging and storage techniques before the vaccine can be used in humans (Contardi and Vidal 2021). 36  EU-Canada Comprehensive Economic and Trade Agreement (CETA), OJ (L) 11 of 14.1.2017. 35

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provision is contained in the EU-Japan Partnership Agreement37 and in the Free Trade Agreement between the EU and South Korea.38

References Agreement between the EU and Japan for an Economic Partnership, OJ (L) 330 of 27.12.2018 Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex IC, 1869 U.N.T.S. 299 Asamblea Nacional Republica de Ecuador (2020) Resolución para requerir al Gobierno Nacional el establecimiento de licencias obligatorias y otras medidas que permitan garantizar el acceso gratuito y a costos asequibles de los productos farmacéuticos y tecnologías médicas en la Declaratoria de Emergencia Sanitaria por la pandemia del Coronavirus (COVID-19) y demás variaciones, así como los protocolos e instrumentos de bioseguridad para el personal de salud, posgradistas y estudiante del Sistema de salud público. https://www.keionline.org/wp-­content/ uploads/ES-­Ecuador-­CL-­resolution.pdf Bharadwaj S (2021) Eli Lilly inks voluntary licencing deal with Natco for COVID drug Baricitinib. The Times of India. https://timesofindia.indiatimes.com/city/hyderabad/eli-­lilly-­inks-­ voluntary-­licencing-­deal-­with-­natco-­for-­covid-­drug-­baricitinib/articleshow/82721695.cms Biolyse Pharma (2022) Bolivia and biolyse sign landmark agreement for export of COVID-19 vaccines. https://www.newswire.ca/news-­releases/bolivia-­and-­biolyse-­sign-­landmark-­ agreement-­for-­export-­of-­covid-­19-­vaccines-­832670191.html Bonadio E (2012) Compulsory licensing of patents: the Bayer/Natco case. Eur Intellect Prop Rev 34(10):719–728 Canadian Law C-13 COVID-19 Emergency Response Act, 25 March 2020. https://www.parl. ca/DocumentViewer/en/43-­1/bill/C-­13/royal-­assent?_sm_au_=iVVvns5WHQ11sMDPvMF ckK0232C0F Chilean Law N° 19. 030 on intellectual property Consejo de los aspectos de los derechos de propiedad intelectual relacionados con ei comercio (2021) Notificación en virtud del acuerdo sobre los ADPIC enmendado  – notificación de la necesidad de importar productos farmacéuticos al amparo del sistema de licencias obligatori[...]Estado plurinacional de Bolivia, IP/N/9/BOL/1. https://docs.wto.org/dol2fe/ Pages/FE_Search/FE_S_S006.aspx?Query=(%20@Symbol=%20ip/n/9/*%20)&Language=S PANISH&Context=FomerScriptedSearch&languageUIChanged=true# Contardi M, Vidal E (2021) Patentes: flexibilidades del ADPIC como respuesta a la pandemia del COVID-19. Lecciones aprendidas y perspectivas de una política futura. Revista Iberoamericana de La Propiedad Intelectual 14:71–104. https://doi.org/10.26422/RIPI.2021.1400.con Correa CM (2021) Expanding the production of COVID-19 vaccines to reach developing countries lift the barriers to fight the pandemic in the global south. South Centre Policy Brief 92 Council for Trade-Related Aspects of Intellectual Property Rights (2021) Notification under the amended TRIPS agreement - notification of intention to use the special compulsory licensing system as an importing member, IP/N/8/BOL/1. https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/IP/N/8BOL1.pdf&Open=True Crombie J (2011) Intellectual property rights trump the right to health: Canada’s access to medicines regime and TRIPs flexibilities in the context of Bolivia’s quest for vaccines. J Glob Ethics 17(3):353–366. https://doi.org/10.1080/17449626.2021.1993452

 Article 14.34, Agreement between the EU and Japan for an Economic Partnership, OJ (L) 330 of 27.12.2018. 38  Article 10.33, EU–South Korea Free Trade Agreement, OJ (L) 127 of 4.05.2011. 37

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Malakhov B (2021) Russia: first ‘Public Security’ compulsory license. Kluwer Patent Blog. http:// patentblog.kluweriplaw.com/2021/03/04/russia-­first-­public-­security-­compulsory-­license Mancini DP, Kuchler H (2020) AbbVie drops patent rights for Kaletra antiviral treatment. Financial Times. https://www.ft.com/content/5a7a9658-­6d1f-­11ea-­89df-­41bea055720b Matthews D (2022) The COVID-19 pandemic: lessons for the European patent system. Eur Intellect Prop Rev 44(4):221–230 Médecins Sans Frontières (2021) Compulsory licenses, the TRIPS waiver, and access to COVID-19 medical technologies. MSF Briefing Document. https://msfaccess.org/ compulsory-­licenses-­trips-­waiver-­and-­access-­covid-­19-­medical-­technologies Médecins Sans Frontières (2022) Latin America: how patents and licensing hinder access to COVID-19 treatments. Médecins Sans Frontières Access Campaign. https://msfaccess.org/ latin-­america-­how-­patents-­and-­licensing-­hinder-­access-­covid-­19-­treatments Ministerial Conference of the World Trade Organization (2022) Ministerial Decision on the TRIPS Agreement adopted on 17 June 2022, WT/MIN(22)/30, WT/L/1141 (Decision) Minssen T, Wested J (2017) Procedural aspects of compulsory licensing under TRIPS: report no. II of a Webinar Series on Reinterpreting TRIPS in the life sciences. https://research.ku.dk/ search/result/?pure=da/publications/procedural-­aspects-­of-­compulsory-­licensing-­under-­ trips(117112c2-­0e57-­497e-­a4a3-­412da01d2945)/export.html Pires de Carvalho N (2005) The TRIPS regime of patent rights, 2nd edn. Kluwer Law International, The Hague Постановление Правительства Российской Федерации от 18.10.2021 № 1767 Об утверждении методики определения размера компенсации, выплачиваемой патентообладателю при принятии решения об использовании изобретения, полезной модели или промышленного образца без его согласия, и порядка ее выплаты (Resolution 1767 of 18 October 2021) Распоряжение Правительства Российской Федерации от 31.12.2020 № 3718-р (Decree of the Government of the Russian Federation No. 3718-r of 31.12.2020). http://publication.pravo. gov.ru/Document/View/0001202101050003 Ramanujam P, Goyal Y (2014) One view of compulsory licensing: comparative perspectives from India and Canada. Marquette Intellect Prop Law Review 18:369 Samal A (2022) After Natco’s withdrawal, Bajaj healthcare files for compulsory license to manufacture Baricitinib. SpicyIP. https://spicyip.com/2021/07/after-­natcos-­withdrawal-­bajaj-­ healthcare-­files-­for-­compulsory-­license-­to-­manufacture-­baricitinib.html Schouten A (2021a) 41 Canadian experts request amendment to schedule 1 of the patent act to include COVID-19 vaccines. Knowledge Eco Int. https://www.keionline.org/36017 Schouten A (2021b) KEI briefing note 2021:2 Canadian experience with compulsory licensing under the Canadian access to medicines regime. Knowledge Eco Int. https://www.keionline. org/bn-­2021-­2 Text n° 524, 2020–2021 proposed by Senator Ronan Le Gleut on 8 April 2021. https://www.senat. fr/leg/exposes-­des-­motifs/ppl20-­524-­expose.html The Hindu (2021) Natco Pharma signs pact with Eli Lilly for Baricitinib. https://www.thehindu. com/business/natco-­pharma-­signs-­pact-­with-­eli-­lilly-­for-­baricitinib/article34582342.ece Thiru (2021) Hungarian compulsory license for Remdesivir raises a stir with BIO, PhRMA and the US Chamber of Commerce. Knowledge Eco Int. https://www.keionline.org/35558 Van Zimmeren E et  al (2022) Compulsory licensing for expensive medicines, KCE Reports 356, KCE Reports (Brussels: Belgian Health Care Knowledge Centre (KCE), 2022), D/2022/10.273/35, https://kce.fgov.be/en/compulsory-­licensing-­for-­expensive-­medicines Viswanath P (2021) How Natco pharma put US drug Giant Eli Lilly under pressure for COVID-19 drug through compulsory licensing filing. https://www.moneycontrol.com/news/business/ companies/how-­natco-­pharma-­put-­us-­drug-­giant-­eli-­lilly-­under-­pressure-­for-­covid-­19-­drug-­ through-­compulsory-­licensing-­filing-­6854771.html Waiver from Certain Provisions of the TRIPS Agreement for the Prevention, Containment and Treatment of COVID-19. Revised decision text IP/C/W/669/Rev.1. (Proposal)

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Chapter 13

The ‘Crowd-Out Effect’ of GI Provisions in EU FTAs: Cheeses Exported to South Korea Wenting Cheng

Contents 13.1  I ntroduction 13.2  How Crowd-Out Would Happen: The Conditions and Limitations 13.3  EU’s Cheese GIs in South Korea: Crowd-Out at Work? 13.3.1  EU-South Korea FTA with the List of GI-Protected Cheese Names 13.3.2  US Countermeasures in a Side Letter for the US-Korea FTA 13.3.3  Effects of the US Restriction – Who Benefits from It? 13.3.4  What Products Are Crowded out, and What Remedies Are Available? 13.4  Conclusions References

                          

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Abstract  This chapter considers a specific issue of the impact of the European Union (‘EU’)’s Free Trade Agreements (‘FTAs’) on third countries, with a focus on geographical indications (‘GIs’). It assesses the hypothesis of the crowd-out effect— when an EU GI-protected product listed in the EU FTAs is the same as product names exported from athird country, the EU producer will exclude third-country exporters from using the same name. The chapter first explains the conditions and limitations of the crowd-out effect, then uses EU-South Korea FTA’s GI list which includes 19 cheese names to examine to what extent the crowd-out effect exists in a real world case. It concludes with key findings, future research directions, and the need for a systematic solution to the crowd-out effect. Keywords  Geographical indications · FTA · TRIPS · Crowd-out effect · Norm collisions · MFN

W. Cheng (*) College of Law, The Australian National University, Canberra, ACT, Australia e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 O. Quirico, K. Kwapisz Williams (eds.), The European Union and the Evolving Architectures of International Economic Agreements, https://doi.org/10.1007/978-981-99-2329-8_13

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13.1 Introduction Geographical indications (‘GIs’)are essentially place names that are used as product names. They have long been an EU phenomenon, and the most famous GIs are from Europe, including Champagne, Parma Ham, Cognac, among many other names. The EU successfully incorporated GI protection into the Agreement on Trade-­ Related Aspects of Intellectual Property Rights (‘TRIPS’) as a type of intellectual property so that producers from a designated place can exclude producers outside of the place from using the same name for their similar products. Article 22 of TRIPS provides the official definition of GIs as ‘an indication which identifies a good as originating in the territory of a member, or a regional locality in that territory, where a given quality, reputation or other characteristic of the good is essentially attributable to its geographical origin.’ This authoritative definition, however, does not reconcile the social, cultural and economic tensions surrounding GIs. European emigrants for generations brought these names, as part of their culture, to new places where they had established new lives (such as the United States of America (‘USA’), Australia, New Zealand, and Canada, the so-called New World countries). In these countries, these names became generic product names, free for all to use. The conflict between GIs in the EU and generic names in these New World countries escalates when products bearing the same name but from different places meet in a globalized market (Raustiala and Munzer 2007). Although TRIPS has set the ‘minimum’ protection standards for intellectual property rights at the international level, many World Trade Organisation (‘WTO’) members outside Europe have either no GI regulation or offered a ‘lower’ level of protection. GIs is an area where discussion and debate continued after TRIPS (Van Caenegem 2004), mainly because the major players in international IP rulemaking, the EU and the USA, cannot reconcile with each other on their demands over international GI regulation. This lack of consensus was demonstrated by the stagnation of GI-related multilateral negotiations at the WTO.  Two GI-related issues were infused for the post-TRIPS negotiations in the Doha Ministerial Declaration Adopted on 14 November 2001—extending higher GI protection standards beyond wines and spirits to foodstuffs, and establishing a multilateral register for wines and spirits. Given the failure of WTO negotiations, the EU and the USA have been separately negotiating GIs at bilateral and regional levels (Engelhardt 2015; Lightbourne 2021). This vertical forum-shifting strategy (Sell 2010), however, led to inevitable legal fragmentation in countries that signed FTAs with both the EU and the USA and accepted their respective GI standards. These countries include South Korea, Colombia and Peru (subsequently extended to Ecuador), Central America, Ukraine, Georgia, the Southern African Development Community (‘SADC’), Canada, Singapore, Vietnam, Japan and Mercosur and China. While the literature focuses on EU-US contestation about GIs in trade negotiations (Creditt 2008; Frankel 2017; Gangjee 2007a; Josling 2006; Raustiala and Munzer 2007), the effect of GI provisions in EU FTAs is not well understood.

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Recent literature has examined the impact of the EU-Canada Comprehensive Economic and Trade Agreement (‘CETA’) on Canadian cheese producers, arguing that, while new Canadian producers can no longer label cheese as ‘feta’ but instead must refer to it as ‘imitation feta’, ‘feta style’, or ‘feta type’,1 the effect of GI recognition varies depending on the terms used to label Canadian cheese and the information given to consumers (Slade et al. 2019). Curzi and Huysmans (2022) also note that GI provisions in EU FTAs do not generally lead to significant additional exports above and beyond the general export-promoting effects of trade agreements. Nonetheless, certain EU producers do benefit from such provisions. Existing studies focus on the impact of the GI provision in EU FTAs primarily on contracting parties (Cheng 2023; Nguyen and Le 2023), not third parties (that is, non-parties). There is still a significant knowledge gap on whether and how the GI rules in EU trade agreements may impact a third country that is not a party to the agreement. This chapter aims to contribute to the literature on the third-country impact of GI provisions in FTAs. It uses GI on cheese products in EU-South Korea FTA as an example to illustrate the impact. I propose the crowd-out effect hypothesis of the EU GI FTA, which refers to the effect that when product names listed in the EU FTAs are the same as product names exported from a third country, the listed name will exclude the use of the same name by exporters from the third country. Specifically, the EU listed 19 cheese products in the EU-South Korea FTA via the mechanism of mutual recognition so that these EU GIs are eligible to be protected GIs in the territory of South Korea. Arguably, these EU names will have exclusive rights to be used in South Korea. Therefore, they will have a ‘crowd-out effect’ on any products that are exported from a third country to South Korea  under the same name—for instance, as ‘Asiago’ is listed by the EU in the EU-South Korea FTA, the same name could not be used for cheeses exported from a third country to South Korea. Similar products from a third country are therefore considered being crowded out from the South Korean market by the EU FTA. Using a new name for these similar products means that the accumulated reputation among certain consumers will be lost. Renaming may also lead to the cost of updating documentation for customs clearance, packaging redesigning, and other associated costs. This chapter is the first step to proposing the hypothesis of the crowd-out effect, explaining why it could happen through the examination of the rulemaking dynamics with different parties involved (both powerful and powerless), discussing the possible impacts on third parties, and the available resources and remedies that they can use to mitigate the impact. Understanding these nuances may provide insights for further empirical research on the crowd-out effect and further discussion on the intersection of international law to resolve the problem. From the perspective of international intellectual property law, it is legitimate for GIs after mutual recognition, to exclude other users to use the same name on similar products—this is exactly the EU’s expectation when negotiating such rules. However, from the  Articles 20.19.2, 20.19.3, 20.21.1, and 20.21.2, Comprehensive Economic and Trade Agreement between Canada, of the one part, and the European Union and its Member States, of the other part. OJ L 11, 14.1.2017. 1

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perspective of the law of treaties, the basic classic principle still holds—a treaty binds the parties, and only the parties; it does not create obligations for a third State.2 The mutual recognition of an EU GI by its FTA partners will create an obligation for importers or even producers in third countries to respect the exclusivity of the EU GI in the territory of this FTA partner. This new obligation also discords with the fact that using such names in the home country of the importers or producers is legitimate because they are generic names in the third country. This article does not intend to make a strong argument that the crowd-out effects are equal to an obligation for a third State because some key issues need to be further scrutinised, in particular, how a third party (importers and producers) is impacted and to what extent such obligation imposed on the importers and producers constitutes an obligation imposed on the third State according to the law of the treaties. However, the law of treaties lens points to the increasing legal fragmentation that GI mutual recognition may create in international law: in the territory of an EU’s FTA partner, a listed name could legitimately be used before, but not after, the FTA; after the conclusion of an EU FTA, for exporters from a third country, a listed name could still be legitimately used in their home country but not in the destination of export. The rest of this chapter is structured as follows. The nex section will specify the major assumptions for the crowd-out effect hypothesis. Section 13.3 examines the hypothesis with cheese products in the EU-South Korea FTA.  The final section concludes and discusses the implications of the crowd-out effect and future research directions.

13.2 How Crowd-Out Would Happen: The Conditions and Limitations The crowd-out effect is proposed based on the observation of GI-related rules on internationally traded goods (including GIs and similar products) as well as power dynamics. This section will discuss the conditions and limitations based on the observation of the EU’s expansion of its GI system globally and the resistance the EU has encountered in this process: GIs is part of the food cultures, and there is a direct competition between the European countries and the immigration countries, while not much competition between the European countries and the rest of the world.

In the GI literature, there has been a distinction between the Old World and the New World, to describe the different positions in international GI negotiations. The Old World countries refer to Europe, whereas the New World countries are those that were later destinations for successive waves of European emigration (Marie-Vivien  Pacta tertiss newue prosunt neque nocent, article 34 of the Vienna Convention on the Law of Treaties 1969 and of the Vienna Convention on the Law of Treaties between States and International Organisations or between International Organisations 1986. 2

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and Biénabe 2017). It is natural that emigrants from Europe generations ago brought to the new lands not only their families but their language, their cultural traditions, and the names of their food as well. In this process, for people living in the new land, the original place names became a source of nostalgia and functioned as a common name, with consumer recognition of the products, in turn, being gradually disassociated from the original place. The division between the Old World and the New World in GIs is a Western-­ centric concept in the sense that the rest of the world that speaks a non-Europe language and have a completely different food culture have no place in this dichotomic division. Some authors also list African countries and other developing countries that maintain food names in a non-European language as Old World countries, but this classification misses that the GI system only originated from Europe. Non-­ European countries only introduced the GI regulation from European countries through legal transplantation since TRIPS, and these countries did not have a strong position to support GIs as the EU had in WTO negotiations. Therefore, the ‘rest of the world’ is a more appropriate label for these countries, and East and Southeast Asian countries are typical examples. Countries like China, South Korea, Japan, and Vietnam speak languages different from any European languages, and they name their places with no replication of the European place names. They also have food cultures that are completely different from the European ones. Internally, there are problems similar to the EU’s competition on place names within these regions. For instance, people can find ‘Hainan Chicken Rice’ or ‘Hokkien Mee’ in Singapore and many other Southeast Asian countries, where emigrants from Hainan and Fujian provinces in China still maintain their recipes and name the food after their places of origin. During and after the Vietnam War, refugees brought Vietnamese food with them around the world. This, however, does not necessarily make China or Vietnam part of the Old World, because people who are still living in these regions where the names come from do not actively fight for their ‘rights’ over the names, or they are not even aware that naming a special food after a region could be a right to prevent competitors. The EU, on the one hand, has spread their right-based concept of GIs to these regions, so that some of the local producers who want to claim authenticity could use GIs to prevent others outside of the region from using them. So far, the EU has signed bilateral trade agreements that include  GI provisions with South Korea, Japan, Vietnam, China and Singapore. One general practice of the EU’s GI strategy is negotiating a list of GI names for mutual recognition in the other party’s territory. Concerning food names, the EU listed 60 names in the EU-Korea FTA in 2010, 173 names in CETA, and 72 names in the EU-Japan EPA. These lists often include both names of agri-food products and names of wines and spirits. TRIPS provides different levels of protection for agri-food products (article 22 TRIPS) and wines and spirits (article 23 TRIPS). Even though wine and spirit GIs are often considered the most valuable GIs, for which consumers are willing to pay a higher premium to the producers (Török et al. 2020), there is no issue in international intellectual property law concerning the level at which wines and spirits should be protected in national law. As the EU’s demands on mutual recognition of wines and spirits do not create

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a new obligation beyond what is required by TRIPS, this article will focus only on GIs for agri-food products. For the EU, it is less difficult to negotiate a list of GIs for mutual recognition with the rest of the world than with the New World. There is little direct competition between the names and products from the EU and names and products from the rest of the world because of different food cultures, different languages, different local ingredients, different traditional processes, and ultimately different products. After entering markets, these products also target different consumer groups. However, GI competition escalated when potential export market of agri-food products was recognised in a globalised market. As the central case study of this article shows, when the European countries and the New World countries all export cheese products to South Korea, there is direct competition between the exporters (Fig. 13.1). One important factor contributing to this competition is that these products are traditionally not part of food culture in South Korea, which means there are very few or no local producers, at least in the short term. In this context, listing EU cheese GI to be mutually protected as Korean cheese GIs in the EU-South Korea FTA mandates that the South Korean Government protect part of the imported products (by certain EU GI producers) and take judicial and administrative measures to prevent other importers and producers from using the names if they come from outside of the designated place. The EU and the New World countries have conflicting demands when they conclude FTAs with the same trading partner. Instead of systematically addressing norm collisions due to such conflicting demands, conflicts are managed through solution-based GI lists at the micro-level.

Fig. 13.1  The value of cheese and curd imported into South Korea in 2020, by country of origin (Total US$639 million). (Simoes and Hidalgo 2011)

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When there is competition between the EU and New World countries in the East and Southeast Asian market, GI lists are indeed an effective way for the EU to exclude competitors from the New World countries. These efforts from the EU are actively opposed by the US. The US Trade Representative (USTR)‘s Special 301 Report in 2018 commented that the EU’s GI agenda is highly concerning’ and ‘harmful’ because it ‘“undermines the scope of trademarks and other IP rights held by US producers and imposes barriers on market access for American-made goods and services that rely on the use of common names, such as parmesan or feta’ (USTR 2018, 19). The USA has implemented a counter-strategy by concluding FTAs that include provisions to lower GI protection standards with the same trading partner. The competing demands from the EU and USA in the FTAs, therefore, need to be managed by the third country. Such management at the national level to harmonise GI norm collisions can be difficult because even TRIPS did not end the controversy over geographical indications between the EU and the USA (Creditt 2008). Norm collisions refer to the incompatibility between two norms due to colliding expectations about appropriate behaviour (Gholiagha et al. 2020). Without comprehensively addressing the incompatibility, TRIPS create micro-level rules to manage the conflict between trademark and sui generis mechanisms. These rules are solution-based so that the implementation of TRIPS is not impeded by visible norm collisions. They may present as general rules and exceptions. Articles 22 and 23 establish general rules and article 24 includes exceptions. They may also present as scenario-based solutions—article 23.3 offers solutions ‘in the case of homonymous geographical indications for wines’. This approach of micro-level management was further adopted in EU FTAs. Canada is the first New World country concluding trade treaties with the EU (the Comprehensive Economic and Trade Agreement, CETA). CETA includes complex micro-level rules including a list for mutual recognition, protection of prior rights, co-existence of GIs and trademarks, and the phasing out of using certain names by Canadian producers. There have been discussions about WTO compliance with this GI list as the major micro-level management rules. For instance, a joint report by the United Nations Conference on Trade and Development (‘UNCTAD’) and International Centre for Trade and Sustainable Development (‘ICTSD’) considers that a GI list for mutual recognition may constitute a violation of the most-favoured-nation (‘MFN’) principle in TRIPS. The MFN principle should be applied to the nationals of all other WTO members, but GI entails a close link with the geographical origin of those products that it protects. This link indicates that, at least indirectly, the nationals of the country where the product originates disproportionately benefit from the protection of the GI.  Hence, a country with the GI de facto obtains an advantage, favour, or privilege that nationals from other countries do not have (UNCTAD-ICTSD 2005, 302). However, there has been disagreement about this claim (Engelhardt 2015), as GIs provide differentiated treatment to indicate the origin of the products in question in a specific geographic area and hence a country. So far, no WTO dispute settlement has been raised against the EU’s practice of GI listing for mutual recognition, so it is still the most used micro-level solution that a third country can rely on when concluding FTAs with both the EU and the USA.

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Powerful New World countries can take countermeasures through FTAs with the same trade partner that signed FTAs with the EU, but not all third countries are able to do so.

With the USA continuing to conclude FTAs that counteract the effects of the EU GI rules, it may seem that a certain balance can be achieved through such competition. The USTR indeed has substantiated its counter-GI strategy to achieve the policy goals of ensuring that: (1) EU GI grants do not violate prior rights (in particular, trademarks including a place name hosted by a US company); (2) EU GI grants do not deprive interested parties of the ability to use common names, such as parmesan or feta; (3) interested persons are informed of the grant and have an opportunity to oppose or cancel any GI; (4) the scope of GI protection is clarified when granting a GI consisting of compound terms, in particular identifying common name components (USTR 2018). In addition, the USA also opposes rulemaking efforts to extend GI protection beyond wines and spirits. The USA has implemented such countermeasures in its trade negotiations. Among all New World countries, no one is as powerful as the USA.  The resources that other third countries can leverage are different. The impact of the EU FTAs on other third countries is the major concern of this article. It is partly because the reputation of the products bearing the same name (the GI) may be first exported by these third countries. Theoretically, preventing third countries from continuing to use the name may not be justified. GIs are used to distinguish between the authentic original and an imitator from other regions. According to the consumer-based rationale, GI protection can reduce confusion and limit consumers’ search costs in the marketplace (Landes and Posner 2003). However, in the specific case of using place names for imported products, it may be the case that cheese products from third countries entered the South Korean market earlier than the EU GI protected products and established a reputation for the name in the South Korean market. In this specific market, consumers may deem that these products first came into their market as original and authentic. GIs may therefore increase consumer confusion rather than reduce it. The second reason for focusing on the impact on third countries (except the USA) is that while these third countries can be impacted by the EU GI list for mutual recognition, they are not parties to an FTA. Indeed, these New World countries are disproportionately impacted by the GI provisions in the EU FTAs, and they are not able to counteract by concluding an FTA with counteracting provisions in the way that the USA does. Consequently, non-US and EU producers, while having their interests directly impacted by the EU FTAs, may not have sufficient remedies to safeguard their interests. Other third countries can rely on the US trade agreements to resist certain GI protection required by the EU, but not comprehensively.

It should be noted that some counter-GI provisions in the US FTAs could benefit other New World Countries. Among all the objectives identified by the USTR (USTR 2018), the opposition and cancellation and expansion of sui generis rulemaking beyond wines and spirits usually apply to all GI names (or GI names for agri-food products in the case of preventing GI expansion beyond wines and spirits). It is not reasonable to deny the due process of opposition or cancellation

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requests raised by other third countries and only accept such requests raised by US  producers. For countries that have signed FTAs with the EU and the USA respectively, it can be risky to deny requests for opposition or cancellation raised by a third country other than the USA—such denial will violate the MFN principle of TRIPS (article 4) (Correa 2020). The broad effect of the MFN principle is to equalise the granting of favours and advantages among WTO Members (Drahos 2001). Following the general practice of how MFN has worked in the bilateral intellectual property rules in trade agreements, what the USA has obtained in its trade negotiations in terms of the right to opposition and cancellation of GIs, should also be available to other New World countries. This is usually the case in reality, as the opposition and cancellation procedures need to be implemented through national law. As there is no general principle of non-discrimination to guarantee equivalent treatment among all listed GI names, the restriction of the exclusivity of listed EU GIs can be selective. As discussed, the EU has taken solution-based rules that treat the scope of exclusivity of GIs for different names differently as long as both parties agree (Omachi 2019). It is fair to say that it is the TRIPS Agreement that creates such levelled treatment between wines and spirits (article 23) and agri-food products (article 22). Therefore, treating GI names differently within a list for mutual recognition by an EU FTA and only restricting the exclusivity of certain names by a US FTA is a TRIPS-compliant practice. This is another example of the micro-level management of norm collisions. Specific to a name listed in an EU FTA for mutual recognition, there are two ways in which the USA could restrict the effect of exclusivity: (1) by claiming a trademark for the name; or (2) by claiming that the name is a generic name. The implications of these two approaches for third parties are different. If the USA prevents GI protection by upholding the prior right of trademarks, trademark registration covers product names. It comes to a controversial area of law (and it should not be registered in the first place).3 However, after a US entity successfully challenges the EU GI because it was a trademark previously registered, cheese importers from third countries are less likely to benefit from the restriction because the trademark will still prevent using the same name for cheeses. If the USA prevents GI protection by successfully arguing that the names are generic, there will be an opportunity for other third countries to benefit if the common names are also used in these countries. When the USA insists on prior rights (trademarks) to protect the interest of US companies, other countries may not benefit from such an outcome of US negotiations at all because the US trademark not only excludes the EU producer but also producers from third countries. However, third countries may benefit from US treaty’s limitation to the EU-listed GI names when the USA insists that certain names are generic names for a product. They could benefit based on the MFN principle  There are discussions on using trademarks to protect product names in the pharmaceutical industry (Dutfield 2021), but not for cheeses. Arguably, the exclusivity of trademarks and GIs is different. After a successful challenge on the ground of prior registered trademark (but not a well-known trademark), the same name shall not be used for similar products. But a GI will prevent the use of the same name for all products. 3

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where the advantage provided to one country (USA) should be equally available to other WTO members. Still, other third countries may have concerns over different place names which are not restricted by the US agreement. In such cases, they could only directly restrict the exclusivity of the GI name through their own FTA. Furthermore, it should be noted that here the scope of ‘third countries’ benefiting from the US countermeasures is any other country beyond the USA and the country where the GI is located, which may include other EU Member States. This leads to an important question of which third countries benefit from USA restrictions.

13.3 EU’s Cheese GIs in South Korea: Crowd-Out at Work? This section will examine the crowd-out effect in the real world, using the EU-South Korea FTA’s effect on third country exports of certain cheese products to South Korea as a case study. As noted above, the USA is an important ‘third country’ that needs to be treated separately. Indeed, after the EU-South Korea FTA (effective from July 2011),4 the US-South Korea FTA (Effective from March 2012) includes counter-provisions restricting the effects of GI provisions in the EU-South Korea FTA.5 South Korea further confirmed in a Side Letter in its FTA that the USA can further include provisions to reduce the impact of the EU-South Korea FTA on US exports to South Korea (Jong-Hoon 2011). Specifically, this section will focus on four questions. First, it will examine the EU-South Korea FTA with the GI rules and the list of GI-protected cheese names. It will further examine the restriction of the US-Korea FTA and the Side Letter to see how the USA has restricted the exclusion effect of the EU GIs recognised as South Korean GIs. Thirdly, it will examine whether other third countries beyond the USA would benefit from the GI restrictions in the US-South Korea FTA—if yes, what sort of restrictions gained by the USA would have broader positive effects for which third countries? Finally, it will summarise what products may actually have the crowd-out effect and what remedies are available for other third countries. Before starting the analysis, it is worth further explaining the case selection. First, the selected case focuses on cheese products. There are several reasons for this selection. Cheeses are among the most GI-intensive products that have an extensive exporting market. In 2010, 48% of GI-labelled food exports from the EU were cheeses (Moir 2018). Current case studies on the value of GI labels often focus on wines and spirits (Skuras and Vakrou 2002). While wines and spirits bring considerable economic value, there is little contention about bilateral GI rules for their protection, given that higher-level protection has already been confirmed by TRIPS article 23. Furthermore, cheeses are among the most contentious products that  Free Trade Agreement between the European Union and its Member States, of the one part, and the Republic of Korea, of the other part, 2011 OJ L 127/1. 5  Free Trade Agreement between the Republic of Korea and the United States of America, available at https://fta.go.kr/webmodule/_PSD_FTA/us/doc/us_Fulltext_eng.pdf 4

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involve GIs and common names. On the one hand, the list of GIs for mutual recognition has been one focus for the EU in its treaty negotiations. Cheeses are, therefore, the most affected products by the differentiated micro-level rules on GIs as compared with other GI protected products. On the other hand, there are a considerable number of common names for cheese products in the New World countries, which makes cheese names the most contentious in the list for mutual recognition. Secondly, this article focuses on South Korea as an export destination. While many other countries have concluded trade agreements with the EU (Table 13.1) with lists of GIs for mutual recognition, the EU-South Korea FTA satisfies most of the conditions for the crowd-out effect as discussed in Sect. 13.2. Many of the EU’s trading partners, including the Andean, Central America, Canada, Australia, and New Zealand, have a food culture that has been significantly influenced by the EU. These countries are also identified as New World countries. In these countries, there are local producers of products similar to the EU’s GI-labelled products. Therefore, while the EU GI-labelled products would crowd out similar products, the impacts are on the trading partner directly (Slade et  al.  2019). As discussed, the direct impact of the EU GI provision on its FTA partner is not the focus of this article. After all, these countries did have opportunities to directly address their concerns in the negotiation process. In addition, concerning New World countries, it would be difficult to observe the distinct impact of the EU GIs on third-country producers because the change in domestic production would also impact imports from the third countries.

Table 13.1  Conditions and limits of the crowd-out effect in different EU FTAs EU’s counterparty in a trade agreement South Korea Andean community Central America SADC Canada Singapore Vietnam Japan China Australia and New Zealand

Time of conclusion 2010 2013 2012 2016 2016 2018 2019 2018 2020 Under negotiation

Number of EU GIs for mutual recognition other than wines and spirits 60 36

Agreement with the USA including GI provisions Yes No

Food culture is significantly influenced by EU emigrants No Yes

88 110 173 84 59 72 131 166

No No Yes No No No Yes Yes

Yes Overlapa Yes No No No No Yes

See Annex I to Protocol 3, List geographical indications from South Africa and the EU, Economic Partnership Agreement between the European Union and Its Member States, of the One Part, and the SADC EPA States, of the Other Part. South Africa listed 102 wines and three agri-food products (two types of infusion, and one lamb meet) to be recognised as GIs in the EU. https://trade.ec.europa.eu/doclib/docs/2015/october/tradoc_153915.pdf

a

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Thirdly, it is also necessary to analyse the situation of US FTAs to understand the differentiated impact on third countries, in particular, how the USA could counteract an EU FTA in a way other third countries cannot. Among the rest of the world identified in Table  13.1 (South Korea, SADC,6 Singapore, Vietnam, Japan and China), only South Korea and China have counter-EU provisions on GIs through their FTAs with the USA, respectively. Most of the early US FTAs did not include such provisions because they were concluded before the EU’s emphasis on GIs as a ‘must-have’ in its FTAs (DG AGRI 2012). This does not mean that GI provisions in EU FTAs with other countries in the list do not have a third-country impact, but only that US producers may be equally impacted as other third countries. Concerning China, both its agreements with the EU and the USA were concluded in 2020.7 From there, China- EU mutual recognition of GIs only started its implementation in 2021. Therefore, only a relatively short time has passed to observe the third-country impact in the Chinese case.

13.3.1 EU-South Korea FTA with the List of GI-Protected Cheese Names It was recognised by South Korean scholars in the negotiations leading up to the EU-South Korea FTA that South Korea had no choice but to agree to an asymmetric protection of GIs (Park 2020). South Korea accepted that it would offer higher-level GI protection for agri-food products beyond wines and spirits. In particular, the EU-South Korea FTA provides that “agricultural products and foodstuffs and wines” shall be protected against misleading, unfair competition and the use of a geographical indication identifying a good for a like good not originating in the place indicated by the geographical indication in question, even where the true origin of the good is indicated or the geographical indication is used in translation or transcription or accompanied by expressions such as “kind”, “type”, “style”, “imitation” or the like.8

This is a TRIPS-plus standard because it extends wines- and spirits-type protection (TRIPS article 23) to agri-food products in general. In addition, there is also a provision on terms that are homonymous to GIs (e.g., an EU GI and the same name used for a similar product from South Korea and vice-­ versa). If GIs from the EU and South Korea are homonymous, both names will be protected on the condition that they have been used in good faith. The Working  The Southern African Development Community (‘SADC’) countries include Botswana, Lesotho, Mozambique, Namibia, Swaziland and South Africa. 7  EU and China. Agreement on cooperation on, and protection of, geographical indications OJ L 408I, 4.12.2020, 3–43.; Economic and Trade Agreement between the Government of the United States of America and the Government of the People’s Republic of China, 2020, available at https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china/phase-onetrade-agreement/text 8  Article 10.21.1of the EU-South Korea FTA. 6

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Group on Geographical Indications composed of both parties will decide the practical conditions of use, including how the names will be differentiated from each other. The decision should consider the need for equitable treatment and guarantee that consumers are not misled. Importantly, the EU-South Korea FTA also provides measures to deal with names that are homonymous to GIs when the products come from third countries. Different from the homonymous terms from the parties, there is no guarantee that both names should be protected. It is entirely up to the party where homonyms are used to decide how to protect the names, considering the need for equitable treatment and guaranteeing that consumers are not misled. It should be noted that cases of homonymous products from the parties are rare. This is simply because the two parties have different food cultures and different language systems, and there are not many local producers of GI-protected names from the other party. The EU-South Korea FTA has also included a list of GIs for mutual recognition. The EU list has included 19 cheese names—nine from Italy, six from France, two from Spain, one from Greece, and one from Portugal. On the South Korean side, the FTA also has a list of Korean GIs to be protected as EU GIs covering products such as ginseng, garlic, rice, beef, pork, and green tea (among others), but not cheeses. Moreover, all listed South Korean GIs are compound names structured as ‘place name + species name’. This structure further confirms that there are no problems with homonyms for listed South Korean GIs. This is because, in a compound name, homonyms for the part of the species name (as a generic name that every producer can use) are acceptable, and the place name is the component that differentiates one GI from another (Table 13.2). It is essentially the singular names from the EU that may potentially have the crowd-out effect.

13.3.2 US Countermeasures in a Side Letter for the US-Korea FTA The US-South Korea FTA includes provisions that prioritize US trademark rights over GIs. Article 18.2.4 of the US-Korea FTA provides: Each Party shall provide that the owner of a registered trademark shall have the exclusive right to prevent all third parties not having the owner’s consent from using in the course of trade identical or similar signs, including geographical indications, at least for goods or services that are identical or similar to those goods or services in respect of which the owner’s trademark is registered, where such use would result in a likelihood of confusion. In the case of the use of an identical sign, including a geographical indication, for identical goods or services, a likelihood of confusion shall be presumed.

While article 18.2.4 clearly prioritises prior registered trademarks over a GI that could be subsequently recognised in the EU, it is important to understand its impact on third parties/countries. Given that trademarks are exclusive rights, it will prevent the use of identical or similar signs (words, including geographical and personal names, as well as letters, numerals, figurative elements, and colours) for similar products by a third party. This provision should be read together with the Side Letter

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Table 13.2  Cheese GI List in the EU-South Korea FTA and constraints from the USA Treatment in the US-Korea FTA Side Letter Names not restricted

A compound term that should be protected in its entirety.

A compound term that should be protected in its entirety (Camembert, Brie, Emmental and Mozzarella are generic names).

Cheese names in the EU-South Korea FTA Comté Reblochon Roquefort Φέτα (transcription into Latin alphabet: Feta) Taleggio Asiago Fontina Gorgonzola Provolone Valpadana Grana Padano Parmigiano Reggiano Pecorino Romano Queijo de São Jorge Mahón-Menorca Queso Manchego Camembert de Normandie Brie de Meaux Emmental de Savoie Mozzarella di Bufala Campana

Country of origin France France France Greece Italy Italy Italy Italy Italy Italy Italy Italy Portugal Spain Spain France France France Italy

of the US-South Korea FTA to identify the different effects when GIs are compound names or singular names (such as those in Table 13.2). In the case of a compound name, it could be difficult for a trademark to register in the first place. Using Brie de Meaux as the illustrative case, the registration would involve a product name (Brie), a place name (Meaux) or a combination of the two (Brie de Meaux). In the case of product name or place name, the likelihood of refusal for registration is high for lack of distinctiveness. However, if a compound name was registered as a trademark, it would prevent a third party (including the EU GI protected producers and other third parties) from using the same words for a similar product. In the case of a singular name being registered as a trademark (e.g. feta), whether the use of the name by others as part of a compound name would constitute an infringement of the trademark is a question for judicial decision based on the trademark law. In general, it is less likely that third parties would benefit from the US restriction through trademarks. However, since the scope of trademark protection is limited to the class of products, other users who use the name for other products in a way that does not conflict with the trademark will benefit from this rule. The priority of trademarks was further safeguarded as grounds for preventing registration and mutual recognition of GIs (article 18.2.15 US-South Korea FTA).

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Each party ‘may provide limited exceptions to the rights conferred by a trademark, such as fair use of descriptive terms’ in article 18.2.5 which could accommodate the interest of the GI owners so that the trademark and the GI could co-exist. However, in rare cases, if a trademark on cheese is registered by non-US and nonEU entities, the right-holder may still rely on article 18.2.4 of the US-South Korea FTA and the MFN principle to claim their prior right. The problem with this trademark restriction on GIs is that, by prioritising one type of exclusive right (trademark) over the other (GIs), only the right-holders benefit from such restriction. Given the tradition of using place names for cheese names by both people from within the place and emigrants for generations, such exclusivity may not be the right solution. Despite restrictions in the US-South Korea FTA, the EU-South Korea FTA still led to a deep concern for the dairy industry in the USA. Over 50 Members of the US House of Representatives requested the USTR to ensure that South Korea’s rules to implement the EU-South Korea FTA’s GI provisions ‘do not undercut the dairy market gains secured’ in the US-Korea FTA (Cooper et al. 2011). As the US-Korea FTA was signed earlier than the EU-South Korea FTA, Jong-Hoon Kim (South Korea’s Minister of Trade) confirmed in the Side Letter to Ron Kirk (the US Trade Representative) to guarantee these gains in the US-South Korea FTA. The USA was satisfied with the effect of the side letter so that ‘US exporters will be able to sell these cheeses into the important South Korean market’ (Cooper et al. 2011). The Side Letter deviates from the US-South Korea FTA’s emphasis on trademarks. It attempted to introduce two major restrictions on the listed EU names by specifying that these names are generic names. First, concerning compound terms, any restrictions or requirements the FTA may impose on the use of these compound terms extend only to the protection of the compound terms in their entirety. Individual components in compound terms, such as ‘grana’, ‘parmigiana’, ‘provolone’, or ‘romano’, (including their translation or transliteration) are not GI protected under the EU-South Korea FTA. It also confirms that certain terms such as ‘camembert’, ‘mozzarella’, ‘emmental,’ and ‘brie’, are generic terms in either the English or Korean languages, and their use should not be restricted by the EU FTA. It further emphasises that these cases are merely illustrative. Secondly, it confirms that a third-party opposition procedure will be in place in due course, according to the US-South Korea FTA. In addition to conflicting with existing trademarks, the Side Letter confirms another ground for the opposition that these names are generic in South Korea. The Side Letter has confirmed that GI protection for ten compound cheese names is only limited to their entirety, and the individual components are generic names. This is a considerable restriction as only 19 cheese names in total are listed by the EU in the EU-South Korea FTA. Meanwhile, the provisions about opposition and cancellation opened opportunities to impose further restrictions after the implementation of both treaties.

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13.3.3 Effects of the US Restriction – Who Benefits from It? From 2010 to 2020, the total cheese imports to South Korea increased from US$268 million to US$639 million, a 139% increase. Figure 13.2 shows the change in the distribution of cheese exporting countries to South Korea according to their country of origin from 2010 to 2020. Clearly, the imports from the USA have increased substantially (from USD 83.5 to USD 276 million, with a 231% increase). Following the US, the cheese exported from New Zealand and EU Member States that did not list their GI names in the EU-South Korea FTA (Germany, Denmark and the Netherlands) have also experienced a greater increase in cheese exports than Italy and France (see Fig.  13.2) which exported GI-protected cheese products. In the same period, exports from Australia slightly decreased. Meanwhile, cheese exports from Argentina to South Korea decreased from US$6.35 million in 2010 to zero in 2020. Among the top ten cheese exporters to South Korea as shown in Fig. 13.1, all have concluded FTAs with South Korea, and all have quota arrangements in cheese products in their FTAs. Changes in cheese exports were not only impacted by the GI rules but also by tariffs and quota limits set by the trade agreements with South

Fig. 13.2  Change of Cheese Exports to South Korea (2010–2020). (Simoes and Hidalgo 2011)

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Korea. Still, GIs play an important role as otherwise some of the US cheeses could not enter the Korean market in the first place. The Side Letter for the US-Korea FTA has clarified the GI protection for compound names, which effectively mitigated the crowd-out effect for more than half of the cheese GI names listed in the EU-South Korea FTA. This may have contributed to a significant increase in the US export of cheese to South Korea. What is the effect of the cheese GI lists after the adjustment of the Side Letter of the US-South Korea FTA, and which third countries benefit from the US restriction on the EU’s GI list? Initially, five countries (Italy, France, Greece, Portugal and Spain) listed GI names in the EU-South Korea FTA. With the restriction in the Side Letter of the US-South Korea FTA, the countries that can effectively be protected by the GI list for their cheese products are Italy, France and Greece (Table  13.2). Cheese exports from these three countries increased in this period as well – Italy from US$5.5 million in 2010 to US$27.9 million in 2020, France from US$20.3 million to US$28.9 million, whilst Greek exports increased over 50 times, from US$5470 to US$304,000. Still, the absolute value of Greek exports remains small as compared with other exporters. It seems that EU Member States that did not have cheese GIs listed for mutual recognition in the EU-South Korea FTA have experienced the greatest increase in their cheese exports in this period. For instance, cheese exports to South Korea from Germany and Denmark both increased more than ten times in this period—from US$4.62 million to US$48.2 million for Germany and US$3.45 million to US$39.9 million for Denmark. Although New Zealand has also experienced an increase, it was only a 20% increase in a decade, considering that New Zealand was already a big exporter of cheese to South Korea in 2010. New world countries such as Australia and Argentina have even experienced a decrease in cheese exports to South Korea in that decade. While quota limits and tariffs impact how the crowd-out effects on different third countries present in reality, the above analysis shows that Germany, Denmark and Netherlands may have benefited most from the restrictions by the Side Letter of the US-Korea FTA on cheese GIs proposed by the EU-South Korea FTA. Within the EU, there are disputes about the use of GI names such as ‘Parmigiano Reggiano’ in different  EU Member States. In a 2008 ruling from the Court of Justice of the European Union (‘CJEU’), Germany’s argument that the term “parmesan” had become a generic name was dismissed; the CJEU confirmed that only cheese bearing the Protected Designation of Origin (‘PDO’) ‘Parmigiano Reggiano’ can be sold under the name ‘Parmesan’.9 However, parmesan is a generic name in the USA (Zacher 2005). Given that the Side Letter of the US-Korea FTA has clarified that only “Parmigiano Reggiano” in its entirety is recognised as a protected GI in South Korea, it is clear that “parmesan” is not a protected GI in South Korea. Consequently, products imported to South Korea under this name in general, even from other EU Member States,  are not excluded by the listed GI “Parmigiano Reggiano” in the

 European Commission v. Federal Republic of Germany, ECJ Case C-132/05.

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EU-South Korea FTA. This example illustrates how EU Member States could benefit from the Side Letter of the US-Korea FTA by exporting products under a name such as parmesan to South Korea while they could not use such a name for the same products in the EU’s internal market due to EU-wide GI protection.

13.3.4 What Products Are Crowded out, and What Remedies Are Available? Based on the previous analysis, it is clear that the eight cheese names that are still effective as GIs after the conditions clarified by the Side Letter of the US-South Korea FTA will have a crowd-out effect on imported cheeses from third countries. These names include feta, Comté, Reblochon, Roquefort, Taleggio, Asiago, Fontina, and Gorgonzola. Among these names, the most controversial one is feta, as it is considered a generic name in many countries (Gangjee 2007b). It is confirmed by Dairy Australia that after the implementation of the EU-South Korea FTA, Australian cheeses that are previously exported to South Korea cannot be exported under the name of ‘feta’, but rather must be renamed ‘white cut cheese’ (McElhone 2018). This may provide an explanation for the decrease in Korean cheese imports from Australia. Still, the exclusive effect of the GI list extends only to the name, not the product per se. While the same product can continue to be imported to Korea from a third country with a changed product name, changing names is often associated with changing packaging, extra marketing costs and a diminished reputation among consumers. There are certain drawbacks to the US approach of imposing restrictions through a Side Letter. The Side Letter does play an important role as a countermeasure, but which cheese GI is restricted primarily depends on the landscape of cheese production within the USA and the MFN principle. The US domestic interests in the dairy industry also set the boundary for the extent to which other third countries could free ride on the US restriction. Cheese names that are ultimately crowded out are those relevantly insignificant for the USA such as feta. As discussed in Sect. 13.2, other third countries are not as powerful as the USA to safeguard their interests in cheese names that are insignificant to the USA. Furthermore, the opportunity for other third countries to free ride the US restriction on the EU GIs is limited. The USA approach of using its own FTA to restrict another FTA is another example of solution-oriented micro-level management. It avoids facing the real competing demands of the EU and uses asymmetric power to safeguard its own gains in its FTA. Consequently, the EU could also avoid the issue of the impact of its GI list on third countries/parties without providing an unambiguous provision within the EU-South Korea FTA. Other third countries, while having their interests impacted by the GI lists in the EU-South Korea Trade Agreement, could not afford such ‘self-­ help’ as the USA did. They could neither seek remedies in the EU-South Korea FTA.

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13.4 Conclusions This article examined an underexplored issue of the EU FTAs’ impact on third countries, with a focus on GIs. It proposed the hypothesis of the crowd-out effect vis-à-vis products exported from third countries. Specifically, when an EU GI-protected product listed in the EU FTAs is the same as product names exported from a third country, the EU producer will exclude third-country exporters from using the same name. The crowd-out effect affecting third countries would happen under conditions when the country that concludes an FTA with the EU has a different food culture as compared with the EU. Powerful third countries, such as the US, could conclude FTAs with the same partner to limit the crowd-out effect. Other third countries could free ride on the US limitation if it is based on the ground that certain names are generic names. This article further uses EU-South Korea FTA’s GI list including 19 cheese names, as an illustrative case to examine the crowd-out effect. The Side Letter of the US-Korea FTA has restricted the exclusivity of 11 names out of 19 listed cheese names. While exporters from all other third countries could rely on the US restrictions in the Side Letter, certain EU Member States (Germany, Denmark and the Netherlands), instead of the New World countries such as New Zealand and Australia, experienced the most significant increase from 2010 to 2020  in their cheese exports to South Korea. The case also shows that the eight remaining cheese GIs that were not restricted by the USA do exclude imports from third countries. For instance, Australian exporters are not allowed to use the name ‘feta’ after the implementation of the EU-South Korea FTA. The EU’s list of GIs for mutual recognition and the US approach of using its own FTA to restrict another FTA are typical examples of a solution-oriented micro-level management of norm collisions in international intellectual property law. While collisions of norms are managed at the micro level, power dynamics play a key role in generating and limiting the crowd-out effect. Both the EU’s inclusion of GIs for mutual recognition and the US countermeasures, while finally consolidated as complex rules in trade treaties, are based on their position of strength in trade negotiations. Even though the USA has successfully limited the crowd-out effect for certain names, a separate treaty between the USA and Korea has avoided the issue of lack of remedies in the EU-South Korea FTA. Less powerful third countries may not be able to leverage trade negotiations to limit restrictions on names that are important to them. They are not provided with a pathway to seek remedies that should otherwise be available in the EU-South Korea FTA. This is a preliminary study on the crowd-out effect. It contributes to the literature by proposing the hypothesis of the ‘crowd-out’ effects based on the contents of trade treaties, the perceived asymmetrical dynamics of negotiations, and micro-­ level application of MFN on the listed GI names for mutual recognition. While comprehensive empirical examination of the FTAs and products where the crowd-out effect exists is beyond the scope of this study, it  sets the foundation for future research with more rigorous methods and research examining the crowd-out effects

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for other listed GI products in other EU FTAs. While future case studies are important, caution is needed not to generalise findings from one case. This is because studies on the economics of GIs (either the willingness to pay for a premium for GI labelling or the impact on rural prosperity) is characterized by heterogeneity in both the products and research methodologies (Török et al. 2020). Such heterogeneity means that the implications of one case are often limited. Even with limited empirical evidence, a systematic solution to the crowd-out effect seems to be needed. This is because the same name in the third country has long been considered generic and can be freely used. These interests are undermined by the GI list in the EU FTAs, and the implementation of the EU FTAs has created new obligations for these exporters from third countries not to use the same name. The Side Letter in the US-South Korea FTA was triggered precisely by discontent in the US dairy industry, which lobbied their government to take action. But the US pragmatic approach is based on its dominant position in trade negotiations and aimed to seek a micro-level solution to soothe the emotions of its domestic dairy industry. Since the US does not solve the problem as a third State being impacted by the EU-South Korea FTA, but rather through its own FTA with South Korea, the fundamental question about the legitimacy of the new obligation for third States is not resolved. Nonetheless, such obligation did not exist in the EU’s trading partner before the FTA and does not exist in the third country even after the FTA, and third parties are adversely impacted without being properly consulted. Without a systematic solution that all related parties are engaged in, such obligations to producers and exporters from the third country will develop into general practice in international trade law. Such problematic evolution may impact not only the EU and the New World countries, but also the rest of the world when they model the EU in their own trade treaties. As pointed out by South Korean scholars, South Korea has learned from the EU strategies and will take the same strategy towards certain common names used in Japan and China – ‘renegotiating the GIs in the EU-Korea FTA can be a method for Korea to protect Korean products from overlapping Chinese and Japanese products’ (Park 2020). Acknowledgement  I thank Dr Hazel Moir for the inspiration to explore this topic and for her constructive comments on various versions of this chapter, and Dr Katarzyna Kwapisz Williams for organising two workshops in 2021 to present the initial findings of this case study, as well as to get feedback from other participants. I would also like to thank Associate Professor Ottavio Quirico for his helpful comments towards finalising the manuscript.

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Correa C (2020) Trade related aspects of intellectual Property rights: a commentary on the TRIPS agreement. Oxford University Press Creditt EC (2008) Terroir v. trademarks: the debate over geographical indications and expansions to the TRIPS agreement. Vand J Ent & Tech L 11:425 Curzi D, Huysmans M (2022) The impact of protecting EU geographical indications in trade agreements. Am J Agric Econ 104(1):364–384. https://doi.org/10.1111/ajae.12226 DG AGRI (2012) Working document on international protection of EU geographical indications: objectives, outcome and challenges. Advisory group international aspect of agriculture Drahos P (2001) BITs and BIPs. J World Intellect Prop 4(6):791–808 Dutfield G (2021) Not just patents and data exclusivity: the role of trademarks in integrated Ip strategy – where lies the public interest? In: Ragavan S, Vanni A (eds) Intellectual Property Law and access to medicines: Trips agreement, health, and pharmaceuticals. Routledge, London, pp 431–445 Economic and Trade Agreement between the Government of the United States of America and the Government of the People’s Republic of China (2020). https://ustr.gov/countries-­regions/ china-­mongolia-­taiwan/peoples-­republic-­china/phase-­one-­trade-­agreement/text Engelhardt T (2015) Geographical indications under recent EU trade agreements. IIC Int Rev Intellect Prop Com Law 46(7):781–818 EU and China. Agreement on Cooperation on, and Protection of, Geographical Indications OJ L 408I, 4.12.2020, 3–43 European Commission v. Federal Republic of Germany (2005) ECJ Case C-132/05 Frankel S (2017) Geographical indications and mega-regional trade agreements and negotiations. In: Calboli I, Ng-Loy WL (eds) Geographical indications at the crossroads of trade, development, and culture: focus on Asia-Pacific. Cambridge University Press, Cambridge, pp 147–167 Free Trade Agreement between the European Union and Its Member States, of the One Part, and the Republic of Korea, of the Other Part, 2011 OJ L 127/1 Free Trade Agreement between the Republic of Korea and the United States of America (2007). https://fta.go.kr/webmodule/_PSD_FTA/us/doc/us_Fulltext_eng.pdf Gangjee D (2007a) Quibbling siblings: conflicts between trademarks and geographical indications. Chi-Kent L Rev 82:1253 Gangjee D (2007b) Say cheese! A sharper image of generic use through the lens of feta. Eur Intellect Prop Rev 29(5):172–179 Gholiagha S, Holzscheiter A, Liese A (2020) Activating norm collisions: Interface conflicts in international drug control. Glob Const 9(2):290–317. https://doi.org/10.1017/S2045381719000388 Jong-Hoon K (2011) Letter to USTR Ron Kirk. http://www.ustr.gov/countries-­regions/ japan-­korea-­apec/korea/exchange-­letters-­between-­ambassador-­kirk-­and-­trademinister Josling T (2006) The war on terroir: geographical indications as a transatlantic trade conflict. J Agric Econ 57(3):337–363 Landes WM, Posner RA (2003) The economic structure of intellectual Property law. Harvard University Press Lightbourne M (2021) What’s in a name? The journey of geographical indications from Paris 1883 to Geneva 2015. GRUR Int 70(10):932–942. https://doi.org/10.1093/grurint/ikab050 Marie-Vivien D, Biénabe E (2017) The multifaceted role of the state in the protection of geographical indications: a worldwide review. World Dev 98:1–11 McElhone C (2018) Presentation at the understanding geographical indications workshop. ANU Centre for European Studies, The Australian National University. https://ces.cass.anu.edu.au/ events/understanding-­geographical-­indications Moir HVJ (2018) The size of the GI market and the importance of GIs in the EU. GIs: what do we know and what should we know? Presentation. Canberra. https://politicsir.cass.anu.edu.au/ sites/default/files/docs/2019/1/2018_09_04_Berlin_Moir_GIMarketSize.pdf Nguyen SL, Le VA (2023) Diffusion of geographical indication law in Vietnam: “Journey To The West”. IIC 54:176–199. https://doi.org/10.1007/s40319-­023-­01289-­9 Omachi M (2019) A tale of two approaches: analysis of responses to EU’s FTA initiatives on geographical indications (GIS). Chi-Kent L Rev 18:153

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Chapter 14

The Evolutionary Process of Tax Treaties and Its Interplay with EU Law: A Critical Analysis Saurabh Jain and Maria Eleni Pouliasi

Contents 14.1  I ntroduction 14.2  Approaches to Prevent Double Taxation 14.2.1  The Unilateral Approach 14.2.2  The Bilateral Approach 14.2.3  The Multilateral Approach 14.3  The Network of Bilateral Double Tax Agreements 14.3.1  The Status Quo 14.3.2  The Multilateral Instrument: A Step Forward 14.3.3  Tax Information Exchange Agreements: A Step Backward 14.4  Dichotomy Between Bilateralism and Multilateralism: The Arm’s Length Principle in EU Case Law 14.4.1  The Arm’s Length Principle 14.4.2  The Arm’s Length Principle Under the EU Case-Law: Apple, Fiat and Starbucks 14.5  Conclusion References

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Abstract  Although the existing network of double tax agreements, the Model Tax Information Exchange Agreement (‘TIEA’), and the Multilateral Instrument (‘MLI’) co-exist, they indicate that the evolutionary process of tax treaties is heading towards different directions. Today, more than 3000 double tax treaties exist, most of which follow either the Organisation for Economic Co-operation and Development (‘OECD’) or United Nations (‘UN’) Model Tax Convention. Traditionally, the system of international taxation consists of a network of tax agreements, which are

S. Jain (*) Curtin Law School, Curtin University, Perth, Western Australia, Australia M. E. Pouliasi University of Auckland, Auckland, New Zealand e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 O. Quirico, K. Kwapisz Williams (eds.), The European Union and the Evolving Architectures of International Economic Agreements, https://doi.org/10.1007/978-981-99-2329-8_14

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bilateral in nature. Thus, the current framework of the double tax agreements represents the status quo. Despite the widely known advantages of the multilateral approach in the evolution of tax treaties, the first noticeable development took place in 2016 with the adoption of the MLI as a result of the Base Erosion and Profit Shifting (‘BEPS’) project. Although the MLI is the first step, it is a beacon to a shift towards multilateralism. From the point of reference of the current network of bilateral double tax agreements, the adoption of the MLI is a step forward. In 2002, following the OECD’s efforts to address harmful tax practices, the OECD formulated the Model TIEA. In contrast to bilateral double taxation agreements—which govern the taxation of various aspects of cross-border transactions—tax information exchange agreements regulate the aspect of the exchange of information only. They are special agreements with a limited scope. The existence of TIEAs is justifiable; however, from the point of reference of the current network of bilateral double tax agreements, they represent a step backward. This chapter also analyses the bilateralism versus multilateralism dichotomy in the light of recent European Union (‘EU’) transfer pricing case law. The chapter, in particular, refers to the Apple case. The EU courts have used treaty law to solve matters related to EU law. Their approach creates an opening to a fertile dialogue between the EU and third countries. It also results in the recognition and incorporation of some internationally accepted principles into positive law. The next step towards multilateralism is to incorporate these principles as binding parts of the MLI. Keywords  Double taxation · Model tax information exchange agreement (‘TIEA’) · OECD multilateral instrument · UN model tax convention · Arm’s length principle

14.1 Introduction While Austro-Hungary and Prussia concluded the first international double income tax treaty in 1899, the network of international tax treaties has emerged and evolved after World War I. Negotiators of the current system of double tax avoidance have considered the multilateral approach to be most effective and efficient, and their objective has been to conclude a worldwide multilateral double tax treaty. However, despite their efforts, countries have preferred to conclude double tax treaties on a bilateral basis. As a result, bilateral double tax agreements predominate the current network of tax treaties. Nevertheless, multilateralism has not lost its relevance to the evolution of tax treaties. Countries have found the multilateral approach useful for coordinating on issues, which are different from the allocation of taxing rights, but are related to the avoidance of double taxation. The OECD’s MLI and the multilateral version of the Model TIEA are two relevant developments. Several scholars have analysed the evolution of tax treaties in a historical context. Many others have explored the possibility of developing multilateral double tax treaties in different forms. This chapter adds to the literature by investigating these developments from

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the point of reference of the existing network of double tax treaties, and by determining how these developments contribute to the evolution of tax treaties. The remainder of this chapter contains three sections. The first sets out the three levels at which nations can adopt measures to mitigate double taxation: unilateral, bilateral and multilateral. It also explains their relative merits and demerits. The second examines developments in the evolutionary process of tax treaties. It argues that the existing network of bilateral double tax agreements is the status quo and analyses the reasons why countries have preferred to adopt the bilateral approach to preventing double taxation as against multilateral one, despite the widely known advantages of the latter over the former. It also examines the MLI and Model TIEA and argues that while the former is a step forward in the direction of multilateralism, the latter is a step backward. The final section focuses on the dichotomy between bilateralism and multilateralism in the light of EU case law. In particular, it refers to transfer pricing cases, in which the EU courts have used treaty law to interpret EU law. It explains possible reasons why the courts adopted this approach and highlights its potential implications on the international tax system, particularly from the standpoint of general international law.

14.2 Approaches to Prevent Double Taxation Although economic activities are globalised, the authority to tax income that they generate lies with nation-States. Most countries assert teir authority to tax on the basis of one of two criteria. First, they are a ‘residence State’. That is, they regard the recipient of income as a resident for tax purposes. Second, they are a ‘source State’, which means that income originated within their territory. If a residence State as well as a source State exercise to the fullest their jurisdiction to impose tax on income generated by a cross-border transaction, the income is taxed more than once. This phenomenon is referred to as ‘double taxation’. The problem with double taxation is that it results in a higher tax burden for international investment than for domestic investment. The difference in the tax burden, in turn, leads to an inefficient allocation of capital. In order to avoid double taxation, countries can adopt countermeasures at the unilateral, bilateral, and multilateral levels (Rixen 2010, 594; Vogel 1986, 5).

14.2.1 The Unilateral Approach Most countries have unilaterally enacted provisions for mitigating double taxation as part of their domestic tax law. When a country is a State of residence it might allow a credit for the tax levied in the source State up to an amount equal to its own tax charge. This method was developed under Anglo-American law. Alternatively, a residence State might exempt income if it is taxed in the source

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State. Countries such as the Netherlands and Switzerland use the exemption method (Vogel 1986, 9). Nevertheless, unilateral measures are insufficient to avoid double taxation for a few reasons. First, they generally do not cover all situations, which give rise to double taxation. For example, unilateral measures may not resolve cases in which double taxation arises from the fact that the taxpayer is considered to be a resident of two States. Second, unilateral measures are confined to the domestic tax law, whereas foreign tax law cannot be modified by them. In other words, unilateral measures provide tax relief only in the country of residence. The problem is that while most source countries impose tax on payment of passive income – which includes dividends, interest and royalties – on a gross basis using withholding tax, residence countries impose tax on a net basis. If the foreign country’s tax at source is not sufficiently limited, there remains a tax excess that cannot be credited against the tax imposed by the country of residence. This situation results in an additional tax burden as compared with tax in the residence country (Nortcliffe 1976, 227). The bilateral approach to avoid double taxation overcomes limitations of unilateral measures. At the bilateral level, countries prevent double taxation by concluding so-called ‘double tax agreements’. They use double tax agreements, in addition to unilateral measures.

14.2.2 The Bilateral Approach Bilateral double tax agreements operate by assigning jurisdiction to tax to either the source State or the residence State for different kinds of income. In other words, it limits the substantive right to tax of either the source State or the residence State according to the type of income involved in a cross-border transaction. Thus, an object and purpose of any tax treaty is to eliminate double taxation; and to do so more effectively than unilateral legislation (Dunlop 2006, 233). Unlike unilateral measures, double tax agreements affect tax conditions in both States. Thus, while the residence country is willing to grant unilateral tax relief, double tax agreements restrict or even waive taxation in the source country. A limit on source-country taxes reduces the tax burden of the residence country’s investors abroad. Further, double tax agreements deal with certain cases of double taxation, which are not covered by unilateral measures. For example, double tax treaties contain tie-breaker rules to resolve situations in which a taxpayer is considered to be a resident of both contracting States. (Nortcliffe 1976, 227). While bilateral double tax agreements deal with lacunae in the operation of unilateral measures, they have their own limitations (Thuronyi 2001, 1654–1661). Double tax agreements work well when transactions are carried on between only two countries. A purpose of double tax treaties is to avoid the double taxation of income by two States. They apply only to residents of one contracting State, who receive income from the other contracting State or who possess assets located in the other contracting State. They become less effective, however, for transactions that

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involve more than two jurisdictions. Such transactions include the so-called ‘triangular cases’, which involve three countries. For example, a typical triangular case may involve a company resident in State A, which has a permanent establishment located in State B and the permanent establishment receives passive income from another company in State C. In such a case, even if there are tax treaties between each of States A, B and C, it is hard for tax administration to determine how to best tax the company in State A. Regardless of whether triangular cases could be adequately dealt with bilaterally, in practice they would not be dealt with bilaterally in the foreseeable future. The existing network of double tax treaties arguably insufficiently covers middle and low-income countries. It takes substantial time to negotiate and ratify double tax treaties, and smaller countries typically do not have the resources needed to negotiate numerous treaties and may have higher priorities. Contracting States of each double tax agreement limit their substantive right to tax reciprocally. In this way, each treaty is sui generis, with provisions set in a manner to balance the competing interests of the two countries involved. Because each double tax agreement is a different legal instrument, different jurisdictions take different interpretive positions on similar or identical clauses. This situation leads to confusion and legal uncertainty. Bilateral treaty networks are difficult to amend; and amendment is costly and slow. Double tax agreements are therefore far from responsive to rapidly developing tax planning strategies. Different countries agree to provide different concessions to different treaty partners. Varying terms of different treaties invite treaty shopping. Whenever a country provides more concessional tax benefits for certain treaty partners, an incentive is created for investors to locate companies in these States, rather than making the investment through a company located in a treaty partner with a less favourable provision. Many scholars consider multilateral double tax treaties to be a solution for the shortcomings of bilateral double tax treaties.

14.2.3 The Multilateral Approach Scholars and international economic organisations have envisaged different forms of multilateral tax treaties (Brooks 2010, 219; McIntyre 2002, 253). Certain scholars and international economic bodies have advocated implementing a worldwide multilateral tax treaty, which would replace the existing network of bilateral tax conventions. (Bird 1988, 297; Loukota 1998, 86–87; Thuronyi 2001, 1642–1643). The International Chamber of Commerce, League of Nations, and OECD attempted individually to develop such a treaty. In 1920, soon after the First World War, the International Chamber of Commerce initiated the effort to formulate a multilateral tax treaty with the objective to overcome international double taxation and to promote the recovery of the world trading system (Graetz and O’Hear 1997,

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1066–1074). It continued working until 1925, when the League of Nations assumed a leadership position in drafting a multilateral tax treaty. In 1946, when the League of Nations dissolved, the Organisation for European Economic Co-operation (‘OEEC’) took over. However, none of these bodies was able to succeed. Eventually, in 1992, the OECD – which replaced the OEEC – abandoned the plan of developing a multilateral tax treaty (OECD 2017a, 20–21). Scholars have analysed in detail the emergence of tax treaties from a historical perspective. This chapter, in Sect. 14.3, focuses on the reasons why bilateral double tax treaties have prevailed in international tax law and refers to the documents of the international bodies in this context. Some scholars favour regional tax treaties and/or regional model tax treaties (Brooks 2010, 227; Jogarajan 2011, 2; Nakayama 2021, 1 and 7; Vann 2010, 31). A regional tax treaty is concluded only among member countries of a regional economic community. Some examples are the Caribbean Community (‘CARICOM’) double taxation agreement, Decision 40 of the Andean Pact, and the Nordic double taxation treaty. Generally, such treaties aim to showcase political commitment for regional integration and to facilitate economic and trade activities within the community by ensuring the elimination of double taxation. They also strengthen cooperation between tax authorities in the region through provisions on exchange of information or assistance in the collection of taxes. A regional model tax treaty – such as the Association of Southeast Asian Nation (‘ASEAN’) Model Tax Treaty – is an agreement among community members on preferred positions to pursue in negotiating a bilateral tax treaty with non-community countries. Moreover, some regional communities could have hard regional laws, which may require each community member to impose minimum rates of tax on different types of income, and which may restrict members from concluding bilateral tax treaties with non-­ members. A good example is the EU Value Added Tax (‘VAT’) Directive. However, the EU does not have hard law on corporate income tax rates. Other scholars recommend developing a multilateral treaty that addresses specific aspects of international taxation, which could be signed by governments with an interest in becoming its signatories (Arnold et al. 2002, 71; Dunlop 2006, 247; Graetz and O’Hear, 1997, 1096–1097; Oliver 2003, 606). It is unclear whether the scholars intend to refer to treaties on provisions concerning the prevention of double taxation, or they also mean to include treaties that address aspects other than the prevention of double taxation. Further, it is not certain whether this category includes treaties that would co-exist with the model conventions and bilateral treaties, or whether such treaties exist only for the purpose of amending a model convention and double tax treaties. As with such scholars, this chapter puts these variants in the same category; however, for the purposes of the analysis, it considers these points of variation. The MLI as Action 15 of the BEPS project and the multilateral version of the Model TIEA are two good examples. This chapter analyses particularly these two instruments, because, from the point of reference of the current network of bilateral treaties, each of these instruments represents two different directions in which the evolutionary process of tax treaties has proceeded. Regardless of the form taken by a multilateral treaty, scholars have identified certain common advantages of multilateral agreements (Brooks 2010, 220–224;

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McIntyre 2002, 253; Thuronyi 2001, 1654–1661). First, multilateral treaties are more effective than bilateral treaties at resolving triangular cases in equitable ways. Adequate resolution of triangular cases would require comprehensive treaty coverage and a harmonised approach, and multilateral treaties embody such attributes. Second, middle- and low-income countries, which do not have the resources to negotiate different bilateral tax treaties, can potentially benefit from multilateral tax treaties to which they could later accede. Third, the uniform text of the multilateral treaty would help signatories to develop a common understanding about its meaning, which in turn would help them to interpret consistently the fundamental and generic principles of double tax treaties. Moreover, the text of the multilateral treaty would be easier to amend and, when amended, would affect international transactions globally rather than only as between two countries. Fourth, a multilateral treaty would reduce treaty shopping. All members of a multilateral treaty agree to offer same concessional tax benefits. Thus, no incentive would exist for the investor to divert investment through a third country. Despite the known and widely discussed benefits of multilateral double tax treaties, bilateral double tax treaties dominate the international law of taxation (Brauner 2003, 317). The next section discusses the reasons for this phenomenon.

14.3 The Network of Bilateral Double Tax Agreements 14.3.1 The Status Quo Scholars have settled upon three reasons behind the tendency of tax treaties towards bilateralism—strongly diverging interests, bad timing and the increasingly reducing relevance of the multilateral treaty (Broekhuijsen 2017, 21; Vann 2010, 1–3). The requirement of a multilateral treaty often expressed by drafters can be regarded as a call for more uniformity in tax systems. In the context of a worldwide multilateral tax treaty, uniformity of tax systems around the world is not feasible because, in the matter of double tax avoidance, fiscal systems of countries differ about allocating the right to tax income in a cross-border transaction (Vann 2010, 7). While some countries advocate source-based taxation, others favour residence-­ based taxation. This difference of opinion exists particularly over the division of tax jurisdiction for mobile capital, such as interest and dividends (Carroll 1939, 35). Draftsmen have been unable to resolve the differences, and hence, have been unsuccessful in formulating a general principle to allocate the right to tax (League of Nations 1927, 8; League of Nations 1928, 5). For this reason, they chose to reconcile the diversity of nations’ tax rules through special rules at the interface of tax systems. A consequence of this approach is that each interface of two tax systems has different features; and diverse features of each interface mean that reconciliation is done on a case-by-case basis. That is, bilateral rather than multilateral tax treaties have become the rule (Arnold et al. 2002, 71; Vann 2010, 7 and 39).

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As discussed above, another type of multilateral treaty is the one signed by regional and trading blocs. Most of the existing multilateral double tax treaties are regional, and they involve countries with similar economic and cultural backgrounds so that the necessary degree of uniformity exists (Schön 2009, 67; Vann 2010, 2 and 35). However, they appear marginal in comparison with the international tax environment to include major trading nations. These multilateral treaties are extensions of current bilateral treaties. The tax treaty world is essentially bilateral and any treaty that a regional group concludes with a country outside the group would essentially be a bilateral exercise. The adoption of bilateral norms by a regional group in dealings with countries outside the group then flows back to affect the tax relations within the group (Vann 2010, 27). Between 1929 and 1935, the League of Nations developed certain drafts of a multilateral double tax treaty (League of Nations 1930, 1931). During the time it developed the drafts, the bilateral approach to prevent double taxation gained popularity in Europe, whilst political tension was on the rise or already existed among the States. Thus, even if countries had adopted one of the drafts as a multilateral convention, they could not have fully prevented double taxation. Considering the increase in the number of bilateral tax treaties, timing of the formulation of the drafts, and the inability of the drafts to reconcile the pre-existing diverse interests, the League of Nations was uncertain about the likelihood of an adequate number of States acceding to the drafts (League of Nation 1931). It remained silent on formalising a draft (League of Nation 1933). Consequently, cross-border transactions continued to be governed by the existing bilateral double tax treaties (Avi-Yonah 2009, 106; Broekhuijsen 2017, 14). In 1955, the OEEC considered drafting a multilateral tax treaty. By that time, the number of bilateral tax treaties concluded had risen rapidly. When considering that no model tax convention existed at that time, it is well possible that the treaties differed in terms of structures, rules, and concept; and it was difficult and impractical to replace—and hence change—the treaties (Broekhuijsen 2017, 20; Vann 2010, 2). Thus, in 1958, before formulating a multilateral convention, the OEEC decided to develop a model bilateral tax convention, which could lay down a foundation for developing a multilateral convention (OEEC Fiscal Committee 1958, 7). In 1992, considering the success of the OECD Model Convention, which was first adopted in 1963, the OECD decided to abandon its efforts to formulate a multilateral convention. It believed that concluding a multilateral tax convention was no longer practical (Broekhuijsen 2017, 21). The chronology of events suggests that the priority of drafters was to formulate a worldwide multilateral tax treaty; however, they could not adopt one, especially because countries reached an impasse in negotiations on the allocation of taxing rights for passive income (Vann 2010, 7 and 26). The objective of the international bodies was to prevent further disintegration of international fiscal law caused by the two world wars. Therefore, in order to make things work, they opted for the bilateral approach to prevent double taxation as a short-term solution (Broekhuijsen 2017, 21).

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Nevertheless, countries have continued to use the bilateral approach to prevent double taxation. Double tax conventions are regarded as current tools of international tax coordination. Model tax conventions drafted individually by the OECD and UN form a background and a starting point for negotiations between individual governments (Dunlop 2006, 235). Particularly for tax coordination at the global level, the traditional regime of double taxation treaties will stay on for a long time. In this sense, the current system of bilateral treaties can be regarded as the status quo in the evolution of international tax agreements (Mason 2020, 354; Schön 2009, 86 and 88). A point that emerges is that the approach underlying a worldwide multilateral tax treaty would be harmonization of nations’ tax systems. A consequence of the approach is that signatories would have to cede their national tax sovereignty. Countries have historically—and understandably—been unwilling to do so, and it is highly unlikely that they would elect to do so in the foreseeable future. By contrast, bilateral tax agreements seek to coordinate or reconcile differences and overlaps of national tax systems while preserving national sovereignty in tax matters by causing the least interference possible with national tax rules. Given the ability to take different positions with respect to different treaty partners—especially with respect to the allocation of taxing rights—countries prefer bilateral tax agreements to a worldwide multilateral tax treaty. It follows that they prefer tax coordination to tax harmonisation. Not all types of multilateral tax treaties seek to harmonise nations’ tax systems. It may be recalled from earlier in this chapter that another category of multilateral tax treaties contains treaties that address specific aspects of international taxation. The MLI and the multilateral version of the Model TIEA are good examples of such multilateral treaties. These seek tax coordination on issues other than the allocation of tax jurisdiction. Further, in the light of the popularity of bilateral tax treaties, certain scholars suggest that new moves in tax coordination should be made in the context of the existence of the current network of bilateral treaties (Broekhuijsen 2017, 21; Schön 2009, 86). Both the MLI and the multilateral version of the model TIEA are meant to operate with the current system of bilateral treaties. The next few sections examine these two instruments.

14.3.2 The Multilateral Instrument: A Step Forward Multinational companies have used loopholes in domestic tax laws and tax treaty rules alike to obtain unintended, skewed consequences, and to exploit cross-border tax disparities to artificially shift profits to low or no-tax locations. Because such companies perform little or no economic activity at such locations, they pay little or no overall corporate tax. Consequently, the OECD and G20 launched the BEPS project. In October 2015, they launched final reports on the BEPS Actions, which essentially set forth, among other things, some minimum standards as regards tax

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treaty rules, some optional tax treaty rules and some best practices or framework rules for domestic anti-avoidance practices (OECD 2016a, 1). More than 3000 bilateral tax treaties exist. Renegotiating them individually in order to implement the treaty-based changes would have been very difficult and time-consuming. Thus, such changes were implemented through a multilateral instrument. Action 15 of the BEPS project envisaged the formulation of the MLI, which, when signed by multiple countries, could modify the application of each tax treaty that involved the signatories (OECD 2015a; Govind and Pistone 2018, 111). The primary purpose of the MLI is to implement the recommendations of the BEPS project, while double tax treaties have two objects and purposes—to avoid double taxation, and to prevent tax avoidance and double non-taxation. It focuses on tax base erosion and profit shifting, governing issues, such as application of mechanisms to eliminate double-taxation, avoidance of permanent establishment status and enhancement of the tax dispute resolution mechanism. The MLI aims to amend existing tax agreements and is referred to as an instrument, rather than as a convention. Provisions of the MLI—which implement certain minimum standards—support impliedly objectives of tax treaties. For example, article 16 implements improvements in the dispute resolution mechanism, hence, also supporting the objective of the prevention of double taxation. Further, article 6 codifies the widely supported idea that international tax treaties not only avoid double taxation, but also prevent double non-taxation (OECD 2016b, 20). Such provisions can be expected to be a step forward in the direction of addressing tax avoidance and tax competition. The MLI publicised legal commitments, which after being implemented and ratified, can be expected to show the way in which substantive norms of international tax law should further develop (Broekhuijsen 2017, 233–234). Moreover, the MLI co-exists and co-relates with the bilateral double tax agreements that it covers (OECD 2016b, 2). In other words, it leaves the bilateral tax agreements intact, while updating them. Consequently, it introduces practical changes, while accommodating State-level sovereignty concerns. Thus, from the point of reference of the current bilateral tax treaty ecosystem, the MLI may represent a significant step towards, and a proving ground for, a more ambitious brand of multilateral tax treaty (Hidalgo 2017, 720 and 721; Mason 2020, 374).

14.3.3 Tax Information Exchange Agreements: A Step Backward In 2002, the OECD released the Model TIEA in the aftermath of its 1998 report on harmful tax competition (OECD 1998; OECD 2002). The 1998 report attributed four main features to a preferential tax regime: (a) very low or zero tax rate; (b) beneficial tax provisions which are only available to foreign investors and exclude the residents of the country; (c) the lack of effective exchange of information in relation to taxpayers benefiting from the operation of a preferential regime; and (d) a national tax regime characterised by lack of transparency (OECD 1998, 26–30).

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The drafters of the Model TIEA envisaged the Model TIEA to be a non-binding instrument, which countries would use for enhancing international co-operation (OECD 2002). To that end, it has a bilateral and a multilateral version. The drafters intended the bilateral version to be used as a model for concluding bilateral treaties on exchange of information. The multilateral version, on the other hand, is not a traditional multilateral convention because the signatories of a multilateral TIEA are entitled to decide with which other countries they agree to be bound. The binding effect applies only to States which have mutually agreed to it. While the multilateral version of the Model TIEA has not been popular, the number of bilateral TIEAs has increased rapidly after 2009. A reason for this phenomenon is that, in 2009, the OECD released a progress report that listed nations according to whether they had implemented the OECD standard for exchange of information (OECD 2009). The so-called ‘white list’ included countries which had implemented the standard; the ‘grey list’ contained countries, which had not implemented the standard, despite commitments to the contrary; and the ‘blacklist’ was the list of uncooperative tax havens. The OECD offered that countries would be removed from the blacklist, if they would sign either 12 double tax treaties containing article 26 of the OECD Model— which incorporates the standard for exchange of information—or 12 TIEAs. The TIEAs option gained popularity among tax havens. States took advantage of the low threshold and signed bilateral TIEAs with each other (Diepvens and Debelva 2015, 211). Their action indicates that the development of bilateral TIEAs is based on weak foundations. It is the outcome of opportunistic behaviour on behalf of States that wanted to continue engaging in tax competition while simultaneously enjoying the benefits of international cooperation. Several scholars have criticised TIEAs. Addison notes that, while TIEAs cover information pertaining to both criminal and civil matters, when tax havens’ assistance is required for the gathering of evidence, they do not cooperate unless provided with evidence of wrongdoing. TIEAs are inefficient in assisting the identification of unknown tax evaders (Addison 2009, 717 and 218). According to Avi-Yonah, TIEAs fail to override bank secrecy provisions in domestic tax laws of tax havens (Avi-Yonah 2007, 5). McIntyre characterises TIEAs as discredited and notes that they provide “an undeserved patina of respectability” (McIntyre 2009). Further, Sawyer argues that initially TIEAs were intended to be utilised as a tool for removing countries from the blacklist, irrespective of the true efficiency of information exchange (Sawyer 2011a, 419). In another paper, Sawyer concludes that, given that systematic changes are not possible, it may be worth wondering whether TIEAs constitute ‘an expensive exercise…that leaves tax havens with little to fear and other countries with little to gain’ (Sawyer 2011b, 54). The scope of the Model TIEA is more restricted than that of article 26 of the OECD Model Tax Convention (OECD 2017a). Indeed, the subjective and objective scopes of article 26 cannot be limited by persons and taxes covered under a tax treaty. Countries can seek information even if someone is not a person for the purposes of a tax treaty, and even if taxes—such as indirect taxes—are not covered under the treaty. The Model TIEA, by contrast, covers only particular persons and

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taxes (OECD 2002, articles 3(a) and 4(c)). Moreover, article 26(1) covers three means of exchanging information—upon request, spontaneously, and automatically—whereas the Model TIEA only covers exchange of information upon request (OECD 2002, article 5). In 2015, the OECD tried to expand the scope of the Model TIEA to cover all three types through a protocol, but it also left countries free to opt for the previous version (OECD 2015b, 2). In addition to a provision for exchange of information, bilateral tax treaties also contain provisions on the allocation of taxing jurisdiction, non-discrimination, the method for the elimination of double taxation, and dispute resolution mechanism. These aspects may not be regulated in a uniform manner given the different levels of bargaining power and political influence of the negotiating parties, but the scope of a bilateral tax treaty is broader than that of a TIEA. TIEAs focus on information exchange and cause a further fragmentation to the efforts for consistency. Thus, although the OECD intended the Model TIEA to also contain a multilateral version, in the emergence of multilateralism, the development of the Model TIEA represents a step backward.

14.4 Dichotomy Between Bilateralism and Multilateralism: The Arm’s Length Principle in EU Case Law 14.4.1 The Arm’s Length Principle The Arm’s Length Principle (‘ALP’) is a standard used in transfer pricing cases for evaluating prices agreed between associated entities. Its purpose is to ensure that international transactions between related entities will take place under the same conditions and the price agreed will be the same as if they were independent entities. The fundamental idea is that any price agreed between uncontrolled entities is always at arm’s length because it is subject to the open market forces (Neighbour and Owens 2002, 952). Consequently, under the ALP, transactions between associated entities are compared to similar transactions between independent entities for tax purposes. The principle has a very long history that goes back to the 1930s, when it was formulated by Mitchell Carroll and is now found in article 9 of the OECD Model Convention (Avi-Yonah 2019, 7; OECD 2017a, article 9). The ALP is an internationally accepted principle, and countries have consciously tried to safeguard international consensus in view of the multilateral nature of scenarios to which it applies (OECD 2017a, b, 19; Owens 1993, 36). In 1992, the United States (‘US’) amended its transfer pricing regulations and shifted the focus of the regulations from comparable transactions to comparable profits. This approach would have resulted in discommoding the consensus. With the objective of maintaining the consensus, the OECD amended its guidelines. It also formed a task force that worked with the US Treasury to ensure that the common approach could be continued (Rogers  and Oats 2019, 2). Subsequently, in the 1995 Transfer Pricing

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Guidelines, the OECD reaffirmed that the ALP was an international standard (OECD 1995, I-1). In 2010, it updated the guidelines and highlighted that the long use of the ALP in practice has led to a common understanding between businesses and tax authorities (OECD 2010, paragraphs 1.14–1.15). Thus, despite the existence of problems with its application, the ALP can be regarded as the only legitimate and realistic solution to transfer pricing cases. Considering the presence of a broad international consensus, scholars have argued that the ALP is part of the international customary law and is binding irrespective of the presence of a bilateral tax treaty or a domestic law provision. A principle should satisfy three elements before is forms part of international customary law. First, widespread usage in the actual practice of States—some ‘material element’—is required. Secondly, the States act in a particular manner because they feel bound to do so (opinio juris)—or a ‘subjective element’ (Mendelson 1996, 177). Thirdly, repetitive actions of a significant number of States do not face persistent objection from a sufficient number of States (Avi-Yonah 2017, 4). Scholars differ on whether the ALP satisfies the ‘subjective element’. Avi-Yonah believes that the principle fulfils the requirements. He draws support from the Altera case, in which the US Treasury used the principle despite the absence of a double tax treaty between the US and Cayman Islands. In his view, the Treasury felt obliged to do so (Avi-Yonah 2019, 8–9). On the other hand, certain scholars note that because courts have interpreted the principle inconsistently, uncertainty exists regarding its application. For this reason, the principle does not satisfy the ‘subjective element’, and therefore it cannot enjoy the status of binding customary international law (Todhe 2019, 258, n. 55). Regardless of how courts use and interpret the ALP, none of them has yet expressly considered the ALP to be binding. It is difficult, therefore, to conclude with certainty whether the principle meets the requirements of the ‘subjective element’. The recent EU case law on State aid, however, creates an opportunity for a fertile dialogue between the EU and third countries, in view of the acceptance of the ALP as an international standard.

14.4.2 The Arm’s Length Principle Under the EU Case-Law: Apple, Fiat and Starbucks In the EU, direct taxation falls under the exclusive competence of the member States. However, the power must be exercised consistently with EU law (European Commission v. Kingdom of Spain, 2012, para. 47). Article 107(1) of the Treaty on the Functioning of the European Union (‘TFEU’) prohibits so-called ‘State aid’,1  Article 107(1) of the TFEU States: ‘Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.’ 1

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which distorts competition by offering a selective advantage—thus granting State aid is incompatible with the internal market (Official Journal of the European Union 2012, 91–92). Although the provision does not prima facie relate to the ALP, the judicial forums of the EU have implicitly read the principle into it. Belgium and Forum 188 v. Commission concerned a Belgian special tax regime that used an assessment method for calculating the taxable income of a particular kind of companies. The regime would relieve the companies from certain tax burden. The issue was whether the regime granted an economic advantage to the companies. The European Commission as well as the Court of Justice of the European Union (‘CJEU’) referred to article 107(1) and observed that for determining the issue, the special regime had to be compared with ‘the ordinary tax system’ that is used to calculate taxable income of a company carrying on its activities in a condition of free competition (Belgium and Forum 187 v. Commission, 2006, para. 95). Neither the Commission nor the Court expressly referred to the APL. The Hornbach-Baumarkt case concerned German transfer pricing legislation. In that case, the German tax authority applied the legislation to adjust the income of Hornbach, a German company. The issue was whether the provision restricted the freedom of establishment. When the matter appeared before the CJEU, Advocate General Bobek delivered his opinion. Although the CJEU did not follow his conclusions, his reasoning is helpful for the present analysis. He stated that the APL is ‘an international standard set out in article 9 of the OECD and United Nations model tax conventions and is used by most tax administrations around the world’ (Opinion of Advocate General Bobek 2017, para. 23). Fiat and Starbucks concerned advance pricing agreements that Luxembourg and the Netherlands had entered into with multinational corporations Fiat and Starbucks, respectively. The agreements essentially allowed these companies to reduce their taxable profits in Luxembourg and the Netherlands, and hence, granted them a selective advantage. Both countries have implemented transfer pricing regimes in their domestic tax codes. When investigating the agreements, the European Commission interpreted article 107(1) of the TFEU and read the ALP into the provision. The Commission held that the ALP necessarily formed part of an investigation of an advance pricing agreement under article 107(1), independently of whether a member State had incorporated that principle into its national legal system (Luxembourg and Fiat Chrysler Finance Europe v. Commission, 2019, para. 131; Netherlands v. Commission and Starbucks and Starbucks Manufacturing EMEA v. Commission, 2019, para. 161). The Commission acknowledged that the ALP it used did not fall within EU law or international law. However it also noted that the principle was inherent in the ordinary systems of taxation of the two countries. In the Commission’s opinion, if a member State’s tax system adopts the separate legal entity approach—that is, the system taxes legal entities, rather than economic entities—the ALP follows directly from the approach, and the member State is bound to use the ALP regardless of whether it has expressly or impliedly incorporated the principle into its national law (Luxembourg and Fiat Chrysler Finance Europe v. Commission, 2019,

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para. 152; Netherlands v. Commission and Starbucks and Starbucks Manufacturing EMEA v. Commission, 2019, para. 164). The Commission explained that the APL was ‘a general principle of equal treatment in taxation’ (Luxembourg and Fiat Chrysler Finance Europe v. Commission, 2019, para. 150; Netherlands v. Commission and Starbucks and Starbucks Manufacturing EMEA v. Commission, 2019, para. 162). It considered the principle to be a tool for it to exercise its powers under article 107(1). It stated that the ALP was a ‘benchmark’ to determine whether a tax measure granted a special advantage within the meaning of the provision (Luxembourg and Fiat Chrysler Finance Europe v. Commission, 2019, paras 151, 162; Netherlands v. Commission and Starbucks and Starbucks Manufacturing EMEA v. Commission, 2019, paras 151 and 163). In Fiat, the Commission also noted that, according to the circular issued by the director of Luxembourg taxes on 28 January 2011, article 9 of the OECD Model Tax Convention and the OECD Transfer Pricing Guidelines are the international benchmark for transfer pricing purposes (Luxembourg and Fiat Chrysler Finance Europe v. Commission, 2019, para. 296). The General Court of the European Union (‘GCEU’) agreed with the Commission’s reasoning, although when assessing the advance pricing agreements, it referred to conditions of free competition, instead of using the term ‘arm’s length principle’. Apple involved the Apple group of companies, which has a parent company located in the United States. The parent company operates globally through wholly owned subsidiaries in various countries, two of which are incorporated in the Republic of Ireland. The Irish subsidiaries are not tax residents there. The parent company and its Irish subsidiaries have entered into a cost sharing agreement and market sharing agreement, which obliges the Irish subsidiaries to share costs with the parent company and to remunerate the parent company for certain services. The Irish subsidiaries further established two Irish branches. The Republic of Ireland then entered into advance price agreements with the Irish subsidiaries, allowing the Irish subsidiaries to allocate profits to their branches in that country in a manner that reduces their tax burden. The European Commission opened a formal investigation and found that the agreements granted the Irish subsidiaries a selective advantage under TFEU article 107(1). When Apple disputed the Commission’s decision before the GCEU, the court decided in Apple’s favour. It, however, agreed with the Commission’s reasoning on the interpretation and application of article 107(1). The Republic of Ireland had not implemented a transfer pricing regime in its domestic tax law. As with its reasoning in Fiat and Starbucks, the Commission read the ALP into TFEU article 107(1), explaining that profits should be allocated in accordance with the principle regardless of whether national tax law of a member State has incorporated the principle (Ireland and Others v. European Commission, 2020, paras 34, 197). In other words, the commission regarded the ALP as part of EU law. The GCEU agreed with the Commission’s interpretation of article 107(1). Both the Commission and GCEU also pointed out that the APL was included in the Republic of Ireland’s double tax treaties with the United Kingdom and US. They concluded that, at least in its bilateral relations with the two countries, the Republic

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of Ireland agreed to apply the APL (Ireland and Others v. European Commission, 2020, para. 220). The Commission also relied on the reasoning of the CJEU in Belgium and Forum 187 v. Commission and observed that the CJEU endorsed the ALP as a benchmark to determine whether tax measures grant selective advantage to certain entities within the meaning of article 107(1) (Ireland and Others v. European Commission, 2020, paras 35 and 194). The Commission regarded the use of the ALP as ‘necessary’. However, the Commission also noted that the OECD Transfer Pricing Guidelines are non-binding and tax authorities should use them only as interpretative tools (Ireland and Others v. European Commission, 2020, paras 36, 221). The GCEU’s agreed impliedly with the Commission’s position that the APL formed part of EU law. When using the ALP, the Commission compared the profitability level calculated in accordance with normal rules of taxation under national law with that resulting from the application of an advance pricing agreement (Ireland and Others v. European Commission, 2020, para. 110). The GCEU found that the commission was justified in relying on the ALP, noting that principles that governed the allocation of profits to subsidiaries could also be applied to branches of companies, and that resident and non-resident companies trading in the Republic of Ireland were comparable (Ireland and Others v. European Commission, 2020, paras 204, 206, 208). Accordingly, the tax burden of a non-resident company trading there through a branch could be compared with that of a resident company carrying on its activities under market conditions. The court drew support from Belgium and Forum 187 for the reason (Ireland and Others v. European Commission, 2020, paras 212, 213). Further, as with the judgment in Fiat and Starbucks, the GCEU concluded that the ALP was a tool enabling the commission to make such a comparison in the exercise of its powers under article 107(1) and that the principle can be used as a benchmark (Ireland and Others v. European Commission, 2020, para. 215). Three points of concern exist with the GCEU’s reasoning in Apple. First, it implies that the ALP formed part of article 107(1). The problem with this approach is that primary EU law does not define the ALP (Todhe 2019, 257). Indeed, it is questionable whether the principle arises from article 107(1). Secondly, it also implies that, in Belgium and Forum 187, the CJEU used the ALAs discussed earlier, in Belgium and Forum 187, the CJEU did not mention the ALP during its assessment. It referred to only the conditions of free competition. Thus, in Apple, the GCEU re-interpreted the reasoning of the CJEU in Belgium and Forum 187. Thirdly, it implies that acceptance of an obligation at levels of a bilateral tax treaty and international law affects the intra-EU relationships. The GCEU fails to justify how the acceptance of the ALP at the treaty level can affect the Republic of Ireland’s obligations under EU law. A bilateral double tax agreement is a result of negotiations between two contracting States, and it governs the rights and obligations only of its contracting States. This implication can severely affect the sovereignty of a member State, and it is against principles of both international and EU law. A possible reason why the GCEU’s adopted this approach is the increased acceptance of the ALP at the international level. The GCEU did not wish to create

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confusion between bilateralism and multilateralism. It acknowledged indirectly that an international consensus exists on the ALP and tried to apply the principle to the Apple case. It was reluctant to say that the use of the ALP was ‘necessary’ under article 107(1) (Ireland and Others v. European Commission, 2020, para. 221); however, at the same time it wanted to leave the Commission free to use the principle. Thus, it interpreted the CJEU’s reasoning in Belgium and Forum 187 and the wording of article 107(1) in order to include the APL as a benchmark. If the GCEU had held that the Commission was obliged to use the ALP, the principle would have become binding either as part of customary international law or as a general principle of EU law. The court hesitated to go that far. It, however, left an opening for a more general application of the ALP. Courts have traditionally used the ALP as a tool for deciding transfer pricing cases. The EU courts, however, have also used the principle for determining the issue of ‘selective advantage’ in cases concerning State aid. Two points emerge from the approach adopted by the EU courts. First, the international consensus may be sufficient to broaden the scope of the application of the principle. In Apple, the GCEU noted that the ALP can be used as a benchmark. According to the Oxford Learner’s Dictionaries, a benchmark is ‘something that can be measured and used as a standard that other things can be compared with’ (Oxford Learner’s Dictionaries 2022). As discussed earlier, in Hornbach Baumarkt, Advocate General Bobek also observed that the ALP is an international standard, and most tax authorities use it. His statement shows that the EU is aware of the significance of the consensus on the ALP. Secondly, it is possible that two ALPs emerge in the future either as a general principle of international law or as a general principle of law—a general ALP that would be used in transfer pricing cases under international tax law, and an EU ALP that would exist as an autonomous principle that the EU case law has created. In Fiat, the GCEU described the EU ALP as ‘a general principle of equal treatment in taxation’. However, in order to avoid expanding the scope of article 107(1), the court also clarified that the principle was not inherent in the provision (Luxembourg and Fiat Chrysler Finance Europe v. Commission, 2019, para. 161). It further observed that the EU ALP used by the European Commission in that case was distinct from the one set out in article 9 of the OECD Model Convention (Luxembourg and Fiat Chrysler Finance Europe v. Commission, 2019, para. 149). The GCEU confirmed that, although the official commentary on the OECD Model Convention and OECD Transfer Pricing Guidelines held great importance, the Commission is not formally bound by them (Luxembourg and Fiat Chrysler Finance Europe v. Commission, 2019, para. 147; Netherlands v. Commission and Starbucks and Starbucks Manufacturing EMEA v. Commission, 2019, para. 155). The two ALPs would create different standards, which in turn would fragment any coherence in the application of the ALP and would jeopardize the existing international consensus. Apple creates an opportunity for coordination between EU law and international tax law. To avoid fragmentation, EU member States—which are also members of the OECD—might consider coordinating with the OECD, aiming to achieve a common interpretation of the ALPs discussed earlier, the OECD coordinated with the

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United States to bring uniformity to the interpretation of the ALPs. The circumstances with the EU are similar, and a similar solution can be adopted. Further, given the international acceptance of the ALP, the OECD might consider implementing the principle as part of the binding content of the MLI.  Currently, anti-abuse provisions and the mutual agreement procedure constitute the sole mandatory MLI provisions. As a next step, the OECD and G20 might consider exploring the possibility of making the ALP mandatory in order to achieve a uniform interpretation at a multilateral level. Because an international consensus exists, it can be expected that this move would not face fierce opposition. Simultaneously, multilateral uniformity would assist in the decrease in the number of transfer pricing related disputes.

14.5 Conclusion Double taxation discourages international investment and affects the flow of capital. Unilateral measures to prevent double taxation are inadequate. Bilateral tax treaties are predominant in the existing international tax system. While they are efficient in situations involving two countries, they fail to eliminate double taxation in triangular cases. The multilateral approach is the most efficient way to eliminate double taxation. However, complete harmonisation through the adoption of a worldwide multilateral tax treaty is not currently feasible due to cultural and economic differences, and sovereignty concerns. Regional treaties indicate that countries of similar backgrounds are more willing to coordinate on international tax matters. The MLI co-exists with the network of bilateral tax treaties. It contains binding provisions on tax dispute resolution and treaty abuse. The adoption of these provisions highlights the presence of consensus between the signatories of the MLI and points in the direction of a more ambitious multilateral tax treaty. For these reasons, it is a step forward towards multilateralism. The Model TIEA contains two versions—bilateral and multilateral. The multilateral version has never been used in practice, and tax heavens took advantage of the bilateral version to escape OECD blacklisting. Unlike bilateral tax treaties, TIEAs regulate only the aspect of exchange of information. Further, compared with article 26 of the OECD Model, the scope of information exchange is limited under the Model TIEA. Hence, the model TIEA is a step backwards in the efforts towards multilateralism. The EU transfer pricing case law suggests that the interplay between EU law and the tax treaty law highlights the existence of consensus regarding the arm’s length principle as a general international standard. Considering that severe opposition is not expected, this phenomenon offers an opportunity for tax co-ordination between the EU and the international community. Countries might consider making the ALP mandatory as part of the binding provisions of the Multilateral Instrument. This step would lead to a uniform interpretation and would reduce transfer pricing related disputes.

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Chapter 15

Data Flow v. Data Protection: Achieving Cross-Broder Harmonisation via EU Horizontal Clauses? Ottavio Quirico

Contents 15.1  Introduction 15.2  Data Flow v. Data Protection 15.3  Data Protection as a Fundamental Right: The EU Heightened Framework 15.4  EU Horizontal Clauses in International Economic Agreements 15.5  Conclusion References

                 

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Abstract  Digitalisation has triggered a profound transformation in the global economy, spanning investment and trade, intellectual property (‘IP’) rights and taxation. Whilst, on the one hand, it facilitates the automatic functioning of the business chain, on the other, digitalisation triggers concerns about privacy and security. This chapter explores the challenges raised by the digitalisation of international economic transactions and how to harmonise regulation. Considering data protection a human right within the European Union (‘EU’) under the EU Charter of Fundamental Rights has led to the adoption of a heightened regulatory framework that is more protective than that of third countries. Arguably, this translates across into international economic agreements, with the EU prompting the adoption of O. Quirico (*) Department of International Humanities and Social Sciences, Perugia University for Foreigners, Perugia, Italy Law School, University of New England, Sydney, NSW, Australia ANU Centre for European Studies, The Australian National University, Canberra, ACT, Australia Department of Political Science, University of Pisa, Pisa, Italy Law Department, European University Institute, Fiesole, Italy e-mail: [email protected]; [email protected]; [email protected]; [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 O. Quirico, K. Kwapisz Williams (eds.), The European Union and the Evolving Architectures of International Economic Agreements, https://doi.org/10.1007/978-981-99-2329-8_15

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extensive trade-restrictive data protection exceptions via horizontal clauses in bilateral and multilateral international economic agreements. Such a regime has the potential to create a disparity between domestic and cross-border data flows and between data flows among different countries, potentially in conflict with the most-­ favoured nation (‘MFN’) and national treatment (‘NT’) principles under the General Agreement on Trade in Services (‘GATS’). The clash can result in either improving cross-border data protection worldwide or lowering data protection in cross-border transactions involving data transfer from and to the EU. Keywords  European Union · Digitalisations · Data trade · Right to privacy · Horizontal · Clauses

15.1 Introduction The international economic system is based on various overlapping flows, including cross-border physical flows via means such as maritime transport, documentary flows and financial flows underpinning transactions between buyers and sellers, through the intervention of banks. Technologies such as the Internet of things (‘IoT’), optical character recognition (‘OCR’) and natural language processing (‘NLP’) allow the automation of key processes in the system, such as compliance checking for corporate social responsibility (‘CSR’). In the digital age, economic transactions have thus become largely dependent on transferring, storing and using data, that is, digital information, across borders, which takes place by electronic means. Whilst facilitating investment and trade, data flows raise concerns about privacy and security. In particular, personal information can be accessed by system operators and through data leakage. States are thus increasingly making laws to limit cross-border data transfer and use. Notably, the EU has been significantly proactive in the area since the 1990s and, with the adoption of data protection as a fundamental right under article 8 of the EU Charter of Fundamental Rights in 2000—a framework that became binding in 2009 via the Treaty of Lisbon—the Union has progressively implemented a heightened data protection regime in the internal market. This process culminated in the implementation of the landmark General Data Protection Regulation (‘GDPR’) in 2016. Such an advanced legislative system creates a discrepancy with respect to regulation in third countries, necessitating adequate harmonisation—but how does this translate into multilateral and bilateral international economic agreements? This chapter explores such trends based on a three-step analysis. First, the contribution assesses the emerging digitalisation of cross-border economic exchanges, particularly the contrast it generates between free trade and cross-border data protection. Second, the paper considers how domestic regulation, notably EU regulation in the internal market, governs the issue, particularly personal data protection, as compared to other countries. Third, the research explores how the discrepancy

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between EU regulation and regulation in third countries translates into international economic agreements.

15.2 Data Flow v. Data Protection The digital transformation of global society has given rise to innovative ‘information industries’, such as cloud computing or big data analytics (OECD 2019), which have revolutionised essentially all aspects of cross-border economic exchanges. Digitalisation indeed spans the entire global economy, from the banking sector, to taxation rights through to the most fundamental supply chains of food and goods. That digitalisation underpins a transformation of all international economic activities is essentially demonstrated by the fact that wholly digital currencies are now seriously being advanced (Huang and Mayer 2022). Suffice it to think about Stellar, an open network established in 2015 for moving money internationally via standard instructions, facilitating business-to-business transactions, with the potential to clear US$2tn in cross-border payments (Stellar 2022). The network aims to replace the Society for Worldwide Interbank Financial Telecommunication (‘SWIFT’), which is considered less transparent and more time consuming (Scott and Zachariadis 2014), but which forms the basis of an overwhelming majority of international banking and transfers. Blockchain solutions are also used as a technology to respond to security and data portability challenges in the food supply system, ensuring the distributed and trustable traceability of food products. Coupled with smart contracts, data-mining, and artificial intelligence (‘AI’), they expedite trade and strengthen food control methods. For instance, remote data on food safety parameters can be analysed and used to determine priorities for inspecting the food chain (Demartini et  al. 2018; Ganne 2018, 78). Furthermore, research and development for dispersed manufacturing processes entail coordinating researchers and scientists in different States, all of whom necessarily share information and data—indeed, they depend upon it. For example, wind turbine manufacturers rely on data from several States to optimise wind energy plants, and thus to minimise operational costs and optimise productivity (Casalini and González 2019, 32). In the area of taxation, the digitalisation of finance is considered essential to spurring innovation and efficiency (OECD 2020, 4). Enhancing cross-border payments has thus become a priority for the G20 and the Financial Stability Board (He 2014). While facilitating free trade, cross-border digital data flow imperils data protection and raises questions that spawn by their very nature international regulatory issues. Indeed, the information trail in current economic interactions is more abundant than ever. Growing online presence presents greater opportunities to record activities, but the amount of collected information and its use are not necessarily clear to the consumer, who may not wish to disclose personal data to companies. Although it is not easy to gather information on data leakage accidents, the case of Capital One Bank in the US clearly illustrates the risks associated with digital data

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trade in the finance and banking sector (Basel Committee 2022, 4). Capital One is among the largest banks in the US, operates in a highly regulated environment, and is a leader in the early adoption of cloud computing technologies. Despite such relatively robust data security frameworks, in July 2019 the bank reported that an external individual had accessed sensitive customer data without authorisation, including incomes, names, addresses, codes and phone numbers, affecting around 100 million individuals and businesses in the United States (‘US’) and a further 6 million in Canada (Novaes Neto et al. 2020). Despite a significant increase in the 1990s and 2000s, digitalised cross-border payments are reported to be still ‘opaque’ (He 2014). Concerns are generated by the fact that data can be monetised by a company, for instance, via selling to other firms that further market them. Trans-border data flows also require a re-thinking of taxation norms, including new nexus rules determining applicable regulation beyond the framework established via classical double taxation agreements (OECD 2020, 12). Such concerns naturally attract assurances that consumer data be managed appropriately. Not only is it privacy protection that is a problem per se, but these issues are also relevant to the development of the economic system as a whole, as consumer trust is essential for natural or legal persons to enter into economic transactions. Within this context, the most delicate question is that of personal data, which constitutes about half of that traded by businesses, with especially heavy reliance in the telecommunications, information technology, financial, and business services industries (Casalini and González 2019, 33). To further complicate the matter, separating personal data from-non personal data is not a simple operation and carries significant additional costs.

15.3 Data Protection as a Fundamental Right: The EU Heightened Framework The EU has taken significant initiatives to regulate the digitalisation of economic transactions since the end of the 1990s and the beginning of the 2000s. In 2001, the European Commission adopted a communication on computerised transit procedures, aiming to facilitate monitoring and controlling trade in goods (European Commission 2001). As a follow up, in 2003 the Commission adopted a communication on electronic customs as a means to establish a simplified and paperless environment (European Commission 2003). This was followed by the e-customs decision in 2008 (European Parliament and Council 2008), establishing the foundations of an interoperable electronic customs environment via a unified data system, simplifying communication between economic operators and customs authorities and improving security at the border. In 2013, the Union passed a ‘Customs Code’ to implement rules facilitating electronic communications among European customs authorities as well as between customs authorities and economic operators (European Parliament and Council 2013). In 2019, the EU designed a structured

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process for the future of customs to 2040, within which digitalisation plays a pivotal role (Ghiran et al. 2020). Set against a framework where the EU is constantly improving the digitalisation of economic transactions, not least as a means to achieve sustainability (Council of the EU 2020), in 1995 the Union adopted the Data Protection Directive (European Parliament and Council 1995). This regulatory tool aimed, on the one hand, to protect the fundamental rights and freedoms of individuals, notably the right to the protection of personal data, and, on the other, to ensure the free flow of such data within the EU, with knock-on implications for the European Economic Area (‘EEA’). In 2000, the EU adopted the EU Charter of Fundamental Rights (EU 2000), which, under article 8, acknowledges data privacy as a human right, distinct from respect for private and family life provided under article 7, whereby personal data must be processed fairly and based on consent, under the control of a monitoring authority. Data privacy is thus conceived of as an individual ‘right of everyone’, entailing a corresponding duty to process data fairly based on consent, as well as a right of access and rectification, under the control of an independent authority.1 Derogations from the right to personal data protection are only allowed by law under article 52(1), subject to proportionality, in the genuine interest of the Union or to protect the rights and freedoms of others. Along the lines of this progression, in 2016 the Union adopted Regulation 2016/679 on General Data Protection—or the General Data Protection Regulation (‘GDPR’) (European Council and Parliament 2016). This instrument repealed the Data Protection Directive, confirming and updating a number of individual rights with regard to personal data (article 2), including the rights of access to data, transparency, rectification, erasure, portability (or the moving of data), and objection to automated decision-making (articles 5 ff.). Procedurally, respect of the right to privacy when data are transferred to a recipient is monitored by a ‘controller’ via a ‘processor’ (article 2). Under article 3, the scope of application of the GDPR involves all data processing in the EU, that is, within the internal market, and situations where EU law applies extraterritorially. It also covers foreign operators who target the EU market by providing goods and services to natural and legal persons within the territory of the Union. The Regulation also extends the scope of the Data Protection Directive by covering data sent by operators situated in the EU to third countries. Few, if any, countries have adopted a stringent personal data protection policy similar to that of the EU. Fundamentally, cross-border data flow can be categorised according to whether there are no restrictions (free-flow), various types of safeguards (flow conditional on safeguards), and case-by-case restrictions requiring ad hoc authorisation (flow conditional on ad hoc authorisation) (Casalini and Lopez  Article 8 (Data protection): (1) Everyone has the right to the protection of personal data concerning him or her. (2) Such data must be processed fairly for specified purposes and on the basis of the consent of the person concerned or some other legitimate basis laid down by law. Everyone has the right of access to data which has been collected concerning him or her, and the right to have it rectified. (3) Compliance with these rules shall be subject to control by an independent authority. 1

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2019, 17). Under the GDPR, the EU allows cross-border data flows based on safeguards and ad hoc authorisation. Essentially, cross-border personal data transfer outside the internal market is feasible if the European Commission grants an adequacy decision about the data protection system in the third country (GDPR article 45). Adequacy is determined based on a set of principles, considering not only data protection, but also the rule of law and respect for fundamental rights, as spelled out in detail in the guidelines adopted by the European Data Protection Board (EDPB 2022). The adequacy mechanism was first introduced in the Data Protection Directive and was later embedded in the GDPR, following confirmation of its fundamental status in the Court of Justice of the European Union’s (‘CJEU’) Schrems I decision, in line with article 8 of the European Charter of Fundamental Rights.2 Adequacy decisions are constantly updated, ensuring that third countries which establish an appropriate level of domestic personal data protection are able to engage more freely with the Union and its citizens online (European Commission 2020). Currently, an adequacy decision is in place with respect to Japan (European Commission 2019), complementing the 2019 EU-Japan Economic Partnership Agreement, whereby high privacy and personal data protection standards integrate free trade. After Brexit, in 2021 the European Commission has positively revised the UK position on personal data protection (European Commission 2021a). By contrast, there is the notable exception of the EU–US Privacy Shield Agreement framework (EU and US 2016), which was invalidated by the CJEU in the Schrems II ruling.3 Transfer of data to third States that are not granted an adequacy decision is allowed, according to GPDR article 46, subject to specific safeguards, including binding corporate rules, standard contractual clauses, or public agreements between enforcement authorities through codes of conduct or certification mechanisms. Such safeguards essentially require that a foreign recipient of personal data from the EU has an establishment or business partner in the EU. Otherwise, a company may exceptionally avail itself of specific derogations under GDPR article 49, such as explicit consent by the data owner. Most countries outside the EU rely on standard contractual clauses as a mechanism for personal data transfer. The CJEU clarified in Schrems II that such clauses cannot be considered ‘essentially equivalent’ to EU data protection in principle, but necessitate a case-by-case assessment, including the possibility for trading companies of adopting ‘supplementary measures’.4

 Maximilian Schrems v. European Commission, Case C-362/14, Judgment of 6 October 2015, para. 99. 3  Data Protection Commissioner v. Facebook Ireland Limited and Maximillian Schrems, Case C-311/18, Judgment of 16 July 2020. 4  Ibid., para. 133. 2

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15.4 EU Horizontal Clauses in International Economic Agreements As a consequence of the progressive approach implemented in the internal market, the EU is prompting the adoption of specific regulation related to cross-border data flow via bilateral and multilateral economic agreements, particularly through sections dedicated to digital trade (see further Sauvé and Soprana 2020). This is further consolidated by the fact that digital trade is squarely encompassed by the common commercial policy, and thus subject to EU exclusive competence, according to article 3(e) of the Treaty on the Functioning of the European Union (‘TFEU’). Along these lines, provisions such as article 7(50) of the 2010 EU-South Korea FTA and article 8(3) of the 2019 EU-Japan Economic Partnership Agreement establish a general exception to free data trade. Such norms indeed allow ‘the protection of the privacy of individuals in relation to the processing and dissemination of personal data’ as well as ‘the protection of confidentiality of individual records and accounts’, provided that these are not arbitrary and non-discriminatory, and that they do not constitute a disguised restriction on the establishment or cross-border supply of services. Similarly, article 13(5)(2) of the 2017 Comprehensive Economic and Trade Agreement (‘CETA’) between the EU and Canada provides that a party ‘shall maintain adequate safeguards to protect privacy’, in particular with regard to ‘the transfer of personal information’. In this context, the transfer of financial information involving personal data should take place in accordance with protective legislation in the territory of the party where a transfer originates. This trend has eventually led the EU to envisage an innovative approach via ‘horizontal clauses’ to cross-border data flows and personal data protection throughout the negotiation of new economic agreements. Fundamentally, by applying article 8 of the EU Charter of Fundamental Rights in the context of international relations, the Union upholds a human rights-based approach to privacy and data protection in international relations. This is the case of the proposed text of a trade agreement between the EU and Indonesia, which aims at facilitating market access, improving trade and investment, and includes rules on data protection in the digital trade title (European Commission 2018). Similar clauses are envisaged in the EU-Australia proposal on digital trade (European Commission 2022). A first clause supporting cross-border data flows to facilitate cross-border trade essentially prohibits digitalised data local processing and storage (European Commission 2021b).5  Article 1 (Cross-border data flows): (1) The Parties are committed to ensuring cross-border data flows to facilitate trade in the digital economy. To that end, cross-border data flows shall not be restricted between the Parties by: (i) requiring the use of computing facilities or network elements in the Party’s territory for processing, including by imposing the use of computing facilities or network elements that are certified or approved in the territory of a Party; (ii) requiring the localisation of data in the Party’s territory for storage or processing; (iii) prohibiting storage or processing in the territory of the other Party; (iv) making the cross-border transfer of data contingent upon use of computing facilities or network elements in the Parties’ territory or upon localisation requirements in the Parties’ territory. (2) The Parties shall keep the implementation of this provision under 5

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Within this framework, a rule dedicated to the ‘protection of personal data and privacy’, defined as ‘any information relating to an identified or identifiable natural person’, compels recognition that this is ‘a fundamental right’, attracting high standards to foster trust in the digital economy and the development of trade. Such a framework allows the parties to adopt ‘appropriate’ standards of protection, including the ‘rules for the cross-border transfer of personal data’. Under the right to regulate, this norm carves an exception out of the basic clause on free data flow. Significantly, the rule also excludes the right to data protection from the jurisdiction of Inter-State Dispute Settlement tribunals, in line with the attempt of the Union to outlaw such adjudication mechanisms and to install a multilateral investment court (European Commission 2021b).6 A further clause on cooperation aims to strengthen data protection, via exchange of information, including the interoperability of electronic systems, communications and consumer protection (European Commission 2021b).7 When transposed in a cross-border dimension, the EU regime protecting personal data, particularly under the GDPR, will naturally prove quite restrictive of international cross-border data trade, requiring States outside the EU to improve their level of protection (US Congress 2021, 13–14),8 thus limiting investment and trade that are based on data transfer. As data trade is governed by the discipline of services (Council for Trade in Services 1999), personal cross-border data restrictions are allowed under general international law, where there are no obligations to ensure free trade in services (Herdegen 2016, 57), and thus EU data review and assess its functioning in 3 years following the entry into force of this Agreement. A Party may at any time propose to the other Party to review the list of restrictions listed in the preceding paragraph. Such request shall be accorded sympathetic consideration. 6  Article 2 (Protection of personal data and privacy): (1) Each Party recognises that the protection of personal data and privacy is a fundamental right and that high standards in this regard contribute to trust in the digital economy and to the development of trade. (2) Each Party may adopt and maintain the safeguards it deems appropriate to ensure the protection of personal data and privacy, including through the adoption and application of rules for the cross-border transfer of personal data. Nothing in this agreement shall affect the protection of personal data and privacy afforded by the Parties’ respective safeguards. (3) Each Party shall inform the other Party about any safeguard it adopts or maintains according to paragraph 2. (4) For the purposes of this agreement, “personal data” means any information relating to an identified or identifiable natural person. (5) For greater certainty, the Investment Court System does not apply to the provisions in Articles 1 and 2. 7  Article 3 (Cooperation on regulatory issues with regard to digital trade): (1) The parties shall maintain a dialogue on regulatory issues raised by digital trade, which shall inter alia address the following issues: the recognition and facilitation of interoperable cross-border electronic trust and authentication services; the treatment of direct marketing communications; the protection of consumers in the ambit of electronic commerce; and any other issue relevant for the development of digital trade. (2) Such cooperation shall focus on exchange of information on the Parties’ respective legislation on these issues as well as on the implementation of such legislation. (3) For greater certainty, this provision shall not apply to a Party’s rules and safeguards for the protection of personal data and privacy, including on cross-border data transfers of personal data. 8  This is proven by the fragmentation of data regulation and the number of international regulatory instruments that aim at harmonising regulation across jurisdictions (WTO and World Economic Forum (WEF) 2022, 14; OECD 2021).

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protection regulation should be considered customarily allowed. By contrast, within the World Trade Organisation (‘WTO’), according to the 1995 GATS cross-border data trade must be in principle free,9 based on the MFN and NT principles. As such, the difference between EU data protection regulation and that of non-EU countries arguably discloses a discrepancy in international economic agreements. In other words, as the WTO has progressed slowly on e-commerce the legality of improved EU personal data protection measures restrictive of cross-border trade might be problematic with particular regard to the MFN and NT principles that are embedded not only in the GATS, but also in essentially all of the EU trade and investment agreements (Velli 2019, 885). Arguably, accepting the conditions established by the EU for data flowing from the Union creates a disparity with respect to local data flows in a non-­EU country. Acknowledging data trade with third countries based on adequacy decisions might breach the MFN principle (Yakovleva 2020, 891–894). Naturally, with respect to EU bilateral and multilateral trade agreements, the ‘horziontal clauses’ themselves allow exceptions to free data trade. With respect to the general discipline of the GATS, asymmetric restrictions might be justified based on the regime of general exclusions embedded in article XIV, subject to the fulfilment of the requisite of ‘necessity’.10 Indeed, GATS article XIV essentially provides that the parties to an international trade agreement have the faculty of adopting measures that are ‘necessary to secure compliance with laws or regulations’, when these are ‘not inconsistent’ with free trade in services (article XIV(c)). Such measures also include those concerning ‘the protection of the privacy of individuals in relation to the processing and dissemination of personal data’ as well as ‘the protection of confidentiality of individual records and accounts’ (article XIV(c)(iii)). Under the ‘chapeau’, the lawfulness of derogatory measures is further subject to the requirement that they do not constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions apply, or a disguised restriction on service trade.11 In this context, nonetheless, it is disputed whether the EU personal data protection system restricting international trade is consistent with the ‘necessity’ test, particularly as concerns the adoption of the ‘least restrictive’ (indispensable) measures to achieve data protection. Notably, it is questionable whether EU-style restrictive measures are the least restrictive means for achieving adequate protection of the right to privacy (Yakovleva 2020, 906). This is particularly true in light of the fact that less restrictive data trade regimes are the norm (Burri 2017).  Antigua and Barbuda v. United States, US-Measures Affecting the Cross-Border Supply of Gambling and Betting Services, Case no. ds285, WTO, Appellate Body, Report of 7 April 2005, para. 6.370. 10  Scholars have also invoked the possibility for States to further liberalise trade under GATS Article V in order to justify the external implications of the EU GDPR (Velli 2019, 887). However, the external application of the GDPR with respect to data privacy restricts, rather than liberalising, international data trade, and therefore also connected non-data trade. 11  This model is replicated in bilateral and multilateral economic agreements with respect to data trade, such as the 2020 US–Mexico–Canada Agreement, whereby Article 19(11) provides that no Party can prohibit or restrict cross-border data trade for the conduct of business, save legitimate policy exceptions. 9

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The rationale underpinning the EU approach is indeed adopting the least restrictive regulatory framework for the right to privacy according to the EU Charter of Fundamental Rights,12 in compliance with EU data protection and privacy rules, rather than adopting the least restrictive barriers to cross-border data flows, which is the rationale inspiring the GATS. Furthermore, while the EU restrictive regime certainly protects the first data transfer to a third country (A), unless a MFN clause is added to horizontal clauses on data transfer in a treaty between the EU and a third State (B), the further transfer of data from State B to another State (C) is unlikely to be afforded equivalent protection. It must be noted, in any case, that the test of necessity has been elaborated by the WTO jurisdictional bodies with respect to trade in goods and services, but not specifically with respect to data trade (WTO Secretariat 2003). It is thus possible that the test of necessity for data trade needs to be assessed differently from other forms of trade.

15.5 Conclusion Economic transactions are progressively being digitalised. On the one hand, the free flow of cross-border data, a service in itself, is essential to the development of international trade and investment. On the other, however, such a flow—particularly in the exchange of personal data—may lead to infringements of the right to privacy. Based on the essential concept that data privacy is a human right under article 8 of the EU Charter of Fundamental Rights, the EU has adopted a stringent regulatory framework on data protection within the internal market. This is more compelling, and therefore more easily cast as derogatory from the perspective of free cross-­ border trade, with respect to that of non-EU countries, necessitating adjustment. Externally, the EU progressive stance on data protection within the internal market is prompting the instalment of a compelling regulatory framework via bilateral and multilateral agreements, prioritising data protection over free cross-border data flow, and thus trade. While derogations from the MFN and NT principles are justified within the context of the WTO under GATS article XIV, establishing a general ‘necessity’ exception, it is questionable whether the EU approach is the least restrictive of international investment and trade, according to the principle of proportionality. Arguably, the case law will clarify the issue, either by compelling a general improvement of privacy in cross-border data flows or, vice versa, by lowering data protection requirements in EU cross-border transactions.

12

 Maximilian Schrems, 2015, paras 93 and 95.

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References Basel Committee on Banking Supervision (2022) International cooperation in a world of digitalisation. https://www.bis.org Burri M (2017) The governance of data and data flows in trade agreements: the pitfalls of legal adaptation. UC Davis L Rev 51(65):95–96 Casalini F, López González J (2019) Trade and cross-border data flows. OECD, Paper Council for Trade in Services (1999) Work programme on electronic commerce: interim report to the general council, WTO S/C/8 Council of the EU (2020) Digitalisation for the benefit of the environment. Press release. https://www.consilium.europa.eu/en/press/press-­r eleases/2020/12/17/digitalisation-­f or­the-­benefit-­of-­the-­environment-­council-­approves-­conclusions Demartini M, Pinna C, Tonelli F, Terzi S, Sansone C, Testa C (2018) Food industry digitalization: from challenges and trends to opportunities and solutions. IFAC PapersOnLine 51(11):1371–1378 EU (2000) Charter of fundamental rights, lastly updated in 2012 EU and US (2016) Agreement between the United States of America and the European Union on the protection of personal information relating to the prevention, investigation, detection, and prosecution of criminal offences OJ L 336/3 European Commission (2001) Communication from the Commission to the European Parliament and the council, strategy to prepare the candidate countries for accession to the 1987 EC-EFTA conventions on a common transit procedure and the simplification of formalities in trade in goods, COM(2001) 289 final European Commission (2003) A simple and paperless environment for customs and trade. Communication to the Council, the European Parliament and the European Economic and Social Committee, COM(2003) 452 final, OJ C 96 European Commission (2018) EU provisions on cross-border data flows and protection of personal data and privacy in the digital trade title of EU trade agreements, explanatory note, 5th round of trade negotiations between the European Union and Indonesia European Commission (2019) Adequacy decision on Japan, creating the world’s largest area of safe data flows. https://ec.europa.eu/commission/presscorner/detail/en/IP_19_421 European Commission (2020) Adequacy of the protection of personal data in non-EU countries. https://commission.europa.eu/law/law-­topic/data-­protection/international-­dimension-­data-­ protection/adequacy-­decisions_en European Commission (2021a) Implementing decision of 28.6.2021 pursuant to regulation (EU) 2016/679 of the European Parliament and of the Council on the adequate protection of personal data by the United Kingdom, C(2021) 4800 final European Commission (2021b) EU-Indonesia agreement: documents. https://policy.trade. ec.europa.eu/eu-­trade-­relationships-­country-­and-­region/countries-­and-­regions/indonesia/ eu-­indonesia-­agreement/documents_en European Commission (2022) EU-Australia agreement: documents. https://policy.trade. ec.europa.eu/eu-­trade-­relationships-­country-­and-­region/countries-­and-­regions/australia/ eu-­australia-­agreement/documents_en European Data Protection Board (2022) Guidelines. https://tietosuoja.fi/en/ guidelines-­of-­the-­european-­data-­protection-­board European Parliament and Council (2008) A paperless environment for customs and trade, decision no 70/2008/EC European Parliament and Council (2013) Regulation (EU) No 952 laying down the Union customs code European Parliament and Council (2016) Regulation (EU) 2016/679 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing directive 95/46/EC

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Chapter 16

Non-economic Conditionality for Comprehensive EU International Economic Agreements? Pablo Cristóbal Jiménez Lobeira and Ottavio Quirico

Contents 16.1  I ntroduction 16.2  Meaning of and Rationale for Fundamental Rights Clauses in Economic Agreements 16.3  Recent Developments 16.3.1  Regional Comprehensive Economic Partenrship 16.3.2  Canada-United States-Mexico Agreement 16.3.3  Comprehensive and Progressive Agreement for Trans-Pacific Partnership 16.3.4  African Continental Free Trade Area 16.3.5  MERCOSUR 16.3.6  Pacific Alliance 16.4  The EU’s Innovative ‘Essential Elements’ Clause 16.4.1  Relevance 16.4.2  Functioning 16.5  An Effective Mechanism for Comprehensive Economic Agreements? 16.6  Conclusion References

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Unless otherwise stated, all translations have been made by the authors. P. C. Jiménez Lobeira (*) ANU Centre for European Studies, The Australian National University, Canberra, ACT, Australia e-mail: [email protected] O. Quirico Department of International Humanities and Social Sciences, Perugia University for Foreigners, Perugia, Italy Law School, University of New England, Sydney, NSW, Australia ANU Centre for European Studies, The Australian National University, Canberra, ACT, Australia Department of Political Science, University of Pisa, Pisa, Italy Law Department, European University Institute, Fiesole, Italy e-mail: [email protected]; [email protected]; [email protected]; [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 O. Quirico, K. Kwapisz Williams (eds.), The European Union and the Evolving Architectures of International Economic Agreements, https://doi.org/10.1007/978-981-99-2329-8_16

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Abstract  Accommodation of fundamental rights in the architecture of international economic agreements (‘IEAs’) is generally rather modest and limited to specific issues. In this context, the European Union (‘EU’) stands out as an early innovator in the promotion of human rights, democracy and the rule of law—and thus a power for good in the global arena—by harnessing its considerable economic clout. The chapter develops this idea in four parts: (1) meaning of and rationale of fundamental rights clauses in economic agreements; (2) presence of fundamental rights clauses in current IEAs; (3) the EU’s innovative ‘essential elements’ clause; and (4) criticism and challenges to the EU approach and implications for the architecture of IEAs. Keywords  European Union · Democracy · Human rights · Rule of law · International economic agreements · Fundamental rights (political) clauses · Essential elements · Retaliation · Soft power · Brussels effect

16.1 Introduction Economic agreements are negotiated on the understanding that they not only bring monetary benefits to the participant States, but also that they are good in a wider sense for their respective populations. Even though they are evidently focused on trade, international agreements rest on normative assumptions about what a ‘good life’ is for individuals, groups and societies as a whole. A relatively recent innovation in the drafting, negotiation and implementation of agreements is the inclusion of specific sections not only mentioning some of those normative assumptions, but also foreseeing ways in which departure from their practice by any of the signing parties will trigger adverse consequences for them. The justification for doing so would be that the economic benefits of the agreement will not effectively reach populations unless elements exogenous to strictly economic aspects are taken into consideration and enacted too. For instance, citizens need a degree of freedom and equality to enjoy the benefits of trade; economic agents must know that regulations and laws will be fair and transparent, promulgated and enforced by legitimate governments operating under a balance of powers; and prices of goods and services should reflect realistic costs not distorted by subsidies or by unfairly low wages. This chapter deals with this normative dimension of economic agreements and how the EU’s approach marks an innovation and a plausible model to be emulated in future IEAs across different regions. The first section explores the meaning of fundamental rights clauses and discusses the legitimacy of including such clauses in economic agreements. Section two surveys some of the most important recent nonEU IEAs to assess if, and to what extent, fundamental rights clauses are present therein. The third section analyses the relevance and functioning of the EU’s fundamental rights clause, particularly as an essential elements clause in IEAs in light of Kelsen’s distinction between primary and secondary rules (Kelsen 1934). The final

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section considers criticism, challenges and positive aspects of the clause and its impact on the architecture of IEAs. The paper concludes with a summary of the discussion and a stand on feasible and desirable future developments.

16.2 Meaning of and Rationale for Fundamental Rights Clauses in Economic Agreements ‘Fundamental rights clauses’ are sections of economic agreements not related to trade itself—goods and services, prices, competition—but rather to a broad category captured by the umbrella concept of ‘human rights’. The concept may receive varying meanings by different actors in the international arena,1 but it usually refers to the Universal Declaration of Human Rights (‘UDHR’)2 and similar expressions inspired by it which tend to be legally binding, such as the European Convention on Human Rights (‘ECHR’: European Parliament 2022b)3 or the International Covenant on Civil and Political Rights (‘ICCPR’).4 To enable its implementation, this conception of human rights and the correlated duties to respect, protect and fulfil them requires, in practice, a political atmosphere based on principles such as democracy and the rule of law. The meaning tends to be the umbrella concept that implicitly includes democracy and the rule of law. Because of that, it would be more appropriate to call them ‘political clauses’, as they refer to a whole climate subscribed to by signatories of IEAs which include and enable the protection of human rights. Two objections could arise from this approach, however. First, why should fundamental rights clauses form part of agreements whose purpose is economic? Second, even if the first difficulty was addressed, why should these clauses follow one particular set of values and principles—political culture—and not another? The first objection is the easier of the two to address, on account of the fact that the economy proceeds upon certain assumptions, for instance, that agreements will be honoured wilfully or else be enforced through legal provisions; that laws and derived regulations impacting the economy will be established by a legitimate government and remain unchanged unless a procedure involving the legislative power is followed; that economic agents can appeal executive or legislative decisions through the judiciary concerning, say, taxes, which they consider unfair; and so on. National-level investment grades or credit ratings, interest rates, inflation, and currency exchange rates—all of them economic indicators—are impacted by non-­economic, often political events and perceptions. A trade agreement with a country with an autocratic government will stand on less secure ground—the whims

 See, for instance, the Chinese Government’s idea in this respect and its differences as concerns the concept expounded on below (Tiezzi 2021). 2  UN GA Res 3/217 A. 3  Opened for signature 4 November 1950, 213 UNTS 221, entered into force 3 September 1953. 4  Opened for signature 16 December 1966, 999 UNTS 171, entered into force 23 March 1976. 1

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of the ruler—on account of the fact that the country is not democratic, for instance. Similarly, an agreement concluded with a flawed democracy lacking a balance of powers, an open public sphere, or civil liberties and education will be riskier than one accorded with a fully democratic system. War is a reason in itself to suspend, and possibly terminate, an IEA.5 The second objection implies a normative choice requiring a philosophical justification that is by nature debatable. The conclusion can be controversial. A case in point is the UDHR. It is seen by some as a summary of the aspirations of every human being of all ages. Yet for others it is an imposition of Western values on countries that do not share that view, within the context of cultural relativism.6 Although arguably its ‘universal’ character could be defended in philosophical terms, a pragmatic approach can show that this conception of human rights is ‘good enough’ as a reference for IEAs, notwithstanding limited shortcomings.7 According to the United Nations, the UDHR ‘is generally agreed to be the foundation of international human rights law’, whereby ‘core principles of human rights first set out in the UDHR…have been reiterated in numerous international human rights conventions, declarations, and resolutions’ (UN 2022). Indeed, today, all UN Member States have ratified at least one of the nine core international human rights treaties, and 80 percent of them have ratified four or more, ‘giving concrete expression to the universality of the UDHR and international human rights’ (UN 2022). Core international human rights treaties span instruments including the ICCPR, the International Covenant on Economic, Social and Cultural Rights (‘ICESCR’),8 the International Convention on the Elimination of All Forms of Racial Discrimination,9 and the Convention on the Rights of Persons with Disabilities (OHCHR 2022a, b).10 Whilst the UDHR itself lacks legal force, it is considered to embed largely accepted binding principles, as do the ICCPR and ICESCR, which incorporate and expound on a significant part of its content, have been signed and ratified by over 170 States (OHCHR 2022b), and can therefore be truly considered to consolidate wide opinio juris sive necessitatis.11 From a normative point of view, the existence and widespread acceptance of the ICCPR lends enough legitimacy to the inclusion of fundamental rights clauses in IEAs—even if the argument itself is rather pragmatic.

 Payment of Various Serbian Loans Issued in France (France v. Serbia) (Judgment) [1929] PCIJ Series A No 20, 3, at 39–40; Brazilian Loans (France v. Brazil) (Judgment) [1929] PCIJ Series A No 21 94, at 120. 6  A case in point is the 1990 Cairo Declaration of Human Rights in Islam, which has been interpreted by some as either contrary to the UDHR (Middle East Centre 2012) or on the way to convergence (Kayaoglu 2021). 7  The declaration was created in a particular historical context, drafted by nine people, voted by only 48 countries and contested several times since its adoption (United Nations 1948). 8  Opened for signature 16 December 1966, 999 UNTS 3, entered into force 3 January 1976. 9  Opened for signature 21 December 1965, 660 UNTS 195, entered into force 4 January 1969. 10  Adopted 13 December 2006, 2515 UNTS 3, entered into force 3 May 2008. 11  North Sea Continental Shelf (Federal Republic of Germany v. Denmark, Federal Republic of Germany v. The Netherlands) (Judgment) [1969] ICJ Rep 3, 43, para 74, and 44, para 77. 5

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16.3 Recent Developments Among the largest IEAs, measured by the portion of the world economy they involve, are the Regional Comprehensive Economic Partnership (‘RCEP’), the Canada, United States and Mexico Agreement (‘CUSMA’), the EU common market, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (‘CPTPP’), the African Continental Free Trade Area (‘AfCFTA’), the Southern Common Market (‘MERCOSUR’), and the Pacific Alliance (Alianza del Pacífico: ‘AP’) (Ghosh 2021). Table 16.1 compares these seven IEAs in terms of figures for nominal gross national product (GDP) and population. Or in graphic terms,12 only: Fig. 16.1.

16.3.1 Regional Comprehensive Economic Partenrship The RCEP is a comprehensive free trade agreement among the Asia-Pacific nations of Australia, Brunei, Cambodia, the People’s Republic of China (‘PRC’), Indonesia, Japan, South Korea, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, Thailand, and Vietnam.13 It includes twenty chapters governing rights

Table 16.1  IEAs: nominal gross national product (GDP) and population

AP MERCOSURa AfCFTA CPTPP EU CUSMA RCEP World

Nominal GDP, 2020 US$1.8 trillion US$2.9 trillion US$3.4 trillion US$10.6 trillion US$15.2 trillion US$23.7 trillion US$26.1 trillion US$84.5 trillion

Population, 2020 230 million 308 million 1.3 billion 499 million 445 million 496 million 2.27 billion 7.64 billion

Talks are currently underway to explore a possible convergence between the two most important trade agreements in Latin America, Mercosur and AP. If that eventuates, together Mercosur (Argentina, Brazil, Uruguay and Paraguay) and AP (Chile, Colombia, Peru and Mexico) would have a combined GDP of $3.7 trillion (bigger therefore than AfCFTA) and a population of 538 million (larger than that of the EU) (Villaroel 2021)

a

12  Percentages in Fig. 16.1 may not exactly correspond to numbers in Table 16.1 as the sources and cut dates are slightly different (those for Fig. 16.1 were released later). 13  Opened for signature 15 November 2020, entered into force 1 January 2022.

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Fig. 16.1  IEAs: combined GDP. (Source: UNCTAD 2022)

and duties spanning, inter alia, investment, trade, rules of origin, sanitary measures, and competition. As large as RCEP is in terms of the economic and population areas it spans, it does not include fundamental rights provisions in its text. The agreement has been criticised for its lack of commitment to internationally recognised labour rights and environmental standards (Ranald 2020). This shortcoming becomes more apparent with signatory countries that give importance to similar provisions in other economic agreements they have signed, as is the case of Australia, which recognises labour and social rights in at least five other agreements, including the CPTPP (Australian Parliament 2022).

16.3.2 Canada-United States-Mexico Agreement The CUSMA,14 a comprehensive economic agreement between Canada, the US and Mexico spanning investment, trade and intellectual property rights,15 includes provisions on environment and labour rights, such as the freedom of association, requiring improved protection for workers and blocking imports of goods made with forced labour, with a view to decreasing the wage gap between workers in the different signatory States (Swanson and Tankersley 2020).  Opened for signature 30 November 2018, entered into force 10 December 2019.  The agreement is named in different ways depending on the order in which the three signing countries are mentioned. Here we follow a geographical, north-to-south order and keep it that way for consistency throughout the chapter. 14 15

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Negotiation of CUSMA’s predecessor―the North American Free Trade Agreement (‘NAFTA’)16―also included a parallel accord on labour rights, the North American Agreement on Labour Cooperation (‘NAALC’), encouraging member countries to enact their own labour laws and providing a mechanism whereby one signing country could challenge non-enforcement by another. However, under the NAFTA, most violations―including freedom of association and collective bargaining―were not eligible for specific sanctions. In the words of DiCaro and MacDonald (2021), ‘the labour side accord was basically toothless’. The updated North American agreement includes a whole section (chapter 23) dedicated to labour rights and mechanisms to monitor and uphold them. As with NAFTA, CUSMA also refers to international labour standards rather than only national ones, in particular the 1998 International Labour Organisation Declaration on Fundamental Principles and Rights at Work, which stresses fundamental principles such as freedom of association and the right to collective bargaining, the elimination of all forms of forced or compulsory labour and discrimination in respect of employment and occupation (ILO 2022). However, as thorough as it attempts to be, the agreement limits itself to stressing labour rights in close connection with economic fairness (competition), with no overarching perspective beyond that, let alone a proper political dimension.

16.3.3 Comprehensive and Progressive Agreement for Trans-Pacific Partnership The CPTPP, or TPP-11,17 was originally a US-inspired and led initiative (the Trans-­ Pacific Partnership; ‘TPP’) under Presidents Bush and Obama, from which the US disengaged under President Trump in 2017 (Atlantic Council 2021; Australian Government Department of Foreign Affairs and Trade 2022). The remaining eleven countries, including Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam, with Japan implicitly assuming the leadership, continued negotiations and progressed in setting a new agreement, the CPTPP, similar to a certain extent to the original TPP but with specific differences after the US left the agreement (Atlantic Council 2021). Currently the UK, the Republic of China (Taiwan), and the PRC are among several applicants to become members (Schott 2021). The CPTPP belongs to a ‘new generation’ of IEAs that encompasses wider issues not only as important, but also as enforceable under the agreement, including labour and environmental standards to ‘reduce the impact of unfair practices and promote sustainable development’ (New Zealand Minister for Foreign Affairs 2022). The preamble highlights values such as corporate social responsibility, 16 17

 Entered into force 1 January 1989.  Opened for signature 8 March 2018, entered into force 30 December 2018.

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cultural identity and diversity, environmental protection, gender equality, labour rights, inclusive trade, sustainable development and traditional knowledge. The agreement incorporates almost completely the text of the TPP—signed in 2016, but which never came into force—except for a few parts which have been suspended and could be reactivated in the future if the parties so agree (CPTPP article 2) (Global Affairs Canada 2018). However, besides labour sections which include protection of worker rights such as the prohibition of forced labour and child labour, and guarantees as to minimum wages and decent working conditions (Asian Trade Centre 2017) that were also contained in the original TPP text, the CPTPP does not include broader human rights or, even less, political clauses.

16.3.4 African Continental Free Trade Area In its consolidated text, the AfCFTA,18 which currently includes 54 African Member States and spans trade in goods, services and customs duties, does not have any general clause dedicated to human rights or even to labour rights (Guillermo Arenas et al. 2022). The agreement does mention the promotion of gender equality as one of its goals (article 3) and the potential role of women in improving export capacity (article 27). This is relevant since, as Zhuawu and Enos-Edu point out, ‘informal micro, small and medium-sized enterprises...in which women dominate, account for about 80 percent of businesses in Africa,’ and more than 70% of cross-border traders, 51% of agricultural workers and 41% of staff in services are women (Zhuawu and Enos-Edu 2021). Gender rights are also stressed in a recent report by the United Nations Conference on Trade and Development (‘UNCTAD’) about AfCFTA, highlighting the vulnerability of women and youth, especially in informal employment and cross-border trade, as well as economic inequality affecting vast sways of the population in different countries (UNCTAD 2021), a problem that must be addressed in order for the benefits of the continental free trade area to reach everybody. In conclusion, the scope for promotion of human rights and, more generally, democratic values in AfCFTA through fundamental rights clauses is laudable but still limited to specific rights.

16.3.5 MERCOSUR Signed at Asunción, Paraguay in 1991, MERCOSUR predates all other IEAs studied here except for the EU. MERCOSUR encompasses a vast array of documents including foundational texts, protocols, agreements and regulations on several

18

 Opened for signature 21 March 2018, entered into force 20 May 2019.

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topics such as culture, international cooperation, women, agriculture and labour affairs and human rights more generally. MERCOSUR has indeed created institutional bodies and/or agreements on a broader range of social and political matters such as human and social rights, migration, refugees and democracy (Canepa 2015). MERCOSUR defines itself as an intergovernmental ‘integration process’, which makes decisions based on unanimity. It possesses, in addition to its three functioning organs (a high-level political council, an operational ‘group’ and a commercial branch), a few ‘permanent organisms’ attending matters that the bloc considers important, such as the ‘Structural Convergence Fund’, a ‘Social Institute’, a Parliament, a Secretariat, a permanent Tribunal and an ‘Institute for Public Policy on Human Rights’ (MERCOSUR 2022). Even though the Treaty of Asunción for the Constitution of the Southern Common Market does not contain fundamental rights clauses,19 two subsequent documents, which are also considered ‘foundational’ for MERCOSUR, do. This is the case of the Protocol of Asunción on Commitment to the Promotion and Protection of Human Rights (30 April 2010),20 and the Protocol of Ushuaia on MERCOSUR’s Democratic Commitment, also signed by associated States Bolivia and Chile (24 July 1998) (MERCOSUR 2021a, b).21

16.3.6 Pacific Alliance According to article 3 of its framework agreement, the AP is an integration agreement that seeks to gradually advance the free circulation of goods, services, capitals and people in its area and become a platform for ‘political articulation, trade and economic integration and projection to the world’, with an ‘emphasis on the Asia Pacific’ (Alianza del Pacífico 2022a, b). The agreement embeds a fundamental rights clause. Under article 2 of the framework agreement and the title on ‘Democracy and the Rule of Law’, the Member States establish as ‘essential requirements for participation’ of any prospective party to the Pacific Alliance, that candidate States have an atmosphere where the rule of law, democracy, the constitutional order, balance of power in government, human rights and fundamental freedoms are upheld and respected (Alianza del Pacífico 2022b).

 Tratado de Asunción para la constitución de un mercado común, signed 26 March 1991.  Protocolo de Asunción sobre compromiso con la promoción y protección de los Derechos Humanos en el MERCOSUR, 2010. 21  Venezuela is a suspended member since 2017, owing to its non-compliance with the Ushuaia Protocol on democracy (Dieguez 2017). Chile is an Associate State. Bolivia’s membership has now been approved (MERCOSUR 2022). 19 20

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16.4 The EU’s Innovative ‘Essential Elements’ Clause 16.4.1 Relevance Although the EU is only the world’s third largest agreement in GDP terms, it is by far the most integrated and sophisticated example. Economically speaking it is a ‘customs union’, with the 27 Member States forming a single territory for customs and excise purposes. Consequently, ‘Member States have no customs duty barriers between themselves and they all have a common customs tariff for imported goods’ (European Commission 2022a). Signed in 1957 and having undergone significant amendment in 1992, 1997, 2002 and 2009, the Treaty of Rome which established the European Economic Community (‘EEC’) is still in force today as the Treaty on the Functioning of the European Union (‘TFEU’). Not only did the Treaty of Rome establish the EEC, but it also intended to advance political convergence in what would become the EU, including permanent institutions such as the European Commission, the Assembly (which would later become the European Parliament), the Council of Ministers and the Court of Justice (‘CJEU’). Treaties currently in force (all in consolidated 2016 versions) are the Treaty on European Union (‘TEU’), the TFEU, the Treaty Establishing the European Atomic Energy Community and the Charter of Fundamental Rights of the European Union (‘EUCFR’).22 Whilst the EEC initially developed as a common market, paralleling the Council of Europe system in the area of fundamental rights, since the adoption of the TEU via the Maastricht Treaty in 1992 and the EUCFR in 2000, it has also developed a human rights dimension. This dimension has been strengthened via the consolidation of the EUCFR into a binding source of EU law with the adoption of the Lisbon Treaty in 2009. The accession of the EU to the ECHR envisaged in TEU article 6(2) certainly reinforces human rights protection in the Union. As a consequence of the development of an ‘internal’ human rights dimension, the EU is also trying to export its human rights approach in the international sphere. There are abundant references to values in external EU treaties that consolidate a political culture or framework that the EU considers good for itself and which it naturally wishes to share with other countries and regions in the international sphere. This has been what we could call a ‘normative mission’ or ‘soft power’ strategy at the heart of EU diplomacy. As the EU’s greatest capacity for influence has been economic,23 a natural vehicle to communicate fundamental values is through political, normative clauses in trade agreements with other regions and countries. This is the core of the EU’s innovation in this field. Not only does the EU common market conform with the widest, deepest and most developed political frameworks deriving from its long history of integration, but it also aims to project its values way beyond its borders through new  Treaty of Lisbon Amending the Treaty on European Union and the Treaty Establishing the European Community, opened for signature 13 December 2007, 2702 UNTS 3 No 47938, entered into force 1 December 2009. 23  At least until the 2022 Russian invasion of Ukraine. 22

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IEAs concerted with other countries and regions, and it has ways to enforce such commitments through economic pressure. No other IEA comes close to this.24 Whilst limited clauses addressing certain human and labour rights, or even basic fundamental rights clauses, do exist in trade agreements in regions outside the EU, as has been described in section two of this chapter, the pioneer and leader in the advancement of political values through economic agreements is undoubtedly the EU (Zerk and Beacock 2021). Democratic principles and human rights defined as ‘essential elements’ were introduced as a clause for the first time in EU agreements signed in 1992 with Brazil, the Andean Pact countries, the Baltic countries and Albania. These clauses were an innovation in as much as they made ‘human rights the subject of common interest...and an instrument for the implementation of positive measures’, also enabling the parties, ‘where necessary, to take restrictive measures in proportion to the gravity of the offence’ (European Commission 1995). Following a communication from the European Commission ‘on the inclusion of respect for democratic principles and human rights in agreements between the Community and third countries’ (European Commission 1995),25 a specific policy for the inclusion of fundamental rights clauses in EU trade agreements was established. Fundamental rights clauses in EU IEAs come as an intrinsic demand of the normative vision enshrined in the EU treaties―the equivalent of its political form or ‘constitution’.26 This was clearly stated in a document drafted by the Council in 2009 on the ‘[c]ommon approach on the use of political clauses’. According to the document, the inclusion of fundamental rights clauses in international economic agreements aims at implementing not only ‘some of its most important external policy objectives, for instance, respect for human rights, democracy and the rule of law and non-proliferation’, but also ‘the EU values and political principles which constitute the basis for its external relations’ as well ‘the EU security interests’ (Council of the European Union 2013). The EU’s IEAs stand out not only for their specific and clear mention of fundamental rights clauses, but also for their extension and prominence in those treaties. Furthermore, the EU has taken an innovative approach to the extent that IEAs establish the possibility of enforcing such clauses

 Perhaps MERCOSUR is the international economic organisation that, after the EU, does more in terms of political clauses. However, it comes far second in comparison with the EU in content, and although it has exercised its economic power to show normative commitment (for instance, by suspending Venezuela’s membership in view of the rupture of the democratic order in this Member State), its power is much more limited in scope and geography. 25  Commented the year after by the European Parliament (European Parliament 1996). 26  As is well-known, the EU attempted to create a constitution in the early 2000s. In the end, the adoption of the constitution was vetoed by the electorates in two countries, France and the Netherlands. The 2009 Treaty of Lisbon kept a good part of the constitution’s content. Although the EU does not have a formal constitution, a very close proxy is the acquis communautaire, that is, the body of treaties that articulate the Union’s political form as it is today. The EU’s acquis communautaire (‘community stock’) is ‘the body of common rights and obligations that are binding on all EU countries, as EU Members (EU 2022). 24

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by way of countermeasures, including the suspension of the normal functioning of IEAs, should the fulfilment of fundamental rights by the counterpart not be satisfactory.

16.4.2 Functioning The legal basis for the adoption of fundamental rights clauses in IEAs is provided by different provisions of the TEU. Article 2 acknowledges ‘respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights’ as foundational values for the Union and its Member States. TEU article 3(5) establishes that the EU ‘upholds’ and ‘promotes’ such values in its external relations, including ‘sustainable development’ as well as ‘free and fair trade, eradication of poverty, and the protection of human rights’. TEU article 21(1) also states that the external action of the Union be guided by its internal fundamental principles (Gammage 2018, at 4–5). Whilst human rights competence is not per se exclusive to the EU, the fundamental rights clause can be included by the EU alone as part of its common commercial policy (Hachez 2015, 13). In this respect, the CJEU has considered that a failure to include fundamental rights clauses in international economic agreements would undermine the legal action of the community.27 Fundamental rights clauses are embedded in bilateral and multilateral economic agreements concluded by the EU, whether comprehensive or focusing mainly on trade (Zamfir 2019, 4). To a certain extent, they complement the expansion of comprehensive trade agreements, which tend to progressively include specific human rights provisions, spanning labour rights and sustainable development. For instance, since the adoption of the EU-Republic of Korea FTA in 2011, several trade agreements recently negotiated by the EU include a chapter on trade and sustainable development. A similar approach has been taken as regards labour rights. Human rights clauses certainly contribute to reinforcing the implementation of such provisions embedded in IEAs. However, the fundamental rights clause remains a specific and more general development of the EU external policy on human rights in the context of IEAs. EU fundamental rights clauses are primary norms (Kelsen 1934) that are framed as ‘essential elements’ clauses. For instance, article 9(2) of the Cotonou Agreement concluded with African, Caribbean and Pacific countries provides that ‘[r]espect for human rights, democratic principles and the rule of law, which underpin the ACP– EU Partnership, shall underpin the domestic and international policies of the Parties and constitute the essential elements of this Agreement.’28 Article 1(1) of the EU Framework Agreement with Korea refers to human rights standards embedded in international agreements and provides that ‘[r]espect for democratic principles and human rights and fundamental freedoms as laid down in the UDHR and other

27 28

 Case C-268/94 Portugal v Council [1996] ECR I-6219.  Emphasis added.

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relevant international human rights instruments’ are at the basis of ‘the internal and international policies of both Parties and constitutes an essential element of this Agreement.’ Article 2(1) of the EU Association Agreement with Georgia refers to both international and EU human rights standards and establishes that ‘[r]espect for the democratic principles, human rights and fundamental freedoms, as proclaimed in the UDHR of 1948 and as defined in the European Convention for the Protection of Human Rights and Fundamental Freedoms of 1950’, inter alia, ‘shall form the basis of the domestic and external policies of the Parties and constitutes an essential element of this agreement.’ Framing primary human rights obligations as ‘essential elements’ of an economic agreement enables a party to take appropriate measures in the case of serious breaches by the other party or parties from the standpoint of secondary norms. Indeed, the primary essential elements clause is usually complemented by a secondary ‘non-execution’ clause, which is included in the final provisions of an economic agreement and allows the adoption of appropriate measures when an essential element of the agreement is breached. According to international law, appropriate (counter-)measures should be necessary and proportionate to the gravity of the breach (International Law Commission’s Draft Articles on State Responsibility, 2001, articles 49–53 and Draft Articles on the Responsibility of International Organisations, 2011, articles 51–56). In this context, the suspension of an economic agreement, in whole or in part, should be a measure of last resort. Substantively, measures that are less disruptive for the agreement should be prioritised. Indeed, suspension has only been applied a few times in the past twenty years in connection with serious violations of human rights, democratic principles or the rule of law.29 More commonly, the EU has resorted to retaliatory measures such as the suspension of meetings and technical co-operation programmes (Hachez 2015, 19). Procedurally, the adoption of retaliatory measures should follow usual procedures for invocation of responsibility, negotiation and dispute settlement (Quirico 2020, 195 ff.). For instance, the non-execution clause in the Cotonou Agreement underscores the importance of political dialogue and includes an elaborate schedule of ‘appropriate measures’. The essential elements and non-execution clauses are ultimately grounded in part V of the 1969 Vienna Convention on the Law of Treaties (‘VCLT’) and the 1986 Vienna Convention on the Law of Treaties between States and International Organisations or between International Organisations (‘VCLTIO’), which regulate procedures that determine the non-effectiveness of an agreement, including its suspension as a whole (VCLT and VCLTIO article 44). Specifically, under VCLT and VCLTIO article 57(a) the operation of a treaty can be suspended with respect to one or all the parties ‘according to the express provision of a treaty’.30 This is established  Notably, fifteen times in the case of the Cotonu Agreement, the overarching framework for EU relations with African, Caribbean and Pacific (ACP) countries, adopted in 2000. 30  Under Articles 58(1)(a)– (b) of the VCLT and VCLTIO, two or more of the parties to a multilateral convention can conclude an inter se agreement to suspend the convention only between themselves, if this is not prohibited by the convention, subject to notification to all the parties to the agreement. 29

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within the framework of article 60, which provides that a material breach of a bilateral or multilateral treaty, involving repudiation or violation of a norm essential to the object or purpose of the agreement, allows the invocation of the particular or general suspension of the agreement.

16.5 An Effective Mechanism for Comprehensive Economic Agreements? The idea of linking human rights and trade agreements via the essential elements clause potentially has a pervasive impact on the structure of IEAs. However, whilst supporters underscore the priority of human rights over economic values, critics consider that trade should be separate from other questions. Positively, it is noted that the fundamental rights clause fosters dialogue between the parties to address shortfalls or areas for improvement in the field of human rights (Ioannides 2017), following a ‘carrot’ rather than a ‘stick’ approach’ (Badescu 2020, 145). In this respect, the clause is a strong motivation for the parties to commit to fundamental values, as trade with the EU, the largest single market in the world (European Commission 2022b), is appealing. This provides a justification to engage in partnerships with countries or regions with a poor record on human rights or democratic values. The prospect of entering a trade agreement with the EU or to keep it active once it has been signed, the argument goes, is a sufficient motivation for a signing party to maintain or improve its human rights and democratic standards. In this case, the primary goal of the ‘essential elements’ clause is not for the EU to brandish the threat of retaliation when poor human rights or democratic standards present themselves, but rather to create a legal basis for dialogue that helps to address those issues in a constructive manner. Within this framework, there is growing pressure in favour of subordinating international trade and investment to human rights. In fact, modern trade and investment agreements progressively tend to include provisions on sustainable development, which is by its very nature a human rights issue, in line with the UN sustainable development goals. It is therefore clear that linking fundamental rights and economics via the essential elements clause fosters the adoption of comprehensive and inclusive agreements, along the lines of the idea of balancing economic competition, equality and ecological issues proposed by the Bruntland Report (World Commission on Environment and Development 1987), rather than having narrowly focused economic treaties. Within this context, the EU Parliament (European Parliament 2022a, b) has underscored that the Union should do more to advance human rights and democratic principles in foreign relations, for instance, by linking climate action and human rights (European Parliament 2021). On the other hand, the fundamental rights clause is not always likely to lead to significant improvements for human rights and political principles in third-party States and international organisations with which the EU negotiates IEAs. Politically,

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the clause may represent a stumbling block in the negotiation of IEAs. For instance, Asian countries tend to systemically reject social clauses within IEAs, so much so that during the negotiation of the EU-Singapore FTA, reportedly the Singaporean government opposed the symbolic gesture of signing an agreement implying a change in its position on death penalty and human rights or governance (Gammage 2018, 15–16). More generally, developing countries are reluctant to accept human rights provisions in IEAs, as they see the essential elements clause as a protectionist measure. The clause is indeed considered a form of interference with internal affairs, particularly given that high human rights standards, notably as concerns second-­ generation labour rights, are not easy to implement and might undermine international competitiveness. More specifically, it is considered that human rights conditionality is more effective vis-à-vis those developing countries that depend more on EU aid (Donno and Neureiter 2018, 335). The problem, however, does not exclusively concern developing countries, but more generally States with a different human rights culture. For example, in 1997 Australia refused to sign an economic treaty embedding the EU standard essential elements clause (Hafner-Burton 2009, 33). More generally, the essential elements of the fundamental rights clause embedded in EU IEAs vary, depending on the nature and structure of the State with which the EU enters into treaties, in contrast with the purported universality of human rights. For instance, the fundamental value of a ‘market economy’ is included in some IEAs, but not in those entered into with socialist countries such as the PRC (Hachez 2015, 15). It is therefore suggested that non-economic conditionality should be tailored on the needs of specific countries. It is also difficult to measure the effectiveness of the fundamental rights clause and, according to available reports, it seems to have limited outcomes (Ioannides 2017, 114–115 and 178–179). In particular, the clause does not operate in isolation in the context of IEAs, but rather in connection with other regulatory tools. Indeed, the clause is not the only means by which the EU enforces human rights; other means include, for instance, the Generalised Schemes of Preferences, which remove import duties on developing countries to facilitate the implementation of labour rights and environmental rights standards. These would be a preferable option, according to scholarly research, as they apply unilaterally and need not to be negotiated (Ioannides 2017, 5; Borchert et al. 2020, 4). Furthermore, there are non-EU institutions, such as the UN and non-governmental organisations, that apply pressure towards the implementation of human rights. From a legal perspective, it remains unsettled in substance whether the fundamental rights clause has the status of binding law or rather that of soft law, as a non-committal norm embedded in an international agreement. In this respect, whilst treaties concluded by the EU and its Member States are certainly binding under the VCLT and VCLTIO, the fundamental rights clause is not drafted as a rule embedding specific legal obligations, but rather as a general provision concerning the protection of human rights as a thorough. As such, invoking a breach of the clause as an essential element of an economic treaty is not a simple issue, and the adoption of ‘appropriate’ retaliatory measures raises two difficulties. First, it is not fully clear what ‘appropriate measures’ exactly are. In this context, the EU has been criticised

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for adopting retaliatory measures selectively, particularly targeting less powerful countries rather than more powerful States (Hachez 2015, 18). Furthermore, retaliation has been applied when drastic changes, such as coups d’état or flawed elections, have taken place, but not in situations of routine human rights violations (Hachez 2015, 18). Second, it is disputed whether the EU should adopt any retaliatory measures at all, given that, as we have seen, support for prioritising human rights over economic interests is not unanimous. Therefore, fundamental rights clauses can certainly be considered part of the ‘Brussels effect’, that is, the extraterritorial extension of EU regulation via the influence of high regulatory standards (Bradford 2020; Scott 2014, 9090). However, they do not necessarily seem to set out specifically binding obligations; this largely depends on the way in which the clause is formulated (Badescu 2020, 141 and 134). Procedurally, at the negotiation stage it is further considered that EU delegations should be given a greater role in the definition of specific conditionality tools, consulting with local stakeholders and civil society (Ioannides 2017, 4). This possibility might nonetheless be hampered by the fact that, while the EU has exclusive competence in the area of the common commercial policy, it has no specific exclusivity in the area of fundamental rights. Therefore, while the EU can establish general essential elements clauses under the common commercial policy, it might face obstacles in spelling out specific human rights obligations. Furthermore, at the implementation stage doubts have been raised as concerns the effectiveness of existing monitoring mechanisms for the fundamental rights clause, particularly as concerns labour rights (Beke et al. 2014). It is indeed noted that monitoring is often left to political bodies facilitating bargaining rather than legal institutions imposing effective sanctions (Badescu 2020, 141–142). Therefore, the idea has been put forward, inter alia, of establishing a permanent human rights committee vested with the power to scrutinise progress on specifically outlined human rights, involving civil society (Van Boven 1996, 99), notably as concerns sustainable development rights (Van Boven 1996, 5). Another proposal aims to improve the role of the European Parliament in monitoring the implementation of the fundamental rights clause, in conjunction with the Council (Bartels 2014, 33). However, it is not easy for the EU to impose such monitoring mechanisms on trade and investment partners in IEAs that have not thus far been subject to meaningful sanctions. It has therefore been noted that the EU may be more interested in portraying itself as a human rights promoter via fundamental rights clauses than in effectively enforcing fundamental rights, at least in countries where implementing the rule of law is problematic (Badescu 2020,149).

16.6 Conclusion The EU has played a key role in developing the fundamental rights clause as an essential element of international economic agreements.

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Theoretically, following Kelsen’s approach, a breach of the essential primary obligation to respect, protect and fulfil human rights triggers the possibility for the EU, its Member States or another party to an IEA to adopt necessary and proportionate countermeasures, including the suspension of the treaty in its entirety. By tying fundamental rights to economics, including key regulatory principles such as democracy and the rule of law, the essential elements clause fosters a comprehensive approach to bilateral and multilateral economic agreements. Should the clause be strictly compulsory, it would have a revolutionary impact on IEAs, subordinating economic interests to social welfare and individual rights. In practice, is the clause effective in achieving its purpose, or is it rather outdated window dressing? Whilst, on the one hand, the clause has the potential to improve human rights at the negotiation stage, its nature as a general non-specific rule situates it half-way between a soft law instrument and a hard binding duty, which affects its effectiveness at the implementation stage. The clause can be considered part of the ‘Brussels effect’, but effectiveness could be improved by substantively increasing the specificity of the clause, tailoring it to the needs of a given country, and developing specific monitoring mechanisms for compliance. These are nonetheless, for the time being, more aspirational purposes than a concrete reality, particularly subject to the political willingness of both the EU itself and its trade partners to prioritise human rights standards over economic values.

References Alianza del Pacífico (2022a) Qué es la Alianza del Pacífico? https://alianzapacifico.net/ que-­es-­la-­alianza/ Alianza del Pacífico (2022b) Acuerdo Marco Alianza del Pacífico. https://alianzapacifico.net/ descarga-­documentos-­acuerdo-­marco-­alianza-­del-­pacifico Arenas G et  al (2022) The African continental free trade area. https://www.worldbank.org/en/ topic/trade/publication/the-­african-­continental-­free-­trade-­area Asian Trade Centre (2017) TPP11 and RCEP compared. https://static1.squarespace.com/ static/5393d501e4b0643446abd228/t/5a1c16398165f542d6cb5c6b/1511790142681/Policy+B rief+17-­12+TPP11+and+RCEP+Compared.pdf Atlantic Council (2021) The RCEP ratification and its implications. https://www.atlanticcouncil. org/blogs/econographics/the-­rcep-­ratification-­and-­its-­implications Australian Government Department of Foreign Affairs and Trade (2022) CPTPP text and associated documents. https://www.dfat.gov.au/trade/agreements/in-­force/cptpp/official-­documents Australian Parliament (2021) Report 196 on the regional comprehensive economic partnership agreement. https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Treaties/ RCEP/Report_196 Badescu M (2020) The legal and practical inefficiency of systematically introducing human rights clauses in the European Union's Agreements. Romanian J Int Law 24:135–150 Bartels L (2014) A model human rights clause for the EU’s international trade Agreements. German Institute for Human Rights and Misereor Beke L et  al (2014) Fostering human rights among European policies. In: Work package no 9, report on the integration of human rights in EU development and trade policies. Centre for Global Governance Studies, Leuven

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Borchert I et al (2020) The pursuit of non-trade policy objectives in EU trade policy, University of Sussex, Université Libre de Bruxelles (ECARES), CEPR, CESifo, CEP, WP Series 09 Bradford A (2020) The Brussels effect: how the European Union rules the world. OUP, Oxford Brazilian Loans (France v. Brazil) (Judgment) [1929] PCIJ Series A No 21 94, at 120 Canepa M (2015) Los derechos humanos en el MERCOSUR. Revista de la Secretaría del Tribunal Permanente de Revisión 3(6):161–177. https://doi.org/10.16890/rstpr.a3.n6.161 Council of the European Union (2013) Common approach on the use of political clauses, Doc 10491/1/09. https://data.consilium.europa.eu/doc/document/ ST-­10491-­2009-­REV-­1-­EXT-­2/en/pdf DiCaro A, McDonald L (2021) CUSMA’s labour mechanisms a testing ground for protecting north-American workers. The Monitor https://monitormag.ca/articles/ cusmas-­labour-­mechanisms-­a-­testing-­ground-­for-­protecting-­north-­american-­workers Dieguez J (2017) Suspensión de Venezuela en el MERCOSUR. https://www.mercosur.int/ suspension-­de-­venezuela-­en-­el-­mercosur Donno D, Neureiter M (2018) Can human rights conditionality reduce repression? Examining the European Union’s economic agreements. Rev Int Organ 13:335–357 EU (2022) Glossary of summaries  – EUR-Lex. https://eur-­lex.europa.eu/summary/glossary/ acquis.html?locale=en European Commission (1995) Communication from the Commission on the inclusion of respect for democratic principles and human rights in agreements between the community and third countries, COM/95/216 FINAL European Commission (2022a) Access2Markets  – The EU market. https://trade.ec.europa.eu/ access-­to-­markets/en/content/eu-­market-­0#EU_Introduction European Commission (2022b) EU position in world trade  – Trade. https://ec.europa.eu/trade/ policy/eu-­position-­in-­world-­trade European Parliament (1996) Resolution on the communication from the Commission on the inclusion of respect for democratic principles and human rights in agreements between the community and third countries, COM(95)0216-C4–0197/95 European Parliament (2021) Human rights and democracy, Doc TA-9-2021-0014. https://www. europarl.europa.eu/doceo/document/TA-­9-­2021-­0014_EN.pdf European Parliament (2022a) The treaty of Lisbon: fact sheets on the European Union. https:// www.europarl.europa.eu/factsheets/en/sheet/5/the-­treaty-­of-­lisbon European Parliament (2022b) Human rights and democracy, fact sheets on the European Union. https://www.europarl.europa.eu/factsheets/en/section/206/human-­rights-­and-­democracy. Accessed 31 Mar 2022 Gammage C (2018) A critique of the extraterritorial obligations of the EU in relation to human rights clauses and social norms in EU free trade Agreements. Eur World Law Rev 20(1). https:// doi.org/10.14324/111.444.ewlj.2018.01 Ghosh I (2021) RCEP explained: the World’s biggest trading bloc will soon be in AsiaPacific. Visual Capitalist. https://www.visualcapitalist.com/rcep-­explained-­the-­worlds-­ biggest-­trading-­bloc-­will-­soon-­be-­in-­asia-­pacific Global Affairs Canada (2018) Comprehensive and progressive agreement for trans-Pacific partnership. https://www.international.gc.ca/trade-­commerce/trade-­agreements-­accords-­ commerciaux/agr-­acc/cptpp-­ptpgp/text-­texte/cptpp-­ptpgp.aspx?lang=eng Hachez N (2015) Essential elements’ clauses in EU trade Agreements: making trade work in a way that helps human rights? Leuven Centre for Global Governance Studies, Working Paper No. 158 Hafner-Burton E (2009) The power politics of regime complexity: human rights trade conditionality in Europe. Perspect Polit 7:33–37. https://www.brookings.edu/research/ the-­organization-­of-­islamic-­cooperations-­declaration-­on-­human-­rights-­promises-­and-­pitfalls ILO (2022) The text of the declaration on fundamental principles and rights at work and its follow­up. https://www.ilo.org/declaration/thedeclaration/textdeclaration/lang%2D%2Den/index.htm International Law Commission (2001) Draft articles on state responsibility for internationally wrongful acts

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International Law Commission (2011) Draft articles on the responsibility of international organisations for an internationally wrongful act Ioannides I (2017) The effects of human rights related clauses in the EU-Mexico global agreement and the EU-Chile association agreement, Ex-post impact assessment performed by the European parliamentary research service Kayaoglu T (2021) Imagining the Islamic international society. Millenn J Int Stud 50(1):245–255 Kelsen H (1934) Reine Rechtslehre: Einleitung in die rechtswissenschaftliche Problematik. F. Deuticke, Leipzig Kuwonu F (2021) Africa’s free trade area opens for business. https://www.un.org/africarenewal/ magazine/january-­2021/afcfta-­africa-­now-­open-­business MERCOSUR (2021a) Protocolo de Ushuaia sobre compromiso democrático en el MERCOSUR. https://www.mercosur.int/logro-­4-­protocolo-­de-­ushuaia-­sobre-­compromiso-­ democratico MERCOSUR (2021b) Su funcionamiento. https://www.mercosur.int/quienes-­somos/ funcionamiento MERCOSUR (2022) Países del MERCOSUR. https://www.mercosur.int/quienes-­somos/ paises-­del-­mercosur Middle East Centre (2012) Human rights: the universal declaration vs the Cairo declaration, 10 December 2012. https://blogs.lse.ac.uk/mec/2012/12/10/1569 New Zealand Minister for Foreign Affairs (2022) Free Trade Agreements. https://www. mfat.govt.nz/en/trade/free-­t rade-­a greements/free-­t rade-­a greements-­i n-­f orce/cptpp/ comprehensive-­and-­progressive-­agreement-­for-­trans-­pacific-­partnership-­text-­and-­resources North Sea Continental Shelf (Federal Republic of Germany v. Denmark, Federal Republic of Germany v. The Netherlands) (Judgment) [1969] ICJ Rep 3 OHCHR (2022a) Core international instruments. https://www.ohchr.org/EN/ProfessionalInterest/ Pages/CoreInstruments.aspx OHCHR (2022b) International covenant on civil and political rights’, status of ratifications. https:// tbinternet.ohchr.org/_layouts/15/TreatyBodyExternal/Treaty.aspx?Treaty=CCPR&Lang=en Payment of Various Serbian Loans Issued in France (France v. Serbia) (Judgment) [1929]. PCIJ Series A No 20, 3 Portugal v. Council, ECJ Case C-268/94, [1996] ECR I-6219 Quirico O (2020) The international legal system. Thomson Reuters, Canberra Ranald P (2020) RCEP has limited trade gains and ignores labour and human rights. Aust Inst Int Aff. https://www.internationalaffairs.org.au/australianoutlook/rcep-­ has-­limited-­trade-­gains-­and-­ignores-­labour-­and-­human-­rights Schott J (2021) China’s CPTPP bid puts Biden on the spot. Peterson Institute for International Economics. https://www.piie.com/blogs/trade-­and-­investment-­policy-­watch/ chinas-­cptpp-­bid-­puts-­biden-­spot Scott J (2014) Extraterritoriality and territorial extension in EU law. Am J Comp L 62(1):9090–9125 Swanson A, Tankersley J (2020) Trump just signed the USMCA  – Here’s What’s in the new NAFTA.  The New  York Times. https://www.nytimes.com/2020/01/29/business/economy/ usmca-­deal.html Tiezzi S (2021) Can China change the definition of human rights? https://thediplomat.com/2021/02/ can-­china-­change-­the-­definition-­of-­human-­rights UNCTAD (2021) Reaping the potential benefits of the African continental free trade area for inclusive growth, Economic development in Africa report UNCTAD (2022) Pacto comercial entre Asia y el Pacífico crea un nuevo ‘centro de gravedad’ para el comercio mundial. https://unctad.org/es/news/pacto-­comercial-­entre-­asia-­y-­ el-­pacifico-­crea-­un-­nuevo-­centro-­de-­gravedad-­para-­el-­comercio United Nations (1948) International bill of human rights: universal declaration of human rights. https://digitallibrary.un.org/record/670964 United Nations (2022) The foundation of international human rights law. https://www.un.org/en/ about-­us/udhr/foundation-­of-­international-­human-­rights-­law

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Van Boven T (1996) Human rights clause in external Agreements: assessing its impact and potential. Neth Q Hum Rights 14:97–101 Villarroel F (2021) Opciones para la convergencia entre la Alianza del Pacífico y el MERCOSUR en facilitación del comercio. https://repositorio.cepal.org/bitstream/handle/11362/47587/ S2100873_es.pdf?sequence=1&isAllowed=y World Commission on Environment and Development (1987) Our common future, report Zamfir I (2019) Human rights in EU trade agreements: the human rights clause and its application, PE 637.975 Zerk J, Beacock R (2021) Advancing human rights through trade. https://www.chathamhouse.org/ sites/default/files/2021-­05/2021-­05-­26-­human-­rights-­trade-­zerk-­beacock.pdf Zhuawu C, Enos-Edu H (2021) The African continental free trade area: an opportunity for boosting women in trade. Commonwealth 177:2–4

Chapter 17

The Singapore Convention on Mediation: National Implementation Practices and EU Prospects Sascha Ferz and Tetiana Tsuvina

Contents 17.1  Introduction 17.2  Background of the Singapore Convention 17.3  The Scope of the Singapore Convention 17.4  National Ratification Practices 17.5  EU Prospects 17.6  Conclusion References

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Abstract In 2019, the United Nations (‘UN’) Convention on International Settlement Agreements Resulting from Mediation (‘Singapore Convention’) was opened for signature. It aims to enshrine a simplified procedure for the enforcement of international settlement agreements resulting from mediation in commercial matters, along the lines of the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (‘New York Convention’, 1958). This chapter attempts to analyse the provisions of the Singapore Convention and to evaluate some European Union (‘EU’) perspectives on ratification. The contribution points out some concerns of a formal and substantive character for the ratification of the Singapore Convention by EU Member States, including the order of ratification, the correlation with existing EU instruments, the expanding ‘juridification’ of mediation, and the absence of accepted uniform mediation standards. The authors argue that such S. Ferz (*) Institute of the Foundations of Law and Interdepartmental Centre for Social Competence, Karl-Franzens-University, Graz, Austria e-mail: [email protected] T. Tsuvina Department of Civil Justice and Advocacy, Yaroslav Mudryi National Law University, Kharkiv, Ukraine Institute of the Foundations of Law, Karl-Franzens-University, Graz, Austria © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 O. Quirico, K. Kwapisz Williams (eds.), The European Union and the Evolving Architectures of International Economic Agreements, https://doi.org/10.1007/978-981-99-2329-8_17

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concerns can be overcome, however, and that it is indeed suitable for EU Member States to ratify the Singapore Convention. Keywords  UN convention on international settlement agreements resulting from mediation (Singapore convention) · Mediation · Juridification · Ratification

17.1 Introduction The United Nations Commission on International Trade Law (‘UNCITRAL’) approved the text of the Convention on International Settlement Agreements Resulting from Mediation (Singapore Convention; SC)1 and amendments to the UNCITRAL Model Law on International Commercial Mediation and International Settlement Agreements Resulting from Mediation (Model Law) on 26 June 2018.2 The SC was signed by 46 countries and opened to ratification on 7 August 2019. It duly entered into force on 12 September 2020, when a sixth-month period expired after the third instrument of ratification was deposited by Qatar. Although the SC was well received by mediators and scholars (inter alia Alexander and Chong 2019; Chahine et al. 2021; Chong and Steffek 2019; Chua 2019), among the 55 countries that have thus far signed the convention, only ten States have ratified it.3 Key players in the world economy, such as the United States of America (‘US’), the European Union (‘EU’), the People’s Republic of China (‘PRC’), India, and the United Kingdom (‘UK’) have not yet signed this international treaty, triggering discussion and concerns about its ratification (inter alia by Clark and Sourdin 2020; Abrishami 2022). The authors attempt to analyse key provisions of the SC and evaluate the suitability of the EU and its Member States ratifying the convention. The chapter proceeds in two steps. First, it assesses key provisions of the SC in light of its historical background. Secondly, it considers national ratification practices and relevant prospects identified for the EU and its Member States.

17.2 Background of the Singapore Convention Mediation is considered to be a voluntary and consensual alternative dispute resolution (‘ADR’) method, conducted by a third neutral person during which the parties to a conflict make attempts to resolve their dispute via a mediator facilitating  United Nations, Report of UNCITRAL, Fifty-first session (25 June-13 July 2018), UNCITRAL, UN Doc. A/73/17 (2018), Annex I. 2  United Nations (2018), Annex II. 3  Available at: https://uncitral.un.org/en/texts/mediation/conventions/international_settlement_ agreements/status 1

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communication to reach a settlement agreement (Hopt and Steffek 2016, 11–15; Moffitt and Bordone 2005, 304). Like other ADR methods, mediation is of great importance in commercial disputes, because the parties to such disputes frequently do not want to litigate and prefer different ‘paths to justice’ (FRA 2016, 48–55), such as arbitration or early neutral evaluation. Mediation can be suitable for parties interested in speedy and cost-effective dispute resolution, which leads to saving partnerships based on ‘win-win’ solutions (Morris-Sharma 2019, 1014; Montineri 2019, 1025; Malacka 2016, 129–132). At the same time, the fact that mediation settlement agreements (‘MSAs’) do not carry the same legal force as court-issued judgments is usually considered a negative aspect of the procedure, especially in commercial matters, which renders it a less attractive ADR vehicle than, for example, arbitration (Menkel-Meadow 2018, 7). Numerous surveys show that enforcement is essential for choosing mediation as a dispute resolution method in commercial matters (Masucci 2019, 1124–1128; Morris-Sharma 2019, 1014–1015; Strong 2014, 52). For example, according to the survey of the Institute for Dispute Resolution (‘IDR’) of the New Jersey City University (‘NJCU’) School of Business, among 103 respondents, 80% (79 responses) state that they ‘would be more likely to include a mediation clause if there was a uniform global mechanism to enforce MSAs (Weiss and Griffith 2019, 1140). In many countries, enforceability is already prescribed by national legislation. The most common instruments for this purpose at a national level are the enforcement of the MSAs as contractual obligations or making them enforceable by means of a notarial deed, approval by the arbitration, court, or a special body (Ferz 2021, 2–7; Tsuvina 2022, 110–123). Suppose MSAs were concluded in cross-border disputes (international MSAs, or ‘iMSAs’) during the trial in court or as a part of the arbitration procedure. In that case, they could be compulsorily executed, for example, following an arbitral award with agreed wording according to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention, 1958),4 or as a court judgment, a court settlement or other authentic instrument within the meaning of Regulation (EU) № 1215/2012 of the European Parliament and of the Council of 12 December 2012 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (Recast) (‘the Brussels Ia Regulation’),5 the Convention on Choice of Court Agreements6 or other international treaties (Tsuvina and Ferz 2022, 44–52). The idea of the SC is to provide a uniquely harmonised regime for the enforcement of iMSAs, along the lines of the New York Convention (Morris-Sharma 2019, 1010, 1013; Montineri 2019, 1031–1032, 1039–1040; Masucci 2019, 1123). For this  UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards. https://uncitral. un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/new-york-­convention-­e.pdf. 5  Regulation (EU) № 1215/2012 of the European Parliament and of the Council of 12 December 2012 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters. https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=celex%3A32012R1215. 6  Convention on Choice of Court Agreements, concluded 30 June 2005. URL: https://www.hcch. net/en/instruments/conventions/full-text/?cid=98 4

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reason the SC is considered ‘the missing piece in the resolution methods spectrum of cross-border ­commercial disputes’ (Gavrila 2020, 29) and is sometimes called ‘the New York Convention for mediation’ (Zhao 2021, 538; Sajnani 2020, 863). Work on this international instrument has not been without problems, being that it raised an enormous challenge and was generally regarded as the result of a ‘compromise’ (Schnabel 2019, 1189–1190; Abramson 2019a, b, 1048, 1052; Schnabel 2018, 1; Morris-Sharma 2019, 1012, 1016). One of the most important questions was whether the SC should regulate both the recognition and enforcement of MSAs, or solely their enforcement. This issue is of crucial importance and needs further explanation for understanding of the SC as an effective mechanism. Despite the similarity with the New York Convention, the term ‘recognition’ is used neither in the title of the SC nor in its text. Commentators explained the exclusion of this term by its different meanings in civil law and common law countries (Abramson 2019a, b, 1056–1057). As a result of the compromise, article 3 of the SC does not explicitly mention the recognition of MSAs. However, it can be inferred from the implied meaning of that article that the first part of this provision covers ‘enforcement’, whereas the second part refers to ‘recognition’, although this concept ‘is replaced with a functional definition that uses other words to address key aspects of recognition, such as the ability to assert a MSA as a complete defense if another party tries to raise the underlying settled claims’ (Abramson 2019b, 1057; Schnabel 2019, 1182, 1184–1185). Also, the term ‘relief’ is used in other articles of the SC to cover both recognition and enforcement. This means that the SC can be used both like a ‘sword’, as it covers the possibility of compulsory MSA enforcement, and a ‘shield’, allowing the possibility of referring to MSAs as proof of the fact that a dispute has been settled (Schnabel 2019, 1185). Such interpretation implies that the SC has the same effect that the New York Convention has with respect to arbitral awards, even without a direct reference to the concept of recognition, although ‘[recognition’s] new name might be seen as a grammatical tragedy’ (Schnabel 2019, 1194–1195). Therefore, while de jure the SC only relies on the concept of ‘enforcement’, de facto it also covers the ‘recognition’ of iMSAs.

17.3 The Scope of the Singapore Convention The scope of the SC is defined in article 1(1), only focusing on settlement agreements, which are (1) resulting from mediation, (2) international, (3) commercial, and (4) concluded in writing. First, settlement agreements should be concluded during the mediation, not under other forms of ADR. The term ‘mediation’ in the SC is used as ‘an umbrella concept’ (Deason 2019, 1163), which covers a wide range of processes, irrespective of how they are referred to at the national level, whereby the ‘parties attempt to reach an amicable settlement of their dispute with the assistance of a third person or persons (the mediator) lacking the authority to impose a solution upon the parties to the dispute’ (per article 2(3) of the SC). To proceed with enforcement, a party has to provide the national authority with the iMSA signed by the

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parties (article 4(1)(a) of the SC) and prove the origin of the settlement from mediation via the signature of a mediator on the MSA or by providing a separate document of the mediator or the institution, which administered mediation, confirming that the MSA was reached during the mediation. If such evidence cannot be provided, other evidence deemed acceptable by the competent authority may be given (article 4(1)(b) of the SC). Another critical factor is that the SC applies only to agreements resulting from mediation that are not part of court proceedings or other quasi-judicial dispute resolution methods. More specifically, excluded from the scope are MSAs that are (a) approved by a court or concluded in the course of proceedings before a court and enforceable as a judgment in the State of the court; or (b) recorded and enforceable as arbitral awards (article 1(3) of the SC). These provisions avoid the possible concurrence between the SC and other international treaties, notably the New York Convention. At the same time, some commentators have criticised such exclusion because it may determine a situation whereby some iMSAs could not be enforced by means of either the SC or other international instruments (Žukauskaitė 2019, 212–213). Second, the SC identifies the MSAs as ‘international’ by taking into account the place of parties’ business, including situations where (a) ‘at least two parties to the settlement agreement have their places of business in different States; or (b) the State in which the parties to the settlement agreement have their places of business is different from either (i) the State in which a substantial part of the obligations under the settlement agreement is performed; or (ii) the State to which the subject matter of the settlement agreement is most closely connected (per article 1(1)). Third, there is no direct explanation of the term ‘commercial dispute’ in the text of the SC. Only some types of disputes—namely consumer, family, inherent, and employment disputes—are excluded from its scope (article 1(2)). For the interpretation of the term ‘commercial’, some commentators proposed that article 1(1) of the above-mentioned Model Law be relied upon (Clark and Sourdin 2020, 483), where this term is taken to cover ‘matters arising from all relationships of a commercial nature, whether contractual or not’, including but not limited to, ‘any trade transaction for the supply or exchange of goods or services; distribution agreement; commercial representation or agency; factoring; leasing; construction of works, consulting; engineering; licensing; investment; financing; banking; insurance; exploitation agreement or concession; joint venture and other forms of industrial or business cooperation; carriage of goods or passengers by air, sea, rail, or road’ (UNCITRAL 2018, Annex II). At the same time, there is the question whether we can refer to the Model Law for the interpretation of the SC when the Model Law has not been adopted in a particular country party to the convention (Alexander and Chong 2022, 17). Currently, in many publications, a broad interpretation of the term ‘commercial dispute’ is supported (Tanzi and Mason 2021, 684–685; Alexander and Chong 2021, 357–360; Alexander and Chong 2022, 18–19). For example, strong arguments support the possibility of applying the SC to investment disputes, particularly investor-State ones (Alexander and Chong, 2021, 1130; Alexander and Chong 2022, 18–19). Indeed, the reservation under article 8(1)(a) of the SC on the

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possibility of opting-out of the regime for a State party means that the SC also covers disputes involving State participation. Moreover, during the SC drafting process, the proposal that only commercial disputes between private parties be covered was declined (Alexander and Chong 2022, 18–19). Arguably, a broad understanding of the term ‘commercial’ is decisive for the implementation of the SC; at the same time, this instrument has a framework character, and thus we need to take into account the peculiarities of national legislation in this regard. To this end, a possible solution is the unification of national legislation on mediation under the Model Law. Fourthly, it bears noting that for the application of the SC, MSAs can be recorded in ‘any form’, including ‘electronic communication’. This notion is essential for the further development of online dispute resolution (‘ODR’) as a whole, and online mediation in particular, especially considering the rapid rate of global digitalisation. National-level legislation can contain special notions in regard to the electronic form.7

17.4 National Ratification Practices Regarding the short time that has passed since the signing of the SC, we can consider a few examples of State practice that have developed post-ratification, with a view to reservations as well. Notably, possible reservations to the SC are embedded in article 8, and relate to the exclusion of the applicability of the SC—the first being in the regime of ‘opting-out’ from iMSAs to which a State (or State authority) is a party (article 8(1)(a)), while the second establishes an ‘opt-in’ regime for the parties to iMSAs (article 8.1b). According to the opt-out reservation, signatory States have the right to exclude the automatic application of the SC in cases where they are themselves party or where ‘any governmental agencies or any person acting on behalf of a governmental agency is a party’. This reservation enables States to decide whether they want to let the SC cover their obligations under iMSAs. The opt-in reservation deals with the possibility of States explicitly accepting the SC, which means that the convention is applicable ‘only to the extent that the parties to the settlement agreement have agreed to [it]’. At first glance, this reservation gives the parties autonomy to decide whether they want to make the SC applicable to their iMSAs, thus making these enforceable. Frauenberger-Pfeiler points out that such a regime may eclipse structural concerns about the parties rushing in to conclude a contract because the parties agree on the enforcement of iMSAs directly in the text of the SC (Frauenberger-Pfeiler 2022, 152). At the same time, this reservation decreases the scope of application of the SC.  Thus, in exercising the option under such a reservation, a State must consider whether it wants to support primarily party autonomy or to ensure the effectiveness of the SC.

 Singapore Convention on Mediation Act 2020, https://sso.agc.gov.sg/Act/SCMA2020

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Interestingly, the New York Convention provides no avenue for the making of such reservations, which makes it a robustly effective instrument for enforcing arbitral awards. Eleven countries ratified the SC until April 2023, including Singapore, Kazakhstan, Belarus, Georgia, Ecuador, Fiji, Honduras, Qatar, Saudi Arabia, Turkey and Uruguay.8 Reservations to article 8(1)(a) have been submitted by five countries—two states at the time of their signature (Belarus and Iran),9 and three at the time of ratification (Georgia, Saudi Arabia, and Kazakhstan).10 Only Georgia and Kazakhstan expressed their reservations to article 8(1)(b) at the time of ratification, while only Iran did so when signing the SC.11 We can further appreciate that there are different approaches to the implementation of the SC at the national level in common law and civil law countries. For example, among common law countries, Singapore has introduced one of the first national-level implementation instruments, the Singapore Convention on Mediation Act 2020 (‘SCMA’).12 This provides parties to iMSAs with the right to make an application to the High Court or the Court of Appeal to seek relief and obtain an enforcement order for iMSAs. Besides the general notions of the SC, the SCMA states in article 4 that the application of the parties can be used not only for enforcement (that is, as a ‘sword’) but also ‘to prove that the matter has already been resolved’ (or as a ‘shield’).13 Discussion around the ratification of the SC is now in an active phase in other common law countries. For example, in March 2022, the Civil Justice Council of Great Britain, in its response to a consultation by the Ministry of Justice on whether the UK should sign and ratify the SC, emphasised that they supported signing the convention without reservations, believing that ‘ratification would signal the UK’s commitment to ADR and, indirectly, enhance the international profile and presence of the UK’s ADR community’.14 In civil law countries, the implementation of the SC could be achieved by providing amendments to the relevant civil procedural codes (‘CPC’). For example, in Georgia, after ratification of the SC, amendments have been adopted to their CPC (part XLIV of the CPC), according to which the Supreme Court of Georgia has jurisdiction to provide relief for iMSAs, whereby a decision is final and not subject to appeal (per article 363–44(6) of the CPC of Georgia). In this respect, article 363–45 of the CPC of Georgia lays down grounds for refusing relief that primarily  Available at: https://uncitral.un.org/en/texts/mediation/conventions/international_settlement_ agreements/status 9  Iran signed but has not ratified the Singapore Convention yet. 10  Available at: https://uncitral.un.org/en/texts/mediation/conventions/international_settlement_ agreements/status 11  Available at: https://uncitral.un.org/en/texts/mediation/conventions/international_settlement_ agreements/status 12  Singapore Convention on Mediation Act 2020, https://sso.agc.gov.sg/Act/SCMA2020 13  Singapore Convention on Mediation Act 2020, https://sso.agc.gov.sg/Act/SCMA2020 14  Available at: https://www.judiciary.uk/wp-content/uploads/2022/04/20220324-CJC-­consultation-­ RESPONSE-to-MOJ-on-ratifying-Singapore-Convention-on-Mediation-2018-­M arch-­2 022FINAL.pdf 8

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codify article 5 of the SC.15 The same regulation applies in Belarus (article 262(1) of Commercial Procedure Code of Belarus).16 Another example of such an approach is Ukraine, which signed the SC in 2019 but is still in progress as concerns the ratification process. There, the amendments to the procedural legislation connected with the signing of the SC took place simultaneously with the preparation of the Draft Law of Ukraine ‘On Mediation’, which was adopted in 2021.17 Both bills were prepared together, but the government decided to separate them at the time of voting in the Ukrainian Parliament. The Draft Law on the Ratification of the SC prescribes relevant amendments to procedural legislation and includes a procedure that, on the one hand, is quite similar to the mechanism of recognition and enforcement of international commercial arbitration awards (articles 474–482 of the CPC of Ukraine) and, on the other, reflects the main statements of the SC. It proposes an ‘opt-in regime’ for iMSAs when the debtor’s place of residence, business, or property is located in Ukraine. An application for enforcement of iMSAs may be submitted within three years from the date of signing: it should contain all information provided in article 4 of the SC and be submitted to the Court of Appeal, whose jurisdiction extends to Kyiv. The grounds for rejection of enforcement of iMSAs are the same as those under article 5 of the SC (Tsuvina and Ferz 2022, 50–51).

17.5 EU Prospects The EU, as a political and economic union, as well as its Member States, are in the process of discussing the possibility of joining the SC.  However, there are some concerns about the signing of the convention, which can be divided into two groups—formal and substantive. Whereas the first group of concerns is connected with legal rules, and can be overcome, the second is more complex, as it is connected with the philosophy of mediation and the so-called ‘magic of mediation’, which goes to intrinsic issues raising more serious obstacles. Formal concerns are grounded in the mechanics of EU participation in international treaties. In particular, it is questionable whether the SC should be signed by EU Member States or just the EU as a single unity, especially taking into account the possible participation of regional economic integration associations, according to article 12 of the SC (Chahine et al. 2021, 771). Participation in the SC is a competence of the EU in the field of international relations and its capacity to enter  Civil Procedural Code of Georgia (№ 1106 of 14 November 1997), https://matsne.gov.ge/ka/ document/view/29962?publication=151 16  Commercial Procedural Code of the Republic of Belarus (№ 219-3 of 15 December 1998), https://kodeksy-by.com/hozyajstvennyj_protsessualnyj_kodeks_rb/262-1.htm 17  Working Group was established at the Ministry of Justice of Ukraine to prepare both draft laws – the Draft Law of Ukraine ‘On Mediation’ and the Draft Law of Ukraine ‘On Ratification of the Singapore Convention’ according to the Decree of the Ministry of Justice of Ukraine on the 27 of June 2019 № 2487/7. 15

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international agreements. Signing by the EU only might be preferable from the vantage point of harmonising implementation within Member States, but concluding the SC as a mixed agreement is also a viable option. Another formal concern is incidental to the correlation between the SC and existing EU instruments in the field, such as the EU Directive 2008/52/EC on specific aspects of mediation in civil and commercial matters (‘Mediation Directive’) and the Brussel Ia Regulation. In particular, the Brussel Ia Regulation is a quite effective mechanism, as it governs the recognition and enforcement of judgments delivered in one of the EU Member States in another EU Member State without any special procedure or declaration of enforceability being required (articles 36.1, 39). Such foreign judgments are prescribed to be enforceable under the same conditions as domestic judgments and ‘the procedure for the enforcement of judgments given in another Member State shall be governed by the law of the Member State addressed’ (article 41.1). The same provisions apply to authentic instruments (article 58) and court settlements (article 59). The Brussel Ia Regulation covers MSAs approved by a court. At the same time, MSAs approved as notarial deeds should also be enforceable, as the Brussels Ia Regulation also covers extra-judicial documents, which can be recognised as enforcement titles in the national system of a Member State (article 58). Furthermore, while MSAs approved as arbitral awards are not covered by the Brussels Ia Regulation, they can be enforced under the New York Convention. In such a situation—taking into account the provision of articles 1(3) and 12(4)—the SC may cover only residual iMSAs that cannot be enforced through other EU instruments. For example, in Austria, as in many other EU countries, agreements resulting from private mediation in cross-border disputes are not enforceable within the meaning of the Brussels Ia Regulation (Frauenberger-Pfeiler 2022, 147–148), that is why in case of ratification, only this type of MSAs will be covered by the SC. Substantive concerns are more complex. A comparative analysis shows that even within the EU, mediation standards differ from country to country (Hopt and Steffek 2016), and we can see more diversification in practice outside the Union. The absence of unified mediation and ethical standards—especially when third-country mediators are involved, and different approaches to the enforcement of MSAs at the national level are considered—make implementing the SC quite complicated. The Mediation Directive was adopted to build a unified approach within the EU, providing a compendium for a harmonized approach to mediation, despite national specificities. At the same time, third countries can have specific standards, which raises concerns about the professional skills of mediators. In this context, grounds for refusing relief connected with a mediator’s misbehavior (article 5(1)(e)-(f)) can cause serious difficulties because of the uncertainty of mediation standards. Ultimately, this is a question of trust in mediation and in the work of the mediators; therefore, increasing such trust and improving ethical professional standards is crucial. This is alternative to court proceedings and thus increasing trust in this method is at the basis of the Mediation Directive, particularly recitals 5 and 19 (Tsuvina and Ferz 2022, 51). Another issue is the so-called ‘juridification of mediation’ (Clark and Sourdin 2020, 482). On the one hand, T. Sourdin pointed out that the SC ‘may herald an

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unnecessary juridification of the process and lawyer domination therein that may paradoxically lead to greater enforcement problems with mediated outcomes and militate against some key, qualitative benefits of the process’ (Clark and Sourdin 2020, 482). This concern is significant because it reflects a general tendency to increase the role of lawyers in the mediation process, based on the mainstreaming of court-connected mediation, practices of mandatory mediation at national levels, and a tendency to provide enforcement mechanisms for MSAs at the national level. This tendency can distort the essence of mediation and its self-value, focusing on legal issues instead of the parties’ interests and emasculating the spirit of mediation. On the other hand, such strengthening of cooperation between the courts and ADR can trigger good results for justice, which is now going through an era of civil justice ‘privatisation’, and the attendant integration of mediation and quasi-judicial ADR methods into the judicial sphere. In such circumstances, struggling with the juridification of mediation is like swimming against the tide.

17.6 Conclusion The SC has brought mediation in commercial disputes to the attention of lawmakers, mediation communities, and lawyers worldwide, enhancing discussion, sharpening mediation practice, and compelling the adoption of national legislation on the enforcement of MSAs. For the time being, eleven countries have ratified and implemented the SC, a number that may be considered scarce as compared to the number of States that have signed the SC or the number of UN members. Yet, this is the consequence of the challenging nature of the SC, and the ambiguous and intricate wording of some of its norms. The low level of ratification of the SC has much to do with issues of trust in mediation. Even the current status of implementation, however, provides a fertile ground to assess the manifold implications of introducing a legal framework for the enforcement of MSAs, for both the common law and continental law systems. Notably, the implementation of the SC at the EU level and its Member States, on the one hand, is aggravated by legal concerns, such as legal overlaps between the SC and other EU instruments and the absence of unified mediation standards. On the other hand, the implementation of the SC in the EU is slowed down by substantive concerns, particularly the publicity of iMSAs and the juridification of mediation. Nonetheless, it may be considered that the ratification of the SC, at least by individual EU Member States that have developed mediation frameworks, would provide impetus for a new round of mediation developments across the EU. The SC has brought along the Model Law, which can be referred to as soft law to improve national regulation and would undoubtedly contribute to harmonising mediation procedures across jurisdictions. Despite this, neither the signing of the SC by an EU Member State nor the creation of a legal framework for the enforcement of MSAs would enhance recourse to mediation in commercial disputes without proper promotional activities among businesses, enhancing awareness of the strengths and limits of mediation.

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Conclusion Ottavio Quirico and Katarzyna Kwapisz Williams

The European Union (‘EU’) has been particularly proactive in the area of international economic regulation, promoting multiple innovations in this space. These advances are essentially rooted in geo-economic considerations, which have become fundamental for the EU and other countries to negotiate international economic agreements, leveraging mechanisms such as countermeasures to constrain the behaviour of potential competitors. This is evidenced, for example, by the move from cultural diplomacy to an instrumental view of culture, whereby the Union protects its own audio-visual sector as a vital objective in trade negotiation policies. Notably, geo-economics may be the principal reason for the Union to decisively embrace a bilateral approach to international economic negotiations, shifting from bi-regionalism to a complex bilateral approach, as shown by the difficulties encountered in the negotiation of the EU-Association of Southeast Asian Nations free trade agreement. In the area of investment, bilateral and multilateral investment agreements—particularly the ‘outdated’ Energy Charter Treaty—have historically made few allowances for addressing the urgent challenge of climate change. Besides the development of a compelling interpretation of clauses on the right to regulate and environmental exceptions, the EU is advancing a substantive reform aiming to limit, and possibly exclude, compensation in the case of expropriation of unsustainable investment. This requires a recalibration of those reforms to the international investment regime which are currently the focus of the United Nations Commission on International Trade Law. As regards trade, the EU, together with Australia and New Zealand (under the Australia-New Zealand Closer Economic Relations Trade Agreement), is fostering a comprehensive approach in the complex area of the mutual recognition of professional qualifications, beyond classical bilateral agreements. To promote fundamental rights and security, the Union is also prompting the adoption of significant innovations in international investment and trade via procedural mechanisms such as investment screening, a new carbon border adjustment mechanism, and the © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 O. Quirico, K. Kwapisz Williams (eds.), The European Union and the Evolving Architectures of International Economic Agreements, https://doi.org/10.1007/978-981-99-2329-8

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EU-US Trade and Technology Council. These may result in either trade expansion or restriction challenging the basic principles of the liberalised global economic regime. While not always effective, intellectual property rights, fundamental tax principles, and procedures for dispute resolution have the potential to harmonise cross-­ border regulation. At the same time, they can engender significant regulatory fractures, particularly when applied restrictively and asymmetrically (whether for legal or political reasons, or both). This can be seen, for instance, in the case of the ‘crowd-out effect’ triggered by geographical indications and the stringent approach to data protection rights promoted by the EU. In a framework that is complex and subject to rapid evolution, the adoption of comprehensive bilateral trade agreements emerges as the preferred option. Against this backdrop, innovations are implemented following the constitutional priority accorded by the EU to its own ‘sui generis’ international legal system. Besides geo-­ economic considerations, critical interests of the Union, such as sustainability, health, and privacy, dictate its actions and attitudes in the international arena. EU measures often collide, more or less apparently, with established general and particular principles of international economic regulation and policy. Although EU policies are not always effective in achieving their stated aims, the ‘Brussels effect’ will arguably continue to foster the progressive development of international economic regulation. To this end, a balance will likely be achieved between essential EU interests and economic liberalisation. Time will tell, particularly in the future jurisprudence of international adjudication bodies, what this balance looks like.

Index

A ASEAN-PRC FTA, 45–47 Audio-visual services, 11, 12, 16–18 Australia-New Zealand Closer Economic Relations Trade Agreement (ANZCERTA), ix, 135, 144, 146–150, 315 B Brazil, Russia, India, China and South Africa (BRICS), 164, 166, 168 Brexit, 33, 52, 276 Brussels effect, x, 177, 298, 299, 316 C Caribbean Forum (CARIFORUM), 11, 15 Clauses environmental, 77 horizontal, 272–280 non-economic, ix, 297 political, ix, 285, 292, 293, 296, 298 Comprehensive and Economic Trade Agreement (CETA), 13, 17, 18, 67, 122, 146, 148, 149, 197, 202, 203, 221, 229, 231, 233, 277 Countermeasures, 34, 35, 174, 234, 236, 239–241, 244, 245, 251, 294, 299, 315 Culture cultural diplomacy, 4, 6, 20, 315 cultural exception, 8, 10, 17–18

cultural value, 7, 10 external relations (in), 4–21 Customary practice regional, 168 universal, 167 D Democracy, 5, 9, 12, 13, 18, 20, 21, 41, 42, 165, 285, 286, 291, 293, 294, 299 Digitalisation data trade, 273–274 Dispute settlement Convention on International Settlement Agreements Resulting from Mediation (Singapore Convention), 304 Dispute Settlement Understanding, 70 Investor-State dispute settlement (ISDS), 48, 60, 61, 68, 71, 76, 77, 81, 85, 91, 96 E Energy Charter Treaty (ECT), viii, 76–92, 96, 102, 103, 315 EU-ASEAN FTA, viii, 40, 42, 45–48, 51, 52 EU-Australia FTA, vii, 67, 68, 148, 160 EU-Korea FTA, 231, 246 EU-MERCOSUR FTA, vii EU-New Zealand FTA, 7, 19, 160

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 O. Quirico, K. Kwapisz Williams (eds.), The European Union and the Evolving Architectures of International Economic Agreements, https://doi.org/10.1007/978-981-99-2329-8

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318 European Union (EU) common commercial policy, ix, 48, 113, 117, 118, 129, 130, 277, 298 Common Commercial Policy, 43 EU-US Trade and Technology Council, ix, 316 trade and investment agenda, ix, 111, 112, 130 F Fundamental rights essential element, 284, 294, 297, 298 right to privacy data protection, 280 G Geo-economics, 315 Geopolitics, 35, 40–54 I Intellectual property (IP) compulsory licensing, 211 Covid-19, 210 geographical indications, 228 patents, 210 privileges crowd-out effect, 233 Investment climate change, viii, 33, 58, 59, 67, 69, 70, 76–78, 83, 88, 161, 315 compensation exceptions, 98, 99, 102–105 Energy Charter Treaty, 315 environment, vii, 79, 101 expropriation, 59, 69, 96–106 protection, 33, 48, 49, 58–71, 76–78, 81, 83, 90, 91, 100, 101, 103, 121, 122, 272, 277, 278, 280 right to regulate, viii screening, ix, 110–112, 117, 118, 123–125, 128, 129, 177, 315 sunset clauses, 77 UNCITRAL, 58, 71 Uniper v. Netherlands, 96, 103

Index M Mediation, ix, 60–62, 71, 304–312 P People’s Republic of China (‘PRC’), 27, 28, 30, 33, 35, 40, 44–47, 52, 101, 110–112, 128, 154, 164–167, 238, 287, 289, 297, 304 Professional qualifications mutual recognition agreement, 134–150 R Regionalisation, viii, 54 Rule of law, 5, 9, 13, 41, 276, 285, 291, 293–295, 298, 299 Russia, 121, 122, 126, 162, 164, 213–215 S Security, 29, 30, 32, 35, 42, 51, 52, 79, 99, 100, 102, 104, 105, 110–112, 114–130, 167, 172, 175–178, 195, 214, 215, 272–274, 293, 315 Soft law, 67, 172, 173, 175, 178, 211, 297, 299, 312 Soft power, 6, 129, 292 Sustainability carbon border adjustment, 157 climate change, 58, 63 climate clubs T Taxation arm’s length principle, 260–266 double, vii, ix, 250–256, 258, 260, 266, 274 Ireland and Others v. European Commission (Apple case), 263, 265 Model Tax Information Exchange Agreement (TIEA), 250, 254, 257–260, 266 OECD Multilateral Instrument, 250 transfer pricing, ix UN Model Tax Convention, 257 Trade and Cooperation Agreement (TCA), 27, 33–35, 146, 149, 187

Index U UNESCO Convention on the Protection and Promotion of the Diversity of Cultural Expressions, 8, 10 United Kingdom (UK), 33–35, 51, 77, 98, 112, 128, 144, 149, 150, 154, 187, 203, 263, 276, 289, 304 United States (US), vii, 26, 40, 65, 97, 112, 147, 155, 187, 228, 260, 274, 287, 304 US-Mexico-Canada Agreement, 279

319 W WTO GATS, 120, 122, 126, 136, 137, 139, 140, 177, 279, 280 GATT, 8, 140, 141, 155, 156, 161, 167 MFN, 122, 140, 141, 233, 235, 279, 280 most-favoured-nation, 122, 155, 233 national treatment, 122, 140, 141, 155 NT, 122, 279, 280 TRIPs Agreement TRIPs plus, 238