International Economic Law and National Autonomy

I N T E R NAT IONA L ECONOM IC L AW A N D NAT IONA L AU TONOM Y

International commitments may sit uneasily with national pressures in the best of times. The current age of economic uncertainty brings these tensions into sharper relief. This volume draws together thirteen analyses of these competing interests in a wide array of contexts, including each of the three main pillars of the World Trade Organization; international investment law and arbitration; and the international fi nancial institutions. The essays feature internationally recognised experts addressing topical examples of international economic law obligations clashing with domestic policy interests. For example, Professor Robert Howse of the New York University Law School, addresses issues of globalisation and whether international and national interests can in today’s world be considered separate, while Ko-Yung Tung, former Director-General of the World Bank, looks at trends in investment treaty arbitration and considers what the future may hold in light of the recent financial crisis, the rise of China as an economic powerhouse, and other factors. m e r e d i t h ko l s k y l e w i s is a Senior Lecturer at the Victoria University of Wellington Faculty of Law and Co-Director of the New Zealand Centre of International Economic Law (NZCIEL). She has previously worked as a senior associate practising litigation and international trade with Shearman & Sterling LLP in Washington, DC, and Tokyo. s u s y f r a n k e l is a Professor at the Victoria University of Wellington Faculty of Law and Co-Director of the New Zealand Centre of International Economic Law (NZCIEL). In addition to her academic position, Susy is Chair of the Copyright Tribunal (NZ) and an Independent Hearings Officer for the Intellectual Property Office of New Zealand.

I N T ER NAT IONA L ECONOM IC L AW A N D NAT IONA L AU TONOM Y Edited by M E R E DI T H KOL SK Y L EW IS SUSY FR A N K E L

c a m br i d g e u n i v e r s i t y p r e s s Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo, Delhi, Dubai, Tokyo, Mexico City Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9780521114608 © Cambridge University Press 2010 Th is publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2010 Printed in the United Kingdom at the University Press, Cambridge A catalogue record for this publication is available from the British Library Library of Congress Cataloguing in Publication data International economic law and national autonomy / [edited by] Meredith Kolsky Lewis, Susy Frankel. p. cm. Includes index. ISBN 978-0-521-11460-8 (hardback) 1. Foreign trade regulation. 2. Investments, Foreign–Law and legislation. 3. Arbitration and award, International. 4. Commercial treaties. 5. International and municipal law. I. Lewis, Meredith Kolsky. II. Frankel, Susy. III. Title. K3943.I558 2010 382′.92–dc22 2010024613 ISBN 978-0-521-11460-8 Hardback The publisher has used its best endeavours to ensure that the URLs for external websites referred to in this book are correct and active at the time of going to press. However, the publisher has no responsibility for the websites and can make no guarantee that a site will remain live or that the content is or will remain appropriate.

CONTENTS

Notes on contributors page vii Acknowledgements xiii Introduction

1

pa rt i International economic law: conceptions of convergence and divergence 1

5

The end of the globalization debate: continued 7 robert howse

2

Global economic institutions and the autonomy of development policy: a pluralist approach 22 yuka fukunaga

3

Fragmentation, openness and hegemony: adjudication and the WTO 44 jason beckett

pa rt i i WTO treaty interpretation: implications and consequences 71 4

Demanding perfection: private food standards and the SPS Agreement 73 tracey epps

5

Eroding national autonomy from the TRIPS Agreement 99 susy frankel

6

The WTO and RTAs: a ‘bottom-up’ interpretation of RTAs’ autonomy over WTO law 116 alberta fabbricotti

v

vi

Contents

7

‘Gambling’ with sovereignty: complying with international obligations or upholding national autonomy 141 henning grosse ruse-khan

pa rt i i i Responding to international economic law commitments 8

167

Safety standards and indigenous products: what role for traditional knowledge? 169 meredith kolsky lewis

9

The GATS and temporary migration policy 193 rafael leal-arcas

10

A different approach to the external trade requirement of GATT Article XXIV: assessing ‘other regulations of commerce’ in the context of EU enlargement and its heightened regulatory standards 216 pinar artiran

pa rt i v Transformations in international economic law 241 11

Foreign investors vs sovereign states: towards a global framework, BIT by BIT 243 ko-yung tung

12

How ‘trade in services’ transforms the regulation of temporary migration for remittances in poor countries jane kelsey

13

Reconceptualising international investment law: bringing the public interest into private business 295 kate miles

Index

320

269

CONTRIBUTORS

p i na r a rt i r a n is currently a lecturer in European & International Economic Law at Istanbul Bilgi University Faculty of Law and European Institute. She graduated from Ankara University Faculty of Law and practised as an attorney-at-law in Ankara in the field of international arbitration. She then completed master’s studies on European Law at the College of Europe in Bruges. She was also awarded the Jean Monnet Scholarship by the European Commission to undertake further postgraduate studies in Europe. Th is was followed by doctoral studies at the European University Institute (EUI) in Florence where she completed her PhD on regional trade agreements and the interpretation of GATT Article XXIV. Pinar has worked for the Academy of European Law at the EUI and has spent periods as a visiting research scholar at the University of Michigan Law School, as a trainee at the European Commission in Brussels, and as an intern at the Appellate Body Secretariat of the WTO in Geneva. She also acts as a consultant to the WTO. Her research interests lie in the fields of International and European Economic law and development. jason beck et t studied at the University of Dundee and the University of Glasgow, and now lectures at the University of Leicester. His research and teaching interests lie predominantly in the areas of legal and political theory, with a particular focus on Critical Legal Theory; Fragmentation in International Law; and the (Im)Possibility of Justice, Universality, or Humanity. A reformed Legal Positivist, who has lost his faith in the eschatological escape of the (International) Community (Interest), and thus the possibility of success in the pursuit of justice, Jason’s recent publications and conference papers have struggled with the question of how to proceed, politically, in the face of the absence of universality, neutrality, or justice (The Death of God). These works are based in a series of contrasts and continuities between the works of Michel Foucault, Martti Koskenniemi, Gillian Rose, and Carl Schmitt. vii

viii

Notes on contributors

t r ac e y e p p s is a Senior Trade Law Advisor at the New Zealand Ministry of Foreign Affairs and Trade. She has an LLM and an SJD from the University of Toronto. She was previously a lecturer in the Faculty of Law at the University of Otago where she taught international trade regulation and international investment law. She remains associated with the University of Otago through teaching a summer school programme in international trade regulation. In 2008, she published International Trade and Health Protection: A Critical Analysis of the WTO’s Sanitary and Phytosanitary Agreement. Together with Professor Andrew Green of the University of Toronto, she is currently working on a book examining the complex and important linkages between the international climate change regime and international trade rules. She has also recently written on issues relating to import product safety regulation, private product standards, and standard of review under the SPS Agreement. a l be rta fa bbr ic o t t i is Researcher in International and European Law at La Sapienza University, Rome. She is a Member of the Teaching Staff Council of La Sapienza University for the doctorate in International Law and European Law. Alberta teaches International Trade Law at the University of Camerino, Italy. Alberta holds a PhD in Public International Law from La Sapienza University (1996). She is the author of many articles and other essays in the fields of international economic law, international protection of human rights, immigration and refugee law. In 2009 she published a book on the WTO-RTA legal relationship (in Italian). Her most recent publication is a commentary on GATT Articles XXVI to XXVIIIbis, in Max Planck Commentaries on World Trade Law, Volume 5 – Trade in Goods (forthcoming). susy fr a n k e l is Professor of Law at Victoria University of Wellington and is a Co-Director of the New Zealand Centre of International Economic Law. Susy’s main research and teaching interests are in intellectual property law and international trade law. Susy has practised law in New Zealand and London. Susy holds an LLM in Intellectual Property from the University of London. She is a member of the Editorial Board of the Journal of World Intellectual Property Law. In addition to her position at the university, Susy is the Chair of the New Zealand Copyright Tribunal and an Assistant Commissioner of Trade Marks, Patents and Designs for the Intellectual Property Office of

Notes on contributors

ix

New Zealand. Susy is consultant expert to the Waitangi Tribunal on the WAI 262 flora, fauna and cultural intellectual property claim. y u k a f u k u nag a is an Associate Professor at Waseda University. She publishes in the field of international economic law. Her interests include trade remedies and the WTO dispute settlement system. She holds an LLM from the University of Tokyo and an LLM from the University of California, Berkeley. She previously served as an intern at the WTO Appellate Body Secretariat. h en n i ng gros se ruse-k h a n is a research fellow at the Max Planck Institute for Intellectual Property, Competition and Tax Law in Munich (Germany). He previously worked as a Lecturer in International Trade Law at the University of Leicester (United Kingdom). His research and teaching focuses on international intellectual property protection and development issues, law and organisation of the WTO as well as other issues of international economic law. In addition to a monograph on international intellectual property for databases, Henning has published widely in peer-reviewed international academic journals, NGO policy papers and research handbooks. He teaches at the Ludwig Maximilian University of Munich (LMU), the International Max Planck Research School for Competition and Innovation (IMPRS CI), and at the Centre for International Intellectual Property Studies (CEIPI, Strasbourg). He is executive Editor of the International Review of Intellectual Property and Competition Law (IIC) for the Commonwealth region. Henning has also acted as a visiting scholar on WTO, International Trade and Intellectual Property Law at the International Islamic University in Islamabad, Pakistan (2004–2005) and at the University of Frankfurt, Frankfurt am Main, Germany (2007). robe rt howse is the Lloyd C. Nelson Professor of International Law at NYU School of Law. Professor Howse received his BA in philosophy and political science with high distinction, as well as an LLB, with honours, from the University of Toronto, where he was co-editor in chief of the Law Review. He also holds an LLM from Harvard Law School. He has been a visiting professor at Harvard Law School, Tel Aviv University, Hebrew University of Jerusalem, the University of Paris 1 (Pantheon-Sorbonne), Tsinghua University, and Osgoode Hall Law School in Canada and has taught in the Academy of European Law, European University Institute, Florence. Since 2000, Professor

x

Notes on contributors

Howse has been a member of the faculty of the World Trade Institute, Berne, Masters in International Law and Economics Programme. He is a frequent consultant or adviser to government agencies and international organisations such as the OECD, the World Bank, UNCTAD, the Inter-American Development Bank, the Law Commission of Canada and the UN Office of the High Commissioner for Human Rights. He is a contributor to the American Law Institute project on WTO Law. He has acted as a consultant to the investor’s counsel in several NAFTA investor-state arbitrations. He is a core team member of the Renewable Energy and International Law (REIL) project, a private/public partnership that includes, among others, Yale University, the law firm of Baker & McKenzie and the investment bank Climate Change Capital. Professor Howse serves on the editorial advisory boards of the European Journal of International Law and Legal Issues in Economic Integration. He is sub-series editor for the series Commentaries on the WTO treaties. He is the author, co-author, or co-editor of six books: Trade and Transitions; Economic Union, Social Justice, and Constitutional Reform; The Regulation of International Trade; Yugoslavia, the Former and Future; The World Trading System; and The Federal Vision: Legitimacy and Levels of Governance in the EU and the U.S. ja n e k e l se y is Professor of Law at the University of Auckland. She specialises in the political economy of law and policy, including international economic regulation. Her most recent book Serving Whose Interests? The Political Economy of Trade in Services Agreements was published in 2008. She has a PhD in Law from the University of Auckland. r a fa e l l e a l -a rc a s is Senior Lecturer in International Economic Law and European Union Law at Queen Mary University of London (Centre for Commercial Law Studies, School of Law). Rafael completed his graduate legal education at Stanford Law School, Columbia Law School, the London School of Economics, and the European University Institute. Rafael has authored more than 50 scholarly publications on international trade and WTO law, international environmental law, EU law, international investment law, and the interaction among them, including the books International Trade and Investment Law: Multilateral, Regional and Bilateral Governance (2010) and Theory and Practice of EC External Trade Law

Notes on contributors

xi

and Policy (2008). Rafael is a qualified attorney in Madrid. He has previously taught at the Academy of WTO Law and Policy of Georgetown University Law Center (Washington, DC), acted as a consultant to the World Trade Organization’s legal affairs division, served in the United States Court of International Trade, and clerked at the European Court of Justice of the European Communities. m e r e di t h kol s k y l e w i s is a Senior Lecturer in the Victoria University of Wellington Law Faculty and is Co-Director of the New Zealand Centre of International Economic Law (NZCIEL). She received her BA from Northwestern University and her Juris Doctor and Masters of Science degrees from Georgetown University. Prior to joining Victoria University of Wellington, Meredith was a senior associate practising litigation and international trade with Shearman & Sterling LLP in Washington DC and Tokyo. Meredith is the New Zealand alternate member of the International Trade Law Committee of the International Law Association; a Founding Executive Committee member and currently Executive Vice President of the Society of International Economic Law; and a member of the Asian WTO Research Network. She has provided trade-related technical assistance in both Vietnam and Indonesia, and has provided training on various WTO issues for the New Zealand Ministry of Foreign Affairs and Trade. She is a past Editor-in-Chief of the New Zealand Journal of Public and International Law. Meredith has published articles and chapters on a wide range of international economic law subjects. In addition, she is co-author of the textbook International Business Law. Meredith will be a visiting Professor at Georgetown Law for the 2010–2011 academic year. k at e m i l e s is a Lecturer in International Law at the Faculty of Law, University of Sydney, specialising in international investment law and international environmental law. She has an LLM in Environmental Law (Hons I) from the University of Auckland, New Zealand, and an LLM in International Legal Studies from NYU School of Law. She is a Legal Research Fellow with the Centre for International Sustainable Development Law, Montreal, Canada, and a participant in the Geneva-based UNCTAD Expert Group on International Investment Agreements. She is a member of the International Law AssociationAustralian Branch and serves on the ILA Study Group on the Role of Soft Law Instruments in International Investment Law. She has also

xii

Notes on contributors

practised in leading commercial law firms in Auckland and Sydney, including at Allens Arthur Robinson in Sydney. ko -y u ng t u ng is Senior Counselor resident in Morrison & Foerster’s New York office. He counsels sovereign governments as well as multinational corporations. In addition, he is a Visiting Lecturer at Yale Law School. Mr Tung served as Vice President and General Counsel of the World Bank (1999–2003) and as Secretary General of the International Centre for the Settlement of Investment Disputes (ICSID) (2000– 2003). Mr Tung has also held a number of other high-level appointments, including as a member of the Presidential Commission on United States Pacific Trade and Investment Policy and the East-West Center Board of Governors, of which he was Chairman. Mr Tung currently serves as a board member of non-governmental organisations and academic centers, including The Morin Center for Banking and Financial Law at Boston University Law School; The London Forum of Economic Law and Development of the University of London; Human Rights Watch-Asia; and Asian American Legal Defense and Education Fund. He is also a member of the Council on Foreign Relations and the American Law Institute. He has also been a member of the Trilateral Commission, and on the board of the International Development Law Organization in Rome and Transparency International-USA. Mr Tung was born in Beijing, China, and raised in Tokyo, Japan. Graduating Phi Beta Kappa, Mr Tung received his BA, magna cum laude, from Harvard University in 1969, and his JD from Harvard Law School in 1973. He was also a Fellow at the Faculty of Law, University of Tokyo. Mr Tung is admitted to practise law in New York and before the United States Supreme Court.

AC K NOW L E D GE M E N T S

As Co-Directors of the New Zealand Centre of International Economic Law (NZCIEL), we were delighted with the success of our inaugural conference. In order to facilitate additional events of this calibre, we have pledged to donate all royalties from this publication to the research activities of the NZCIEL. We are grateful to Jessica Lai and Michelle Limenta for their editorial assistance.

xiii

" Introduction

The multiplicity of commitments resulting from the World Trade Organization (WTO), free trade agreements (FTAs), bilateral investment treaties and other agreements has increasingly complicated the nature of national obligations. The World Bank and IMF further impinge on national autonomy by imposing a variety of conditions on loans and other forms of funding. All of these treaty obligations impact on governments’ ability to exercise complete autonomy in the establishing and administering of national policy objectives. In particular, the rules and decisions arising from these international agreements and financial institutions result in limitations on countries’ ability to make a wide range of regulatory decisions, including those relating to health, environment, immigration and other issues of national importance. Until relatively recently, these types of regulatory matters were regarded as policies almost exclusively to be determined by sovereign nations. At the same time that international agreements pose constraints on national regulatory autonomy, there remains considerable national autonomy in relation to how to comply with the variety of obligations the agreements impose. Th is tension between international cooperation and autonomy to act in the national interest is the core theme running through this collection. The complex interplay between international economic law and national autonomy presents such a variety of interesting legal issues that we decided to make this the theme of the inaugural conference of the New Zealand Centre of International Economic Law (NZCIEL). The conference, held in December 2007 in Wellington, New Zealand, featured presentations addressing the theme through a wide range of international economic law lenses, including but not limited to international trade, intellectual property, international investment and international development. The chapters comprising this volume are based on the papers and presentations delivered at that conference. Reflecting the diverse nature of the conference, our contributors hail from institutions based in eight countries and on four continents. The contributions reflect not only 1

2

Introduction

the diversity of view that comes from different cultural backgrounds, but a wide range of substantive expertise. The thirteen chapters delve into the theme of international economic law and national autonomy from different substantive and philosophical perspectives. Coverage ranges from the WTO to the World Bank to international investment law. Within the WTO, submissions address topics that span across the goods, services and intellectual property pillars of the organisation, and approaches ranging from theoretical critique to detailed treaty interpretation. The contributions featured here are organized into four parts: International economic law: conceptions of convergence and divergence; WTO treaty interpretation: implications and consequences; Responding to international economic law commitments; and Transformations in international economic law. In the opening part, Professor Robert Howse builds on his keynote address to the conference by exploring ‘The end of the globalization debate: continued’. The core theme in this chapter is that even the antiglobalists have gone global and that the debate is not so much about globalization as a good or evil, but rather how countries have worked with globalization to achieve their national interests. Professor Howse’s chapter brings together many of the themes running through the rest of the volume, as he explores concepts of integration and fragmentation, and ultimately responds to the national autonomy question posed by the conference, by determining that the answer is neither convergence nor divergence. Associate Professor Yuka Fukunaga examines the theoretical bases behind proposals to reduce the ‘democratic deficit’ and ‘economic bias’ associated with global economic institutions (GEIs) such as the WTO, World Bank and IMF in ‘Global economic institutions and the autonomy of development policy: a pluralist approach’. Associate Professor Fukunaga critiques these assumptions, and goes on to propose an alternate, pluralist approach to the global legal order. Lastly, Dr Jason Beckett provides a theoretical challenge to recent scholarship in his contribution, ‘Fragmentation, openness and hegemony: adjudication and the WTO’, critiquing the assumptions and theoretical underpinnings of much of the contemporary writing on fragmentation and coherence. In Part II, the authors address diverse aspects of WTO treaty interpretation and the resulting implications for national autonomy. In ‘Demanding perfection: private food standards and the SPS Agreement’, Dr Tracey Epps focuses on the interplay between WTO rules on the one hand and the setting of food and other product standards by private entities on the other. She cautions that private food safety standards have the potential

Introduction

3

to undermine the SPS Agreement’s trade liberalization and transparency objectives, among other concerns. Professor Susy Frankel discusses the structure and objectives of the TRIPS Agreement that require Members of the WTO to enact minimum standards of intellectual property protection into their domestic law in her chapter, ‘Eroding national autonomy from the TRIPS Agreement’. She argues that national autonomy is a structural feature of the TRIPS Agreement, and of many other international intellectual property agreements, but that the parties to the TRIPS Agreement choose to reduce that autonomy by negotiating more detailed intellectual property protection in other international fora. In ‘The WTO and RTAs: a “bottom-up” interpretation of RTAs’ autonomy over WTO law’, Dr Alberta Fabbricotti proffers a novel, bottom-up approach to interpreting Article XXIV of the General Agreement on Tariffs and Trade (GATT), contending that RTAs could be argued to have autonomy over WTO law in the form of tacit acceptance of an international custom, instead of simply as non-compliant behaviour in the context of the WTO legal regime. Part II concludes with Dr Henning Grosse Ruse-Khan’s chapter ‘“Gambling” with sovereignty: complying with international obligations or upholding national autonomy’, which uses the dispute between the United States and Antigua over the supply of online gambling services to explore the apparent conflict between complying with recommendations of the WTO Dispute Settlement Body and maintaining national autonomy over local regulations. The chapter uses the gambling case to analyse the efficiency of the dispute settlement system through examination of compliance issues implicated by the dispute. Part III highlights how countries have responded to or should respond to certain international economic law obligations and frameworks, and the effects and implications of these responses. Meredith Kolsky Lewis’s chapter, ‘Safety standards and indigenous products: what role for traditional knowledge?’, addresses whether the SPS Agreement provides WTO Members with too much regulatory autonomy in the context of restrictions on trade in indigenous products with a long history of traditional use. She suggests that the concept of traditional knowledge could be extended from its usual intellectual property context to assist in developing a more balanced framework for assessing the safety of indigenous products. Dr Rafael Leal-Arcas examines the issue of immigration policy in the context of the General Agreement on Trade in Services in his chapter, ‘The GATS and temporary migration policy’. He discusses the dichotomy whereby Mode 4 (temporary migration) of the GATS is currently subject to strict domestic regulations and limitations within the

4

Introduction

European Union, yet it is simultaneously widely recognized within the EU that immigration is a necessary element to enhancing competitiveness in a knowledge-based society. Finally, Dr Pinar Artiran’s chapter, ‘A different approach to the external trade requirement of GATT Article XXIV: assessing “other regulations of commerce” in the context of EU enlargement and its heightened regulatory standards’, identifies interpretive difficulties within GATT Article XXIV and the tensions these introduce into the relationship between multilateralism and regional integration. The book concludes in Part IV with three authors who identify transformative patterns in international economic law. Ko-Yung Tung utilizes his expertise as former Vice President and General Counsel of the World Bank to assess the ways in which globalization has fundamentally transformed foreign investments, and to demonstrate the tension between international norms and domestic regulatory issues, in ‘Foreign investors vs sovereign states: towards a global framework, BIT by BIT’. Professor Jane Kelsey delivers the type of critique for which she is best known, in her chapter ‘How “trade in services” transforms the regulation of temporary migration for remittances in poor countries’. Professor Kelsey argues that the WTO General Agreement on Trade in Services (GATS) has effected a regulatory transformation whereby services have been transformed from their previous – primarily social – dimension, into a form of commodity that is exchanged in international markets, with negative effects for temporary migrant workers. Last but not least, in ‘Reconceptualising international investment law: bringing the public interest into private business’, Kate Miles argues that international investment law is out of step with other areas of international law in that it has been far slower to incorporate societal considerations such as the public interest, and proposes procedural and substantive steps to rectify this disconnect.

PA RT I International economic law: conceptions of convergence and divergence

1 The end of the globalization debate: continued Robert Howse

I

Introduction

This brief essay pursues a line of argument that I deployed in a review article in the Harvard Law Review,1 discussing several important recent books about globalization.2 The thesis is that there is no longer a meaningful or important debate for or against globalization because the antiglobalizers have themselves gone global. In various sites of global law and policy-making, including those at the interstices of the global and local (as will be explained), the anti-globalizers actually found processes and institutions where, unlike the case with the ‘state’ in many instances, they could air their criticisms of policies and express their values as global values. Despite the continuing rhetoric and polemics regarding the promotion of globalization, there is no longer an anti-globalization ‘side’ in the debate, coherently representing the position that the territorial nation-state is and should remain the locus of control over economic activity and that it should retain a monopoly on legitimate governance. Today the protesters who march against ‘globalization’ are not marching in favor of the ‘state’. Instead, they are, mostly, advocating a set of values and causes that transcend state boundaries and that require global action. Anthony Giddens anticipated, at the beginning of this century, that the debate would re-focus as a debate about globalization, rather than whether globalization should take place (as I learned after writing

1

2

R. Howse, ‘The End of the Globalization Debate: A Review Essay’, Harvard Law Review, 121 (2008) 1528. These are R. Abdelal, Capital Rules: The Construction of Global Finance (Harvard University Press, 2007); J. Bhagwati, In Defense of Globalization, 2nd edn (Oxford University Press, 2007); J. Frieden, Global Capitalism: Its Fall and Rise in the Twentieth Century (New York, W. W. Norton & Company, 2006); S. Sassen, Territory, Authority, Rights: From Medieval to Global Assemblages (Princeton University Press, 2006); J. Stiglitz, Making Globalization Work (New York, W. W. Norton & Company, 2006).

7

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Robert Howse

my Harvard essay). In an interview in 2000, he suggested that the second globalization debate would be: about what globalization is, what its consequences are, and what kind of framework we can develop for the world to accommodate it. It’s plainly had a lot of positive developments in producing a more interdependent world. We have to learn to harness those things, and we have to shift away from the kinds of political positions that were dominant for the last few years, and we have to produce a politics which allows us to create an inclusive society locally, nationally, and globally, and to harness these processes for the betterment of human beings.3

II The origins of the anti-globalization movement and the original globalization debate A wide range of meanings of globalization is reflected in a recent definition by the philosopher Jurgen Habermas: ‘by “globalization” is meant the cumulative processes of a worldwide expansion of trade and production, commodity and financial markets, fashions, the media and computer programs, news and communications networks, transportation systems and flows of migration, the risks generated by large-scale technology, environmental damage and epidemics, as well as organized crime and terrorism.’4 (However, Habermas leaves out of his definition the globalization of law: this reflects the general assumption, quite likely incorrect, or at least too simplistic, that the law’s role is to react to globalization as a given force and that law has not itself been an element in that force.)5 In much popular discourse, globalization is considerably more than something that explains and begs to be explained at the same time: it is a magnet for a range of deeply felt hopes and fears, and still produces intense polemics ‘for’ and ‘against’. Many of us, though, can feel both a sense of loss and disorientation from the collapse or erosion of familiar structures, fixed within the territorial nation-state model of human organization, and exhilaration at the new possibilities of connectedness and human flourishing. This complex or ambivalent reaction may be a good starting point for a more reflective take on globalization, one that does not try simply to 3

4 5

‘The Second Globalization Debate: A Talk With Anthony Giddens’, Edge, (30 January 2000), available at www.edge.org/3rd_culture/giddens/giddens_index.html (accessed 11 August 2009). J. Habermas, The Divided West (Cambridge, Polity Press, 2006), p. 175. For a complex and subtle view on the relation of globalization to law, see S. Cassesse, ‘The Globalization of Law’, New York Journal of International Law and Politics, 37 (2005) 973.

The end of the globalization debate: continued

9

soar above the passions and the polemics, rather to see, in Tocqueville’s image, not differently than the parties in the debate, but farther. At least a decade before the end of the Cold War, the old struggle between right and left over the governance of the economy and the redistribution of wealth within the advanced liberal democracies had, significantly, yielded to a new attitude: the center-left, especially its elite elements, embraced many of the center-right critiques of the post-war regulatory and welfare state as inefficient, wasteful and dependency-inducing. As well, the center-left shifted away from support for trade protectionism and capital controls as instruments of progressive governance that ensured the state’s ability to maintain a stable and fair social contract with business, labor and the disadvantaged.6 The center-left sought to pursue traditional progressive values through a more economically liberal (in the sense of pro-free-market) approach to governance of the economy.7 The regulatory reforms of the Carter administration in the United States, the agenda of New Labour under Tony Blair in the United Kingdom and the restructurings of the welfare state in the Netherlands and Denmark are examples of cases where a basically progressive political movement or national political culture turned towards the market as understood by the economic right, but claimed to hold to progressive values all the same.8 The End of the Cold War – often referred to as the death of communism – seemed to consecrate the notion that the ideological struggle about the relationship between state and market was over: both domestically and globally, market liberalism had triumphed. Of course, the regulatory and welfare state remained, but debate about its future direction could no longer be inspired by sources or approaches at odds with the idea of a large sphere of (mostly) free play for markets, domestic and global. The most explicit, and some would say simplistic, articulation of this triumph of market liberalism was Francis Fukuyama’s ‘end of history’ idea, which suggested that, after the Cold War, states were left with no rationally defensive alternative to (what was largely) the American variant of global capitalism.9 As is well summarized by 6

7

8

9

See generally R. Howse, J. Robert, S. Prichard and M. J. Trebilcock, ‘Smaller or Smarter Government?’, University of Toronto Law Journal, 40 (1990) 305. See, for example, the various contributions in J. LeGrand and P. Robinson (eds.), Privatization and the Welfare State (London, Allen and Unwin, 1984), especially, D. Donnison, ‘The Progressive Potential of Privatization’, p. 45. See R. Howse, ‘From Politics to Technocracy – and Back Again: The Fate of the Multilateral Trading Regime’, American Journal of International Law, 96 (2002) 94, pp. 101–2. F. Fukuyama, ‘The End of History?’, The National Interest (Summer 1989).

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Robert Howse

Frieden in Global Capitalism, there was an extraordinary new consensus in favor of economic liberalization and open markets: Between 1979 and 1985 the advanced industrial countries turned from the conflict and confusion of the 1970s to financial orthodoxy and economic integration. Starting around 1985, the developing countries left fi ft y years of import substitution behind and moved aggressively to export, open their markets, privatize, and deregulate. The socialist economies (other than China and Vietnam) came last, after 1990, but they gave up central planning and moved to war capitalism at speeds varying from rapid to breakneck.10

Frieden rightly emphasizes that domestic economic liberalism was inextricably intertwined with openness to globalization. The complex domestic and global forces that led to a shift within the political center, and indeed the center-left , towards market liberalism were such as to elude a single ‘site’ or institutional or party setting, in which a movement could unite those discontented with or skeptical of such a shift. In these circumstances, the discontents had to coalesce as a new counterculture, inspired by and adapted from that of the 60s protest movements.11 Since the center-left that betrayed them at least claimed to share their progressive values, the discontents could not make the center-left governments and their advisers and political base the explicit target; plunging into the complexity of the domestic debates over the redesign of the regulatory and welfare state did not work for the discontents; they found that they were alienated – part of an older progressive culture (even if some were younger in years) at odds with the newer technocratic, pragmatic policy culture of the center-left, the latter being more internationalist than nationalist, more inspired by sophisticated managerial and economic ideas than by traditions of worker solidarity and civil protest, more awed and impressed than worried by technology and the increasing velocity, mobility and mutability of modern life. The discontents were deprived of a clear enemy ‘within’ against which to unite; and, as suggested, they were awkward in inserting themselves into complex and technical debates about governance of the modern economy. Being at odds with the ascendant center-left policy culture, it

10 11

Frieden, supra, note 2, p. 378. E. Yuen, ‘Introduction’ in E. Yuen, G. Katsiaficas and D. B. Rose (eds.), The Battle of Seattle: The New Challenge to Capitalist Globalization (New York, Soft Skull Press, 2001), p. 7.

The end of the globalization debate: continued

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is understandable that they chose ‘globalization’ as the target. It could be seen as an impersonal and distant force (allowing one to forget the origins of many of the discontents in confl icts within the progressive movement and center-left parties themselves) and at another level a set of choices by a technocratic elite within secretive and clubbish networks, public and private – an elite with a supposedly coherent marketliberal ideology and an indifference to, if not contempt for, democracy as grassroots politics.12 The anti-globalization movement understood itself as defending the traditional (progressive regulatory and social welfare) state against ‘globalization’.13 And there, thus, arose a great and intense debate about whether ‘globalization’ was good or bad, inevitable or resistible in relation to the ideal of the progressive democratic state. This debate (which was both fueled and frustrated at the same time by the deep ambiguity about what globalization was – a kind of diabolical external force or a set of contestable choices by detestable people) is now, for better or worse, over.

Why the globalization debate is over (or, at least, the first globalization debate)14 There are at least six reasons why ‘globalization vs. anti-globalization’ turns out not to capture what is at stake. First of all, the state itself has been reshaped in important ways, partly due to globalization alone and partly for other reasons. Strengthening of the executive power in relation to the legislative is one dimension of this, but even within the executive there is a redistribution of power between different ministries. As Saskia Sassen observes, power has been redistributed within the state towards the executive and, within the executive, towards those agencies most congenial to economic liberal values and agendas (finance ministries) and away from those traditionally responsive to progressive constituencies such as labor ministries.15 As she

12

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14 15

For a look at globalization from the more traditional anti-globalization perspective, see, for example, H. Veltmeyer (ed.), Globalization and Antiglobalization – Dynamics of Change in the New World Order (Burlington, VT, Ashgate Publishing Limited, 2004). For an anti-globalization perspective on the Seattle Protests, see Yuen et al., supra, note 11. For a clear illustration of such an understanding, see, for example, M. Barlow and B. Campbell, Take Back the Nation (Toronto, Key Porter Books, 1992). See Howse, ‘The End of the Globalization Debate: A Review Essay’, supra, note 1. Sassen, supra, note 2, p. 168ff.

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suggests, the globalization debate tended to focus on whether the state was weakened or weakening itself by globalizing. Instead, the real issue is how the state has been remade and reordered, and the resulting degree of tractability of the new or emerging state and its institutions to the underlying normative agenda of the anti-globalizers. According to Sassen, ‘the increased complexity and technicality of the economy, whether national or global, is a key factor in the internal state redistribution of power’.16 The state in many respects does not appear to retain its character as a secure repository of values such as democracy and distributive justice.17 In consequence, at least if it is taken for progressive motivations, the classic or original anti-globalization position that the state should not cede power to global market forces, or that it should take back that power, makes little sense. Indeed, as just explained, in some respects the anti-globalization movement arose from disappointment from what was done to the state by the new center and center-left political elite, and frustration in the face of efforts of the discontents to insert themselves effectively in the new domestic politics. Second, some of the most pressing problems of concern today to people who still identify themselves with the anti-globalization movement are problems that could not have been solved by strong individual nation-states’ uncoordinated exercise of sovereignty. The most obvious and obviously serious is climate change; another example is biodiversity.18 A national interest model of sovereign regulation, where the state is free to regulate to satisfy the balance of diverse constituencies within its borders without regard to external effects, is unable to yield a solution to these global commons problems. While economic globalization has arguably exacerbated the problems by driving rapid industrial growth in the developing world, this very same growth has indisputably taken millions of people out of poverty, even if it has increased inequality and created new social tensions in some countries. In these circumstances, only a fair global governance system to address climate change, which establishes principles to determine the just contribution of each national 16 17

18

Ibid., p. 171. I wish to emphasize that I do not here mean to subscribe to the fatalistic position of, for instance, Thomas Friedman (The Earth is Flat [New York, Farrar, Straus & Giroux, 2005]), that the state simply has no choice but to yield to globalization; the state can remain an effective actor, and agent of progressive values, but only by itself working alongside global actors, including non-state actors and in important ways at the global level. See generally, C. Bail, R. Falkner and H. Marquard (eds.), The Cartagena Protocol on Biosafety: Reconciling Trade in Biotechnology with Environment & Development? (London, Earthscan Publishing and Royal Institute of International Affairs, 2002).

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community to the problem, can vindicate the underlying balance of relevant values.19 Th ird, the demands that those associated with an ‘anti-globalization’ position are placing on the state often now have less to do with the classic role for the state in the protection of its own citizens and internal wealth redistribution, and instead relate to the projection of the power of the state outside its boundaries, often to pressure or discipline other states that are unwilling to have their own policies reflect the values in question. Th is is nowhere more evident than in how the debate concerning the relationship between environmental and labor standards and globalization has evolved.20 Traditionally, the ‘anti-globalization’ position was strongly focused on the problem of a ‘race to the bottom’ – with mobility of goods, services and capital globally, the ability of the state to maintain strong domestic environmental and labor standards was thought to be threatened by the capacity to move production to jurisdictions with lower standards, or those prepared to lower their standards in order to attract investment and make their goods and services more competitive in global markets.21 Within this frame, the concern of the anti-globalizers with other countries’ standards was directly related to the concern about the loss of capacity of the state to protect domestic interests in the face of global competition and the purported race to the bottom. The emphasis has now shifted towards a concern to vindicating environmental protection and labor rights as global values in the presence of regimes that appear not to care about them; major campaigns have led to the use of economic sanctions against, for instance, regimes such as Burma, where the concern is evidently not any competitivenessbased threat to domestic standards in the sanctioning countries. Once one recognizes the shift in question, one realizes that economic globalization is a premise of, not a threat to, the kind of action that the supposed ‘anti-globalizers’ are demanding of the state: for without high degrees of global economic interdependence, the use of trade or other economic sanctions to pressure countries to conform to global values would be much less plausible. 19

20

21

See International Task Force on Global Public Goods, ‘Meeting Global Challenges: International Cooperation in the National Interest’, Final Report, (2006), pp. 39–42. See R. Howse and M. J. Trebilcock, ‘The Free Trade-Fair Trade Debate: Trade, Labor and the Environment’ in A. O. Sykes and J. S. Bhandari (eds.), Economic Dimensions in International Law (Cambridge University Press, 1995), p. 186. R. Howse, ‘From Politics to Technocracy – and Back Again’, supra, note 8, p. 103.

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Fourth, as is illustrated by this last observation, there is a growing awareness of the complex effects of globalization on the realization of the values of those constituencies identified or self-identified as antiglobalizers. We are faced with fundamental indeterminacy and, arguably, the impossibility of creating a comprehensive ledger or balance sheet, a kind of futility in making a general claim that ‘globalization’ is overall good or bad, benign or malign, in relation to the relevant values or goals. It also seems like such an accounting would be premature. The fift h point has precisely to do with the very phenomenon of ‘global values’. The classic debate between globalization and anti-globalization largely assumed that the nation-state was the repository of legitimacy. Thus, the question was whether economic globalization threatened or unduly constrained the legitimate, democratic choices made in and by the nation-state. Yet, while the democratic deficit remains an important sub-theme in discussions about globalization, the legitimacy of the claims of the purported ‘anti-globalizers’ increasingly sounds not in the democratic self-determination of national communities, but in values and norms thought to belong to or inhere in the global ‘community’ itself, often reflected in multilateral regimes of international law, whether environmental treaties such as Kyoto,22 biodiversity regimes such as Rio and Cartagena, 23 the ILO declaration on core labor rights24 or the UN covenants on human rights.25 The invocation of such norms depends, at least implicitly, on a shift in the scale or scope of moral concern beyond the boundaries of the territorial nation-state. In these circumstances, a defense of state sovereignty against globalization makes little sense. Often, what one ends up defending is the capacity of the state to advance global values and, as already suggested, this may include its capacity to affect or influence decisions of other states that would traditionally have been understood as ‘sovereign’ choices. And here, as noted, globalization in important ways may enhance capacity in this last sense. Sixth and lastly, and perhaps this flows logically from the idea of global values, the purported ‘anti-globalization’ movement has constituted 22

23

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Kyoto Protocol to the United Nations Framework Convention on Climate Change (UN Doc. FCCC/CP/1997/7/Add.1, 1997); (1998) 37 ILM 22 (10 December 1997). Rio Convention on Biological Diversity, 1760 UNTS 79 (5 June 2002); and Cartagena Protocol on Biosafety to the Convention on Biological Diversity (2000) 39 ILM 1027 (29 January 2000). ILO Declaration on Fundamental Principles and Rights at Work (1998) 37 ILM 1237 (19 June 1998). Universal Declaration of Human Rights (UN Doc. A/810 at 71, 1948), GA Res. 217A (III) (10 December 1948).

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itself on a global scale and has learned to operate in global sites of power, whether the WTO in Geneva or the World Bank in Washington, DC. Yet, the original method of organizing resistance to ‘globalization’ entailed mobilizing nationalistic sentiment and internal constituencies, such as unionized workers in particularly vulnerable industries and locales or recipients of social assistance or cultural subsidies, in other words, groups traditionally dependent upon state protection. This has given way to the formation of global networks of activists who intervene in struggles surrounding the terms of economic and social life in communities throughout the world, engaging and linking constituencies in different locales, even if there remain elements of cultural nationalism and communitarian rhetoric in some anti-globalization quarters.

III The end of the globalization debate thesis reconsidered: new or revived challenges to globalization The above claims have been tested both by some private responses to my Harvard essay as well as by events and tendencies remarked on by many commentators. One set of responses suggested that I ignored the various incarnations of localism as a challenge to globalization as such, not merely to the modalities and values of particular versions of globalization.26 The main philosophies of localism, such as those of Serge LaTouche and Vandana Shiva, stress local self-sufficiency in agricultural (and perhaps industrial) production as an alternative to global economic integration. According to Shiva, ‘localization of economies is a social and ecological imperative. Only goods and services that cannot be produced locally – using local resources and local knowledge – should be produced nonlocally and traded long distance.’27 Further, ‘Earth Democracy is based on local democracy, with local communities – organized on principles of inclusion, diversity, and ecological and social responsibility having the highest authority on decisions related to the environment and natural resources and to the sustenance and livelihoods of people. Authority is delegated to more distant levels of governments on the principle of subsidiarity.’28 26 27

28

These were personal responses by people in emails, not published responses. V. Shiva, Earth Democracy: Justice, Sustainability, and Peace (Cambridge, MA, South End Press, 2005), p. 10. Ibid., pp. 10–11.

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A careful examination of these principles and their practical implications suggests that in fact Shiva’s Earth Democracy presupposes globalization – indeed, an advanced stage of globalization. First of all, at the normative level, Shiva’s localism is in fact derived, not from a closed tradition or a particular indigenous cultural heritage, or a Heideggerean rejection of the universal in favor of the soil, the roots, but is itself premised on ‘the ground of our common humanity’ and a set of rights for everyone. Democracy itself is not the will of a particular people or culture but is relativized by the universal and universalizing notions of diversity and, above all, inclusion. The global circulation of ideas and values is crucial to Shiva’s project: ‘Earth Democracy globalizes compassion, justice and sustainability.’29 At the empirical level, it is important to remember that localism was, historically, undermined in the first instance not by globalization but by the project of the modern nation-state.30 To the extent, as suggested above, that globalization has gone hand in hand with the weakening of the nation-state’s claim as the supreme or even exclusive source of legitimate governance or rule, and its capacity to stake this claim, arguably globalization has actually assisted in opening up new spaces for the local. Indeed, technologies whose current form and dissemination is largely unthinkable outside the framework of advanced globalization – the Internet/email, internationally interconnected cell phones – have loosened the real capacities of the nation-state to control or suppress local discourse and political and cultural diversity. Two examples illustrate the way in which localism works with, not against, globalization. In certain Asian states, as in other developing countries, replacing imported oil with locally and sustainably produced energy sources has depended on technology transfer and the emergence of international and regional standards, which allow fuels produced in ways that make sense locally to be used in vehicles produced elsewhere.31 In the case of agricultural self-sufficiency, Shiva notes the threat to localism from the ‘piracy’ of traditional knowledge by multinationals. However, as she also seems aware, even if the WTO TRIPS Agreement,32 a justifiable 29 30 31

32

Ibid., p. 11. See, generally, A. de Tocqueville, L’ancien Regime et la Revolution en France (1856). See N. Jansen, ‘Sustainable Biofuels and the Need for Applicable Standards’, presented at The RSB Consultation: South-East Asia Stakeholder Consultation (Kuala Lumpur, 26–7 March 2009). Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, (1994) 33 ILM 1197, 1869 UNTS 299 (15 April 1994).

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target of anti-globalists for various reasons, did not exist, these practices would remain a problem; addressing them requires a new global deal on intellectual property and related matters, not simply tearing up the existing deal and reverting to a status quo ante where multinationals aggressively use domestic intellectual property rules.

The financial and economic crisis On some readings, the recent financial and economic crisis represents a fundamental reversal of the momentum in the direction of globalization. It has been states that have taken the lead, visibly and undeniably, in responding with new regulations, bailouts for financial institutions and with industrial and social policy measures, as well as trade protectionism. The apparent resurgence of the state is especially evident in that, even in the highly integrated European Union, the individual member states have been the key actors in response to the crisis. To my mind these phenomena are uncontestable, and are a powerful reminder of what globalization is and is not about: globalization is not the transfer of governance or authority from the state to global institutions or a global authority (the global constitutionalist or world government reading). Indeed, as Joseph Stiglitz has noted: In effect, economic globalization has outpaced political globalization. We have a chaotic, uncoordinated system of global governance without global government, an array of institutions and agreements dealing with a series of problems, from global warming to international trade and capital flows. Finance ministers discuss global financial matters at the IMF, paying little heed to how their decisions affect the environment or global health. Environment ministers may call for something to be done about global warming but they lack the resources to back up those calls.33

The question is rather whether the state, in exercising its legitimate governance capacities, re-conquers its traditional role as the sovereign – the definitive voice of legitimate public norms, able to control or determine outcomes without recourse to values and consideration of interests beyond its borders, working, if need be, against global markets and curbing them to the extent that they are an impediment to its sovereignty. The answer here I think is, clearly, no. First of all, it is a measure of the extent to which the rhetoric of the globalization debate has already been reshaped along the lines argued 33

Stiglitz, supra, note 2.

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above that the regulatory or deregulatory choices to which the crisis can, in part, be attributed have not widely been blamed on impersonal forces or demonic forces of globalization. Part of the national response to the crisis reflects recognition that the problems were national in significant measure. Second, to the extent that global forces have been involved, the response has not been to walk away from the liberalization of movement of capital (a modification of globalization that even some pro-globalization thinkers have strongly argued for, at least in the case of short-term flows; for example, Jagdish Bhagwati),34 but to strengthen global regulation, enhancing the rules of the Basle Committee and giving an expanded role to the Financial Stability Forum in its new incarnation as the expanded Financial Stability Board.35 Third, the crisis has illustrated the complexity of assessing the costs and benefits of global interdependence. On the one hand, there have been justified fears that the developing world’s hopes for growth would be dashed by a crisis manufactured in the developed West. On the other hand, recent evidence suggests at least partial delinkage, and the resurgence of demand in Asia, and elsewhere in the developing world, has in fact now started to lessen the crisis in the developed world, especially the United States, beginning to compensate to some extent for the collapse of domestic demand, and resulting in strong recent US export figures. Interdependence has arguably also prevented recklessly nationalistic responses; for example, China’s extensive risk exposure in US debt as well as dependence on the US market has led to close cooperation and consultation between Chinese and US officials throughout the crisis. With respect to protectionism, the fear of an unraveling of free trade in a protectionist freefall reminiscent of the 1930s has not materialized. Careful studies of protectionism in the wake of the crisis attribute sharp short-term declines in trade to dramatic falls in real demand as well as the choking of trade finance due to the financial side of the crisis, and only to a limited degree to protectionism. It is notable that such protectionist responses as we have seen have largely taken place within the framework of the rules of the WTO, negotiated at the height of global economic liberalism, the Uruguay Round (for example, anti-dumping duties or procurement measures permitted under carve-outs or reservations in the WTO 34 35

Bhagwati, supra, note 2. See the Financial Stability Forum, ‘Principles for Cross-Border Cooperation on Crisis Management’, Financial Stability Board (FSB) (2 April 2009).

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Government Procurement Agreement,36 or because the states in question have not signed that Agreement at all).37 Looking at recent polling of the American public on trade policy, Edward Gressner notes that, to the broader public, the risks of confrontational trade policy apparently seem much higher than they did a year ago, and support for more cooperative relationships with foreign governments is unusually high.38

IV

A resurgence of strong sovereignty and nationalism as counter-perspectives to globalization?

Writing in the Wall Street Journal, Bob Davis suggested a new rise of nationalism as a fundamentally anti-globalization force, pointing to phenomena as varied as sovereign wealth funds, national restrictions on the Internet, backlashes against immigration and ‘petro-nationalism’ in countries such as Russia. The state, according to Davis, has come back with a vengeance.39 I believe we must first distinguish between nationalism as an ideology or force in politics and economics on the one hand and assertive state sovereignty on the other. Davis tends to confuse these things, as do many other commentators who are economic liberals. They identify nationalism with strong government intervention. Yet, the latter could easily be in the service of global or universal values (social and economic rights, for instance), not on behalf of some idea or ideal of the nation. Historically, nationalism, the idea of a nation, a people, a volk, as an organic unity was a powerful tool for consolidating the power and legitimacy of the state as the sole or supreme legitimate source of governance, of rule – the nation-state.40 Today, the state is as likely to be fractured by nationalism as consolidated by it. Th is is an important theme in Ruti Teitel’s forthcoming book, Humanity’s Law.41 She notes that civil 36

37

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39

40 41

Agreement on Government Procurement, Marrakesh Agreement Establishing the World Trade Organization, Annex 4(b), 1915 UNTS 103 (15 April 1994). See, for example, S. J. Evenett, B. M. Hoekman and O. Cattaneo (eds.), The Fateful Allure of Protectionism: Taking Stock for the G8 (London, World Bank Centre for Economic Policy Research [CEPR], 2009), especially Evenett’s discussion of the US stimulus package and how it has been designed and implemented to respect, at least arguably, WTO trade disciplines (pp. 39–42). E. Gresser, ‘The End of the Globalization Debate? Creeping Protectionism Lingers in the Shadows if Only for the Moment’, YaleGlobal (2 June 2009), p. A1. B. Davis, ‘The Rise of Nationalism Frays Global Ties’, Wall Street Journal (28 April 2008). See Lord Action, ‘Nationality’, The Home and Foreign Review (1862). R. Taitel, Humanity’s Law (Oxford University Press, forthcoming).

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wars, failed or weakened states, dislocations of peoples, enclaves and diasporas have all been generated by nationalism. The ‘state’ in its classic conception and capabilities now becomes more problematic, if anything, on account of nationality claims. It becomes even less capable of presenting itself as an alternative to globalization. One could say something similar about religious fundamentalism. The Jihad vs. McWorld formulation in the title of Benjamin Barber’s essay42 reflects the frequent misconception of religious fundamentalism as a force of resistance to globalization. The mistake here is the identification of globalization with economic liberalism, which is connected to the overall misconception at which this essay aims – a failure to conceive the debate as about what globalization is and should be, not whether it is or should be. As has become much more apparent since Barber wrote, religious fundamentalism operates through global networks and often has global ambitions to shape hearts and minds, even if it does not, as such, directly intend to. Religious fundamentalism, as deployed by various political interests and factions, has a destabilizing influence on a range of states and state-building enterprises, which is more than obvious in much of the Middle East. Now let us turn to sovereignty. I have already noted that globalization is misconceived when it is understood as the transfer of sovereignty to global institutions, to a supposed global sovereign authority or governance structure. Sometimes, institutions such as the WTO, the World Bank and the IMF are demonized or essentialized as the world government of the globalizers to which sovereignty has been transferred. But, as I have elaborated elsewhere, these kinds of institutions mostly operate as channels for the brokering and coordination of power, among states but also non-state actors increasingly, including multinationals, foundations and NGOs.43 Just as globalization does not mean the transfer of sovereignty to some global level of governance, it does not mean either, as an empirical matter, that states cannot exercise sovereignty effectively in the face of global forces. Rather, the weakening of the state, as Sassen argues, really means a rearrangement of sovereignty. The state can be strong, but strength comes from working with other actors, global actors, and can no longer be understood as a monopoly on legitimacy or the capacity to 42 43

B. Barber, ‘Jihad vs. McWorld’, The Atlantic (March 1992). R. Howse, ‘Sovereignty Lost and Found’ in W. Shan, P. Simons and D. Singh (eds.), Redefining Sovereignty in International Economic Law (Oxford, Hart Publishing, 2008), p. 61. What follows derives from that essay.

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determine or control outcomes autonomously from external or global actors or forces. An increasing body of evidence and scholarly research shows that some of the most dramatic economic success stories have occurred in states with governments that have pursued dirigiste economic policies, opposing and distorting global market forces where their objectives suggested such a course of action, ‘opening up’ to global markets only to the extent, again, that such opening up served their objectives. Here, one thinks of Brazil, India and China. High levels of dependence on trade and foreign investment and developing country status have not deterred countries such as these from attempting to control markets to achieve their economic and social objectives, with some considerable success.44 What counts here is that these governments have not rejected globalization, but rather worked with and through global markets effectively to achieve public objectives. Nor have they simply yielded to globalization as an irresistible external force. In other words, their policy calculus has already transcended the globalization debate. 44

D. Rodrik, ‘Rethinking Growth Policies in the Developing World’, presented as a Luca d’Agliano Lecture in Development Economics (Torino, Italy, 8 October 2004). On China, see M. Gallagher, ‘Reform and Openness: Why China’s Economic Reforms have Delayed Democracy’, World Politics, 54 (2002) 338.

2 Global economic institutions and the autonomy of development policy: a pluralist approach Yuk a Fukunaga

I

Introduction

Specialized institutions with narrowly defi ned mandates flourish in various fields of international law. Global1 economic institutions (GEIs) such as the World Bank,2 the International Monetary Fund (IMF) and the World Trade Organization (WTO) have been among the most influential. The main source of their influence is that the GEIs are often equipped with effective tools to enforce rules and policies. For example, the World Bank and the IMF may impose conditions on their loans while the WTO has a compulsory dispute settlement system. The enforcement of their rules and policies not only affects inter-state relations among the member countries but also, and more often, forces the modification of the members’ domestic policies. Because of the growing impact of the latter, these institutions are occasionally criticized for unduly restricting the autonomy of the member countries’ decision-making processes. Interestingly enough, the critics do not necessarily argue that the GEIs should not influence the domestic policies of the members at all; rather, the criticism concerns how they should do so. The criticism is twofold. First, critics express a concern over the ‘democratic deficit’ of the institutions in view of the lack of procedures in place to reflect the voices of all stakeholders, including state and non-state actors. They argue that no institution should enforce rules and policies that are formulated in the absence of 1

2

This chapter uses the term ‘global’ instead of ‘international’ in order to highlight that the impacts of GEIs extend not only to states and inter-state relationships but also to businesses and citizens within states. The World Bank is composed of five branches: the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA) and the International Centre for Settlement of Investment Disputes (ICSID).

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those potentially affected by these rules and policies. Second, critics point out the ‘economic bias’ of the institutions in that their rules and policies take into account only economic considerations. They complain that the enforcement of such rules and policies distorts domestic policy decisions that need to reflect both the economic and non-economic values of citizens. The non-economic values typically imply environment and human rights but can also include other values such as health and culture. There are a number of practical proposals to reduce the ‘democratic deficit’ and the ‘economic bias’ of the GEIs. Some of these may be reasonable, while others may not. The main purpose of this chapter is not to undertake a detailed analysis of the respective proposals. Instead, it aims to assess the theoretical bases of the proposals. As will be discussed, these proposals often assume the continuity of the domestic legal orders with the international legal order. To put it in an extreme way, the continuity may suggest that the international and the domestic legal orders are ultimately converging into a unified global legal order. Based on the assumption of an emerging global legal order, the proposals argue that GEIs should hear the views of all stakeholders – both state and non-state and both economic and non-economic actors – and pursue balanced policies, taking into account all policy considerations, both economic and non-economic, in order to ensure the unity of the order. To a certain degree, these arguments correctly reflect the current dynamics between the international and the domestic legal orders. However, they often disregard the diversity and plurality of our societies. Section III of this chapter examines and criticizes the theoretical assumptions behind the proposals and proposes, as a complement, a pluralist approach that emphasizes the plurality of the global legal order. In order to clearly illustrate the theoretical arguments, this chapter focuses on the development policies of the three major GEIs, i.e., the World Bank, the IMF and the WTO. The development policy of the GEIs has had increasing impact on the domestic conditions and policies of developing countries, and is often criticized on counts of both ‘democratic deficit’ and ‘economic bias’. Section II of this chapter describes how the development policy of the GEIs has influenced the domestic conditions and policies of developing countries, how it has been criticized and how the GEIs have responded to the criticisms. Section II provides a basis for the theoretical analyses in Section III. Section IV sketches out the practical implications for the GEIs of the theoretical analyses set forth in Section III. Finally, Section V concludes the chapter.

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II

The development policy of the GEIs and proposed improvements

In the early days of the GEIs, their development policies paid little attention to the domestic conditions and policies of developing countries. For example, in the late 1950s and 1960s, the World Bank increased economic development assistance to developing countries, with the strong financial support of the United States;3 however, its loans were primarily targeted at building economic infrastructure such as power plants and roads that were considered essential for economic growth.4 The General Agreement on Tariffs and Trade (GATT),5 under the changing international environment in the 1960s,6 began to exempt the developing Contracting Parties from the GATT traditional principles of non-discrimination and reciprocity,7 but fell short of actively addressing development concerns within developing countries. The exclusive focus of the GEIs on macroeconomic policies (and not on domestic conditions and policies) was consistent with the demands of developing countries at that time. During that era, their demands 3

4

5

6

7

During this period, the World Bank also strengthened its institutional framework by establishing the IFC and the IDA. The IFC was instituted to promote private sector development in developing countries, while the IDA was designed to provide credits to developing countries on concessional terms. D. Kapur, J. P. Lewis and R. Webb, The World Bank: Its First Half Century (Washington DC, Brookings Institution Press, 1997), vol. 1, pp. 109–20. The other Bretton Woods Institution, the IMF, also began to strengthen its institutional framework for development purposes by establishing the Compensatory Financing Facility (CFF) and the Buffer Stock Financing Facility (BSFF), but its role in development assistance was rather limited until the 1970s. Oct. 30, 1947, 61 Stat. A-11, T.I.A.S. 1700, 55 UNTS, 194. The GATT is the predecessor of the WTO. Strictly speaking, the GATT was a provisional agreement without an institutional framework; however, this chapter refers to the GATT as one of the GEIs in light of its subsequent institutional development and the creation of the WTO. For example, it was in 1964 that the United Nations Conference on Trade and Development (UNCTAD) was created with the hope that developing countries be integrated into the international trading system. In 1965, the GATT Contracting Parties incorporated Part IV into the GATT, entitled ‘Trade and Development’, under which the GATT began to authorize preferential tariffs without requiring reciprocity, which led to the adoption of the generalized system of preferences (GSP) in 1971. See R. E. Hudec, Developing Countries in the GATT Legal System (London, Trade Policy Research Centre, 1987), chs. 4–6; R. Prebisch,‘ Vers une Nouvelle Politique Commerciale en Vue du Développement Économique: Rapport du Sécretaire Général de la Conférence des Nations Unies sur le Commerce et le Développement’, Revue Économique, 16 (1965) 676; M. Virally, ‘Le Principe de Réciprocité dans le Droit International Contemporain’, Recueil des Cours, 122 (1967-III) 88.

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for economic development, which were partly driven by the rise of the decolonization movement and nationalist sentiment, aimed at achieving substantive equality between developing and developed countries. Thus, their chief concern lay in the size of their economies, and they squarely rejected the interference of international institutions in domestic affairs.8 The limited policy focus of the GEIs and the nature of the developing countries’ demands determined the approach of international law scholars towards the development issue during this period. The purpose of the then academic movement under the heading of the international law of development (droit international du développement)9 was limited to legitimizing the modification of the traditional principle of formal equality and to bringing a new principle of substantive equality into the relationship between developing and developed countries.10 However, the limited focus on macroeconomic policies gradually turned out to be insufficient and inappropriate to promote the development of developing countries. Since the 1970s, the focus of the GEIs’ development policy has gradually shifted from the overall economies of developing countries to their domestic conditions and policies. For example, the World Bank adopted a ‘basic needs’ approach in the 1970s, which necessarily directed its attention to domestic conditions within developing countries.11 Thereafter, although the policy priorities of the World Bank changed over time, as illustrated by the structural adjustment policy12 and the so-called Washington Consensus in the 1980s,13 as

8

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11 12

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K. Ito, ‘Reexamination of the “International Law of Development”: Toward the Constitution of New Theoretical Framework’, Hongo Hosei Kiyo, 12 (2003) 1, pp. 4–12 [Japanese]. A. Philip, ‘Les Nation Unies et les Pays en Voie de Développement’, presented at L’Adaptation de L’O.N.U. au Monde D’Aujourd’hui (Colloque International de Nice, 27–29 mai 1965), pp. 130–3. See, for example, M. Virally, ‘Vers un Droit International du Développement’, Annuaire Français de droit international , 11 (1965) 3, pp. 5–7; O. Schachter, ‘The Evolving International Law of Development’, Columbia Journal of Transnational Law, 15 (1976) 1; R-J. Dupuy, ‘Communauté Internationale et Disparités de Développement: Cours Général de Droit International Public’, Recueil des Cours, 165 (1979-IV) 119; T. Takashima, International Law of Development (Keio Tsushin, 1995) [Japanese]. Kapur et al., supra, note 4, pp. 265–8. Ibid., pp. 513–44; I. F. I. Shihata, The World Bank in a Changing World: Selected Essays (compiled and edited by F. Tschofen and A. R. Parra), (Dordrecht, Martinus Nijhoff, 1991), pp. 25–7 and 58–61. J. Williamson, ‘What Washington Means by Policy Reform’ in J. Williamson (ed.), Latin American Adjustment: How Much Has Happened? (Washington DC, Institute for International Economics, 1990), p. 7. See also G. Rains, ‘Successes and Failures of

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well as the current focus on good governance14 and poverty reduction,15 its chief concern has consistently been the domestic conditions and policies of developing countries. As for the IMF, the collapse of the par value system dramatically reduced its originally intended role and led it to assume new functions of financing and monitoring the economies of developing countries.16 Similar to the World Bank, the IMF exerts influence over the domestic conditions and policies of developing countries by imposing conditionality on its loans.17 In the GATT/WTO, although the development issue was not brought to the forefront until recently,18 its expanding rules19 and strengthened dispute settlement procedures led to increased impacts on the domestic policies of developing countries. In light of the potential inconsistencies between the GATT/WTO rules and the domestic rules and policies of developing countries, special and differential (S&D) treatment has been incorporated in order to avoid the

14

15

16

17

18

19

Development Experience Since the 1980’s’ in L. Emmerij (ed.), Economic and Social Development into the XXI Century (Inter-American Development Bank, 1997), p. 81. See, for example, J. C. Hopkins, ‘Therapeutic Lending in a Post-Colonial World’, Michigan State Journal of International Law, 14 (2006) 439, pp. 452–4; V. P. Nanda, ‘The “Good Governance” Concept Revisited’, Annals of the American Academy of Political and Social Science, 603 (2006) 269, pp. 272–6; World Bank, Localizing MDGs for Poverty Reduction in Viet Nam: Ensuring Good Governance for Poverty Reduction (2003); Shihata, supra, note 12, pp. 53–61 and 79–93. See, for example, G. de Burca, ‘Developing Democracy Beyond the State’, Columbia Journal of Transnational Law, 46 (2008) 221, pp. 256–76; DFID and R. Alsop (ed.), Power, Rights, and Poverty: Concepts and Connections (The World Bank, 2004), available at www. siteresources.worldbank.org/intempowerment/Resources/PPFinalText.pdf (accessed 10 May 2010); R. Kanbur and D. Vines, ‘The World Bank and Poverty Reduction: Past, Present, and Future’ in C. L. Gilbert and D. Vines (eds.), The World Bank: Structure and Policies (Cambridge University Press, 2000), pp. 101–3. In order to perform its new function, the IMF established the Structural Adjustment Facility and the Enhanced Structural Adjustment Facility (ESAF). D. Fuhr and Z. Klughaupt, ‘The IMF and AGOA: A Comparative Analysis of Conditionality’, Duke Journal of Comparative and International Law, 14 (2004) 125, pp. 127–32; Evaluation of Structural Conditionality in IMF-Supported Programs, Issues Paper for an Evaluation by the Independent Evaluation Office (IEO) (2005), available at www.imf.org/external/np/ieo/2005/sc/051805.pdf (accessed 10 May 2010); International Monetary Fund, Guidelines on Conditionality (2002), available at www.imf.org/ External/np/pdr/cond/2002/eng/guid/092302.pdf (accessed 10 May 2010). The development issue was the center of attention in the 1960s but the objective of the measures adopted by the GATT was limited to entitling developed countries to derogate from the obligations of the GATT in order to redress the imbalance between developed and developing countries. Regulatory agreements such as the GATS (General Agreement on Trade in Services) and the TRIPS Agreement (Agreement on Trade-Related Aspects of Intellectual Property Rights) were newly adopted in the Uruguay Round.

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inconsistencies,20 and technical assistance has been provided in order to remove them.21 The GEIs’ shift in development policy increased tension with the national regulatory autonomy of developing countries, and led to the possibility of inviting resentment from developing countries amidst the North–South conflicts.22 In fact, at one point, the fear became reality in the context of the disputes over the nationalization of natural resources.23 Developing countries succeeded in adopting the Charter of Economic Rights and Duties of States,24 stipulating that each state has the right ‘to nationalize, expropriate or transfer ownership of foreign property’ and that any controversy over compensation ‘shall be settled under the domestic law of the nationalizing State and its tribunals’, which fueled controversy over the applicable rules of international law on nationalization.25 Nevertheless, developing countries were not totally ignorant of the existing international law rules even during the most intensive period of the disputes.26 Moreover, today, developing countries often choose to accept international law rules of trade and investment in order to benefit from the increasing trade with, and investment from, developed countries.27 There is also a suggestion that the shift in the development policy of the GEIs was made in response to the social movement from the developing world.28 20

21 22

23

24 25

26 27

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Hudec, supra , note 7, pp. 81–8. For example, the TRIPS Agreement contains several S&D provisions in view of the possibility that the enhanced protection of intellectual property rights could prevent developing countries from adopting the development policies of their choice. Doha Ministerial Declaration, WT/MIN(01)/DEC/1 (20 November 2001), paras. 38–41. The United Nations General Assembly adopted a resolution concerning Permanent Sovereignty over Natural Resources in 1962 and the Declaration on the Establishment of a New International Economic Order in 1974. See, for example, R. Dupuy (ed.), The New International Economic Order: Commercial, Technical and Cultural Aspects (Dordrecht, Martinus Nijhoff, 1980). The growing awareness of sovereignty and the demand for economic independence from Western countries drove some developing countries to nationalize natural resources in their territories. For more about the historical background, see N. Schrijver, Sovereignty over Natural Resources: Balancing Rights and Duties (Cambridge University Press, 1997), chs. 2–3. U.N.G.A. Res.3281 (XXIX), 12 December 1974. M. Sornarajah, The International Law on Foreign Investment, 2nd edn (Cambridge University Press, 2004), pp. 283–8; J. Nakagawa, Legal Process of Natural Resources Nationalization (Tokyo, Kokusai Shoin, 1990), pp. 162–74 [Japanese]. Schachter, supra, note 10, pp. 8–9. Cf. D. L. Swenson, ‘Why Do Developing Countries Sign BITs?’, U.C. Davis Journal of International Law and Policy, 12 (2005) 131. B. Rajagopal, International Law from Below: Development, Social Movements and Third World Resistance (Cambridge University Press, 2003), pp. 95–9 and 104–12.

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With these circumstances in mind, the question is not whether the GEIs are justified in constraining the domestic policy autonomy of developing countries at all, but rather how the GEIs should influence it.29 In this regard, there are two major criticisms against the development policy of the GEIs.30 First, the GEIs have been criticized for exerting undue influence on the domestic policies of developing countries without hearing the voices of the stakeholders (‘democratic deficit’).31 Second, the development policy of the GEIs has been criticized for being overly economically oriented and for distorting indispensable non-economic interests and values in developing countries, such as human rights and the environment (‘economic bias’).32 With regard to the first criticism, the proposals made by critics include the following: more active participation of developing countries in the decision-making process; increased involvement of non-state actors, including human rights and environmental nongovernmental organizations (NGOs); and the enhancement of the accountability and transparency of the GEIs. For the second criticism, the improvement proposals include considerations of non-economic interests and values, enhanced consistency with international law rules of human rights and the environment, and more effective compliance monitoring.33 29

30

31

32

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But see C. H. Lee, ‘To Th ine Ownself be True: IMF Conditionality and Erosion of Economic Sovereignty in the Asian Financial Crisis’, University of Pennsylvania Journal of International Economic Law, 24 (2003) 875. While this chapter focuses on the criticisms that arose from the increasing constraints on the policy autonomy of developing countries, another frequent criticism is that the structural problems of the World Bank and the IMF, such as their bureaucratic nature and the undue influence of a few developed countries and of the fi nancial sector, prevent them from effectively pursuing their policy goals. See, for example, N. Woods, The Globalizers: The IMF, the World Bank, and Their Borrowers (Cornell University Press, 2006), pp. 15–28. See, for example, M. Darrow, Between Light and Shadow: The World Bank, The International Monetary Fund and International Human Rights Law (Oxford, Hart Publishing, 2003), pp. 104–6; J. W. Head, The Future of the Global Economic Organizations: An Evaluation of Criticisms Leveled at the IMF, the Multilateral Development Banks, and the WTO (New York, Transnational Publisher, 2005), pp. 65–6, 117–9 and 172–3. See, for example, Darrow, supra, note 31, pp. 66–83; Head, supra, note 31, p. 63, pp. 113–4 and 169–71; Woods, supra, note 30, pp. 39–64. For these and other proposals, see, for example, Darrow, supra, note 31, pp. 221–93; Woods, supra, note 30, pp. 179–213; A. Buira (ed.) Reforming the Governance of the IMF and the World Bank (London, Anthem Press, 2005); Head, supra, note 31, pp. 94–110, 155–66 and 201–12; D. D. Bradlow, ‘Should the International Financial Institutions Play a Role in the Implementation and Enforcement of International Humanitarian Law?’, University of Kansas Law Review, 50 (2002) 695, pp. 713–21; O. Medenica, ‘The World Bank, the IMF and the Global Prevention of Terrorism: A Role for Conditionalities’, Brooklyn Journal of International Law, 29 (2003–4) 663, pp. 692–707; F. MacKay, ‘Universal Rights or a

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The GEIs have, at least partly, been responding to these criticisms. For example, the World Bank widened its mandate to take into account non-economic considerations34 and adopted the environmental and social ‘safeguard’ policies that are designed to avoid, mitigate or minimize the adverse environmental and social impacts of projects supported by the Bank.35 Moreover, the Bank established the Inspection Panel to ensure compliance with its policies, including its safeguard policies.36 The most notable feature of the Panel is that it shall receive requests for inspection by any ‘affected party’ (except a single individual) or by ‘the local representative of such party or by another representative in exceptional cases’.37 The IMF has also been expanding its mandate to include noneconomic issues.38 For example, it reflects concerns such as governance, gender and the environment in its conditionality and consultation under Article IV of the Articles of Agreement.39 In addition, the IMF established

34

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36 37

38 39

Universe into Itself?: Indigenous Peoples’ Human Rights and the World Bank’s Draft Operational Policy 4.10 on Indigenous People’, American University International Law Review, 17 (2002) 527, pp. 533–5. The relevant provisions of the Articles of Agreement provide that ‘only economic considerations shall be relevant to’ its decisions. Articles of Agreement of the International Bank for Reconstruction and Development, 27 December 1965, 16 UST 1945, 60 Stat. 1440, TIAS No. 1502, 2 UNTS. 134, amended, 17 December 1965, 16 UST 1942, Art.IV, sec.10; Articles of Agreement of the International Development Association, 26 January 1960, 11 UST. 2284, TIAS No.4607, 439 UNTS. 249, Art.V, sec.6. The World Bank expanded its mandate by interpreting the term ‘economic considerations’ in a flexible manner. See, for example, The International Bank for Reconstruction and Development, Development and Human Rights: The Role of the World Bank (1998), available at http://siteresources. worldbank.org/BRAZILINPOREXTN/Resources/3817166-115895645304/40441681186409169154/08DHR.pdf (accessed 10 May 2010); Shihata, supra, note 12, pp. 67–79; D. D. Bradlow, ‘The World Bank, the IMF, and Human Rights’, Transnational Law and Contemporary Problems, 6 (1996) 47, pp. 55–9. The World Bank, Operational Manual, vol. 1, available at http://wbln0018.worldbank. org/institutional/manuals/opmanual.nsf/05TOCpages/The World Bank Operational Manual?OpenDocument (accessed 4 February 2008). Resolution No. IBRD 93-10/Resolution No. IDA 93–6 (1993). Resolution, para. 12. For the Inspection Panel, see, for example, D. D. Bradlow, ‘Lessons from the NGO Campaign Against the Second Review of the World Bank Inspection Panel: A Participant’s Perspective’, ILSA Journal of International and Comparative Law, 7 (2001) 247; T. Kiriyama, ‘Development and Human Rights in the World Bank: Operational Policy on Indigenous Peoples and the Inspection Panel’, Journal of International Law and Diplomacy, 102 (2004) 589, pp. 598–605 [Japanese]. Darrow, supra, note 31, pp. 170–83. See, for example, IMF, The Role of the IMF in Governance Issues – Guidance Note (Approved by the IMF Executive Board, 25 July 1997), paras. 12–16, available at www. imf.org/external/np/sec/nb/1997/nb9715.htm - I2 (accessed 10 May 2010).

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the Poverty Reduction and Growth Facility (PRGF)40 and the Exogenous Shocks Facility (ESF) to refine its policies in order to effectively achieve the Millennium Development Goals adopted by the United Nations.41 The World Bank and the IMF have also been playing an increasingly important role in post-conflict peace-building.42 In the WTO, there has been at least one dispute that has implications for the treatment of non-economic considerations in development policy. In the EC – Tariff Preferences dispute, India challenged an EC measure that imposed conditions for the granting of different tariff preferences to developing countries.43 The conditions included the protection of labor rights, the protection of the environment and the combatting of drug production and trafficking. Although the Appellate Body found that the EC’s measure did not comply with the term ‘non-discrimination’ in paragraph 2(a) of the Enabling Clause,44 it noted that the term does not require the granting of identical preferences to all developing countries, and that different preferences can be granted to some developing countries in order to meet the development, financial and trade needs of individual developing countries.45 This finding suggests that differential tariff preferences could be allowed under the WTO in view of non-economic considerations, provided that such considerations would be in line with the needs of development, finance and trade. Despite these changes in the GEIs, critics continue to argue for wider and more effective participation of stakeholders as well as for consideration of broader policy concerns. Instead of assessing the validity of 40 41

42

43

44

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The PRGF replaced the ESAF. The Millennium Development Goals were derived from the United Nations Millennium Declaration adopted in 2000. The Goals include a set of specific targets to reduce poverty and improve the quality of life in developing countries. United Nations Millennium Declaration, G.A. Res. 55/2, U.N. GAOR, 55th Sess. (U.N. Doc. A/Res/55/2, 2000). K. E. Boon, ‘“Open for Business”: International Financial Institutions, Post-Confl ict Economic Reform, and the Rule of Law’, New York University Journal of International Law and Politics, 39 (2006–7) 513, pp. 522–49. Request for the Establishment of a Panel by India, European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries (EC – Tariff Preferences), WT/DS246/4 (9 December 2002). Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries, Decision of 28 November 1979 (L/4903). Appellate Body Report, EC – Tariff Preferences, WT/DS246/AB/R, adopted 7 April 2004, paras. 157–65. Cf. R. Howse, ‘India’s WTO Challenge to Drug Enforcement Conditions in the European Community Generalized System of Preferences: A Little Known Case with Major Repercussions for “Political” Conditionality in US Trade Policy’, Chicago Journal of International Law, 4 (2003) 385.

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individual proposals presented by critics, the next section examines the theoretical bases of these proposals.

III Emergence of a global legal order and a pluralist approach Section II highlighted the growing influence of recent GEI development policy on the domestic conditions and policies of developing countries. However, this permeating influence is not exclusive to the GEIs. Human rights and environmental institutions whose primary focus is the domestic conditions and policies within states are growing in numbers and influence. The development of these institutions has motivated international law scholars to question the traditional dichotomy between the international and the domestic legal orders,46 and even led some to suggest the emergence of a new global legal order.47 The assumed emergence of a global legal order occasionally underlies the above-mentioned proposals pertaining to the development policy of the GEIs. This section reviews the international law studies related to this assumption; discusses the implications for the GEIs and the limitations of these studies; and presents a pluralist approach as a complementary perspective on the global legal order. At the outset, it is important to note that there has been an increase in attention paid to the dynamic continuity between the international and the domestic legal orders. For example, in explaining why states obey international law, Harold Hongju Koh presents the idea of the ‘transnational legal process’. According to this idea, states internalize international law rules in a variety of public and private, domestic and international forums.48 Further, using the concept of a ‘disaggregated state’, Anne-Marie Slaughter explains that networks of government officials – regulators, judges and legislators – converge national rules, principles and judicial decisions; improve compliance with international 46 47

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P. C. Jessup, Transnational Law (Yale University Press, 1956), pp. 1–16. See, for example, L. M. Friedman, ‘Erewhon: The Coming Global Legal Order’, Stanford Journal of International Law, 37 (2001) 347, pp. 353–63; Y. Blank, ‘The City and the World’, Columbia Journal of Transnational Law, 44 (2005–6) 875, pp. 888–90; G. Teubner, ‘“Global Bukowina”: Legal Pluralism in the World Society’ in G. Teubner (ed.), Global Law Without a State (Aldershot, Dartmouth Publishing Company, 1997), pp. 7–8. H. H. Koh, ‘Transnational Legal Process’, Nebraska Law Review, 75 (1996) 181, pp. 183–86; H. H. Koh, ‘Why Do Nations Obey International Law?’, Yale Law Journal, 106 (1996–7) 2599, pp. 2645–58.

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agreements; and enhance cooperation among them.49 Both Koh and Slaughter share the view that the distinction between the international and domestic legal orders is becoming increasingly blurred; however, their viewpoints differ with regard to the causes. While Koh pays attention to the influence of international law permeating the domestic legal orders,50 Slaughter focuses on the partnership among the domestic actors, which transcends national borders.51 In addition, Martha Finnemore analyzes this blurring phenomenon, using constructivist theory, and criticizes the static and uniform view of state interests. She argues that ‘state interests are defined in the context of internationally held norms and understandings about what is good and appropriate’.52 From among international economic law scholars, Ernst-Ulrich Petersmann, who has published numerous works on constitutionalism, makes a normative argument that it is necessary for national, transnational and international judges and courts to cooperate with each other in order to protect the rule of law in international trade.53 Albeit from different perspectives, these and other scholars are generally in agreement that the international and the domestic legal orders are becoming increasingly interconnected. Based on the growing continuity of the domestic legal orders with the international legal order, some international law scholars have suggested that a new global legal order is emerging.54 Although different scholars have varying ideas on the nature of such a global legal order, the emergence of a new global legal order often implies that the domestic legal orders are enmeshed with international law rules and norms and, in addition, that multiple legal orders – local and national, regional and international, and public and private – are gradually beginning to comprise a single body of law. Further, this implies that autonomy in domestic decision-making is constrained because important policy decisions may not be made solely at the domestic level. They may be either supplemented or even replaced by policy decisions made at the international or other levels, in part because decisions made at the domestic level can later be challenged at the 49

50 51 52

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A. M. Slaughter, A New World Order (Princeton University Press, 2004), pp. 5–14 and 171–95. Koh, ‘Transnational Legal Process’, supra, note 48, pp. 203–5. Slaughter, supra, note 49, pp. 12–14. M. Finnemore, National Interests in International Society (Cornell University Press, 1996), pp. 1–31. E-U. Petersmann, ‘Multilevel Judicial Governance of International Trade Requires a Common Conception of Rule of Law and Justice’, Journal of International Economic Law, 10(3) (2007) 529, pp. 539–47. See supra, note 47.

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international level. Based on these assumptions, the emergence of a global legal order has two major implications that have been identified. First, commentators have highlighted that procedural rights for stakeholders cannot be secured solely by ensuring accountability at the domestic level. In other words, even if stakeholders participate, express their views and influence the domestic decision-making process, a policy decided in this manner can be dismissed at a different forum in a global legal order. Therefore, it is argued that stakeholders – particularly non-state actors – should be allowed to participate in decision-making processes both at the domestic and the international levels. Among the scholars who argue for procedural rights of non-state actors in a global legal order, Benedict Kingsbury, Nico Krisch and Richard Stewart have observed the emergence of a global administrative law. This would provide principles, procedural rules, review mechanisms and other mechanisms relating to transparency, participation, reasoned decision-making and the assurance of legality in global governance, addressed to both state and non-state actors including individuals, market actors and NGOs.55 In a similar manner, Daniel Esty regards transparency and public participation as essential elements for ensuring the good governance of international institutions. 56 In particular, in the context of the WTO, Steve Charnovitz argues that the involvement of NGOs can enhance the legitimacy of international institutions.57 These analyses occasionally draw on other studies in different areas of the social sciences, such as cosmopolitan democracy58 and deliberative democracy.59 The second major implication is that the emergence of a global legal order may require policy coordination at the international level rather than the domestic level. Policy objectives are occasionally in conflict – such as the conflicts between development and human rights and between 55

56

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B. Kingsbury, N. Krisch and R. B. Stewart, ‘The Emergence of Global Administrative Law’, Law and Contemporary Problems, 68 (2005) 15, pp. 23–5 and 27–42. See also B. S. Chimni, ‘Co-Option and Resistance: Two Faces of Global Administrative Law’, New York University Journal of International Law and Politics, 37 (2004–5) 799, pp. 801–6. D. C. Esty, ‘Good Governance at the Supranational Scale: Globalizing Administrative Law’, Yale Law Journal, 115 (2006) 1490, pp. 1530–4. S. Charnovitz, ‘Nongovernmental Organizations and International Law’, American Journal of International Law, 100 (2006) 348, pp. 363–8; S. Charnovitz, ‘WTO Cosmopolitics’, New York University Journal of International Law and Politics , 34 (2001–2) 299. D. Held, Democracy and the Global Order: From the Modern State to Cosmopolitan Governance (Stanford University Press, 1995). J. Habermas, Between Facts and Norms (Cambridge MA, MIT Press, 1996), pp. 107–9 and 118.

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trade and environment – and there may arise a need to make trade-offs between confl icting objectives. Such trade-offs are normally effected at the level of domestic decision-making. However, the emerging global legal order – particularly the permeating influence of the GEIs over domestic policies, on the one hand, and the relatively moderate influence of human rights and environmental institutions on the other – could distort the balance in domestic policy decisions (in a manner that is most likely biased towards economic interests). Therefore, policy coordination may be needed at the international level in order to minimize detriment from this distortion.60 This issue, commonly referred to as the fragmentation of international law rules, has been drawing the attention of international law scholars, who have been discussing various questions such as whether fragmentation is harmful or not, and, if it is harmful, how it can be minimized. In the WTO context, among other aspects, the discussion has thus far focused on whether and how the WTO should coordinate its rules and policies with non-economic international law rules and policies.61 Although most international law scholars appear to agree that the WTO should consider non-economic international law rules and policies, there is considerable disagreement on how this should be done. For example, Robert Howse argues that panels and the Appellate Body should take into account noneconomic values and non-economic international law rules in interpreting the WTO Agreements.62 Joost Pauwelyn goes so far as to suggest that, in certain situations, panels and the Appellate Body should apply nonWTO international law rules that conflict with the WTO rules.63 However, Andrew Guzman questions the legitimacy of the adjudicatory approach suggested by Howse and Pauwelyn, and supports negotiated solutions. He 60 61

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Darrow, supra, note 31, pp. 66–112. See, for example, B. Simma, ‘Fragmentation in a Positive Light’ in ‘Diversity or Cacophony: New Sources of Norms in International Law Symposium’, Michigan Journal of International Law, 25 (2003–4) 845; Report of the Study Group of the International Law Commission (fi nalized by M. Koskenniemi), ‘Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of International Law’, (A/CN.4/L.682, 2006). R. Howse, ‘Adjudicative Legitimacy and Treaty Interpretation in International Trade Law: The Early Years of WTO Jurisprudence’ in J. H. H. Weiler (ed.), The EU, the WTO and the NAFTA: Towards a Common Law of International Trade (Oxford University Press, 2000), pp. 51–61; R. Howse, ‘From Politics to Technocracy – and Back Again: The Fate of the Multilateral Trading Regime’, American Journal of International Law, 96 (2002) 94, pp. 109–12. J. Pauwelyn, Conflict of Norms in Public International Law: How WTO Law Relates to Other Rules of International Law (Cambridge University Press, 2003), pp. 456–78.

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proposes that the WTO should, over time, expand its role to include non-trade issues. According to him, this can be done if the WTO is structured along departmental lines, in order to permit its expansion into new areas while simultaneously taming its trade bias.64 From a different perspective, Andrew Lang argues that reinventing the concept of embedded liberalism creates an understanding, not only of how the trade regime should balance its economic objectives with other social objectives, but also of how intersubjective understandings of the social objectives are constructed.65 Outside the WTO, many argue that the World Bank and the IMF should use their development policies to protect the environment and human rights at the same or even higher levels than those provided for in other international law rules.66 As briefly reviewed above, studies pertaining to a global legal order acknowledge (correctly, for the most part) the current dynamics between the international and the domestic legal orders. Against this background of the emergence of a new global legal order, the development policies of the GEIs have been criticized for their democratic deficit and economic bias, and proposals for improvement have been put forward. In other words, as part of a unified global legal order, the GEIs are required to directly reflect the voices of the constituents of this new order, including non-state actors, without the intervention of the states. Moreover, the GEIs are required to coordinate their development policy with other domains and levels of the new order so as to lend coherence to that order. At first glance at least, these criticisms and proposals appear convincing. As the above reviews pertaining to a global legal order suggest, it is almost undeniable that state and non-state stakeholders need to be given procedural rights in international institutions in some way, and that specialized international institutions with limited mandates cannot operate in complete isolation from other international law rules and institutions. However, the studies that discuss the emergence of a global legal order have one critical flaw: they often overlook the persisting discontinuity between the international and the domestic legal orders. 64

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A. T. Guzman, ‘Global Governance and the WTO’, Harvard International Law Journal, 45 (2004) 303, pp. 307 and 313–48. A. T. F. Lang, ‘Reconstructing Embedded Liberalism: John Gerard Ruggie and Constructivist Approaches to the Study of the International Trade Regime’, Journal of International Economic Law, 9(1) (2006) 81, pp. 101–15. See, for example, Darrow, supra, note 31, pp. 124–33; MacKay, supra, note 33, pp. 544–54, 559–66 and 589–606; Kiriyama, supra, note 37, pp. 607–10; Medenica, supra, note 33, pp. 704–7.

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This discontinuity can be illustrated, for example, by the attitude of domestic courts in major developed countries, which generally are reluctant to directly apply international law rules.67 Moreover, the rules of international agreements often allow the contracting parties discretion on how to internalize international law rules in the domestic legal orders.68 The recent managerial approach to compliance69 also suggests that international law rules may not necessarily assume that the rules are immediately and unconditionally a part of the domestic legal orders. In addition, empirical studies show that the specific context of domestic conditions and local imperatives affects the manner in which a state internalizes its obligations under international law rules.70 These facts suggest that states retain a considerable degree of policy autonomy, despite the development of international law rules and institutions. More importantly, the discontinuity is not only a description of reality but it also has normative value. Our societies are extremely diverse, comprising different cultures, religions, resources, ethnicities, and so on, and this diversity merits protection. The policy autonomy left to each state is to preserve such diversity. This does not imply that diversity justifies rejecting outright the incorporation of international law rules into domestic legal orders. Instead, it suggests that, even if international law rules claim universality and are accepted as such, they acquire particular meanings in the specific sociological contexts of each society.71 The 67

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See, for example, Y. Shany, Regulating Jurisdictional Relations between National and International Courts (Oxford University Press, 2007), pp. 39–77; T. Cottier and K. N. Schefer, ‘The Relationship between World Trade Organization Law, National, and Regional Law’, Journal of International Economic Law, 1 (1998) 83. Cf. H. H. Koh, ‘International Law as Part of Our Law’, American Journal of International Law, 98 (2004) 43, pp. 55–7; Slaughter, supra, note 49, pp. 181–3. A. Chayes and A. H. Chayes, The New Sovereignty: Compliance with International Regulatory Agreements (Cambridge MA, Harvard University Press, 1995), pp. 1–28 (pointing out that coercive measures to sanction violations are ineffective in enforcing international law in today’s international system, and presenting an alternative ‘managerial model’ relying on a cooperative, problem-solving approach such as reporting and monitoring, dispute settlement and capacity-building). A. L. Paulus, ‘The Emergence of the International Community and the Divide Between International and Domestic Law’ in J. Nijman and A. Nollkaemper (eds.), New Perspectives on the Divide Between National and International Law (Oxford University Press, 2007), pp. 228–34; D. J. Fleming and J. P. McEvoy, ‘Domestic Implementation of Canada’s International Human Rights Obligations’ in O. E. Fitzgerald (ed.), The Globalized Rule of Law: Relationships between International and Domestic Law (Ontario, Irwin Law, 2006), pp. 527–41; P. B. Potter, ‘Legal Reform in China: Institutions, Culture, and Selective Adaptation’, Law and Social Inquiry, 29 (2004) 465, pp. 478–86. M. Koskenniemi, ‘International Law in Europe: Between Tradition and Renewal’, European Journal of International Law, 16 (2005) 113, pp. 122–3; Y. Onuma, Human

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attempt to apply an international law rule in a uniform manner should be rejected as the unilateral imposition of a particular viewpoint regarding the rule. In light of the above analyses, this chapter proposes to add a pluralist perspective to the current debate on a global legal order.72 This perspective emphasizes the descriptive and normative value of the discontinuity that persists within the global legal order. While the pluralist approach acknowledges that the international and the domestic legal orders are being converged into an emerging global legal order, it modifies the above-mentioned implications of the global legal order in light of the discontinuity. Its core proposal is to encourage each state to remedy autonomously the democratic deficit and the economic bias in the domestic legal orders, instead of addressing these problems directly at the international level. More specifically, the pluralist approach comprises two distinct arguments.73 First, it cautions against the full participation of all non-state actors at the international level. In fact, since a certain degree of discontinuity remains between domestic legal orders and the international legal order, the need to give non-state stakeholders rights to participate at the international level is questionable. In addition, from a normative perspective, the pluralist approach warns that participation of all non-state actors might negate the value of the discontinuity and replace it with hegemonic dominance of the particular views of those with louder voices. While the wealth of the developed world allows its non-state actors to actively engage in discourse at the international level, non-state actors in the developing world often lack the capacity to access international forums.74 Allowing the full participation of all non-state actors may eventually compromise the interests of the weaker (but sometimes more genuine) stakeholders in the developing world.75 Even if we disregard the disparity that exists among stakeholders’ capacities, in societies that

72

73 74

75

Rights, States, and Civilizations: From a Universalistic Perspective to an Intercivilizational Perspective of Human Rights (Tokyo, Chikuma Shobo, 1998), pp. 141–51 [Japanese]. For the historical roots of legal pluralism and its possible extension to international law, see P. S. Berman, ‘Global Legal Pluralism’, Southern California Law Review, 80 (2007) 1155, pp. 1169–79. For different views on global legal pluralism, see, for example, Teubner, supra, note 47. P. M. Nichols, ‘Extension of Standing in World Trade Organization Disputes to Nongovernment Parties’, University of Pennsylvania Journal of International Economic Law, 17 (1996) 295, pp. 318–19. Y. Fukunaga, ‘Participation of Private Parties in the WTO Dispute Settlement Processes: Treatment of Unsolicited Amicus Curiae Submissions’, Soochow Law Journal, 4 (2007) 99, pp. 105–13.

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comprise multiple constituencies with a wide range of interests, values, religions and ethnicities, enhanced accountability to some of these could imply reduced accountability to others.76 In light of the above considerations, the pluralist approach rejects the notion of allowing the participation of all non-state stakeholders in a single unified forum. Instead, this approach suggests that there are multiple decision-making forums with different constituents, and these are not necessarily sequential. Each constituent should be given a voice at forums that best reflects its values, without being disturbed by non-constituents. Second, the pluralist approach questions the need for unity in the global legal order. In other words, it acknowledges that there is unresolvable fragmentation among international law rules with different scopes and among international institutions with different mandates. On the one hand, this means that the existing rules of international law fail to coordinate the conflicts among international law rules and institutions.77 On the other hand, it also means that the conflicts should be left untouched, to a certain extent, in light of the fact that international society lacks the shared hierarchical order of various interests and values that is indispensable to coordinate conflicting rules and policies. There is a suggestion that the policies of the GEIs should be adjusted in light of ‘justice’ considerations;78 however, the notion of what is ‘just’ varies in each society and cannot be determined in a unitary manner in the international sphere.79 The pluralist approach argues that the discontinuity enables the unresolvable fragmentation in the international legal order to be resolved in domestic legal orders in accordance with the hierarchy that each state embraces. Doing otherwise would threaten the diversity of our separate nations.

IV

Practical implications of the pluralist approach

Th is section sketches out the practical implications of the pluralist approach for GEI development policy. First, the GEIs should determine cautiously the scope of stakeholders participating in their decision-making processes. The wider participation 76

77 78

79

N. Krisch, ‘The Pluralism of Global Administrative Law’, European Journal of International Law, 17 (2006) 247, pp. 263–74. ILC Report, supra, note 61. F. J. Garcia, ‘Global Justice and the Bretton Woods Institutions’, Journal of International Economic Law, 10(3) (2007) 461, pp. 464–7. Rajagopal, supra, note 28, pp. 221–4.

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of NGOs from developed countries runs the risk of the imposition of Western values on developing countries without considering the values of the latter.80 The pluralist approach insists that effective participation in the decision-making process of the GEIs should be ensured for genuine constituents of developing countries. The GEIs must consider in entirety the interests and values of the people who actually live in developing countries and who are actually affected by their development policies, instead of considering the interests of Northern-based NGOs that might erroneously presume that they represent ‘higher’ or more advanced values.81 In this regard, it is worth reassessing the two landmark cases wherein the World Bank, for the first time, responded to the voices of the NGOs: the Polonoroeste project and the Narmada Valley project. The objective of the former was to fund Brazil’s project to build a highway and feeder roads, partly with the expectation that the project would contribute to poverty alleviation. However, the Bank later gave up funding the project in the face of NGO warnings that the project could have serious consequences for ecology and the indigenous population. With regard to the Narmada Valley project, the World Bank decided to help the Indian government build over 3000 dams along the Narmada River in order to increase irrigation capacity and power generation. However, this project was expected to result in the dislocation of millions of people. NGOs were critical of the human rights and environmental costs of the project and launched international campaigns against it; they ultimately succeeded in forcing the Bank to withdraw funding.82 While these cases are often cited as successful examples of the participation of NGOs in the GEIs’ development policy-making and implementation, they also reflect the disproportionate influence that US-based NGOs have on World Bank policy. In both projects, the NGOs not only 80

81

82

N. Woods, ‘Making the IMF and the World Bank More Accountable’ in Reforming the Governance of the IMF and the World Bank , supra , note 33, pp. 149 and 159–66. See also Rajagopal, supra , note 28, pp. 258–62. Other commentators point out the tremendous influence the United States has over GEI policy. See, for example, N. L. Bridgeman, ‘World Bank Reform in the “Post Policy” Era’, Georgetown International Environmental Law Review, 13 (2001) 1013, pp. 1020–2; Note (M. Elahi), ‘The Impact of Financial Institutions on the Realization of Human Rights: Case Study of the International Monetary Fund in Chile’, Boston College Third World Law Journal, 6 (1986) 143, p. 145. Cf. Y. Blank, ‘Localism in the New Global Legal Order’, Harvard International Law Journal, 47 (2006) 263, pp. 274–6. For a detailed analysis of these projects, see, for example, R. Wade, ‘Greening the Bank: The Struggle over the Environment, 1970–1995’ in Kapur et al., supra , note 4, pp. 637–53 and 687–709.

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approached the World Bank directly but also lobbied US congressmen, warning them of the possible disastrous consequences of the projects. In fact, the support of the US Congress, which has considerable influence in the World Bank, was crucial to the success of the NGOs’ campaigns. This fact implies that US-based NGOs are in a better position to influence the Bank’s policy than NGOs located elsewhere. Thus, if the World Bank increases the participation of all NGOs in its policy-making, the result may be that US-based NGOs further reinforce their influence over the World Bank’s policy: they can affect the Bank’s policy by lobbying the US Congress and by addressing the World Bank directly. In this light, the pluralist approach suggests that the World Bank should interact more actively with the local communities in developing countries rather than with NGOs in general, in order to prevent the voices of the genuine stakeholders from being drowned out by others.83 The second practical implication of the pluralist approach is that, although the GEIs should pay heed to the non-economic rules of international law, they should also be aware of the different implications of these rules in the context of development in each developing country. The pluralist approach does not deny that the GEIs, as part of the global legal order, should endeavor to align their policies with other areas of international law84 and collaborate with other international institutions.85 Such efforts can help the GEIs avoid unnecessary conflicts with non-economic international law rules and effectively pursue sound 83

84

85

Rajagopal, supra, note 28, pp. 174–89. In addition, efforts should also be made to improve developing country government participation, for example, by improving their voting procedures in the GEIs. See, for example, C. Jakobeit, ‘Enhancing the Voice of Developing Countries in the World Bank: Selective Double Majority Voting and a Pilot Phase Approach’ in Buira, supra, note 33, pp. 213, 215–17 and 223–9. Cf. UN Millennium Project, Investing in Development: A Practical Plan to Achieve the Millennium Development Goals (2005), pp. 211–22. For a debate on the implications for the GEIs of the international legal instruments on the protection of indigenous people, see J. W. Head, ‘Protecting and Supporting Indigenous Peoples in Latin America: Evaluating the Recent World Bank and IDB Policy Initiatives’, Michigan State Journal International Law, 14 (2006) 383, pp. 403–9 and 418–23; F. MacKay, ‘The Draft World Bank Operational Policy 4.10 on Indigenous Peoples: Progress or More of the Same?’, Arizona Journal International & Comparative Law, 22 (2005) 65. Berman, supra, note 72, pp. 1196–1201. The World Bank and the IMF have been intensifying their cooperation as the duplication of their operations increases: D. D. Bradlow and C. Grossman, ‘Limited Mandates and Intertwined Problems: A New Challenge for the World Bank and the IMF’, Human Rights Quarterly, 17 (1995) 411, pp. 433–4. In addition, the WTO has started cooperating with development institutions under the Integrated Framework for Trade-Related Technical Assistance to Least Developed Countries, launched in 1997. ‘Working Together to Enable LDCs to be Active Players and

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development policies.86 However, the GEIs should be mindful of the fact that their primary objective is to generate economic benefits, through either development assistance or trade liberalization, and not to enforce international law rules in general.87 It is essential for the GEIs to discover the different implications for non-economic international law rules in the specific context of a particular developing country.88 Th is assumes greater importance in light of the permeating influence of GEI development policy on the domestic conditions and policies of developing countries. At this point, it is again instructive to review the above-mentioned landmark cases. Although the positive aspect of the cases is emphasized, in that the World Bank made reasonable decisions not to fund the projects in consideration of non-economic concerns, it should not be disregarded that the World Bank’s withdrawal of funds does not necessarily put an end to the planned projects themselves. For example, in the case of the Narmada Valley project, the Indian government continued to undertake dam construction even after withdrawal of the World Bank funds.89 Moreover, it is also significant to note that the World Bank’s

86

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88 89

Beneficiaries of the Global Trading System: Integrated Framework Explained’, available at www.integratedframework.org/fi les/non-country/IF_explained.pdf (accessed 10 May 2010). The WTO has also initiated the ‘Aid for Trade’ project, which seeks to mainstream trade into development strategies; Recommendation of the Task Force on Aid for Trade, (WT/AFT/1, 2006). See also J. P. Trachtman, ‘The Missing Link: Coherence and Poverty at the WTO’, Journal of International Economic Law, 8(3) (2005) 611, pp. 619–21. Bradlow and Grossman, supra, note 85, pp. 434–8; Darrow, supra, note 31, pp. 282–4 and 287–93. For the relationship between loan agreements and other international law rules, see A. Broches, ‘International Legal Aspects of the Operations of the World Bank’, Recueil des Cours, 98 (1959-III) 297, pp. 343–53; J. W. Head, ‘Evolution of the Governing Law for Loan Agreements of the World Bank and Other Multilateral Development Banks’, American Journal of International Law, 90 (1996) 214, pp. 230–4. The fact that the World Bank and the IMF are specialized agencies of the United Nations does not affect this conclusion. It should also be noted that the World Bank and the IMF are relatively independent from the United Nations system as compared to other specialized agencies. See Agreement between the UN and the International Bank for Reconstruction and Development, 16 UNTS. 346, (15 November 1947), Article I, para. 2; Agreement between the UN and the International Monetary Fund, 16 UNTS. 326, (15 November 1947), Article I, para. 2. See also S. I. Skogly, The Human Rights Obligations of the World Bank and the International Monetary Fund (London, Cavendish Publishing Limited, 2001), pp. 103–5 and 151–2; Boon, supra, note 42, pp. 542–3. At the same time, the fact that the WTO is external to the United Nations system does not isolate it from the rules of international law adopted under the United Nations. Boon, supra, note 42, pp. 575–9. K. Dan, The World Bank and Non-Governmental Organizations (Tokyo, Tsukiji Shokan, 2006), pp. 183–4 [Japanese].

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projects often produce mixed results: while they may undermine the environment or human rights, they may be expected to achieve other similarly important interests and values, such as poverty reduction. Although these two projects illustrate cases in which environmental and human rights costs undoubtedly outweigh other benefits, there may be other cases wherein projects would require a different decision after the weighing and balancing of competing interests and values. Therefore, it is essential to consider carefully both developmental and non-economic concerns, and to adjust non-economic rules of international law and other values in accordance with the specific context of each developing country. In other words, it is not possible to apply international law rules in a uniform manner. The importance of adjusting non-economic rules and values based on specific contexts can also be illustrated by the experiences of the World Bank in promoting political reform in developing countries in order to combat corruption or restore governance in post-confl ict situations. The World Bank often attempts to achieve its goals by introducing a one person, one vote electoral system and a gender-balanced representation that are based on the principles of democracy. However, such attempts have occasionally encountered fierce resistance from local communities that claim that their traditional decision-making processes were incompatible with the values of the West .90 For example, in Indonesia, the World Bank launched a project to establish elected and gender-balanced sub-district councils in order to eradicate a political culture of corruption and to decentralize political power. Despite the overall success of the project, the councils occasionally became paralyzed due to their rejection by the traditional authorities that were excluded from the councils.91 Learning from the Indonesia experience, the Bank adopted a more flexible policy when establishing village-level councils in East Timor; they gave councils the option of making determinations by consensus and open ballot, and left traditional leaders with the responsibility of organizing the process for selecting nominees to the councils.92 Although the World Bank failed

90

91 92

F. Rawski, ‘World Bank Community-Driven Development Programming in Indonesia and East Timor: Implications for the Study of Global Administrative Law’, New York University Journal of International Law and Politics, 37 (2005) 919, pp. 930–2. Ibid., pp. 924–32. Ibid., pp. 938–40; World Bank, ‘Timor-Leste: Project Performance Assessment Report’, (27 June 2007), paras. 3.11–15. See also T. A. Kelley, ‘Exporting Western Law to the

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to suppress the opposition to the councils, it was a valuable attempt to socialize democratic principles in accordance with the traditions and values of a developing country. Recently, the World Bank successfully completed a pilot project in Ghana which aimed to integrate and improve the involvement of traditional authorities instead of bypassing them.93 These cases demonstrate the strength of the pluralist approach of endorsing the multiple meanings of seemingly universal rules and values, including democracy.

V

Conclusion

The development policies of the GEIs have been increasingly impacting on the domestic conditions and policies of developing countries. It is against this background that the GEIs have been criticized for their democratic deficit and economic bias, and have been urged to allow for the wider and more effective participation of non-state stakeholders and to take into account both economic and non-economic considerations. These criticisms have important theoretical implications in that they suggest the emergence of a global legal order. While this chapter does not deny the emergence of a global legal order, it insists on the persistent discontinuity that remains within the global legal order. The discontinuity gives a state sufficient autonomy to decide, on its own, how to adapt its rules and policies to international law. Only with this discontinuity can we preserve the diversity of our societies. When the GEIs formulate and implement development policy, they should be aware of the descriptive and normative value of the discontinuity. This chapter suggests that the pluralist approach would enable them to do so.

93

Developing World: The Troubling Case of Niger’, George Washington International Law Review, 39 (2007) 321, pp. 329–33 and 362–6. World Bank, Implementation Completion and Results Report on a Grant in the Amount of US$ Million 5.05 to the Republic of Ghana for Promoting Partnership with Traditional Authorities Project (31 May 2007).

3 Fragmentation, openness and hegemony: adjudication and the WTO Jason Beckett

I

Introduction

Contemporary international law is trapped between an incomprehensible reality of fragmentation and a sentimental dream of constitutional order: between Apology and Utopia. The process of fragmentation is a direct result of the technicalisation and specialisation inherent in the modern project of a professional international law: the attempt to model international law ever more closely on its municipal counterpart; to secure for international law the autonomy of national law. Constitutionalism forms the limit point of the juridical imagination: the ‘iron cage’, or condition of possibility, of modern juridical thought. As a result, international lawyers generally, and (incorporationist) trade lawyers in particular, have sought refuge in the idea of ‘coherence’. In accordance with this ideal, the disparate branches of a fragmented international law are to, and thus can, be brought, non-coercively, into a rational order – an order within which the essence of each sub-system is preserved, and their surface differences are shown to yield an underlying harmony of interests. However, this dream is unsubstantiated! In reality, coherence represents not a natural confluence of interests, but the unequal compromise of competing worldviews caught in mortal conflict. Because coherence is an unattainable goal, the search for ‘coherence’ becomes the wilful disregard of a reality of conflict, the hegemonic imposition of a particular project which has, always already, subsumed and regulated its ‘others’. The search for coherence can be nothing but a denial of reality, and a refusal to search after the necessarily complex responses to the challenges the process of fragmentation offers. Coherence, perceived as an alternative to strict constitutionalism, is an attempt to secure a level cohesion on a par with municipal legal orders. 44

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Given its structural pre-eminence within international law, trade law’s response to this reality is of particular importance. The pursuit of coherence disguises a hegemonic strategy: the assumption of constitutional power, of political authority, but in denial, and thus without the corollary acceptance of political responsibility.

II

Technicalisation

It is convenient to take Koskenniemi’s history of the development, professionalisation and technicalisation of public international law (PIL) as our starting point. This presents ‘modern’ international law as a project of professionalisation, technical perfection and isolation; an attempt to insulate (or at least separate) international law from power politics between nations. In short, to model international law on its domestic counterpart.1 This process should be particularly associated with Hersch Lauterpacht and Arnold MacNair, and with the establishment of the British Yearbook of International Law and the International Law Reports, alongside – commentating and reporting upon – the Permanent Court of International Justice (PCIJ), and the Covenant of the League of Nations.2 International law would be recognised as a profession, as a distinct – and valuable – system in international life. The authority of law would be based on its claims of technical expertise, and depoliticisation. PIL could then be conceived of as a single legal system, which – like any other complete system – could provide a single right answer to any given legal problem. The ideological legitimation of PIL would be directly analogous to that of domestic law: law provides singular answers to contested problems.3

III Fragmentation: the telos of specialisation Weber and Luhmann, functional differentiation However, Koskenniemi also notes that ‘the problems faced by public international law today … result in large part from that strategy … of 1

2

3

This would also have a decisive effect on the imagination of, particularly European, international lawyers and on their stock responses to crises. See note 61 and accompanying text, infra. M. Koskenniemi, ‘The Fate of Public International Law: Between Technique and Politics’, Modern Law Review, 70 (2007) 1, p. 2. N. MacCormick, ‘The Concept of Law and “The Concept of Law”’, Oxford Journal of Legal Studies, 14 (1994) 1.

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becoming technical ’.4 Fragmentation – the perceived disintegration of PIL into discrete sub-systems or ‘self-contained regimes’ (e.g. trade law, environmental law, human rights law) – whether it is perceived as a problem or not, results from that same strategy. In other words, there is a direct – and, indeed, inexorable – link from technicalisation to fragmentation, a link inherent in the process of modernity itself. Philosophically, or sociologically, we can term this process the division of labour, which leads to ‘functional differentiation’.5 As labour, or knowledge, increases, and becomes diff use, the role of generalist becomes ever less feasible; professionalisation then leads – inexorably, and perhaps harmlessly – to specialisation. No one would be expected, for example, to be proficient in New Zealand law, or English law (nor would any self-respecting law school teach a course in either). Yet, at least sometimes, at least some of us, are expected to be proficient in international law: indeed, some even claim this proficiency for themselves.6 We can see the beginnings of a paradox here: within our specialisations, ‘we’ perceive contestation, ambiguity, vagueness and indeterminacy; yet outside our specialisations, we intuitively expect/assume the law to be clear, or at the very least significantly clearer. Th is is a vital point, the implications of which will be examined later in this chapter. The important point for now, however, is that increasing specialisation necessarily leads to fragmentation, be it the division of labour, functional differentiation, or, most drastically yet most plausibly, operational closure.

IV

Solipsism and operational closure: being an expert

Solipsism is the process of perceiving the world through ourselves, it is an epistemic necessity, a precondition of imposing intelligibility on the world. As MacIntyre has noted:

4 5

6

Koskenniemi, supra, note 2. See M. Weber, Science as a Vocation; see also W. Rasch, Niklas Luhmann’s Modernity: The Paradoxes of Differentiation (Stanford University Press, 2000); and N. Luhmann, Law as a Social System (Oxford University Press, 2004). B. Simma and D. Pulkowski, ‘Of Planets and the Universe: Self-Contained Regimes in International Law’, European Journal of International Law, 17 (2006) 483.

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to share a culture [is] to share schemata which are at one and the same time constitutive of and normative for intelligible action by myself and are also means for my interpretations of the actions of others.7

Solipsism is a closure, by means of which we impose sense upon the world by forcing its raw data into categories we understand. It is also a community concept, the schemata or categories we apply are not created by us; they are inherited.8 Thus we interpret the strange on the basis of analogies with the familiar. The specifically Luhmannian insight is that this closure causes different social systems to interpret the world differently. Indeed, taken to its logical conclusion, it causes the different systems to ‘construct’ entirely different worlds. Worlds are nothing more than the sum of their interpretations, because there is no direct access to a pre-theoretical reality.9 This gives rise to the theory of operational closure, and the distinctions between ‘system’ and ‘environment’. It also underwrites the claim that (individuals generally and) experts or functionaries in particular act within these systems as (mere) ‘points of attribution’, or ‘semantic artefacts’.10 Put simply, lawyers think like lawyers, economists like economists, moralists like moralists, etc. Each employs a specific coding to interpret the world around them, and thus the same ‘reality’ appears differently from different perspectives.11 Members of each system perceive the world only in terms of that system: for lawyers the world is understood in terms of legal/illegal; for economists profit/loss; for moralists good/bad. But these codes have no meaning outside each system. For each system, all other systems (and the communications they produce) are simply part of the environment – ‘noise’ which can be interpreted only in terms of that 7

8

9

10 11

A. MacIntyre, ‘Epistemological Crises, Dramatic Narrative and the Philosophy of Science’, The Monist, 60 (1977) 453. See further, J. Beckett, ‘Mercy, Particularity, and the Map from the Void’, Archiv für Rechts-und Sozialphilosophie, 93 (2007) 217. R. Darnton, ‘Philosophers Trim the Tree of Knowledge: The Epistemological Strategy of the Encyclopedie’ in The Great Cat Massacre, and Other Episodes in French Cultural History (London, Penguin Group, 2001), pp. 191–213. See, for example, A. Camus, The Rebel (London, Penguin Group, 2000), pp. 230–5; G. Teubner, ‘How Law Thinks’, Law and Society Review, 23 (1989) 727. Teubner, ibid. N. Luhmann, Theories of Distinction: Redescribing the Descriptions of Modernity (Stanford University Press, 2002) and Luhmann, Law as a Social System, supra, note 5; Teubner, supra, note 9 and Teubner, Law as an Autopoietic System (Oxford, Blackwell, 1993); W. Rasch, Sovereignty and Its Discontents: On the Primacy of Conflict and the Structure of the Political (London, Birkbeck Law Press, 2004); J. Beckett, ‘Confl icting Orders: How Peace is Waged’, Leiden Journal of International Law, 20 (2007) 281; J. Black, ‘Constitutionalising Self Regulation’, Modern Law Review, 59 (1996) 24.

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system’s code.12 Thus, where ethics may declare pollution ‘bad’, the law will understand a call to make such conduct (or what it imagines ethics to consider ‘bad’ conduct) ‘illegal’. However, economics will simply perceive an additional cost (the fine) imposed on certain forms of waste disposal. The basic proposition of this chapter is that this process of operational closure also takes place within the law, and underwrites and explains the process of ‘fragmentation’ which international law is currently experiencing.13 Moreover, electing to understand and explain the phenomenon in this way leads to new insights and an enhanced understanding of the operation of this process, and what may be done about it. Conversely, failing to understand fragmentation in this way leads to increasingly pathological responses to it.

The nature of expertise Expertise then is something we develop, but it is also something which restricts us. To understand certain things is to fail, or refuse, to understand others. Expertise becomes a worldview, in confl ict with alternative expertise. The old adage ‘jack of all trades, master of none’ has as its inevitable corollary the fact that to master one ‘trade’ is the work of a lifetime; and lawyers are no more lawyers than constructors are constructors. Each field has undergone its own processes of specialisation and consequent differentiation; the latter into, inter alia, builders, joiners, plumbers, electricians, architects and interior designers. Th is is the division of labour, the process of fragmentation. Specialisation occurs because it is efficient and expedient. The division of labour allows more to be accomplished. In law, specialisation facilitates the accumulation of expertise in specific areas, at the expense of ignorance in others (where expertise will be accumulated by others, ignorant of the complexities in the former area). This involves the division not only of labour, but of the law; a division into functional areas, or specialisations: war/force; human rights; environment; trade; organisations, etc. Thus specialisation allows for increased focus and depth, for the discovery and overcoming of uncertainty and ambiguity; but also for the creation of dissension, disagreement, incoherence and indeterminacy. These may, in turn, be overcome, but at the price of consensus 12 13

Teubner, ‘How Law Thinks’, supra, note 9. G. Teubner and A. Fischer-Lescano, ‘Regime-Collisions: The Vain Search for Legal Unity in the Fragmentation of Global Law’, Michigan Journal of International Law, 25 (2004) 999.

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loss.14 Fragmentation is inexorable in the process of technicalisation, specialisation, expertise. Yet this differentiation is the motor of progress: the ‘negative’ and the ‘positive’ are inevitably intertwined.15

V

The functioning of operational closure Self-reference and coding

It has been noted, and seems widely accepted, that ‘no [self-contained] regime can be created outside the scope of general international law.’16 From this some have made the false syllogistic deduction that no such regime can exist outside the scope of general international law. This relies on the claim of lineage, or genealogy: the regime was created by PIL, and it is therefore (always and forever) part of international law. But this is simply not so. Biologically, it is tantamount to claiming that we remain, physically, part of our mothers. A more legal analogy might be that of former colonies – particularly those (like New Zealand) which were given independence voluntarily.17 In these cases, the legal system of the new state began as a part of the legal system of the colonial power; it was created within that system, but was not therefore inexorably bound to that system, not fated to remain a part of that system for all eternity. Arguably at least, the system could not have been created outside the metropolitan legal order, but it could break free of that system. It could declare its own independence, and sever its reliance on its former master. Thus the question cannot be logically foreclosed in this way. It is not a question of whether self-contained regimes can exist, but rather of whether they do exist. To return to the colonial analogy: in Luhmannian terms, the question of separation, of closure, arises when the colonial system wishes to depart from the judgements, and hence authority, of the metropolitan order. New Zealand law wishes to end its dependence on, and thus subservience to, British law. Separation is consummated when 14

15 16

17

M. Koskenniemi, ‘International Law in Europe: Between Tradition and Renewal’, European Journal of International Law, 16 (2005) 113, p. 119. Weber, supra, note 5. A. Lindroos and M. Mehling, ‘Dispelling the Chimera of “Self-Contained Regimes”: International Law and the WTO’, European Journal of International Law, 16 (2005) 857. Actually, this seems equally true of states founded on revolution, as even there the allocations (of property, rights, etc.) of the former, colonial, system generally remain as the default position, or foundation of the new legal system.

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the question no longer stands as legal/illegal in a British legal order, but in the New Zealand one. The same question can be formulated – albeit with different force and emphases – in relation to ‘general PIL’ and the differentiated (sub?) systems of the contemporary international order.

Normative closure and cognitive openness ‘Luhmann views modernity as the fragmentation of society into a plurality of autonomous discourses characterised by the loss of a unifying mode of cognition.’18 The same division can be applied by analogy to international law, and the various ‘sub-systems’ or ‘regimes’ which have evolved from, and perhaps broken free of, international law. The moment at which a system breaks free – at which ‘hypercircular closure’ takes place – is the moment in which its own code becomes autonomous.19 Thus WTO autonomy came into being at the moment that the ‘Trade and …’ (‘linkage’) debate began to function as an independent discourse. This discourse presupposes a triple distinction between ‘WTO legal/illegal’, ‘general PIL legal/illegal’, and other sub-systems’ legal/ illegal.20 However, it is important to understand the functioning of this closure. Neither systems nor sub-systems exist in isolation. Autopoeisis is an evolution of systems theory, which, while accepting the postulate that systems are affected by their environment, that they are adaptive and open, disputed the seemingly obvious point ‘that they could be directly influenced, regulated or even determined by their environment’.21 Autopoeisis accepts that, while allowing regulating actors to ‘intervene directly by defining environmental constraints’ has some effect, it ‘became increasingly clear’ that this impact was unexpected, the system did not behave/ react as expected, or desired. A return to the idea of ‘closed systems’ was absurd – the environment did clearly affect the system – so the idea of ‘self-description’ was developed to provide a point of reference toward which the system can be organised. This ‘basic circularity and organisational closure’ alone provides

18 19 20

21

Teubner, supra, note 9, p. 738. Teubner, Law as an Autopoietic System, supra, note 11, pp. 25–46, especially 33. Actually, this may only be a twin distinction. As I shall go on to argue, ‘general PIL’ is simply another sub-system, with neither greater, nor lesser, autonomy than the others. Teubner, Law as an Autopoietic System, supra, note 11, p. 13.

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stabilising mechanisms.22 This is what moves us beyond the stalled binary debate of openness/closure:23 systems are both open and closed. That is, systems are cognitively open (they are aware of their environment, and changes therein), but normatively closed: they cannot change their basic coding. As a result, their cognitive openness is conditioned by their normative closure. Put differently, closure effects their capacity to perceive and interpret ‘reality’ (the environment). The environment can only be made sense of in terms of the system’s own code, because there must be a self-aware system to interpret that reality. Closure takes place at two levels: 1. The question of relevance (legally relevant/irrelevant) 2. The question of effect (legal/illegal)

The internal environment Operational closure is offset by, but also conditions, a ‘cognitive openness’. In brief, systems can perceive the world outside themselves – which, importantly, includes the other systems – but can understand this world only in terms of their own closure, their coding. Thus, for law the world can only be perceived in terms of legal/illegal; for economics in terms of profit/loss; science, true/false; morality, good/bad; etc. Consequently, no system can understand any other system; there is neither communicability, nor even translatability.24 Instead, each system must strive to make sense of the actions – and especially the communications – of the others, in terms of its own operational closure. Th is leads to the radical constructivism of the Luhmannian method; and on to the idea of the ‘internal environment’.25 This is an epistemic space within which each system constructs its own ‘world’; the constructions of the other systems are also located here, and it is here (alone) that systems can act intelligibly. However, their actions are intelligible only to themselves; to the other systems, including that being ‘regulated’, the actions are mere ‘noise’, ‘perturbations’ which must be constructed in terms of that system’s own code, (re)constructed within its internal environment. ‘The “binding decisions” 22 23

24 25

Ibid., p. 15–16. As exemplified in the ongoing debate between Pauwelyn and Trachtman; see infra note 57 and accompanying text. See notes 59–63, and accompanying text, infra. N. Luhmann, Social Systems (Stanford University Press, 1995), pp. 189–93.

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that are the outcomes of the political system [are] the perturbations that irritate other systems.’26 Operational closure is an absolute bar on intersystemic understanding or communication. Each system, by identifying unity differently, effectively constructs and then observes (regulates) a different world from any other system. This is equally true of the differentiation within (international) law, and precludes escape into a fantasy of a common language or perspective shared by lawyers. This gives a different perspective on the fragmentation of PIL, which should now be understood as a series of differentiated, operationally closed, (sub-)systems, aware of, but not in (direct) contact with one another – a series of systems each of which believes itself complete, and in touch with the environment, but each ‘in fact’ communicating with, and regulating, only itself, and its interpretations of the others.

Applying foreign law: expertise effaced The ‘trade and …’ or ‘linkage’ debate is, in effect, a question of interdisciplinarity, linked to, yet separate from, the other questions of interdisciplinarity27 inherent in the application of (international) law. Like any question of interdisciplinarity, the debate entails two reductive movements which efface the expertise claimed. First, the external (‘and’ ‘linked’) discipline has to be constructed as a coherent whole, whose ‘norms’ can be readily (incontestably) identified and ‘incorporated’ by the dominant discourse (trade law). Second, this process of incorporation – i.e. in fact the process of construction outlined above – must recreate these ‘norms’ as trade norms, or ‘facts’ within trade law: as trade law variables. The first movement returns us to the paradox outlined at the beginning of this chapter;28 the second will lead us to the quite separate paradox with which the chapter concludes.29 When law is described to laypersons, it is presented as a machine,30 producing a singularly correct answer to any given question; similarly economics, political science, natural science, etc. Yet, for practitioners, each discipline is recognised as a field of contestation. Nonetheless, so-called interdisciplinarity attempts to suppress the paradox whereby 26 27 28 29 30

Rasch, supra, note 11, p. 44. For example, the interface between law and economics, or law and science. See notes 6 and 7, and accompanying text, supra. See notes 76 and 77, and accompanying text, infra. See, for example, M. Berlins and C. Dyer, The Law Machine, 5th edn (London, Penguin Group, 2000).

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the ‘dominant’ discourse is perceived as a field of contestation, and the ‘minor’ discipline is not. Think, for example, of law and economics, or international law–international relations. As a rule, the minor discipline is used as a strategic tool (weapon) in the battles over the major one. Th is requires that that discourse be presented as coherent and authoritative. Richard Posner’s dalliances with ‘economics’ in his ‘Law and Economics’ thesis/school provide a perfect illustration. Posner (presumably unsatisfied with his institutional authority) seeks the additional support of the ‘science’ of economics31 without ever engaging the disputes and confl icts within economics, let alone the external, or historical, critiques of economics (as a nonscientific discourse/discipline). His (preferred) version of economics is presented as authoritative, coherent and, moreover, capable of addressing ‘extra-economic’ questions relating to the assignment of value to social facts.32 Even those exceptions (e.g. Anne-Marie Slaughter), who nail their colours to the mast, present their version/stream of the minor discipline (e.g. international relations; IR) as both coherent and incontestable. In fact, it is neither; it is speculative and contested.33 The linkage debate requires an analogous presentation. Trade law is open-ended and indeterminate, hence it must be supplemented (for its content as well as its legitimacy) by other regimes of international law, e.g. human rights or environmental law. Thus: In its very fi rst case, the Appellate Body of the WTO observed that the WTO agreements ‘should not be read in clinical isolation from public international law’ and later specified that ‘[c]ustomary international law applies generally to the agreements between WTO members’.34

Again, a twin movement should be highlighted: first, the move to gain advantage within trade law (that is, in favour of one of (any) two (or more) positions within WTO discourse); second, the move to legitimise trade 31

32

33

34

R. Posner, Economic Analysis of Law, 7th edn (Austin TX, Wolters Kluwer Law & Business, 2007). P. Schlag, ‘“L’hors de Texte, C’est Moi” – The Politics of Form and the Domestication of Deconstruction’, Cardozo Law Review, 11 (1989–90) 1631. J. Goldstein, M. Kahler, R. O. Keohane and A-M. Slaughter, Legalization And World Politics (Cambridge MA, MIT Press, 2001); A-M. Slaughter, ‘International Law in a World of Liberal States’, European Journal of International Law, 6 (1995) 503; contra see J. E. Alvarez, ‘Do Liberal States Behave Better? A Critique of Slaughter’s Liberal Theory’, European Journal of International Law, 12 (2001) 183. Koskenniemi, supra, note 2, p. 16.

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law’s hegemonic/expansionist tendencies.35 Moreover, this process of elision or effacement is inevitable. If the external discourse is to be ‘effectively’ employed, it must be presented (by its proponents in the dominant discourse) as coherent and authoritative; its norms self-identifying.36 This is particularly true when we consider its ‘customary’ norms, which can be applied as a part of ‘general international law’. However, custom actually adds yet another layer of complexity – because identifying customary norms entails privileging one theory above the others in the highly contested arena of the ontology of CIL.37 Quite simply, the norms of other regimes are not self-evident in the way in which incorporationist discourse demands and requires. This point is very well illustrated by Philip Alston’s reconstruction and critique of the work of Ernst-Ulrich Petersmann.38 In essence, Alston levels all of the above charges at Petersmann. He has effaced the complexities of human rights discourse; he has recast that discourse in his own (neo-liberal) economic terms; and he has used this recast discourse as a strategic tool within trade law. In doing so, he has reduced human rights to commodities, trade (law) variables held ‘for instrumental purposes’ – now negotiable like any other commodity. He has robbed human rights of their essence and specificity. But all, of course, for the very best of reasons.39

Andrew Lang and the ‘trade and …’ debate In a very interesting and ambitious intervention in the debate, Andrew Lang has suggested that we abandon the ‘trade and …’ debate,40 and recognise instead that neither the ‘trade’ nor the ‘and …’ are naturally given: both are social constructs. The effect of the ‘trade and’ debate, according to Lang, is to guarantee the subservience of the ‘and’ or minor 35 36

37

38

39

40

Beckett, supra, note 11, p. 311. Which they are not; see, for example, R. Dworkin, Law’s Empire (Cambridge MA, Harvard University Press, 1986), pp. 65–6. See J. Beckett, ‘Countering Uncertainty and Ending Up/Down Arguments: Prolegomena to a Response to NAIL’, European Journal of International Law, 16 (2005) 213. P. Alston, ‘Resisting the Merger and Acquisition of Human Rights by Trade Law: A Reply to Petersmann’, European Journal of International Law, 13 (2002) 815. It should be noted that Petersmann has offered a response to Alston, see E-U. Petersmann, ‘Taking Human Dignity, Poverty and Empowerment of Individuals More Seriously: Rejoinder to Alston, European Journal of International Law, 13 (2002) 845. A. T. F. Lang, ‘Reflecting on “Linkage”: Cognitive and Institutional Change in the International Trading System’, Modern Law Review, 70 (2007) 523.

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discourses, and the inherent supremacy of current understandings of trade, and thus of trade law. In short, the ‘trade and’ debate serves only to privilege trade law, in structure and content: it does little or nothing for the external regimes whose legitimacy it recuperates for itself.41 I agree with Lang that the ‘trade and’ debate, in reifying a particular understanding of liberal trade, forms a ‘discursive structure’ through which critiques of the liberal trade project are understood.42 Moreover, he is also correct that this structure (the understanding of the liberal trade project) has changed over time.43 However, I disagree with his assumption that trade lawyers have control over this process of change, and he is wrong to assume that they have been ‘profoundly affected by external criticism’, becoming ‘a more diverse group than ever before’44 while still remaining trade lawyers. These claims simply contradict, unless they are founded on an implicit belief in the capacity of trade lawyers to transcend the confines of their discipline, reach the Archimedean point,45 and redefine the trade project – a claim itself at odds with Lang’s focus on discursive structure and ideological evolution. The paper betrays a belief that ‘external’ values can be assimilated as internal values, and yet ‘retain’ their original structure, effect and significance. Once more: they never had such a structure in the first place (other areas of PIL are contested also); and second, to define them as part of the trade structure is precisely to define them as trade values, i.e. to endlessly perpetuate their subordination.46 Moreover, and finally, it is trade lawyers who are to carry out this process of assimilation – whilst concurrently re-imagining themselves – and thus it is as trade variables that the external norms would be incorporated. The alternative is that trade lawyers lose that homogeneity, that shared focus (the privileging of trade and economic considerations), which causes them to be trade lawyers. That loss, however, will have unintended (yet entirely predictable) effects on the adjudicative machinery of world trade law.47 41 45

46

47

Ibid., p. 524. 42 Ibid., p. 536. 43 Ibid. 44 Ibid., p. 523. Th is is an imaginary space, outside of the World, from which ‘reality’ or ‘truth’ might be accurately perceived. See, for example, J. Broackes, ‘Realism, Scepticism and the Lament for an Archimedean Point: Stroud and the Quest for Reality’, Philosophy and Phenomenological Research, 68 (2004) 415. Moreover, this subordination is also exported to, and perpetuated within, the subsystems within which the principles originated. As environmental, human rights and other lawyers perceive the tactical advantages of recognition within the (structurally superior) trade law discourse, they will learn to instrumentalise their own constitutive norms and commitments. See notes 80 and 81, and accompanying text, infra. See notes 80–90, and accompanying text, infra.

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Emissaries from another world? I particularly like the imagery of planets and universes, whether deployed by Simma and Pulkowski, ‘Of Planets and the Universe: Self-contained Regimes in International Law’,48 or (in oddly mixed metaphor) by Pauwelyn: ‘Bridging Fragmentation and Unity: International Law as a Universe of Inter-Connected Islands.’49 The implicit claim being that a universe is both universal (vast) and yet understandable (by the universalists). Perceiving the regimes (sub-systems) as planets raises two questions of perspective. To follow the reasoning of the above authors, we should be able to lift our focus from our planet to contemplate the mysteries of the universe: yet we will still be on our planet (within our regime) looking out. Consequently, our view will remain limited, distorted by distance, simplified by lack of detail. The alternative is to seek the advice of emissaries, representative of other worlds. Presumably, these would include legal emissaries (human rights or environmental lawyers), scientific technocrats and political advisers, all kinds of experts, authorities and witnesses. But what kind of information would they bring; and who would interpret it? Follow the analogy through: imagine the Earth was to send one emissary to the stars. Should the emissary be male or female? Black or white? Rich or poor? Occidental or oriental? Reduce the scope: imagine the United Kingdom was to send one emissary – to ‘verify’ ‘British life’ to an interested New Zealander – or Aborigine, or Cuban – the same questions apply; the same complexities must be effaced. But what else could be done? We could send multiple emissaries, but then no coherent view could be formed. Similarly then, were we to receive multiple emissaries, we must choose between their claims, their testimonies, their truths. This returns us to the first problem of perspective. Who describes and who decides are interrelated, cumulative, problems. The question of expertise gives way to one of epistemic authority, the need to decide, and thus to appropriation by the authoritative discourse.

Expertise re-visited: indeterminacy Perhaps the easiest place to perceive the paradoxical effect that expertise leads to indeterminacy is in so-called general international law: the 48 49

Supra, note 6. J. Pauwelyn, ‘Bridging Fragmentation and Unity: International Law as a Universe of Inter-Connected Islands, Michigan Journal of International Law, 25 (2004) 903.

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law of treaties and custom, of general principles, structure, coherence and interpretation.50 As initially noted by the American Legal Realists, and recapitulated by the Critical Legal Studies (CLS) movement, the ‘rules’ on legal interpretation (e.g. as encapsulated in arts. 31 and 32 of the Vienna Convention on the Law of Treaties; VCLT) are contradictory to the point of being meaningless: 31 (1). A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. 32. Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31: (a) leaves the meaning ambiguous or obscure; or (b) leads to a result which is manifestly absurd or unreasonable. According to art. 31, one must neither add to nor subtract from the text, merely interpret ‘naturally’, whatever that means.51 However, according to art. 32, if that is ambiguous or ‘absurd’ (unpalatable) one may go behind the text, find an ‘intention of the parties’. Moreover, and returning to art. 31, if the result is still undesirable, one may impose an ‘object and purpose’ (a telos) on the text, and interpret in its light. Still unsatisfactory? Add or remove words as necessary to realise the telos imposed. In short: do as you will is the whole of the law.52 The result is ‘decontextualised and arbitrary reasoning’, as Young has described the approach of the Panel in the Biotech case.53 Th is problem is endemic, and may be magnified (or at least made manifest) by the perfectly understandable desire for ambiguity – and

50

51

52

See M. Young, ‘The WTO’s Use of Relevant Rules of International Law: An Analysis of the Biotech Case’, International and Comparative Law Quarterly, 56 (2007) 907, pp. 920–1; J. Beckett, ‘Rebel Without a Cause? Martti Koskenniemi and the Critical Legal Project’, German Law Journal, 7 (2006) 1045, p. 1057; Pace I. Cheyne, ‘Gateways to the Precautionary Principle in WTO Law’, Journal of Environmental Law, 19 (2007) 155. On the fallacy of ‘ordinary meaning’ interpretation, see Beckett, supra, note 50; see also Schlag, supra, note 32; and S. Fish, Doing What Comes Naturally (Durham NC, Duke University Press, 1990). For arguments discounting the possibility of securing determinacy via linguistic precision, see W. Sharrock and B. Anderson, The Ethnomethodologists (Chichester UK, Ellis Horwood, 1986). See Young, supra, note 50, pp. 922–5. 53 Ibid., p. 924.

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thus interpretative discretion – in legal texts.54 Moreover, it is radically exacerbated by what I have elsewhere analysed as ‘non-semantic indeterminacy’.55 This takes two forms: first is the multiplicity of values said to underlie international law (and thus offer themselves in the roles of telos and intention); the second is a radical disagreement as to what constitutes a norm of customary international law.56 As a result, all (international) lawyers are caught: even ‘general PIL’, which may even become, paradoxically, the most specialised of the sub-fields.

VI

Coherence and hegemony: the delusion of (Dworkinian) interpretation

One thing should be made clear, in case it is not already obvious: my concern in this chapter is not with competence, but with capacity. This is not simply a re-run of the Pauwelyn–Trachtman spat concerning the interpretation of the WTO’s statutes.57 It is not about whether the Panels are entitled to apply external law, but rather about whether they are able to do so. My thesis is that they are not able to do so, regardless of any normative grant of entitlement. Put differently, I would dispute the implicit assumption that, because openness or incorporation is permitted, therefore it must also be possible. External norms simply do not exist in a manner which would allow their incorporation in WTO law; moreover, even if they did, the system’s own closure would entail not incorporation but reconstruction. The norms to be applied by the WTO can only be WTO norms. External norms must be constructed as internal ‘facts’ in the WTO’s internal environment58 – facts whose very existence is conditioned on the WTO’s closure and coding: facts/norms of WTO law, reflecting trade 54

55 57

58

M. Koskenniemi, From Apology to Utopia, 2nd edn (Cambridge University Press, 2005), p. 591; Contra , I. Scobbie, ‘Wicked Heresies or Legitimate Perspectives? Theory and International Law’ in M. D. Evans (ed.) International Law, 2nd edn (Oxford University Press, 2006), pp. 89–92. Beckett, supra, note 50, pp. 1057–9. 56 Beckett, supra, note 37. See, for example, J. Pauwelyn, ‘The Role of Public International Law in the WTO: How Far Can We Go?’, American Journal of International Law, 95 (2001) 535, pp. 535–78; and ‘The Jurisdiction of the WTO’, American Society of International Law Proceedings, 98 (2004) 135, pp. 135–8. Contra, J. Trachtman, ‘The Domain of WTO Dispute Resolution’, Harvard International Law Journal, 40 (1999) 333, pp. 333–7; and ‘The Jurisdiction of the WTO’, American Society of International Law Proceedings, 98 (2004) 139. Although attempting to argue the exact opposite, this point is clearly illustrated by Cheyne, note 50 supra, pp. 160–1 and 168, and openly conceded, p. 171.

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law’s underlying economic focus. As Cheyne – in an article designed to support the incorporationist claim – states, ‘The Appellate Body has … treated the provisions that reflect [environmental law] as internal rules for the purposes of interpretation.’59 It is because of the radical indeterminacy of PIL,60 and the impossibility of incorporation or transplantation, that there can be no overall (external) perspective, no systemic view, no possibility of coherence. Thus, where Pauwelyn notes: ‘systemic interpretation’, that is, interpretation of a treaty in the context of the broader system of international law, including custom, general principles and certain other treaties (as in the US – Shrimp/Turtles and Oil Platforms cases), is an important conflict-avoidance tool.61

He misses the point entirely, replacing the question at issue with a sentimental abstraction.62 The conclusion of Koskenniemi’s argument is that the discovery of ‘coherence’, or the ‘values already embedded in the legal system’, the identification of a coherent ‘segmental expression’ of policy, is an imposition of one view, not the discovery of an Archimedean Point: The interpretative techniques lawyers use to proceed from a text or a behaviour to its ‘meaning’ create (and do not ‘reflect’) those meanings … Hermeneutics, too, is a universalisation project, a set of hegemonic moves that make particular arguments or preferences seem something other than particular because they seem, for example ‘coherent’ with the ‘principles’ of the legal system … But they offer no … authentic translation of the ‘raw’ preferences of social actors into (universal) law.63

59 60

61

62

63

Ibid., p. 171. On the ubiquity and radicality of indeterminacy in PIL, see Beckett, supra, notes 37 and 50; Koskenniemi, supra, note 54; and Rasch, supra, note 11. J. Pauwelyn, ‘The Fragmentation of International Law’, available at www.law.duke.edu/ fac/pauwelyn/pdf/fragmentation_of_international_law.pdf (accessed 16 May 2009), para. 29. However he had already conceded in para 15: ‘… Martti Koskenniemi, for example, has pointed out that unity is a hegemonic project which seeks the predominance of my perspective, my institution.’ Gillian Rose develops the concept of sentimentality, which she describes as our capacity to ‘embellish [our] arbitrary selectivity of compassion in rhapsodies or melodramas’; or, for lawyers, objective narratives of legal perfection and personal exculpation. All of which function to externalise suffering and deny our own implication, ‘leav[ing] us emotionally and politically intact’, ‘secure’ but gazing only at a comforting illusion, like ‘coherence’ or ‘confl ict-avoidance’. See Mourning Becomes the Law (Cambridge University Press, 1996), especially pp. 48–54. See, also, notes 65–76, and accompanying text, infra. Koskenniemi, supra, note 54, p. 597–8, footnotes omitted.

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Put in more practical terms: Even if the institutions were to apply the same rules, they would apply them differently owing to ‘differences in the respective context, object and purposes, subsequent practice of parties and travaux preparatoires’.64

Any attempt at coherence could function only internally to a given system – the WTO believing itself to be coherent with general PIL – or through the imposition of hierarchy or meta-system; the ‘constitutionalisation’ of PIL .

VII Law(yer)s’ desire for a meta-system Coherence was intended to function as a non-hierarchical equivalent to constitutional order; but it cannot do so. However, constitutionalisation, order and the avoidance of norm-conflicts are deeply ingrained in the lawyer’s psyche. As Koskenniemi has noted, many of ‘our’ ‘European’ desires for international law are based on a solipsism which causes us to interpret the international order through the assumptions by which we make (normative) sense of the municipal: The domestic analogy that persuades us – contrary to all evidence – that the international world is like the national so that legal institutions may work there as they do in our European societies … we read international law in the image of our domestic legalism … Today, that tradition is most visibly articulated in the debate … about the constitutionalization of international law under the UN Charter.65

However, it is important to realise that the question of ‘visible articulation’ is quite distinct from that of existence. That is, the constitutionalisation debate is simply the most open, naïve, version of the desire for hierarchical ordering. This provides the context for Pauwelyn’s claim that: The challenge ahead is to fi nd a balance between, on the one hand, the need for diversity and specialized regimes and solutions and, on the other hand, the importance of maintaining an overall framework or ‘system’ of international law that offers a sufficient degree of security and coherence.66

The whole point of constitutionalism is to establish the hierarchical superiority of the constitution and, under the constitution, the hierarchical ordering of political and juridical institutions. The central problem 64 66

Koskenniemi, supra, note 2, p. 7. Pauwelyn, supra, note 61.

65

Koskenniemi, supra, note 14, p. 122.

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in attempting to replicate the model at the international level revolves around the allocation of authority: which document should form the constitution? Which body should sit at the apex of the hierarchical triangle? Coherence was an attempt to circumvent this problem, replacing the hierarchical structure with a heterarchy of agreement, consensus, cooperation and compromise. It was an attempt which failed, and did so inexorably: if competences are to be allocated, a meta-system is required. At the municipal level, Black has noted that: There is a need to develop an understanding of the role of law in the context of a functionally differentiated society 67 … [where] in place of the hierarchy of ‘state–individual’ there is a heterarchy of different spheres of society … mediate[d] in a horizontal manner.68

However, this heterarchy – and the role of law in relation to it – exists in the shadow of law’s (assumed) hierarchical superiority: it is the question of how law ought to regulate/supervise a heterarchy existing beneath it (but presumed to be valuable). It is precisely this (potentially failing) model which has a stranglehold on juridical thought. Thus, Teubner and Fischer-Lescano note how international lawyers: Direct themselves to a hierarchical solution to the problem, which, whilst not wholly reproducing the ideal of legal hierarchies of the nation-state, at least comes somewhere close to it.69

Pauwelyn encapsulates the desire for justice through order when he notes that: [The] ‘fall-back’ on other rules of international law, without the need for any explicit incorporation or reference in the treaty under examination, is a crucial, if not the most important, tool to maintain a modicum of coherence and interaction between the branches of international law.70

However, as Koskenniemi observes: Constitutionalism, as we know it from the national context, relies on some basic understanding of the common good.71

Perhaps then: A more plausible constitutionalism remains formal. It suggests that system and hierarchy are intrinsic to juristic thought and thus also to international law.72 67 69 70 72

Black, supra, note 11, p. 24. 68 Ibid., pp. 28–9. Teubner and Fischer-Lescano, supra, note 13. Pauwelyn, supra, note 61, para. 28. 71 Koskenniemi, supra, note 2, p. 16. Ibid.

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This seems just as circular, eliding ‘juristic thought’ with the modern European nation-state, and its political ordering – an ordering predicated on the very same imposed unity of values that the formalising project was designed to dispense with. Simply another, albeit more elaborate, European sentimentality.73 Moreover, and more importantly, it does not address the unavoidable and substantive question of which document or institution should sit at the apex of the hierarchy. Coherence, to repeat, is simply another manifestation of this constitutional order. The heterarchy of functional differentiation sits beneath a hierarchically superior document (e.g. the UN Charter) or institution, e.g. the jurisdictionally privileged WTO adjudicative machinery. As a direct consequence, any move by the WTO to assume ‘responsibility’ for the concerns of other sub-systems entails assuming authority to interpret (construct) those systems within its own protocols;74 to reinforce and legitimate its own hierarchical superiority.75 Constitutionalism with the UN Charter (and thus the International Court of Justice; ICJ) at its peak is directly analogous to coherence with ‘General PIL’ (and thus the WTO’s interpretation of PIL) at its ‘summit’ (or ‘core’). The structural location of the WTO, as an institutionalised system, places a premium upon its constructions of ‘external’ law. Consequently, the desire for ‘openness’ leads to a hegemonic or imperialistic claim: a colonisation, and perpetual subordination, of the other sub-systems of PIL.76 The result could be termed the Pauwelyn Paradox: in attempting to ensure that ‘there is more to life than trade’,77 we turn all non-trade issues into trade variables.

VIII

Implications for WTO adjudication

It is fair to argue, I believe, that law is inherently universalist; very few legal scholars, practitioners, or theorists would be happy with the idea of spaces outside the law – of zones of lawlessness.78 However, from 73

74 75 77

78

The juristic form has served us well, and thus simply is the appropriate form. Even when it patently does not work, there can be no alternative. Another comforting, exculpatory, illusion, see supra, note 62. Young, supra, note 50, pp. 908, and 920–1. Beckett, supra, note 11, p. 311. 76 Koskenniemi, supra, note 2, p. 27. J. Pauwelyn, Conflict of Norms in Public International Law: How WTO Law Relates to other Rules of International Law (Cambridge University Press, 2003), p. xi. Steyn, ‘Guantanamo Bay: The Legal Black Hole’, presented at 27th F.A. Mann Lecture, The British Institute of International and Comparative Law and Herbert Smith (London,

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an autopoietic perspective, this is not unique: all systems perceive themselves as complete, and thus as constitutive and regulative of the entire world. For a system to perceive a problem as extant is for that system to believe that it (alone) can provide the (correct/appropriate) solution.79 Th is is no less true of WTO law – which shares with domestic law the privilege of hierarchical superiority within its social context, a privilege which functions to reinforce the assumption of unlimited jurisdiction. However, as noted, all systems have this tendency, and thus systems come into conf lict, they overlap, contest and compete. This ‘war of the social systems’80 is inevitable, because no system has any reality for any other system, and each system is sovereign over itself, and hegemonic in regard to others. The war can be denied or disguised, most especially if one (or more) system(s) is raised to the level of metasystem. 81 However, even then, the war is not ended, but displaced, internalised. This can occur – and can appear not to occur – because systems are paradoxically more sovereign over their constructions of each other than they are over themselves. ‘Real’ systems are heterogeneous, but can be externally constructed as homogenous precisely because of systems’ sovereignty over their own internal environment. Internally, law, ethics, economics, politics and so on are indeterminate; but externally they can be made to appear determinate and clear. This is important, because hegemonic systems – e.g. law – base their claims to hegemony on their capacity to learn from, or incorporate, other systems. Thus, a ‘sovereign’ law will be economically efficient, ethical, prudent, pragmatic and so on. However, this is possible only on the condition that law claims the ‘epistemic authority’ to determine the wise, ethical, efficient and so on; and that is possible only within the internal environment of law.

79

80

25 November 2003), available at www.statewatch.org/news/2003/nov/17Guantanamo. htm (accessed 22 February 2008). It is worth emphasising that, in the Luhmannian model, social-systems form the primary epistemic subjects, with individuals secondary at best. Thus references to subsystems are not synonymous to references to their practitioners: that, for example, land or environmental law perceives itself as complete does not entail that individual land or environmental lawyers share this perception, except when they are operating purely as land or environmental lawyers. Beckett, supra, note 11, pp. 308–10. 81 Rasch, supra, note 11, p. 39.

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The regulatory trilemma This expansionist tendency – which is precisely advocated for the WTO by incorporationist scholars – appears, from an ‘external’ (or, rather, differently situated) perspective as a pathological overreach. The nature of the pathology is unclear, uncertain, or perspective-dependent: The result is the regulatory trilemma. Law is either ignored by the system, or it destroys that system’s traditional norms of behaviour; or it is itself disintegrated by the pressures imposed on it by the political and social systems.82

The classic development of the trilemma concerned the ‘interaction’ of law and ‘the lifeworld’ in a domestic setting, particularly where the law was asked to perform regulative (rather than censorial) functions. However, it can also be usefully transposed to a setting of internal legal fragmentation. Moreover, this transposition brings into relief the multiple, concurrent, pathologies of WTO overreach. Consider, for example, the ‘interface’ of WTO and environmental law: the so-called gateway principle. This claims that the WTO ‘reflects’ or ‘incorporates’ environmental law, and, particularly, the precautionary principle. However, the principle’s status, meaning and effect in environmental law are never examined. Instead, the WTO interprets its own statutes, returning, recursively, to its own previous judgements, creating the appearance of a precautionary principle – but one which has very limited (if any) practical effect.83 Thus, ‘the law’ (precautionary principle) is ignored by the system, or rather by two systems. In ‘reality’, precautionary measures are not permitted; in the WTO the richness of environmental law is effaced.84 Moreover, in appearing to consider the principle, the WTO has constructed its own image, within its internal environment.85 However, that ‘image’ appears as a particular form of noise within the system of environmental law. Given the structural imbalance whereby the WTO has compulsory jurisdiction, and environmental law no jurisdiction, 82 83 84 85

Black, supra, note 11, p. 47. Cheyne, supra, note 50, p. 171. See, also, notes 51–3, and accompanying text, supra. Young, supra, note 50, pp. 911, 912 and 915. On a similar note, but for structural rather than epistemic reasons, see H. Grosse RuseKhan, ‘Proportionality and Balancing within the Objectives of Intellectual Property Protection’ in P. Torremans (ed.), Intellectual Property and Human Rights (Alphen aan den Rijn, Netherlands, Kluwer Law International; Enhanced edn of Copyright and Human Rights, 2008), section IV.

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this noise becomes significant. The decision, being made by a court,86 has authority, and this opens up the political question of WTO hegemony.

The Hartian desire for verification In attempting to rescue law from the vagaries and idiosyncrasies of moralist or metaphysical reasoning (scholastic dogmatism), Hart redefined the project of jurisprudence as ‘an exercise in descriptive sociology’. Even though it can be demonstrated that law is neither a brute fact, nor a sufficiently coherent theoretical construct to facilitate this descriptive enterprise,87 one aspect of the Hartian project has proven particularly difficult to escape: the lawyer’s desire for verification. Thus where Hart was content to criticise other theorists for being ‘prepared to ignore any actual decisions of judges which run counter to their own logical calculations’88 and thus displaying a lack of care ‘for the actual practice of the law’, Hartian thinkers learn a different lesson: a proposition’s appearance in the text of a legal decision is (conclusive) proof of its validity. Think, for example, of the extensive focus by human rights lawyers on the Pinochet case89 in the United Kingdom’s House of Lords. The judges’ patent lack of expertise in PIL was quite ignored; what counted was their ‘authoritative’ determinations on the customary nature of the prohibition on torture. Likewise, the Canadian Supreme Court’s selfconsciously obiter remarks, in the Quebec case,90 on the putative ‘right to secession’ in PIL have been treated as an authoritative verification of that right. Lawyers, in short, like cases! Thus there are political consequences to expansive WTO jurisdiction. Because the WTO has compulsory jurisdiction, its views – its findings – have additional authority; they will 86

87 88

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90

As Koskenniemi has noted, ‘The Appellate Body is today treated as a “court” and its members as “judges,” and its reports are read at government offices and universities as “judgments” whose “binding force” is hardly undermined’, see ‘Constitutionalism as Mindset: Reflections on Some Kantian Themes in International Law’, Theoretical Inquiries in Law, 9 (2007) 20. Beckett, supra, notes 37 and 50. H. L. A. Hart, Essays in Philosophy and Jurisprudence (USA, Oxford University Press, 1984), p. 268. For the manner in which Hartian analysis necessarily falls into the same trap, albeit prioritising personal preference over logical calculation, see Beckett, supra, note 50, pp. 1052–7. R v. Bow Street Metropolitan Stipendiary Magistrate, ex parte Pinochet Ugarte (No 3.) [2000] 1 AC 147. Reference Re Secession of Quebec (1998) 161 DLR (4th) 385.

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be relied on as evidence of the state of the law outside the WTO framework. Thus, for example, Philippe Sands presents the decision in the Beef Hormones case as a ‘rule of risk assessment’ ‘appropriate [to] the international community’,91 that is, as a rule of environmental law; or at the very least, as material evidence of such a rule.

Gateways work two ways The metaphor of a ‘gateway’ is both instructive and distorting. It is distorting insofar as it underpins the idea of a freestanding ‘legal principle’, ‘norm’ or ‘rule’ existing – as a ‘thing-in-itself’ – outside the ‘estate’ of WTO law. An entity which is then ‘brought into’ that estate, that regime: unaltered, merely displaced.92 As has been demonstrated above, this is simply an inaccurate description of the processes of norm construction, identification and interpretation which occur when external law is ‘perceived’ and ‘applied’. Instead this is a truly constructive process whereby the legal norm is not displaced, transplanted, or even ‘transposed’, but entirely created (albeit under the guise/delusion of replication) within the WTO system. However, the metaphor is also helpful, serving to remind us of the bi-directional effects of this process of norm-construction. Put simply, gateways work two ways: allowing things in, but also allowing things out. Of course there is, in fact, neither ingress nor egress, and yet the normative terrain is altered on either side of the gateway. What is created within the WTO is also (re)constructed (reflected) without. The WTO’s ‘recognition’ or ‘interpretation’ of external norms also affects those norms in their own field of application.93

Homogeneity lost? Openness and the disintegration of trade law The fi nal ‘option’ within the trilemma – and perhaps an alternative reading of Lang’s proposal – is that WTO law takes the external norms

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P. Sands, ‘Environmental Protection in the Twenty-First Century: Sustainable Development and International Law’ in R. L. Revesz, P. Sands and R. B. Stewart (eds.) Environmental Law, the Economy, and Sustainable Development (Cambridge University Press, 2000), p. 387. Cheyne, supra, note 50, p. 161. 93 This is implicitly conceded, ibid., p. 169.

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seriously. Environmentalists, human rights lawyers, and so on are invited on to the Panels and the Appellate Body, not as experts or witnesses, but as judges: their expertise is raised to a level equal to, or greater than, that of their trade law brethren.94 The system of the WTO would then be ‘disintegrated’, and replaced by a system of environmental or human rights adjudication, or, more likely, by open confl ict in the guise of judicial decision-making.

IX

Conclusions

Something remains plausible about the suggestion that hierarchy, order and coherence are intrinsic to juristic thought, and the implied claim that juristic thought is good, somehow valuable.95 It seems paradoxical to claim that juridical thought is good within the sub-systems, but bad between the sub-systems; and yet – as Luhmann has so famously, and repeatedly, noted – paradoxes are not inherently bad, and indeed, are often productive.96 Any attempt to introduce a meta-system to allocate disputes, competencies, or to find coherence would, necessarily, be hegemonic. The system would be doubly pathological in (a) claiming its own absolute truth (a neutrality amongst the other systems) and (b) simply internalising the conflicts within, and between, systems into itself.97 Perhaps then the better option is simply to acknowledge these conflicts, this inevitable fragmentation which technicalisation has bequeathed us: It is this change to which international lawyers have reacted by speculating on the ‘dangers’ of incoherence, forum shopping and, perhaps characteristically, ‘loss of overall control’.98

Perhaps we must learn to embrace this loss of control, or better still, to re-imagine it as an assumption of responsibility. Coherence, hierarchy, accommodation and other mechanisms of confl ict displacement are,

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See Grosse Ruse-Khan, supra, note 85, for a similar argument, but again one based on a structural bias rather than epistemic limitation, and thus presupposing the possibility of an external perspective, from which such biases could be overcome. Th is claim is made explicit in Koskenniemi, supra, note 14, pp. 118–19, and supra, note 54, p. 591; see also Beckett, supra, note 50, pp. 1059–64. N. Luhmann, ‘The Th ird Question: The Creative Use of Paradoxes in Law and Legal History’, Journal of Law and Society, 15 (1988) 153. Beckett, supra, note 11, pp. 311–12. 98 Koskenniemi, supra, note 2, p. 4.

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perhaps, better understood as conflict denial, and thus of a refusal of responsibility: see no evil, hear no evil, speak no evil. But conflict disguised/denied is not confl ict resolved. These mechanisms are simply insidious, devious deployments of hegemonic strategy.99 It may be true, as Koskenniemi has suggested, that knowledge of the forum in which a dispute will be decided is tantamount to knowledge of the decision which will be made,100 but coherence and order will not alter this. All they do is displace/deny responsibility for dispute allocation.101 Consequently, even if fragmentation is the problem, constitutionalisation is not the solution. This remains true when the constitutionalisation project is presented as an embrace of heterarchy through the possibility of coherence. This ‘solution’ does not escape the problems of hierarchy and power; it is simply an attempt to exercise constitutional authority, without claiming that authority, and so avoiding the need for political justification. Moreover, the move to hierarchy or coherence also insulates states from the political responsibility entailed by their adoption of concurrent but contradictory obligations, for example, in the fields of environment and trade. By allowing a tribunal to adjudicate on, or rather create and impose, a ‘coherence’ between these obligations – within a juridical framework which a priori privileges the trade law perspective – states can avoid the responsibility inherent in making such politically contested choices between their obligations, and the confl icting political priorities which they manifest. It is neither the judicial role to accept this responsibility, nor an acceptable political position for states to ‘outsource’ it. Both options – constitutionalisation and coherence – appear attractive principally because hierarchical, constitutional order forms the ‘iron cage’ of possibility,102 the limit point of the juridical imagination. However, the problematic is not, necessarily, that of surpassing the

99

100 101

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Koskenniemi, supra, note 54, pp. 597–8; R. Cover, ‘Nomos and Narrative’, Harvard Law Review, 97 (1983) 4, p. 60, and ‘Violence and the Word’, Yale Law Journal, 95 (1986) 1601, p. 1628; J. Beckett, ‘The Violence of Wording’, No Foundations: The Journal of Extreme Legal Positivism (forthcoming 2010). Koskenniemi, supra, note 2, p. 8. On the relationship between the existence of a normative order and the abdication of responsibility, see F. Johns, ‘Guantanamo Bay and the Annihilation of the Exception’, European Journal of International Law, 16 (2005) 613. M. Weber, The Protestant Ethic and the Spirit of Capitalism (T. Parsons trans.) (London, Allen & Unwin, 1989), p. 181.

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municipal analogies and solutions which dominate juridical thought; but simply of recognising their contingency, their potential inadequacy (in either context) and their costs. It is merely a question of offering alternative conceptualisations. The challenge, of course, is imagining those alternatives.

PA RT I I WTO treaty interpretation: implications and consequences

4 Demanding perfection: private food standards and the SPS Agreement Tr acey Epps

I

Introduction

In a June 2005 meeting of the WTO’s Committee on Sanitary and Phytosanitary Measures (the SPS Committee), St Vincent and the Grenadines and Jamaica voiced concern about difficulties exporting bananas due to strict safety and quality standards imposed by British supermarkets.1 With other countries, they raised the issue again at meetings in October 20062 and June 2007.3 These producer countries’ concerns are driven by an increasing trend for private retailers in developed countries to require adherence from their suppliers with, inter alia, food safety standards that are more stringent than official government regulations. The countries in question have argued that, under the Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement), governments are responsible for standards set by their private sectors. However, this argument is contentious and there is no supporting precedent for the complaining countries’ position. This chapter examines whether the SPS Agreement

1

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Committee on Sanitary and Phytosanitary Measures (SPS Committee) – Note by the Secretariat, ‘Summary of the Meeting Held on 29–30 June 2005’, (WTO Doc. G/SPS/R/37/ Rev. 1, 2005), p. 6. The other countries were Argentina, Belize, Cuba, Dominica, Egypt, Indonesia, Kenya and South Africa. SPS Committee – Note by the Secretariat, ‘Summary of the Meeting Held on 11–12 October 2006’, (WTO Doc. G/SPS/R/43, 2006), p. 11. The other countries were Egypt, Pakistan, Ecuador, Brazil, Cuba, Belize, Chile, Venezuela, Argentina, Kenya, South Africa, Dominican Republic, Mexico, Colombia, China, Bolivia, Costa Rica, Peru and Rwanda. ‘Sanitary and Phytosanitary Measures: Developing Countries Complain about Pesticide Residue Requirements’, (WTO, News Items, 27 and 28 June 2007).

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covers private sector standards.4 It concludes that it does not and considers some of the implications of this conclusion.5 Private standards potentially undermine the SPS Agreement’s objectives, impacting negatively on the international trading system and causing difficulties for developing countries. Conversely, they provide significant benefits for the private sector. Section II describes the use of private standards in the global agrifood system. Section III examines the SPS Agreement’s objectives and rules and concludes that they are not applicable to private food standards. Section IV considers the implications of this conclusion for the international trading system, for developing countries and for retailers and consumers. Section V concludes and raises questions for further research.

II

Private standards

Development and coverage Private standards deal predominantly with matters of food safety, but also cover quality and various social and environmental issues related to food production. Food safety regulation has traditionally been the domain of governments, with input from international bodies such as the Codex Alimentarius Commission (Codex).6 However, it is increasingly characterised by a mix of public and private organisations.7 On the private side, retailers have enormous buying power which enables them to impose 4

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7

Th is question is currently being discussed within the SPS Committee. See for example, SPS Committee – Note by the Secretariat, ‘Private Standards and the SPS Agreement’, (WTO Doc. G/SPS/GEN/746, 24 January 2007). There may also be a question as to whether some of the private standards of the type referred to in this chapter are covered by the Technical Barriers to Trade (TBT) Agreement which covers documents that lay down ‘product characteristics or their related processes and production methods’ and with which compliance is mandatory; and also non-mandatory standards promulgated by ‘standardising bodies’. I have chosen to focus here on the SPS Agreement due to space constraints and the fact that, to date at least, more controversy has arisen over food standards that are covered by the SPS Agreement. For a brief discussion of TBT Agreement-related issues, see J. Bohanes and I. Sandford, ‘The (Untapped) Potential of WTO Rules to Discipline Private Trade-Restrictive Conduct’, working paper presented at the Society of International Economic Law Inaugural Conference (Geneva, July 15–17 2008), p. 30. Created in 1963 by the Food and Agriculture Organization (FAO) of the United Nations and the World Health Organization (WHO) to develop food standards, guidelines and related texts. T. Havinga, ‘Private Regulation of Food Safety by Supermarkets’, Law and Policy, 28 (2006) 515, p. 516.

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standards on suppliers and producers.8 Importers may also be involved in the development of private standards where they are contractually liable to the retailer for failure to supply products to desired safety and quality levels.9 Private standards are prevalent across Europe and are increasing in other countries, including the United States and Japan, as well as middle- and lower-income countries.10 Private food safety standards focus on various aspects of the supply chain from ‘farm to fork’. Good agricultural practice (GAP) covers production and harvesting up to when the product leaves the farm gate, while good manufacturing practice (GMP) covers processing.11 Requirements include how an item is produced, harvested, cooled, washed, graded, sorted, handled, processed, packed, stored, transported, traded, distributed and sold.12 Recently, standards have also begun to encompass social and environmental issues such as labour standards, occupational health and safety standards and climate change.13 Private standards are often more stringent than public regulations. EU regulation, for example, tends to require equivalence of risk outcomes, while private standards require equivalence of processes.14 In a recent survey of 16 leading retailers in OECD countries, 85 per cent reported that their standards were higher than the relevant government standard, while about half reported that they were significantly higher.15 8

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10

11

12 13

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P. N. Grabovsky, ‘Green Markets: Environmental Regulation by the Private Sector’, Law & Policy, 16 (1994) 419, p. 429; cited in Havinga, supra , note 7, p. 525. S. Willems, E. Roth and J. van Roekel, ‘Changing European Public and Private Food Safety and Quality Requirements: Challenges for Developing Country Fresh Produce and Fish Exporters – European Union Buyers Survey’, The World Bank, (Agriculture and Rural Development Discussion Paper, 2004), p. 19. S. Jaffee and S. Henson, ‘Standards and Agro-Food Exports from Developing Countries: Rebalancing the Debate’, The World Bank, (Policy Research Working Paper 3348, 2004), p. 2; T. H. Jonker, H. Ito and H. Fujishima, ‘Food Safety and Quality Standards in Japan: Compliance of Suppliers from Developing Countries’, The World Bank, (Agriculture and Rural Development Discussion Paper, 2004). J. E. Lamb, J. A. Velez and R. W. Barclay, ‘The Challenge of Compliance with SPS and Other Standards Associated with the Export of Shrimp and Selected Fresh Produce Items to the United States Market’, The World Bank , (Agriculture and Rural Development Discussion Paper, 2004), p. 18. Ibid., p. 18. D. Gascoigne and O’Connor and Company, ‘Private Voluntary Standards Within the WTO Multilateral Framework’, (WTO Doc. G/SPS/GEN/802, 2007), p. 15. G. C. Lee, ‘Private Food Standards and their Impacts on Developing Countries’, European Commission, (2006), p. 6. Committee for Agriculture, ‘Final Report on Private Standards and the Shaping of the Agro-food System’, OECD Directorate for Food, Agriculture and Fisheries, (2006), p. 23. See also Lee, supra, note 14.

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The literature suggests that the private sector ‘has jumped ahead of the public sector, substituting consumer demand for citizen demand, market accountability for governmental accountability’.16 Private regulation is moving faster than governmental regulation and is broader in scope.17 In some cases, private standards are the impetus behind legislative developments.18

Motivation The primary motivation for the development of private standards is the desire of retailers to obtain a competitive advantage in the market. Setting strict and publicly visible standards is considered key in securing customer loyalty and increasing the value of a firm’s reputation.19 In particular, setting safety and quality standards that go beyond minimum government requirements helps protect the value of private brands and builds reputation.20 In Europe, the value of going beyond government requirements arose out of various food safety scares beginning in the 1980s – including bovine spongiform encephalopathy (BSE or ‘mad cow disease’) and dioxin contamination – which led to a decline of public confidence in the ability of governmental regulatory agencies to deal with food and agricultural safety issues.21 In Japan, a number of scandals, including a food poisoning outbreak caused by dairy products and the discovery of illegal levels of pesticide residues in frozen vegetables, had a similar effect.22 Many governments are under budgetary constraints which limit the scope of their regulatory activities, even in the face of such events.23 While some governments have responded in recent years to consumer

16

17 18

19 20 21 22

L. Busch and C. Bain, ‘New! Improved? The Transformation of the Global Agrifood System’, Rural Sociology, 69 (2004) 321, p 335. See also S. Henson and T. Reardon, ‘Private Agri-food Standards: Implications for Food Policy and the Agri-food System’, Food Policy, 30 (2005) 241, pp. 243–4. Busch and Bain, supra, note 16. For example, in Switzerland, an animal welfare scheme implemented by a supermarket was later adopted into government legislation. L. Fulponi, ‘Private Voluntary Standards in the Food System: The Perspective of Major Food Retailers in OECD Countries’, Food Policy, 31 (2006) 1, p. 8. Ibid., p. 6. Ibid. See also Gascoigne and O’Connor and Company, supra, note 13, p. 14. Fulponi, supra, note 18, pp. 2 and 9. Jonker et al., supra, note 10, p. 6. 23 Fulponi, supra, note 18, p. 2.

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concerns with new and improved food safety regulations,24 Havinga finds that, overall, public food safety regulation is becoming less detailed and less prescriptive. 25 Thus, retailers have an opportunity to build their reputations by filling the gap which consumers perceive to have been left by governments. In addition to concerns about safety and quality, consumers in Western countries have become increasingly concerned with social and environmental issues in food production and exhibit some willingness to pay more for products incorporating social goals.26 NGOs have played a significant role in pushing for retailers to incorporate these types of issues into their standard-setting activities.27 In Europe, retailers are moving to require environmental labelling to indicate, for example, whether produce has been air-freighted and, if so, the distance it has travelled (‘food miles’) and its ‘carbon footprint’.28 Retailers have developed private standards in many cases because of legal liability issues.29 In the United Kingdom, for example, the Food Safety Act requires buyers to take all reasonable steps to ensure that the food they receive from upstream suppliers is safe. However, it provides a defence against liability where retailers take all reasonable precautions and exercise ‘due diligence’ to avoid commission of an offence. 30 Th is has provided a strong impetus for fi rms to focus on their food safety practices, implementing strict quality assurance programmes with their suppliers and raising standards above minimum levels to ensure a margin of defence.31 Fulponi fi nds that in other countries, firms either anticipate enactment of similar legislation or act as if there is such legislation.32 24 26

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29 30

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Willems et al., supra, note 9, p. 7. 25 Havinga, supra, note 7, p. 529. See L. Becchetti and F. C. Rosati, ‘Global Social Preferences and the Demand for Socially Responsible Products: Empirical Evidence from a Pilot Study on Fair Trade Consumers’, The World Economy, (2007) 807. M. Hatanaka, C. Bain and L. Busch, ‘Th ird-party Certification in the Global Agrifood System’, Food Policy, 30 (2005) 354, p. 364. The term ‘carbon footprint’ refers to the total amount of carbon dioxide and other greenhouse gases emitted over the full life cycle of a product. David Deans, ‘Special Report: Carbon Labels – A Green Mark Too Far?’, available online at Ethical Corporation, www.ethicalcorp.com/content.asp?contentID=5622 (accessed 15 October 2008). Gascoigne et al., supra, note 13, p. 35. S. Henson and S. Jaffee, ‘Food Safety Regulation: An Overview of Contemporary Issues’, Food Policy, 24 (1999) 589, p. 594. J. E. Hobbs, A. Fearne and J. Spriggs, ‘Incentive Structures for Food Safety and Quality Assurance: An International Comparison’, Food Control, 13 (2002) 77. Fulponi, supra, note 18, p. 9.

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The proliferation of private standards also owes much to changes in the global supply chain and retailing practices, including a trend towards vertical integration through the use of direct contracts between suppliers and retailers and the expansion of supermarkets in food retailing, both nationally and internationally.33 Mergers and acquisitions have caused significant concentration of the retail market, with the market share of big supermarkets having increased significantly.34 One estimate finds, for example, that 70 per cent of the food products sold in most major European markets is now sold through supermarkets.35 Retail consolidation has caused a market power shift from processors (who used to control product characteristics) to retailers.36 Retailers now have the power to impose standards on their suppliers.37 It has also made it difficult for national governments to regulate food safety and quality. As supply chains tend to cross multiple boundaries, government regulators are challenged by the quickening pace of product differentiation and expansion of quality attributes.38 Government regulators have difficulty keeping up with new developments and changing production practices. In a globalised world, to be effective, regulations need to be transnational in scope and applicability.39 Thus, a greater role has arisen for the private sector in standards setting and enforcement.40 Finally, consolidation heightens retailers’ liability concerns; with greater concentration, no food safety problem will be confined to local markets, increasing the potential for loss of reputation and financial liability.41

Form Private standards fall into one of two broad categories. The first involves group initiatives, where retailers and importers participate in either collective national schemes or collective international schemes. The second is where retailers set their own exclusive standards. 33

34 35

36 37 39

SPS Committee – Note by the Secretariat, supra , note 4, para. 4. See also L. Fulponi, Communication from the OECD to the Committee on Sanitary and Phytosanitary Measures, ‘Private Voluntary Standards and Developing Country Market Access: Preliminary Issues’, (WTO Doc. G/SPS/GEN/763, 2007). See also Henson and Reardon, supra, note 16, p. 242. Hatanaka et al., supra, note 27, p. 358. M. K. Muwanga, ‘Experiences on Adjustment to Private Standards in Key Export Markets’, presented at UNCTAD-WTO Informal Information Workshop (26 June 2007). Busch and Bain, supra, note 16, p. 328. Havinga, supra, note 7, p. 525. 38 Hatanaka et al., supra, note 27, p. 356. Ibid., p. 356. 40 Ibid., p 355. 41 Ibid., p. 358.

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Collective national and international schemes vary both in their product coverage and in the issues they address. They tend to focus on safety and quality issues, with some covering the entire supply chain and others focusing on specific aspects. One of the most influential national schemes is that maintained by the BRC (British Retail Consortium) which represents all British retailers. Its original standard was developed in response to the Food Safety Act 1990, which placed legal responsibility on retailers for products marketed under their own label.42 Today, it has global standards covering food safety, packaging, storage and distribution, which are published in eight languages.43 One of the most well-known collective international schemes is GlobalGAP, a retailers’ initiative originally developed by the European retailers’ fresh produce working group in response to food scares in Europe.44 GlobalGAP places GAP requirements on fruit and vegetables at the farm level. Member retailers use the scheme by requiring their suppliers to be GlobalGAP certified. It has been reported that GlobalGAP members control 85 per cent of the Western European fresh produce market and that the scheme’s influence is so pervasive that it is quickly becoming the standard for suppliers who wish to export to Europe.45 Exclusive standards are most common in Europe, where several retailers have developed their own specifications or private ‘codes of conduct’. Products are branded in a manner that draws consumers’ awareness to the assurances being made and helps differentiate one company’s products from those of their competitors (for example, Tesco’s ‘Nature’s Choice’ and Carrefour’s ‘Filière Qualité’).46 Often, exclusive standards are based on national and EU food safety and quality regulations, but in most cases exceed them. Lee notes that sometimes they even exceed the standards of collective schemes such as GlobalGAP.47 Major retailers also include social issues (for example, labour, animal welfare) and environmental rules in exclusive ‘codes of practice’.48 42 43

44

45 46 47

Lee, supra, note 14, p. 13. See online at www.brc.org.uk/standards/default.asp?mainsection_id=1 (accessed 29 September 2008). GlobalGAP was formerly known as ‘EurepGAP’, see www.globalgap.org/. Other international schemes include Safe Quality Food (SQF), an Australian initiative, and Global Food Safety Initiative (GFSI), established by 50 international retailers. Lee, supra, note 14, p. 27. Hatanaka et al., supra, note 27, p. 360. Gascoigne et al., supra, note 13, pp. 14–15. Lee, supra, note 14, p. 27. 48 Willems et al., supra, note 9, p. 19.

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Monitoring and enforcement Private standards are only effective if adequately monitored and enforced. The most common method, particularly where standards relate to food safety, is through auditing by accredited certifying bodies.49 These certifiers are private or public organisations responsible for evaluating and certifying safety and quality claims based on a particular set of standards and compliance methods. Through certification, retailers are largely able to pass on responsibility and liability for policing the safety and quality of their products. If a product failure occurs, retailers can claim they took all reasonable precautions and exercised due diligence by adopting third-party certified standards.50 It also allows retailers to shift the cost of certification to suppliers and to use third-party certification as a marketing tool.51

III The SPS Agreement and private standards The SPS Agreement obliges WTO Members to follow certain rules in their regulatory decision-making concerning the adoption and enforcement of sanitary and phytosanitary (SPS) measures. These are measures to protect humans, animals and plants against risks arising from pesticides, additives, contaminants, toxins or diseases. They thus cover much of the same ground as private standards aimed at ensuring food safety. They do not, however, cover the same ground as private standards that are aimed at addressing social and environmental concerns. The analysis in this section is, therefore, only applicable to private standards dealing with food safety. The SPS Agreement provides that no Member should be prevented from adopting or enforcing measures necessary to protect human, animal or plant life or health; and that the negative impacts of domestic SPS measures on trade be minimised. It thus recognises the importance of domestic regulatory autonomy, as well as that of trade liberalisation in advancing global and domestic welfare. The SPS Agreement permits countries to adopt and maintain traderestrictive SPS measures that are ‘necessary’ to protect health, subject to a number of substantive and procedural rules. Article 3.1 provides the baseline by encouraging Member countries to base their SPS measures

49

Ibid., p. 15.

50

Ibid., p. 360.

51

Ibid.

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on international standards, guidelines, or recommendations, where they exist. It makes specific reference, for food safety, to the standards, guidelines and recommendations established by Codex.52 Where countries wish to introduce or maintain SPS measures that result in a higher level of protection than would be achieved by measures based on the relevant international standards, guidelines or recommendations, they must ensure that the measure chosen ‘is applied only to the extent necessary to protect human, animal or plant life or health, is based on scientific principles and is not maintained without sufficient scientific evidence’.53 Further, SPS measures must be based on an assessment of the risks to human, animal or plant life or health.54 This structure makes it more difficult for countries to shelter domestic industries behind restrictive health regulations or to disguise protectionist strategies under the cloak of health regulations.55 Two questions arise in determining whether private food safety standards are covered by the SPS Agreement. First, do private standards fall under the definition of ‘SPS measures’? Second, does the SPS Agreement cover the actions of retailers, being private, for-profit entities?

Are private standards ‘SPS measures’? The term ‘SPS measure’ is defined in Annex A(1) as: all relevant laws, decrees, regulations, requirements and procedures including, inter alia , end product criteria; processes and production methods; testing; inspection; certification and approval procedures; quarantine treatments including relevant requirements associated with the transport of animals or plants, or with the materials necessary for their survival during transport; provisions on relevant statistical methods, sampling procedures and methods of risk assessment; and packaging and labelling requirements directly related to food safety. [Emphasis added]

The SPS Agreement does not define the term ‘all relevant laws, decrees, regulations, requirements and procedures’, leaving open for interpretation whether it covers private standards. According to Article 31(1) of the Vienna Convention on the Law of Treaties, ‘a treaty shall be interpreted in good faith in accordance with 52 55

SPS Agreement, Annex A(3)(a). 53 Ibid., Article 2.2. 54 Ibid., Article 5.1. T. Josling, D. Roberts and David Orden, ‘Food Regulation and Trade: Toward a Safe and Open Global System’, Institute for International Economics, (2004), p. 40.

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the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose’. 56 The words ‘laws and decrees’ on their ordinary meaning clearly refer to governmental measures. However, the words ‘regulations, requirements and procedures’ are more nuanced. Their ordinary meaning does not clearly indicate whether they must be governmental measures. On the face of it, the term ‘regulation’ comes closest to conveying such a meaning; however, defi nitions in the regulatory literature do not support this conclusion. Regulation refers to the processes of rulemaking (standard setting), monitoring, compliance and enforcement.57 Traditional views would accord the rulemaking function to the legislature or governmental regulatory bodies. However, regulatory theory today contemplates that this function may also rest with private actors, with regulation thus extending along a continuum from ‘command and control’ regulation where government is responsible for all aspects of regulation and administration, to privately controlled regulation at the other end.58 This view of regulation is implicit in various definitions of the term. For example, Black sees regulation as ‘the sustained and focused attempt to alter the behaviour of others according to defined standards or purposes with the intention of producing a broadly identified outcome’. This may involve, for example, mechanisms of standard setting, information gathering and behaviour modification.59 Flynn and Marsden write that ‘regulation may be formalised through the enactment of legislation or it may be established socially through sets of social [and economic] practices, backed up by political and/or economic power’.60 Private standards in the global agrifood system are capable of falling within the ordinary meaning of regulation as understood by regulatory theorists. They represent the private sector’s use of economic power to change the behaviour of producers and suppliers, and have the effect of establishing norms in the market. That said, there is a line between what 56

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The applicability of the Vienna Convention to WTO disputes was confi rmed in US – Gasoline. Appellate Body Report, United States – Standards for Reformulated and Conventional Gasoline, WT/DS2/AB/R, adopted 20 May 1996, pp. 16–17. S. Picciotto, ‘Introduction: Reconceptualizing Regulation in the Era of Globalization’, Journal of Law and Society, 29 (2002) 1, p. 1. N. Gunningham and J. Rees, ‘Industry Self-Regulation: An Institutional Perspective’, Law and Policy, 19 (1997) 363, p. 366. J. Black, ‘Critical Reflections on Regulation’, Australian Journal of Legal Philosophy, 27 (2002) 1, pp. 25–6. A. Flynn and T. K. Marsden, ‘Rural Change, Regulation, and Sustainability’, Environment and Planning A, 27 (1995) 1180, p. 1186.

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are simply contractual specifications of supply requirements between a retailer and a supplier and those which represent regulation. This line is blurred, and identifying it will depend upon various factors, including the degree of market power held by the retailer and the degree to which the terms have become a market standard. Yet, one must be careful in relying solely on the ordinary meaning of words as accepted among a group (regulatory theorists) outside the context of the provision to be interpreted. Context is critical – here, it is that of a multilateral treaty widely understood to regulate government conduct. In the absence of specific provisions making private actions subject to the rules, there are arguably no grounds to read the rules as subjecting private actions to WTO disciplines. Some interpretive guidance of the SPS Agreement may, however, be obtained by reference to other covered agreements which form part of the relevant context of the SPS Agreement. Particularly relevant are cases decided under Article III:4 of the General Agreement on Tariffs and Trade (GATT) which refers to ‘all laws, regulations and requirements’. Several dispute settlement panels have considered the meaning of these terms. In Canada – Periodicals, the Panel stated that the terms ‘laws, regulations and requirements’ must involve a government action.61 In Canada – Autos, the Panel found that actions by private parties can only constitute ‘requirements’ within the meaning of Article III:4, where there is a ‘nexus’ between those actions and actions of a government, such that the government can be held responsible for the actions.62 A dispute panel considered the meaning of the word ‘requirement’ again in India – Autos, where it was suggested that there are two distinct situations that would satisfy the term ‘requirement’: (1) obligations which an enterprise is ‘legally bound to carry out’; and (2) obligations which are not mandatory but which an enterprise ‘voluntarily accepts in order to obtain an advantage from the government’.63 Both these definitions require an input from government, either in enforcing the legally binding requirement or in conferring an advantage.

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Panel Report, Canada – Measures Concerning Periodicals, WT/DS31/R, adopted 30 July 1997, paras. 5.33–5.36. Panel Report, Canada – Certain Measures Affecting the Automotive Industry, WT/ DS139/R and WT/DS142/R, adopted 19 June 2000, para. 10.107. Panel Report, India – Measures Affecting the Automotive Sector, WT/DS146/R and WT/ DS175/R, adopted 5 April 2002, para. 7.184.

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While care must be taken to interpret each of the covered Agreements according to their specific context, these decisions regarding GATT Article III:4 have direct relevance to interpretation of the term ‘all relevant laws, decrees, regulations, requirements and procedures’ in the SPS Agreement. The GATT and SPS Agreement were both implemented with the purpose of disciplining government action. Indeed, the initial impetus for development of the SPS Agreement came out of the perceived necessity to reinforce GATT rules and disciplines in the SPS area, given the adverse effects that such regulations and barriers can have on agricultural trade.64 Further, the SPS Agreement’s Preamble states that the Members desire to ‘elaborate rules for the application of the provisions of GATT 1994 which relate to the use of sanitary or phytosanitary measures, in particular the provisions of Article XX(b)’. Article 3.2 says that SPS measures which conform to international standards, guidelines or recommendations shall be presumed to be consistent with the relevant provisions of this Agreement and of GATT 1994. These references to the GATT in the SPS Agreement suggest that the term ‘measures’ in the latter should be read consistently with ‘measures’ under the GATT. In particular, it would be inconsistent if the SPS Agreement required private actions to comply with GATT rules if they are not covered by the GATT in the first instance. The Annex A definition of ‘SPS measure’ has been the subject of one decision: EC – Biotech Products. The Panel found that an SPS measure consists of three elements: the purpose of the measure, its legal form and its nature. It determined that the Annex A(1) mention of ‘laws, decrees, and regulations’ referred to the form that SPS measures must take. It then explained that the terms ‘requirements and procedures’ did not refer to the form SPS measures must take, but were a reference to their nature (for example, end product criteria, processes and production methods, testing, etc).65 The Panel therefore seemed to be saying that an SPS measure must be in the form of laws, decrees or regulations.66 The Panel’s decision 64

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Report by the Chairman to the Negotiating Group on Agriculture, ‘Negotiating Group on Agriculture, Working Group Sanitary and Phytosanitary Regulations and Barriers’, (WTO Doc. MTN.GNG/NG5/WGSP/1, 1990). Panel Report, European Communities – Measures Affecting the Approval and Marketing of Biotech Products, WT/DS291/R, WT/DS292/R and WT/DS293/R, adopted 21 November 2006, para. 7.149. I. Carreño and P. R. Vergano, ‘Private Standards Within the WTO Multilateral Framework’ (O’Connor and Company, European Lawyers, Brussels) – Annex to

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appears to be underscored by a presumption that some nexus with government is required for a measure to be covered by the SPS Agreement. While such a presumption is arguably defensible, the insistence on SPS measures taking the form of ‘laws, decrees, or regulations’ is lacking any apparent justification, either in the text or otherwise. It should also be noted that the SPS Agreement includes the term ‘decrees’, which is not present in the GATT’s definition of a ‘measure’. The inclusion of this term provides further support for the argument that government action is required. Decree is ordinarily used to denote an official or authoritative decision. The Oxford English Dictionary defines it, inter alia, as ‘an ordinance or edict set forth by the civil or other authority; an authoritative decision having the force of law’. There is nothing to suggest that, of the words used in this list, regulations, requirements or procedures should be given a meaning so disparate as those preceding it, so as to include private actions with no nexus to government. Trebilcock and Howse provide further support for a narrow reading of the terms ‘regulation, requirements and procedures’. They argue that if the text of a WTO agreement constitutes or reflects a painstakingly negotiated set of trade-offs between liberal trade values and interests and other policy values and interests, attention to the exact text is essential to preserve the balance of the bargain.67 They suggest that such an approach is reflected in Article 19.2 of the Dispute Settlement Understanding, which states that ‘the panel and Appellate Body cannot add to or diminish the rights and obligations provided in the covered agreements’. The SPS Agreement represents a set of trade-offs between liberal trade values and domestic regulatory autonomy in an area of considerable political sensitivity. The enactment of SPS measures is a critical aspect of countries’ regulatory response to risks to humans, animals or plants. Interpretation of the Agreement should therefore aim to preserve the balance as negotiated. Interpreting ‘all relevant laws, decrees, regulations, requirements and procedures’ to include private standards would arguably extend countries’ obligations under the SPS Agreement in a manner that the negotiators never intended. Article 32 of the Vienna Convention permits reference to the travaux preparatoires in order to, inter alia , confi rm an interpretation, or to

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Submission by the United Kingdom to the Committee on Sanitary and Phytosanitary Measures (WTO Doc. G/SPS/GEN/802, 2007), p. 73. M. J. Trebilcock and R. Howse, The Regulation of International Trade, 3rd edn (Oxford, Routledge, 2005), p. 134.

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determine meaning where there is ambiguity or obscurity. During these negotiations, focus was always on ‘national practices’, with the understanding that assessment of a threat to animal or plant life or health, and determination of the preventive measures considered necessary, were matters ‘which lay within the competence of the relevant national authorities in each country.’68 Th is supports the interpretation that the Agreement was intended to discipline government measures. As Gascoigne points out, while private standards were already in use before and during negotiation of the SPS Agreement, safety standards were typically considered to be a matter for action by governments.69 Widespread private sector responses to broader consumer concerns have come about largely since negotiation of the Uruguay Round Agreements.70 Finally, the Appellate Body has said that interpretation must give meaning and effect to all the terms of a treaty and that an interpreter is not free to adopt a reading that would result in reducing whole clauses or paragraphs of a treaty to redundancy or inutility.71 If the definition of SPS measure were read to include private standards, it would essentially render Article 13 of the SPS Agreement (which makes provision for actions by ‘non-governmental entities’) redundant, as there would be no need for a provision dealing with actions by non-governmental entities if their actions in the form of private standards were already covered. Thus, the context of the Agreement supports a finding that SPS measures only comprise governmental measures.

Actions by non-governmental entities Article 13 states that: Members shall take such reasonable measures as may be available to them to ensure that non-governmental entities within their territories, as well as regional bodies in which relevant entities within their territories are members, comply with the relevant provisions of this Agreement. [Emphasis added.] 68

69 71

Committee on Trade in Agriculture, ‘Sanitary and Phytosanitary Regulations and Other Technical Barriers to Trade’, (WTO doc. AG/W/13), para. 2. Excerpt in Annex of: Negotiating Group on Agriculture, Sanitary and Phytosanitary Regulations Affecting Trade in Agriculture – Background Note by the Secretariat, ‘Sanitary and Phytosanitary Regulations Affecting Trade in Agriculture’, (WTO Doc. MTN.GNG/NG5/W/41, 1988). Gascoigne et al., supra, note 13, p. 22. 70 Ibid. United States – Gasoline, supra, note 56, p. 23.

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Thus, governments are responsible at least in part for the actions of non-governmental entities. The Agreement does not define ‘nongovernmental entities’ and there are at least two possible interpretations of this fairly ambiguous term. It is arguable that only private entities that have been entrusted by government with the performance of certain tasks or that have some special legal status would fall under the definition.72 However, a broader interpretation that covers private entities might apply, as some developing countries have recently argued before the SPS Committee with respect to EurepGAP (now GlobalGAP).73 Nonetheless, it is unlikely that panels and the Appellate Body would adopt a broad definition of the term. The ordinary meaning of the words provides limited guidance. The Oxford English Dictionary defines the term ‘non-governmental’ as ‘not belonging to or associated with a government’. This definition would seem to cover any private entity, including retailers. However, the question must be asked why the term ‘non-governmental’ was chosen, as opposed to ‘private’ or ‘commercial’. The latter are ordinary, everyday words used to describe private, for-profit entities such as retailers. The addition of the prefi x ‘non-’ arguably puts the term into an intermediate category between governmental bodies on the one hand and fully private, for-profit organisations on the other. Taking a contextual approach, support for a narrow interpretation may be found by looking at other covered Agreements. The term ‘non-governmental entity’ is not found in the GATT, but is found in Article I:3 of the GATS which stipulates when a measure affecting trade in services is considered to be a measure taken by a WTO Member. It refers to ‘measures taken by non-governmental bodies in the exercise of powers delegated by central, regional or local governments or authorities’. The inclusion of the qualifier ‘delegated’ means GATS covers non-governmental measures only where the government has delegated responsibility for making the measure to the entity in question. GATS also refers to non-governmental bodies in its Annex on Telecommunications where it refers in paragraph 7(b) to the role played by ‘intergovernmental and non-governmental organisations and agreements 72 73

Gascoigne et al., supra, note 13, p. 9–10. SPS Committee – Note by the Secretariat, ‘Minutes of the Meeting held on 29–30 June 2005’, (WTO Doc. G/SPS/R/37, 2005), paras. 16–17. The European Commission responded that EurepGAP is a private body whose standards are not EC standards. Further, even if they exceeded the requirements of EC standards, the EC could not object to them as they did not confl ict with EC legislation (para. 18).

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in ensuring the efficient operation of domestic and global telecommunications services, in particular the International Telecommunications Union’. This use suggests ‘non-governmental’ was meant to indicate some kind of intergovernmental or other recognised body involved in regulation and standard setting, perhaps such as Codex. The term ‘non-governmental’ is also found in the Agreement on Preshipment Inspection, in its definition of ‘international standards’. The footnote to Article 2.4 says that an international standard is a ‘standard adopted by a governmental or non-governmental body whose membership is open to all Members, one of whose recognised activities is in the field of standardisation’. This definition again suggests that in the WTO the term ‘non-governmental’ means something more than just any private commercial entity. The Agreement on Technical Barriers to Trade (TBT Agreement) uses the similar term ‘non-governmental body’ and defines it to include a body with ‘legal power to enforce a technical regulation’. This indicates the existence of some non-governmental bodies with no such legal power, but such bodies fall outside the scope of the Agreement. It is arguable that if the drafters of the SPS Agreement had intended the definition of non-governmental entity to be restricted in a similar manner to one of these other agreements, they would have done so explicitly, and that it is therefore inappropriate to read such elements implicitly into the SPS Agreement.74 However, given that the term ‘non-governmental entity’ is ambiguous and could be read in different ways, reference to context, including the way in which the term has been narrowed in other covered agreements, is therefore appropriate. The ordinary meaning of the words ‘non-government’, as noted above, is conceptually different from the words ‘private’ or ‘commercial’, words that would more readily be read to include retailers and their associations.75 There is nothing to suggest that the SPS Agreement should be radically different from other WTO Agreements when it comes to the meaning given to the 74

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See Bohanes and Sandford, supra, note 5, p. 38. They refer to the Appellate Body’s statement that words should not be read into a treaty ‘that are not there’ (Appellate Body Report, India – Patent Protection for Pharmaceutical and Agricultural Chemical Products, WT/DS50/AB/R, adopted 16 January 1998, para. 45). See also Article 19.2 of the Dispute Settlement Understanding as noted above. Note that under consideration here are retailers and their associations such as EurepGAP. There may be an argument for construing actual standards-setting organisations (whether intergovernmental or sectoral) differently than associations such as EurepGAP which are controlled by retailers.

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term ‘non-governmental entity’. Reference to the travaux preparatoires reveals no proposals that the SPS Agreement would apply to private sector organisations.76 In addition, Gascoigne records the recollections of two Uruguay Round negotiators,77 both of whom suggest that the application of the Agreement to private voluntary standards was never mentioned, either in formal negotiating meetings or in informal discussions.78 The history of the SPS Agreement negotiations also supports a narrow interpretation. The issue of health regulations as trade barriers emerged during the Tokyo Round (1973 to 1979) as it was recognised that, not only did divergent regulations have the potential to impede trade, but the issue would grow in importance as governments adopted more health and safety and environmental regulations.79 The negotiators focused on government regulations as these had been proliferating since the late 1960s.80 The Tokyo Round negotiations led to adoption of the Agreement on Technical Barriers to Trade (known as the ‘Standards Code’) in 1979. The Standards Code applied to both industrial and agricultural products81 and aimed to minimise trade distortions arising from divergent national regulations.82 By 1987, however, consensus had emerged that the GATT and the Standards Code had failed to curtail proliferating regulations disrupting agricultural trade.83 Uruguay Round negotiations addressed this failure. The SPS Agreement was part of the response, with negotiators expressing concern that, if border restrictions such as tariffs and quantitative restrictions were reduced successfully, there would be more pressure on governments to use health 76

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78 80

81 82

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See the WTO series of documents MTN.GNG/NG5/WGSP#. See also T. P. Stewart, The GATT Uruguay Round: A Negotiating History (1986–1992), Volume 1, Commentary (Boston, Kluwer Law and Taxation Publishers, 1993). Gretchen Stanton, who chaired almost all of the negotiating meetings, and Digby Gascoigne, who represented Australia throughout the negotiations. Gascoigne et al., supra, note 13, p. 22. 79 Stewart, supra, note 76, p. 1067. Negotiations were based on a study that GATT Members had commenced in 1967 which aimed at establishing a comprehensive inventory of existing non-tariff barriers to international trade. The Activities of GATT 1967/68, (Geneva, GATT, 1969), p. 10; Stewart, supra, note 76, pp. 706–7. Article 1.3. Unlike the SPS Agreement, the Standards Code was a plurilateral agreement which meant that it was not ratified by all WTO Members; there were only 38 members at the end of 1991. Stewart, supra, note 76, p. 1067. D. Roberts, ‘Preliminary Assessment of the Effects of the WTO Agreement on Sanitary and Phytosanitary Trade Regulation’, Journal of International Economic Law, 1 (1998) 377, p. 380.

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and sanitary regulations to restrict trade. The border restrictions in question were government measures, so a reasonable implication is that concern focused on the potential for governments to resort to health measures. The SPS Agreement’s initial Terms of Reference stated that ‘rights and obligations under the proposed SPS Agreement should be extended also to relevant local government bodies, on a best efforts basis’.84 Similar references were made throughout the negotiations; however, there was nothing to suggest that it should be extended to private entities. Thus, the available evidence suggests that the reference to ‘nongovernmental entities’ in Article 13 does not contemplate the application of the SPS Agreement to the development of private standards.

IV

Implications

Private standards are not legal requirements. However, where they become the industry norm, suppliers may have little choice in choosing whether or not to comply. As the WTO Secretariat notes, the choice is likely to be one between compliance or exit from the market. In these situations, the distinction between private voluntary standards and mandatory official requirements blurs.85

For the international trading system To the extent that private food safety standards are more stringent than official government requirements, the SPS Agreement’s trade liberalisation and transparency objectives are arguably being undermined. Similarly, private standards dealing with social and environmental issues may also undermine the general principles of trade liberalisation. First, onerous standards have the potential to impede market access. While the SPS Agreement does not guarantee any particular level of market access, it does seek to minimise the negative impacts of SPS measures on trade. If private standards are not covered by the SPS Agreement’s disciplines, then a back door is potentially opened to measures that have such a negative impact. A number of provisions in WTO Agreements seek to 84

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Negotiating Group on Agriculture, Working Group Sanitary and Phytosanitary Regulations and Barriers – Note by the Nordic Delegation, ‘Form and Disposition of the Agreement on Sanitary and Phytosanitary Barriers’, (WTO Doc. MTN.GNG/NG5/ WGSP/W/10, 1990). SPS Committee – Note by the Secretariat, supra, note 4, para. 9. See generally Fulponi, supra, note 18.

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prevent circumvention of the rules by ‘textual hooks’ attributing to WTO Members conduct undertaken by private parties.86 However, the analysis in Section III did not uncover any ‘textual hooks’ in the SPS Agreement that could extend to the present case where there is no evidence that governments are deliberately circumventing their obligations. Second, private standards may be used as a protectionist tool or as a disguised restriction on trade. Traditionally, protectionism against imports has been considered the territory of producers. However, Perdikis, Kerr and Hobbs argue that the WTO ought to recognise that consumers can also represent a source of protectionist pressure.87 That is, consumers’ preferences lead them to demand ‘protection’ against imports that are seen as dangerous or otherwise undesirable (not necessarily because there is a real health risk), and this may be considered a form of protectionism which is able to take hold via private standards. In addition, while common wisdom holds that private standards are developed in response to consumer demand, there remains a question as to what drives consumer demand. Consumer demand for local produce may be driven in part by propaganda from local industry protecting themselves from foreign competition. Third, the proliferation of private standards may diminish the level of transparency around standard setting, further undermining the SPS Agreement’s objectives. Retailers are under no obligation to notify their standards and/or make their standard-setting processes transparent or consistent.88 Finally, where private standards are being used, two of the mechanisms provided for in Article 4 of the SPS Agreement to facilitate trade are made redundant. These are: first, the concept of equivalence which provides for countries to recognise other countries’ SPS measures as equivalent, even if different, so long as they achieve the importing Members’ desired level of SPS protection; and second, the concept of mutual recognition whereby the importing country explicitly recognises the equivalence of the regulations in the exporting country so that exporters need only comply with the regulations in their home country. The difficulty this presents is that including private standards under the SPS Agreement would potentially harm the trading system by reducing its legitimacy among domestic constituencies. The SPS Agreement 86 87

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See Bohanes and Sandford, supra, note 5, p. 26. N. Perdikis, W. A. Kerr and J. E. Hobbs, ‘Reforming the WTO to Defuse Potential Trade Confl icts in Genetically Modified Goods’, The World Economy, 24 (2001) 379, p. 392. Gascoigne et al., supra, note 13, pp. 26–7.

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has already come under fire for intruding into the regulatory decisions of Members and – by requiring scientific evidence – precluding consideration of social, cultural and ethical concerns.89 Hilf argues that the more the WTO is involved in the exercise of public authority by affecting domestic regulations, particularly in matters such as health, the more that authority must be legitimised in order to be respected. In this sense, legitimacy refers to the WTO’s need for a ‘high degree of moral and normative justification for its political and social actions’.90 Legitimacy of international institutions may be gained through democracy, where there is participation in deliberation and decision-making by agents considered as moral and political equals,91 as well as through delivering good results.92 The WTO’s legitimacy has been criticised as lacking on both these grounds.93 Extending its rules to private standards would further threaten the WTO’s legitimacy due to a lack of mandate or justification. Even if the organisation’s source of legitimacy is accepted as being the Member states,94 those states have not authorised the WTO to include private entities within its embrace.

For developing countries For developing countries, the impact of private standards may be both positive and negative. The main benefit – where compliance with standards is achieved – is enhanced access to foreign markets and the potential to develop longer-term trading relationships.95 Standards requiring 89

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See, for example, D. N. Scott, ‘Nature/Culture Clash: The Transnational Trade Debate Over GMOs’, Hauser Global Law School Program, (Global Law Working Paper 06/05, 2005), pp. 31, 47 and 57; J. Scott, ‘On Kith and Kine (and Crustaceans): Trade and Environment in the EU and WTO’ in J. H. H. Weiler (ed.), The EU, the WTO and the NAFTA (New York, Oxford University Press, 2000), pp. 125–67. M. Hilf, ‘How Can Parliamentary Participation in WTO Rule-Making and Democratic Control Be Made More Effective? The European Context’ in E.-U. Petersmann (ed.), Reforming the World Trading System (New York: Oxford University Press, 2005) 413, p. 414. A. B. Zampetti, ‘Democratic Legitimacy in the World Trade Organization: The Justice Dimension’, Journal of World Trade, 37 (2003) 105, p. 117. D. C. Esty, ‘The World Trade Organization’s Legitimacy Crisis’ World Trade Review, 1 (2002) 7, p. 16. Ibid. J. Bacchus, ‘A Few Thoughts on Legitimacy, Democracy, and the WTO’ in Petersmann (ed.), Reforming the World Trading System: Legitimacy, Efficiency, and Democratic Governance (New York, Oxford University Press, 2005), pp. 429 and 431. Lee, supra, note 14, p. 23. Some argue that this is in fact the only benefit. O. Aloui and L. Kenny, ‘The Cost of Compliance with SPS Standards for Moroccan Exports: A Case Study’, The World Bank, (Agriculture and Rural Development Discussion Paper, 2004), p. 28.

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production process and performance improvements not only facilitate market access, but also have the potential to improve a country’s overall productivity and economic performance and also to benefit the local environment and worker health (for example, through less and correct use of pesticides).96 These potential benefits are, however, subject to developing country concerns that private standards are a barrier to market access for their exporters due to their content, cost of implementation and capacity requirements.97 With respect to the content of standards, the concern is that they are biased towards European practices.98 In addition, there are concerns that standards may be used as a protectionist tool.99 There are particular concerns about the appropriateness of social standards that are not related to product attributes and conflict with local circumstances, values and practices.100 Recent complaints in the SPS Committee have raised concerns in each of these regards.101 Second, the costs of implementation can be high, and reduce profit margins.102 Again, this is a key concern of those countries that have complained to the SPS Committee about EurepGAP standards for bananas.103 Costs tend to impact most severely on small and medium-sized producers with limited capital and economies of scale.104 Regarding certification, not only are suppliers often required to obtain third-party certification, but audits may be required multiple times annually and may have to be repeated due to lack of equivalence between schemes. Further, in many developing countries there are no independent third-party certifiers, meaning that suppliers must bring in certifiers from Europe or the United States, which is an expensive exercise.105 96

97 98

99 100

101

102 103

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See generally Jaffee and Henson, supra, note 10. See also L. Fulponi, ‘Private Voluntary Standards and Developing Country Market Access: Preliminary Results’, (WTO Doc. G/SPS/GEN/763, 2007), para. 17. Gascoigne et al., supra, note 13, p. 5. Gascoigne et al., supra, note 13, p. 5. Willems et al., supra , note 9, p. 21. See also Jaffee and Henson, supra , note 10, pp. 14 and 37. Jaffee and Henson, supra, note 10, p. 2. Gascoigne et al., supra, note 13, p. 5. Aloui and Kenny write about standards that are ‘drastic and costly’ and not appropriate to local social and climatic conditions. Aloui and Kenny, supra, note 95, p. 29. See SPS Committee – Note by the Secretariat, ‘Minutes of the Meeting held on 29–30 June 2005’, (WTO Doc. G/SPS/R/37, 2005). Gascoigne et al., supra, note 13, p. 5. SPS Committee – Note by the Secretariat, ‘Summary of the Meeting Held on 11–12 October 2006’, (WTO Doc. G/SPS/R/43, 2006), p. 11. Gascoigne et al., supra, note 13, p. 5. Hatanaka et al., supra, note 27, p. 362. Willems et al., supra, note 9, p. 35.

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Studies by Fulponi and the OECD do find, however, that once farms are compliant, the ongoing audit and certification costs of private standards are often not excessive in relation to sales. Also, some standards schemes allow for group certification, which may reduce the costs.106 Capacity constraints include both physical and human capital.107 Physical capital shortages are often external to suppliers, relating to economy-wide infrastructure and services such as lack of reliable energy supplies, low-quality transportation and telecommunications systems, lack of laboratories and lack of cold storage facilities.108 Human capital shortages may cause difficulties for exporters in administrative matters such as record keeping, chemical use verification, management of different standards systems and their compliance and certification of good manufacturing practices.109 Perhaps more fundamentally, human capital shortages lead to difficulties in implementing required changes in operations, particularly for small and medium-sized producers.110 Despite these costs, the outlook for developing countries as a whole is not necessarily negative. Jaffee and Henson find that the environment in which standards are being applied is complex and dynamic and it is not easy to generalise. Thus, the balance between standards-as-barriers and standards-as-catalysts is specific to particular commodities in particular markets.111 What is clear, however, is that where suppliers are unable to meet private standards, they will struggle to sell their goods into affected markets. Various studies have documented the difficulties faced by suppliers, noting that while those who are in a position to comply can benefit from private standards, those who are not risk being excluded from the market.112 The SPS Agreement recognises the ‘special difficulties’ that may be faced by developing country members in complying with its rules and expresses the Members’ desire to assist them in this regard. Its technical assistance and special and differential treatment provisions (Articles 9 and 10) are intended to promote the interests of developing countries. To the extent that these provisions are intended to support the WTO’s 106 107

108 109 110 112

Fulponi, supra, note 33, para. 12. L. Fulponi, ‘Private Standards Schemes and Developing Country Market Access: Findings From Four Case Studies’ (Presentation to Joint UNCTAD/WTO Informal Session on Private Standards, Geneva, 2007). Fulponi, supra, note 33, para. 19. Ibid., para. 15. See also Lee, supra, note 14, p. 26. Fulponi, ibid. 111 Jaffee and Henson, supra, note 10. See, for example, J. J. Okello and S. M. Swinton, ‘Compliance with International Food Safety Standards in Kenya’s Green Bean Industry: Comparison of a Small- and a

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broader development objectives, a failure to discipline private standards might be seen as undermining those development objectives. That is, rich countries may be seen as abdicating their regulatory responsibilities to the private sector, thereby avoiding transparency and other obligations under the SPS Agreement.

For retailers and consumers It has been suggested that consumer demand is a significant motivating factor in the growth of private standards. Yet, research indicates that purchasers only benefit to a limited degree from these standards. Only a relatively small class of consumers are in a position to demand higher standards and pay higher prices. This small group of consumers may not be reflective of the general population and may not fairly represent the broader public interest.113 Further, consumers’ ability to influence is limited; many corporations engaged in private standard setting limit participation and intervention in the decision-making process.114 It seems that large retailers are the only clear winners, as they are in a position to control production and distribution of food globally.115 The costs of developing and implementing private standards are low in return for high benefits, which include reducing risks and uncertainty, safeguarding against claims and retaining consumers’ trust. In most cases, retailers achieve these benefits by passing responsibility onto their importers and processors.116 The market power of retailers allows them to impose standards on suppliers without providing any contractual certainty of supply, and to demand adherence to standards without reciprocating by paying a premium for the products.117

V

Conclusion

A large number of private standards in the food industry deal with subject matter that falls within the purview of the SPS Agreement.

113

114 117

Large-scale Farm Producing for Export’, Review of Agricultural Economics, 29 (2007) 269. Aloui and Kenny, supra, note 95. J. Konefal, M. Mascarenhas and M. Hatanaka, ‘Governance in the Global Agro-food System: Backlighting the Role of Transnational Supermarket Chains’, Agriculture and Human Values, 22 (2005) 291. Ibid., p. 299. 115 Ibid., p. 295. 116 Willems et al., supra, note 9, p. 7. Gascoigne et al., supra, note 13, p. 5. See also Jonker et al., supra, note 10, p. 28; Henson and Reardon, supra, note 16, p. 247.

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There is a double-edged sword regarding such standards. On one hand, if a private sector initiative is trade-distorting without adequate justification, WTO intervention might be considered appropriate. Indeed, failing to intervene threatens to undermine achievement of the SPS Agreement’s trade liberalisation objectives. On the other hand, to interpret the SPS Agreement as covering private standards would extend the WTO’s reach into market activities to an extent never anticipated by the negotiators and thus threaten its very legitimacy. On balance, the case for non-intervention by the WTO – in the absence of a clear negotiated mandate to the contrary – is the more convincing. The question then remains, if the type of private standards in question are not covered by the SPS Agreement, what next? And further, how to deal with standards that address social and environmental issues? As discussed, motivation for private standards revolves around enhancing reputation and profit. An optimal solution to the problems presented by the shift to private standards would be for governments to take a stronger regulatory stance, thus removing the motivation for retailers to set their own standards. If governments were to be more prescriptive and detailed with food safety standards, their efforts could be judged pursuant to the SPS Agreement. And engaging with the social and environmental issues that concern consumers would force WTO Members to come to terms with the issues raised and their implications for trade. To take such a stance would arguably be in the interests of governments as guardians of the legitimacy and relevancy of the multilateral trading system. However, there is a significant impediment to governments taking a strong regulatory stance. Most importantly, the private sector is doing it for them, thus minimising the costs to governments and allowing them to avoid hard questions raised by the use of social and environmental standards. Further, where consumers believe that retailers are acting in their interests by setting high standards, they will have less incentive to lobby governments to do more. These factors suggest that a second-best solution has to be found. Such a solution will likely require export-interested industries to take the initiative. Different approaches will be required, depending upon whether the problem facing the industry is a simple market access problem, or whether there is some form of disguised trade restriction or discrimination involved. When an allegation of discrimination or a disguised trade restriction arises (albeit due to private standards), governments of exporting countries are likely to take a greater interest if

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they feel that WTO rules are being undermined. That is, there might be a sense that their trading partners are – through government inertia – creating holes in the international trading regime. Whether governments of importing countries will also take an interest is less obvious. It is possible that they may do so due to lingering doubts about the possible application of WTO rules to the situation. However, the European Community’s denial of any responsibility in the face of the allegations by St Vincent and the Grenadines is not an encouraging sign in this regard. Despite this, where the problem facing an exporter involves some form of disguised trade restriction or discrimination, seeking to engage with the government of the importing country may be at least worth pursuing. It is certainly arguable that exporters should be able to enlist the support of their government, or government agencies (such as New Zealand Trade and Enterprise), to pursue such engagement. While governments of importing countries will likely say that they cannot control what private retailers do (as the European Community has told St Vincent and the Grenadines with respect to EurepGAP standards for bananas), persistent pressure may eventually have some traction. Engaging with governments of importing countries may be more fruitful if combined with a second approach, namely, to develop transnational networks of producers to engage with governments and/or retailers to find solutions to problems facing exporters. In the case of what appears to be disguised trade restrictions, such groups could seek to engage with both retailers and governments. Where the issue is purely a market access one, limiting engagement to the retailers and relevant organisations will be more appropriate. This type of approach recognises the market power held by retailers and would seek to rebalance the power shift in the market by bringing producers together. The situation facing different sectors and industries should be investigated, as no one solution will fit all. In particular, the best approach and possible solutions will differ, depending on whether the standards at issue concern food safety or quality, or social and environmental concerns. In some cases, there might be room for cooperation between retailers and producers in standard-setting activities. In others, there might be a role for competition law where retailers are large enough to have a dominant position in the marketplace. The implications of private standards for developing countries have been the subject of more research than have the implications for industries

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in developed countries.118 This research confirms that there is a need for developed countries to provide assistance in order to help facilitate trade between developing and developed countries. In addition, they should ensure that their technical assistance programmes recognise the realities of trade, assisting developing countries to comply with private standards, not just governmental regulations. Perhaps one area where further research would be useful is the potential for producer networks in developing countries to engage with those in developed countries. This chapter has considered the interplay between the SPS Agreement and private standards, and posited directions for future research. The suggested solutions contained here are only a beginning. It is hoped that some of the issues and suggestions raised here will be of use in setting an agenda for such research. 118

The World Bank has done a significant amount of work in this regard. See the Agriculture and Rural Development Discussion Papers series, including: Aloui and Kenny, supra, note 95; Lamb, Velez and Barclay, supra, note 11; Jonker, Ito and Fujishima, supra, note 10; Steven Jaffee, ‘From Challenge to Opportunity: Transforming Kenya’s Fresh Vegetable Trade in the Context of Emerging Food Safety and Other Standards in Europe’, The World Bank, (Agriculture and Rural Development Discussion Paper 1, 2003); Steven Jaffee, ‘Delivering and Taking the Heat: Indian Spices and Evolving Product and Process Standards’, The World Bank, (Agriculture and Rural Development Discussion Paper 19, 2005).

5 Eroding national autonomy from the TRIPS Agreement Susy Fr ankel

I

Introduction

The TRIPS Agreement1 has acquired a notorious reputation. Many regard its requirements as too onerous and out of step with the economic and development needs of developing countries. Some developed countries regard it as not strong enough in some areas, such as enforcement of intellectual property rights. Since the coming into force of the TRIPS Agreement its dissatisfied members, whether they are developed or developing countries, have negotiated, sometimes successfully, changes to international intellectual property protections in other international fora. These changes have been possible for two reasons. First, because the changes are outside the scope of the TRIPS Agreement and so TRIPS is not a limitation on the protection emerging elsewhere. An example of this is the development of sui generis protection for traditional knowledge. Second, because the TRIPS Agreement provides members with degrees of national autonomy over the implementation of some aspects of the Agreement. This autonomy over implementation arises because of the structure of the TRIPS Agreement. The TRIPS Agreement has a framework that allows its members some national autonomy over their own intellectual property legal regime, as long as those laws do not otherwise breach the Agreement.2 That national autonomy, even if limited, is provided through a structural framework of minimum national standards of intellectual property protection which members are required to enact in 1

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Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement or TRIPS), 15 April 1994, Marrakesh Agreement Establishing the World Trade Organization (WTO Agreement), Annex 1C, 33 I.L.M. 1197, 1198 (1994). Article 1.1 of the TRIPS Agreement provides ‘Members shall give effect to the provisions of this Agreement. Members may, but shall not be obliged to, implement in their law more extensive protection than is required by this Agreement, provided that such protection

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their domestic law. Those standards are agreed minimums and members have also agreed that they may provide more extensive protection in their domestic laws.3 It is, therefore, sometimes said that the TRIPS Agreement is a floor and not a ceiling. The TRIPS Agreement also states that ‘Members shall be free to determine the appropriate method of implementing the provisions of this Agreement within their own legal system and practice.’4 The effect of this provision is that the TRIPS Agreement is premised on a kind of national autonomy over implementation. This means that there are a multitude of laws and methods of enacting and enforcing those laws that can meet the minimum standards. Thus, although the core principles are similar, the details of domestic laws may be very different. This fundamental nature of a minimum standards agreement means that it does not necessarily create detailed harmonisation. Complete harmonisation would result in identical or near identical domestic laws. Minimum standards preserve autonomy over the exact detail of the laws while creating a harmonised policy behind those differing laws.5 The scope of that national autonomy will vary between the different articles of the TRIPS Agreement. Some articles are broad in what they require whereas others are more prescriptive. Th is chapter, in Sections II and III, discusses minimum standards and various aspects of national autonomy in implementing standards in the core areas of intellectual property as defi ned in the TRIPS Agreement.6 The number of differences between national laws in many of these areas of intellectual property has led to a number of international negotiations to harmonise intellectual property standards more deeply. These negotiations have taken place and are taking place in fora such as the World Intellectual Property Organization (WIPO), 7 the Convention on Biological

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does not contravene the provisions of this Agreement. Members shall be free to determine the appropriate method of implementing the provisions of this Agreement within their own legal system and practice.’ Ibid. 4 Ibid. This national autonomy over implementation coexists with the non-discrimination principles of national treatment and most-favoured nation (MFN). The non-discrimination principles ensure that members can expect that their intellectual property rights owners will qualify for non-discriminatory protection in other member states. The TRIPS Agreement does not defi ne intellectual property as such. In Article 1:2 it defi nes intellectual property as those areas covered in the Agreement which include copyright and related rights, trademarks, geographical indications, industrial designs, patents, layout-designs (topographies) of integrated circuits, protection of undisclosed information and control of anti-competitive practices in contractual licences. WIPO is a specialised agency of the United Nations, based in Geneva. See generally www.wipo.org/ (accessed 10 December 2009).

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Diversity (CBD), 8 and more recently the ACTA negotiations.9 In addition to these multilateral negotiations, members harmonise their intellectual property protections through free trade agreement (FTAs). These other international standards, whether reached through multilateral negotiations or through FTAs, deepen the harmonisation of intellectual property standards and in doing so they may lessen the degree of national autonomy over the implementation of the TRIPS minimums.10 Section IV discusses how these multilateral agreements and FTAs erode national autonomy in the TRIPS Agreement. The relationship between these other standards and the TRIPS Agreement is complex and this chapter, in Section V, offers some conclusions about how that relationship might change international intellectual property law.

II

Minimum standards

The use of minimum standards as a framework for international intellectual property protection was established in the nineteenth century, when the first major multilateral agreements, the Berne Convention11 and the Paris Convention,12 were formed under the auspices of what is now known as WIPO.13 Minimum standards combined with national treatment 8

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Convention on Biological Diversity, 5 June 1993, 1750 U.N.T.S. 143, available at www. cbd.int/ (accessed 10 December 2009). Article 8(j) provides: ‘Subject to its national legislation, respect, preserve and maintain knowledge, innovations and practices of indigenous and local communities embodying traditional lifestyles relevant for the conservation and sustainable use of biological diversity and promote their wider application with the approval and involvement of the holders of such knowledge, innovations and practices and encourage the equitable sharing of the benefits arising from the utilization of such knowledge, innovations and practices.’ There is ongoing work on defi ning and making operational this article at the Conference of the Parties. Anti-counterfeiting Trade Agreement negotiations are not part of any international organisation. They were commenced in October 2007 by the United States, the European Commission, Switzerland and Japan. Since then Australia, Canada, the European Union, Jordan, Mexico, Morocco, New Zealand, Republic of Korea, Singapore and United Arab Emirates have joined the negotiations. The details of the draft agreement became available for the first time in 2010. A summary can be found at www.med.govt.nz/templates/ ContentTopicSummary_34357.aspx (accessed 10 December 2009). Additionally members may agree to greater levels of harmonisation in bilateral and free trade agreement negotiations. Berne Convention for the Protection of Literary and Artistic Works, 24 July 1971 (Paris text), 1161 UNTS 3; 102 Stat 2852 (Berne Convention). Paris Convention for the Protection of Industrial Property, 14 July 1967 (Stockholm text), 828 UNTS 305 (Paris Convention). For a discussion of minimum standards in the Berne Convention, see generally S. Ricketson and J. C. Ginsburg, International Copyright and Neighbouring Rights: The Berne Convention and Beyond (Oxford University Press, 2006).

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became the international intellectual property agreement structural norm. There are several aspects of intellectual property protections that were not covered by the Berne and Paris Conventions and that was, in part, a reason for the development of the TRIPS Agreement.14 The TRIPS Agreement incorporated the substantive parts of the Paris and Berne Conventions.15 As minimum standards do not achieve harmonisation, one might ask why the TRIPS Agreement is structured in that way. Undoubtedly, because it was more effective to adopt an existing, and in many ways successful, international intellectual property framework and expand on it rather than start from scratch.16 However, in using the minimum standards framework the TRIPS Agreement also embodies the autonomy that members have over implementation of those standards. By focusing on this autonomy over implementation I am not suggesting that the TRIPS Agreement is not a detailed Agreement that requires its members to have substantive and far-reaching intellectual property protections in their domestic law. Rather, I emphasise that the minimum standards framework is the mechanism through which there can be degrees of autonomy over some aspects of national laws. Minimum standards, however, can be made more and more detailed in a way that removes or lessens autonomy that members of an agreement may have. Minimum standards are a stepping stone to harmonisation. They begin a path to harmonisation because they create some similar standards of intellectual property protection and even, sometimes, similar details which are implemented in national laws. Minimum standards in international intellectual property agreements, such as the Berne and Paris Conventions, have always been combined with the ability for members to provide more extensive protection. Nations who desire more extensive protection can enact it for themselves. Such nations have often then wished to see similar, more extensive, protections in other countries and therefore seek to have those other countries enact more extensive protections. Thus, 14

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The TRIPS Agreement also introduced dispute settlement to international intellectual property protection and this was an important reason that major developed countries pushed for intellectual property’s inclusion in the WTO. For a general discussion of the development of the TRIPS Agreement, see D. Gervais, The TRIPS Agreement: Drafting History and Analysis, 3rd edn (London, Sweet & Maxwell, 2008). The TRIPS Agreement also incorporated the International Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations, 26 October 1991, [hereinafter Rome Convention], see Article 13, and the Treaty on Intellectual Property in Respect of Integrated Circuits, 26 May 1989, see TRIPS Agreement, Article 1:3. Also WIPO was a well-established intellectual property-focused institution whereas the WTO has a broader mandate.

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international intellectual property has progressively developed through this mechanism. While the minimum standards structure is much older than the TRIPS Agreement, since TRIPS came into force in 199617 there has been a lot of activity, multilaterally and through FTAs, to increase intellectual property standards. This activity has eroded and is eroding some aspects of the national autonomy that the TRIPS Agreement allowed in the first instance. Before discussing that erosion it is necessary to outline some of the TRIPS Agreement minimum standards and how they give members varying degrees of national autonomy over their implementation.

Copyright The TRIPS Agreement draws heavily on the Berne Convention to set the minimum standards for copyright protection. It does this by incorporating the main provisions of the Berne Convention into the TRIPS Agreement.18 These provisions include different types of minimum standards. They are a mix of broad standards, that leave considerable room for national differences, and prescriptive standards that do not leave much, if any, discretion over their implementation. Copyright law protects literary and artistic works, as defined in the Berne Convention.19 The TRIPS Agreement adds to the subject matter of protection by expressly requiring the protection of databases that are ‘intellectual creations’ and that members protect computer programs as literary works.20 The requirement for the protection of computer programs leaves little room for the category of copyright work which must be applied to computer programs, but it leaves much scope for how that literary work law develops. 21 17

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Although the WTO agreements came into force in January 1995, industrialised members did not have to comply with the TRIPS Agreement until 1 January 1996. TRIPS Agreement, supra, note 1, Article 9:2. Article 2 of the Berne Convention, supra, note 11, provides that ‘the expression “literary and artistic works” shall include every production in the literary, scientific and artistic domain, whatever may be the mode or form of its expression, such as books, pamphlets and other writings; lectures, addresses, sermons and other works of the same nature; dramatic or dramatico-musical works; choreographic works and entertainments in dumb show; musical compositions with or without words; cinematographic works to which are assimilated works expressed by a process analogous to cinematography; works of drawing, painting, architecture, sculpture, engraving and lithography; photographic works to which are assimilated works expressed by a process analogous to photography; works of applied art; illustrations, maps, plans, sketches and three-dimensional works relative to geography, topography, architecture or science.’ TRIPS Agreement, supra, note 1, Article 10. In some countries computer programs are also protected as patents.

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The Berne Convention allows members to make certain choices about the way in which they protect copyright works. Members are, for example, free to protect industrial designs through copyright, but they do not have to do so.22 Because the TRIPS Agreement allows for more extensive protection, the relationship between more extensive protection and the minimum standard can be complicated for national treatment purposes.23 However, broadly the ultimate proof of national autonomy over minimum standards is the ability for members to provide more extensive protection. Conversely, the ultimate limitation to national autonomy is the inability to provide less extensive protection except in the limited sphere of exceptions discussed below.

Trade marks and geographical indications The TRIPS Agreement is the fi rst time that a trade mark 24 and a trade mark owner’s rights25 have been defi ned broadly at the international 22 23

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Berne Convention, supra, note 11, Article 1:7. An issue may arise whether a more extensive protection needs to be provided on a national treatment basis or whether it is outside the scope of the TRIPS Agreement so national treatment is not required. What is greater or outside of the Agreement is not always straightforward to identify. An example is the European approach to database protection, which it says is outside of the scope of the TRIPS Agreement because TRIPS does not require protection of data under Article 10. The alternative argument is that it ought to be subject to national treatment because protecting data from unfair extraction is a greater level of database protection than the TRIPS Agreement requires. It simply requires that the selection and arrangement of databases that are intellectual creations are protected, see TRIPS Agreement, Article 10.2, and for a general discussion of the database issue see Bernt Hugenholtz, ‘Implementing the European Database Directive’, www.ivir.nl/publications/hugenholtz/PBH-HCJ-LIB.doc (accessed 10 December 2009) and J. H. Reichman and P. Samuelson, ‘Intellectual Property Rights in Data?’, Vanderbilt Law Review 50 (1997), 51. Article 15:1 of the TRIPS Agreement provides ‘Any sign, or any combination of signs, capable of distinguishing the goods or services of one undertaking from those of other undertakings, shall be capable of constituting a trademark. Such signs, in particular words including personal names, letters, numerals, figurative elements and combinations of colours as well as any combination of such signs, shall be eligible for registration as trademarks. Where signs are not inherently capable of distinguishing the relevant goods or services, Members may make registrability depend on distinctiveness acquired through use. Members may require, as a condition of registration, that signs be visually perceptible.’ Article 16:1 of the TRIPS Agreement provides, ‘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 for goods or services which are identical or similar to those in respect of which the trademark is registered where such use

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level. 26 The defi nition of trade mark utilises the concept of a sign. The TRIPS Agreement requires protection of signs that are ‘words including personal names, letters, numerals, figurative elements and combinations of colours’.27 However, protection is not limited to particular types of signs and many countries have more extensive signs protected under trade mark law, such as sounds and smells. National autonomy over whether to have this, more extensive, kind of protection for trade marks is not simply a matter of choosing more extensive protection or not; the TRIPS Agreement expressly preserves such autonomy in the words ‘Members may require as a condition of registration that signs be visually perceptible.’28 The core requirement for trade mark protection is that trade marks must be distinctive. The TRIPS principle that trade marks must distinguish a trader’s goods from other traders’ goods29 is generally found in most trade mark laws. It is the kind of standard that should be described as leaving ample scope for national autonomy, as how courts and trade mark registration offices interpret distinctiveness varies from country to country. The TRIPS Agreement anticipates some of this variation of national laws as it provides that countries may (but, notably, not must) protect trade marks that have acquired distinctiveness through use.30 The TRIPS Agreement requires protection of geographical indications in a general way, allowing countries to determine whether they have a separate geographical indications system or whether it is a part of the trade mark system.31 Less autonomy is found for the protection of geographical indications relating to wines and spirits, where more detailed protection is required.32

Patents The TRIPS Agreement requires that members provide for patents over inventions in all fields of technology. 33 Th is removed any national

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would result in a likelihood of confusion. In case of the use of an identical sign for identical goods or services, a likelihood of confusion shall be presumed. The rights described above shall not prejudice any existing prior rights, nor shall they affect the possibility of Members making rights available on the basis of use.’ The Paris Convention, supra , note 12, although it requires protection of well-known marks, does not require a broad substantive protection for trade marks. TRIPS Agreement, supra, note 1, Article 15:1. Ibid., Article 15:1. 29 Ibid. 30 Ibid. 31 Ibid., Article 22. Ibid., Articles 23 and 24. Also see generally Gervais, supra, note 14, pp. 290–324. TRIPS Agreement, Article 1.

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autonomy over excluding certain categories of inventions from patentability purely on the basis of subject matter. Prior to TRIPS, many countries excluded patents in relation to pharmaceuticals.34 Under the TRIPS Agreement such blanket exclusions are no longer permissible, although developing countries had an extended period of time, until 2000, in which to bring their patent laws into compliance with the TRIPS Agreement.35 The extended period of time was until 2005 for patents relating to product inventions in ‘areas of technology not so protectable in its territory on the general dates of application’ of TRIPS.36 This extension until 2005 was particularly important for product patents relating to pharmaceuticals and agro-chemical products. Least developed countries have until 2013 to bring their laws to TRIPS Agreement standards.37 Even though the subject matter of patents is harmonised, there remains much national autonomy over the criteria of patentability. TRIPS provides that patents shall be available for inventions ‘provided that they are new, involve an inventive step and are capable of industrial application’.38 There is no definition of these criteria and so they may be defined in national law and interpreted by national courts. The result is widely different standards of patentability and much disagreement over those standards internationally. The TRIPS Agreement is silent on the definition of inventive step.39 Th is silence means that members must implement their own defi nitions of inventive step.40 Th is results in different countries having

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Prior to TRIPS, India, for example, allowed patents for the process of making pharmaceuticals, but not for the end product. This allowed India to make generic pharmaceuticals through non-patented processes. TRIPS Agreement, Articles 65:2 and 65:3, which allow the same delay for countries transitioning from communism. Ibid., Article 65:4. Ibid., Article 66, which originally provided for a 10-year extension, but was extended by WTO Ministerial Declaration until 1 July 2013. The declaration is available online at www.wto.org/english/thewto_e/minist_e/min05_e/draft_text_e.htm (accessed 10 December 2009). TRIPS Agreement, supra, note 1, Article 27:1. A footnote records that inventive step is synonymous with non-obviousness, see footnote to Article 27 of the TRIPS Agreement . J. H. Reichman and R. C. Dreyfuss, ‘Harmonization Without Consensus: Critical Reflections on Draft ing a Substantive Patent Law’, Duke Law Journal 57 (2007), 85–130, p. 97, state, ‘Admittedly, TRIPS gives its Members some leeway to tailor their laws to local needs. For example, states can presumably supply their own definitions of “inventive step” and determine for themselves the technological scope of patent protection.’ See also pp. 98–9 and the discussion of tying inventive step to a nation’s economic goals. Also

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different approaches to what is an inventive step. There must be limits to the autonomy that members have in defining inventive step. National definitions should presumably not be so demanding that nothing could be patentable, thus eliminating the scope of the TRIPS Agreement.41 The diversity arises from how inventive step is assessed. Broadly, an inventive step is something that is not obvious to a person skilled in the art. Beyond this, however, it is impossible to say that there is any international consensus or norm, regarding the level of or meaning of inventive step. Indeed, the push at WIPO for greater harmonisation of patent law and international negotiations aimed at that recognises the lack of consensus.42 Because TRIPS requires that products in all fields of technology must be patentable, there is no disagreement between members that fi rstuse pharmaceutical products are patentable. However, differences have emerged over whether TRIPS compliance requires second and subsequent uses of known pharmaceuticals to be patented.43 India’s law, for example, effectively defines inventive step so that it does not allow patents

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of note is that the parameters of inventive step will often be a combination of statute and case law in common law countries. There must be some conceptual boundary otherwise the treaty provision would be meaningless and such an interpretation would not be consistent with the principles of treaty interpretation. See R. C. Dreyfuss and A. F. Lowenfeld, ‘Two Achievements of the Uruguay Round: Putting TRIPS and Dispute Settlement Together’, Virginia Journal of International Law 37 (1997), 275, at pp. 282–304 where the authors suggest this is an area where the WTO dispute settlement process should show deference to developing country standards of inventive step. There is an ongoing negotiation at WIPO for a harmonisation of substantive patent law treaty; see also discussion in Reichman and Dreyfuss, supra, note 40. New uses of known pharmaceuticals were not always patentable, even in the developed world, because the pharmaceutical was known, and therefore novelty and inventive step could not be established. These types of patents, often called Swiss claims, were patented, in developed countries, on the basis that although the pharmaceutical compound itself is not necessarily new, the use is new. A Swiss-type patent claim is a claim for the use of a known substance in the manufacture of a medicament for the therapeutic and/or prophylactic treatment of a medical condition. Swiss-type claims are designed to circumvent prohibitions on patenting methods of medical treatments and are also an exception from the absolute rule of novelty, because the substance or the composition in the claim already forms part of the prior art. Swiss claims are rationalised on the basis that novelty is not completely abandoned as there is a ‘novel’ use. Broadly, the supposed rationale behind allowing Swiss claim patents is a reward for investment made to fi nd new uses. See generally R. Eisenberg, ‘The Problem of New Uses’, Yale Journal of Health Policy, Law and Ethics 5 (2005), 717. The original Swiss claim was for a second use of a known pharmaceutical. Since then, patents have been granted for subsequent uses and for new dosages, see generally S. Frankel, ‘Lord Cooke and Patents: The Scope of “Invention”’, Victoria University of Wellington Law Review 39 (2008), 73, 92–4.

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for second and subsequent uses of known compounds unless there is ‘an enhancement of the known efficacy’44 of the substance. India and some other developing countries regard such patents as being for incremental inventions and therefore resulting in the evergreening of a patent for a pharmaceutical substance.45 In sum, Members can and do delineate the details of patent systems according to their economic circumstances.46 This is clearly an area of the TRIPS Agreement where there has been much national autonomy. As discussed below, however, some FTAs have narrowed that autonomy for some members.

Enforcement of intellectual property The provisions of the TRIPS Agreement that require parties to have civil and criminal remedies and enforcement regimes are general requirements that provide much room for members to have considerable differences in their systems. Thus, there is much national autonomy in these minimum standards. General differences between WTO Members’ court systems are recognised in the TRIPS Agreement, which provides that none of the enforcement obligations create obligations that the parties provide a system of intellectual property enforcement that is distinct from its general civil and criminal law.47 44

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The Patents (Amendment) Act of 2005, India, s 3(d), provides that the following are not patentable inventions: ‘The mere discovery of a new form of a known substance which does not result in the enhancement of the known efficacy of that substance or the mere discovery of any new property or new use for a known substance or of the mere use of a known process, machine or apparatus unless such known process results in a new product or employs at least one new reactant.’ See generally A. Acuri and R. Castro, ‘How Innovative is Innovative Enough? Reflections on the interpretation of Article 27 TRIPS from Novartis v India ,’ http://papers.ssrn. com/sol3/papers.cfm?abstract_id=1159821 (accessed 21 March 2009); see also R. K. Rai, ‘Effect of TRIPS-Mandated Intellectual Property Rights on Foreign Direct Investment in Developing Countries: A Case Study of the Indian Pharmaceutical Industry’, Journal of World Intellectual Property 11 (5–6) (2008), 404. For further discussion of how members could do even more diversifying and be TRIPS compliant, see G. B. Dinwoodie and R. Dreyfuss, ‘Diversifying Without Discriminating: Complying with the Mandate of the TRIPS Agreement’, Michigan Telecommunications and Technology Law Review 13 (2007), 445. Article 41:5 of the TRIPS Agreement provides: ‘It is understood that this Part does not create any obligation to put in place a judicial system for the enforcement of intellectual property rights distinct from that for the enforcement of law in general, nor does it affect the capacity of Members to enforce their law in general. Nothing in this Part creates any obligation with respect to the distribution of resources as between enforcement of intellectual property rights and the enforcement of law in general.’

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The degree of autonomy in these provisions has been tested before the WTO dispute settlement body. In a dispute with China, the United States complained that China provided inadequate enforcement of copyright and trade mark infringement.48 One part of the complaint related to the thresholds of infringing copies that would give rise to a criminal level of infringement of copyright under Chinese law.49 The core of the United States’s case was that China’s thresholds, for criminal infringement in copyright law, rendered the requirements of the TRIPS Agreement to provide criminal offences for infringement ineffective in many instances where the criminal activity resulted in a number of copies that fell just below the relevant threshold. The scope of criminal liability and remedies for copyright infringement was an area over which there was little international agreement both in the Uruguay Round, leading to the TRIPS Agreement, and subsequently.50 Consequently the enforcement-related minimum standards, including those specifically about criminal liability and enforcement, are the classic example of minimum standards that are not prescriptive, but leave a lot of scope for different methods of implementation in national laws, or in other words the minimum standard leaves much national autonomy over its implementation.51 48

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For a summary of the US position, see Office of the United States Trade Representative, ‘WTO Case Challenging Weaknesses in China’s Legal Regime for Protection and Enforcement of Copyright and Trademarks’, www.ustr.gov/sites/default/fi les/uploads/ factsheets/2007/asset_upload_fi le908_11061.pdf (accessed 10 May 2010). See Request for Consultation by the United States, China – Measures Affecting the Protection and Enforcement of Intellectual Property Rights (China TRIPS Enforcement), WT/DS362/1, 10 April 2007. Interestingly, China reduced the level of the relevant thresholds from 1000 to 500 shortly before the US requested a Panel be formed to hear the dispute. As a result, the requirements for enforcement of intellectual property rights in the TRIPS Agreements are minimum standards, which are more akin to stating general principles rather than setting out details of enforcement. Article 41:1, the introductory provision to the enforcement articles of the TRIPS Agreement requires that: ‘1. Members shall ensure that enforcement procedures as specified in this Part are available under their law so as to permit effective action against any act of infringement of intellectual property rights covered by this Agreement, including expeditious remedies to prevent infringements and remedies which constitute a deterrent to further infringements. These procedures shall be applied in such a manner as to avoid the creation of barriers to legitimate trade and to provide for safeguards against their abuse.’ Article 61 of the TRIPS Agreement provides: ‘Members shall provide for criminal procedures and penalties to be applied at least in cases of willful trademark counterfeiting or copyright piracy on a commercial scale. Remedies available shall include imprisonment and/or monetary fines sufficient to provide a deterrent, consistently with the level

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As discussed below, it is precisely because of this national autonomy that the ACTA negotiations aim to prescribe more details of intellectual property enforcement. Also, enforcement provisions are strengthened in a number of United States FTAs.

III Exceptions to minimum standards protection The greatest area of national autonomy in both the Berne Convention and the TRIPS Agreement are the exceptions to protection. The TRIPS Agreement provides for some specific exceptions, such as exceptions to patentability on the basis of ordre public.52 In copyright, trade marks and patents, there are general criteria that must be met in order for members to provide exceptions in their laws. The test for all of these general exceptions originates from the Berne Convention and that test was adopted and adapted in the TRIPS Agreement.53 This is known as the three-step test. This test allows members to delineate their own exceptions to TRIPS minimum standards provided that those exceptions meet all three conditions. The conditions vary slightly between the different areas of intellectual property, but broadly exceptions must be limited, must not conflict with the normal exploitation of the work and must take into account the legitimate interests of the intellectual property rights owner.54 The patent and trade mark exceptions also refer to the legitimate interest of third parties. While some exceptions are found in many jurisdictions, such as copyright exceptions for research, many exceptions are exclusive to a particular country or even group of countries. The TRIPS flexibilities are even

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of penalties applied for crimes of a corresponding gravity. In appropriate cases, remedies available shall also include the seizure, forfeiture and destruction of the infringing goods and of any materials and implements the predominant use of which has been in the commission of the offence. Members may provide for criminal procedures and penalties to be applied in other cases of infringement of intellectual property rights, in particular where they are committed willfully and on a commercial scale.’ TRIPS Agreement, supra, note 1, Article 27:2. There are also permitted other exceptions from patentability, such as therapeutic and surgical methods of treatment, see Article 27:3. Also compulsory licensing of patents under Articles 31 and 31bis of TRIPS are a kind of exception. A discussion of the relationship between the provisions can be found in Ricketson & Ginsburg, supra, note 13, para 13.94–13.115 and see also WTO Panel Report, Canada – Patent Protection of Pharmaceutical Products, WT/DS114/R, adopted 17 March 2000. The details of the provisions can be found in relation to copyright at Article 13, trade marks at Article 17 and patents at Article 30 of the TRIPS Agreement.

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sometimes cited as the way in which developing countries may calibrate the TRIPS Agreement to meet some development needs. The parameters of the three-step test have been heavily criticised because they are ill-defined and the WTO panel interpretation of the test has been complicated and has failed to provide sufficient guidance for national legislatures that craft such exceptions.55 In the face of this there have been calls to clarify and even harmonise exceptions to copyright.56 Perhaps the appeal of harmonisation is that it would give a common understanding to what is within the three-step test and what is not; however, that appeal is outweighed by a number of factors. First, the different exceptions arise precisely because of differing circumstances, including economic conditions in different countries. Within copyright law, for example, countries tend to have exceptions that reflect social values such as education, research and free speech. It is beyond the scope of this chapter to describe different countries’ approaches to copyright exceptions; however, some broad features are outlined here. The exceptions will vary, depending on the role of and the legal structure that supports such social values in any particular country. This means that some countries will have broader exceptions than others. Additionally, countries without major copyright industries may utilise exceptions as much as possible so that uses of copyright works are as inexpensive as possible. In the field of patents, countries that seek to have cheaper access to patented goods or even to produce cheaper versions of patented goods, such as generic pharmaceuticals, will often seek to use patent exceptions as broadly as possible.57 The entire purpose of exceptions is that they can be calibrated to local economic and cultural needs. Consequently, the notion of harmonised exceptions conceptually does not sit well with the broad purpose of exceptions, which is that they may be crafted to recognise national interests. 55

56

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For a discussion of the three-step test see J. C. Ginsburg, ‘Toward Supranational Copyright Law? The WTO Panel Decision and the “Th ree-Step Test” for Copyright Exceptions’, R.I.D.A. 187 (2002) 3 and R. Okediji, ‘Towards an International Fair Use Doctrine’, Columbia Journal of Transnational Law 39 (2009) 75. For a summary of the calls for clarity and use of exceptions see UNCTAD/ICSTID Limitations and Exceptions to Copyright: Recent Developments and the Way Forward, available at www.unctad.org/sections/dite_totip/docs/tot_ip_0011_en.pdf (accessed 10 December 2009). Th is is not limited to patent exceptions. As discussed above, countries may calibrate patent criteria such as inventive step to meet local conditions, and compulsory licences under Articles 31 and 31bis are used to meet local needs.

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There may be exceptions to this such as when national interests transcend boundaries and become a regional interest, such as in the European Union. Similarly exceptions may be harmonised within an FTA. In the AustraliaUnited States FTA, for example, the parties agree to limit exceptions in relation to copyright and patents.58 However, it could be argued that this was more in the US interest rather than in Australia’s interest.59

IV

Harmonisation outside of TRIPS

An inevitable consequence of minimum standards of intellectual property, rather than harmonised detail, is disputes over compliance with those minimum standards and attempts to reach agreement over the details of minimum standards. Other than formal disputes brought to the WTO dispute settlement body, disagreements over appropriate minimum standards are played out in the TRIPS Council discussions about the scope of the TRIPS Agreement and in other fora, including other multilateral bodies and FTAs. Negotiations in other multilateral fora include drafting a treaty for the protection of traditional knowledge and traditional cultural expressions at WIPO. Negotiations relating to protection for these matters are also under way in the context of the Convention on Biological Diversity,60 and the issues are part of other international bodies.61 As discussed above, there are many areas of the TRIPS Agreement where the minimum standards are so broad that they may be complied with in national laws in many different ways. Examples of this are the TRIPS exceptions, which are sometimes called the TRIPS flexibilities, and the civil and criminal enforcement standards. In both of these areas there are ongoing international negotiations to agree to more detailed provisions than those in the TRIPS Agreement. The European Union, United States, Switzerland and Japan commenced negotiations outside of any existing international body for a treaty providing more considerable detail on civil and criminal enforcement and 58

59

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Australia-United States Free Trade Agreement, Chapter 17, available at www.dfat.gov.au/ trade/negotiations/us_fta/final-text/index.html (accessed 10 December 2009). See R. Burrell and K. Weatherall, ‘Exporting Controversy? Reactions to the Copyright Provisions of the U.S.-Australia Free Trade Agreement: Lessons for U.S. Trade Policy’, University of Illinois Journal of Law, Technology and Policy 2 (2008) 259. Supra, note 8. For an overview of the various international bodies see C. Beat Graber, ‘Institutionalization of creativity in traditional societies and in international trade law’, in Shubha Ghosh (ed.), Creativity, Law and Entrepreneurship (Cheltenham, Edward Elgar, 2010).

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remedies for infringement of intellectual property rights. A number of other countries have now joined the negotiations.62 The details of the draft treaty were secret until 2010 although a summary of its aims was publicised in a G8 Leaders’ Communiqué which stated:63 Effective promotion and protection of IPR are critical to the development of creative products, technologies and economies. We will advance existing anti-counterfeiting and piracy initiatives through, inter alia, promoting information exchange systems amongst our authorities, as well as developing non-binding Standards to be Employed by Customs for Uniform Rights Enforcement (SECURE) at the World Customs Organization. We encourage the acceleration of negotiations to establish a new international legal framework, … ACTA, and seek to complete the negotiation by the end of this year. We will promote practical cooperation between our countries to develop tools to combat new techniques in counterfeiting and piracy and spread best practices. We reaffi rm our commitment on government use of soft ware in full compliance with the relevant international agreements and call on other countries to follow our commitment.

This tells more about the political motivation behind ACTA and strengthening international enforcement efforts generally than the content of the treaty. The failure in the Uruguay Round negotiations and in the ongoing work of the TRIPS Council to achieve more detailed enforcement provisions than the general minimum standards in TRIPS, and the US loss in the dispute it brought over China’s compliance enforcement provisions, have provided incentives to the ACTA negotiations. The call for harmonisation of exceptions in copyright law is now coming from a variety of quarters, which do not represent the broad copyright-rich countries such as the United States. An example is a call for an international agreement for copyright exceptions for the blind. At WIPO Brazil, Ecuador and Paraguay have proposed a treaty for exceptions to copyright to enable access to works for the blind.64 New Zealand is a country that already has such an exception in its national law.65 One question 62 63

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Supra, note 9. Paragraph 17 of the G8 Leaders’ Communiqué on the World Economy published on 8 July 2008 and available at www.med.govt.nz/templates/ContentTopicSummary_34357. aspx (accessed 10 December 2009). See Secretariat Document of the WIPO Standing Committee on Copyright and Related Rights SCFCR/18/5, 25 May 2009, available at www.wipo.int/edocs/mdocs/copyright/en/ sccr_18/sccr_18_5.pdf (accessed 10 December 2009). Copyright Act 1994, s 69(1) provides, ‘A body prescribed by regulations made under this Act may, if the conditions contained in subsection (2) of this section are complied with,

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is whether such a treaty is necessary. Also, is it the best way to achieve the stated aim of assisting the visually impaired? Under the TRIPS framework, members may provide such exceptions in their national laws and, as mentioned above, some do. The exception must be compliant with the three-step test and the level of protection must not be lower than the TRIPS minimums or indeed the Berne Convention minimums.66 If there is an agreement on this exception then it should avoid curtailing members’ ability to make even further exceptions under the TRIPS Agreement and the Berne Convention. What all of these negotiations have in common is that they aim, and some will succeed, in detailing international intellectual property obligations. To an extent all international negotiations curb members’ ability to act unilaterally; they must act in accordance with their international agreements. However, all of the international negotiations and agreements over intellectual property have the cumulative effect of curbing national autonomy that the TRIPS Agreement currently allows. In addition, FTA negotiations create limitations to that autonomy between member states. I have argued elsewhere that the plethora of FTAs have a norm-changing effect on international intellectual property standards that affect others outside of the FTA.67

V

Concluding thoughts

The number of agreements at multilateral, plurilateral and bilateral levels about intellectual property protection are delineating the boundaries of the protection in more and more detail. These processes have engaged many voices in different areas of intellectual property law and other areas of law, including areas affected by intellectual property law, such as human rights. Many of these processes seek to define the details of international intellectual property protection in such a way that the gaps in the minimum standards are filled in. While the filling of gaps may bring

66 67

make [or communicate] copies or adaptations of published literary or dramatic works for the purpose of providing persons who have a print disability with copies that are in Braille or otherwise modified for their special needs, without infringing copyright in those literary or dramatic works.’ Berne Convention, supra, note 11, Article 20. See S. Frankel, ‘The Legitimacy and Purpose of Intellectual Property Chapters in FTAs’, in Ross Buckley, Vai Io Lo and Laurence Boulle (eds), Challenges to Multilateral Trade: The Impact of Bilateral, Preferential and Regional Trade Agreements (Alphen aan den Rijn, Netherlands, Kluwer Law International, 2008).

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a kind of clarity, it undoubtedly erodes some aspects of national autonomy over intellectual property protection that are found in the TRIPS Agreement. The process of detailing many more aspects of international intellectual property protection has and will continue to erode the level of national autonomy that, to the surprise of some, in fact exists under some minimum standards under the TRIPS Agreement.

6 The WTO and RTAs: a ‘bottom-up’ interpretation of RTAs’ autonomy over WTO law Alberta Fabbricotti

I

Introduction

The relationship between the WTO and regional trade agreements (RTAs) is usually addressed using a top-down approach that questions the compatibility of the RTAs with the WTO, under the assumption that the larger multilateral legal system perpetually prevails over the regional dealings. Another way of tackling the issue is to treat it as a political phenomenon, which cannot be framed in legal terms. This chapter suggests a third, bottom-up approach to the question, that RTAs’ autonomy over WTO law might be interpreted as tacit performance of an international custom, and not simply as non-compliant behaviours.

II The relationship between the WTO and RTAs according to existing doctrine: criticism A doctrinal approach to the relationship between the WTO legal system and the RTAs usually starts with Article XXIV GATT, Article V GATS and the Enabling Clause,1 which – it is said – ‘govern’ the formation and further implementation of RTAs, setting down substantial and procedural requirements with which RTAs are obliged to comply.2 1

2

These rules are alternative and somewhat complementary. GATT Article XXIV is applicable to agreements on trade in goods involving industrialised nations as among the contracting parties, the Enabling Clause covers trade in goods integration agreements concluded between developing countries, and Article V GATS deals with agreements providing for liberalisation in trade in services, whether amongst industrialised or developing countries or both. There are two substantial requirements. First, GATT Article XXIV obliges the WTO Members on entering an RTA to abolish or diminish approximately to zero the customs duties and the other regulations of commerce with respect to ‘substantially all’ trade

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The intent of the review is to evaluate the degree of consistency of the regional dealings with the multilateral system. Therefore, the extremely complex relationship between WTO law and RTAs is usually tackled in a rather simplified one-way top-down direction.3 Another part of the doctrine deals with the subject of the WTO and regionalism, referring to Article 41.1(a) of the Vienna Convention on the Law of Treaties (VCLT). The WTO regulates conditions for inter se modifications to its multilateral agreements through its provisions on RTAs, that is, Article XXIV GATT, Article V GATS and the Enabling Clause. Therefore, these provisions should occupy a higher position (a sort of constitutional rank) in WTO law.4 A common feature of most writings, whether they address directly the WTO provisions pertaining to RTAs, or rely on Article 41 VCLT, is the assumption that the WTO legal system always prevails over RTAs. However, since there is abundant evidence that RTAs too often diverge from WTO RTA provisions, the doctrine supporting the WTO primacy over RTAs should explain this drawback either as a lack of clarity of the WTO provisions or as inappropriateness of the WTO monitoring functions, or both. Whatever the case, the majority of the doctrine concludes that there is a need to clarify or strengthen WTO rules about the creation and the development of RTAs. However, there are few concrete proposals for reform.5 The present chapter adopts a different approach. Unlike the abovementioned doctrine, a fundamental assumption of this chapter is the

3

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5

originating from one of their regional partners (‘internal requirement’). Second, under paragraph 5, the contracting parties of an RTA must not increase duties or to render more severe the other regulations of commerce with respect to third States (‘external requirement’). The procedural requirements concern the duty to notify the text of the RTA and any subsequent change to it to the relevant WTO political bodies. The literature focusing on GATT Article XXIV is immense (the bibliography on GATS Article V and the Enabling Clause is more limited). A sample is contributions in L. Bartels and F. Ortino (eds.), Regional Trade Agreements and the WTO Legal System (Oxford University Press, 2006). J. H. Mathis, Regional Trade Agreements in the GATT/WTO: Article XXIV and the Internal Trade Requirement (The Hague, T.M.C. Asser Press, 2002), pp. 271–85; T. Cottier and M. Foltea, ‘Constitutional Functions of the WTO and Regional Trade Agreements’, in Bartels and Ortino (eds.), supra, note 3, pp. 43–74, at p. 56. C. B. Picker, ‘Regional Trade Agreements v. the WTO: A Proposal For Reform of Article XXIV to Counter this Institutional Th reat’, University of Pennsylvania Journal of International Economic Law, 26 (2005) 267; Y. Devuyst and A. Serdarevic, ‘The World Trade Organization and Regional Trade Agreements: Bridging the Constitutional Credibility Gap’, Duke Journal of Comparative and International Law, 18 (2007) 1.

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impracticability of any solution that involves strengthening of WTO rules relating to RTAs. The history of Article XXIV GATT shows that states are extremely reluctant to modify any of it, regardless of whether the proposed change would make the rules more severe or are merely to clarify and explain. Recent evidence of this attitude is the very modest Transparency Mechanism for Regional Trade Agreements which resulted from the Doha Round negotiations.6 The original mandate of the Ministerial Conference was to clarify and improve disciplines and procedures applying to RTAs under the existing WTO provisions.7 Pauwelyn takes a pragmatic approach and questions the primacy of WTO law over RTAs.8 Like other authors, he departs from the view that the relationship between the WTO and RTAs is mainly political.9 According to Pauwelyn, general international law (in particular, the law of treaties)10 should only intervene to untangle the ‘messy maze of preferences’ resulting from the overlap between the WTO and RTAs.11 Panels and tribunals settling disputes, either at the WTO or under an RTA, should use this general international law for this untangling purpose. In applying self-restraint, judicial activism or other attitudes, as the case may be, these jurisdictional fora are entrusted to ‘redirect’, so to say, the

6

7 8

9

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General Council Decision, ‘Transparency Mechanism for Regional Trade Agreements’, (WTO Doc. WT/L/671, 2006). Emblematic of the shortcomings of the Transparency Mechanism is its paragraph 10: ‘The WTO Secretariat’s factual presentation shall not be used as a basis for dispute settlement procedures or to create new rights and obligations for Members.’ Doha Ministerial Declaration, 14 November 2001, para. 29. J. Pauwelyn, Legal Avenues to ‘Multilateralizing Regionalism’: Beyond Article XXIV, paper presented at the WTO Conference on Multilateralizing Regionalism , (Geneva, 10–12 September 2007), available at www.wto.org/english/tratop_e/region_e/con_sep07_e/ pauwelyn_e.pdf (accessed 6 October 2008). For instance, this seems to be the view already held by P. Hilpold, ‘Regional Integration According to Article XXIV GATT – Between Law and Politics’, Max Planck Yearbook of United Nations Law, 7 (2003) 219. Reference is made by Pauwelyn, Legal Avenues to ‘Multilateralizing Regionalism’, supra, note 8, pp. 8–17, to rules on compatibility of successive treaties relating to the same subject matter (Article 30 VCLT), on interpretation of treaties (Article 31 VCLT), on effects of treaties on third States (Article 34 VCLT) and on inter se modifications (Article 41 VCLT). J. Bhagwati, Free Trade Today (Princeton, NJ, and Oxford, Princeton University Press, 2002), pp. 112–13, defi nes the ‘Spaghetti Bowl’ in the following terms: ‘a messy maze of preferences as PTAs formed between two countries, with each having bilaterals with other and different countries, the latter in turn bonding with yet others, each in turn having different rules of origin; an unruly mass of criss-crossing strings that, in any case, is beyond my capabilities!’

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choices of the WTO Members being also contracting parties of one or more RTA on adjudicating fora and applicable law. This line of reasoning is not convincing.12 It is not clear whether the coordination of the different dispute settlement mechanisms, their jurisdiction and the law applicable by them etc., would occur either as a result of amendments in the relevant treaty rules (the WTO Dispute Settlement Understanding, or DSU, and of pertinent chapters or annexed protocols of RTAs) or as a ‘spontaneous’ conformity by panels and tribunals to rules of general international law (to the potential detriment of the specific terms of their mandate under WTO or RTA regimes). If the former option prevails, then again the unfeasibility of changing rules, whether having restrictive or explanatory intent, would apply. If the latter option prevails, that is, the direct reference to general international rules, several arguments of a different nature arise. First, there is a logical presumption that, since politics, not law, dominates the interplay between the WTO rules and RTAs, there would be even less room for law when conflicts (either of law or of jurisdiction) between the two systems arise. Second, and this is a point which is core to this chapter, it is doubtful that what is at stake is merely a conflict between treaties, thus suitable to being ‘untangled’ by rules pertaining to the law of treaties (VCLT), even if these were general or customary. It is suggested in this chapter that the VCLT does not regulate the matter at hand because it is different in essence.13 In the author’s view, it is a problem which forms ‘part of the general relationship between customary norms and treaty norms which is too complex to be dealt only with one aspect of it in [an] article [of a codification convention].’14 The above follows from the author’s main conjecture that RTAs’ foundation might rely on international custom. This argument will now be developed through a bottom-up interpretation of RTAs’ autonomy from WTO law. 12

13

14

For a critical analysis of Pauwelyn’s foundation, see Jason Beckett, ‘Fragmentation, Openness and Hegemony: adjudication and the WTO’, in this volume, pp. 58–62. F. Capotorti, ‘L’extinction et la suspension des traités’, Recueil des Cours, 134 (1971 – III) 417, pp. 517–19. Report of the ILC to the General Assembly, ILC Doc. A/6309/Rev. 1, ILC Yearbook, 1966, Vol. II, p. 236. Th is was an ILC comment to the VCLT draft Article 68 provisionally adopted in 1964 (see Doc. A/5809, ILC Yearbook 1964, Vol. II, pp. 198–9) and entitled ‘Modification of a Treaty by a Subsequent Treaty, by Subsequent practice or by Customary Law ’ [emphasis added] that the ILC decided to discontinue.

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III The bottom-up approach to the WTO and regionalism and its customary law implications An implicit suggestion of this paper is to overturn the perspective from which the issue of the WTO–RTAs relationship is usually addressed, switching from a ‘top-down’ approach (it is the WTO which determines the conformity requirements for RTAs), to a ‘bottom-up’ approach (it is the RTAs themselves which determine the degree of their adherence to WTO law, through their actual behaviour).15 Empirical observation shows that RTAs choose to abide by WTO obligations. The structure of the WTO–RTAs legal relationship is thus characterised by ‘variable geometry’ rather than by hierarchical order.16 The only way to overcome the impasse, ‘reforms needed/reforms impossible’, is to go beyond the language and scope of Article XXIV GATT, Article V GATS and the Enabling Clause17 (from now on, only GATT Article XXIV will be mentioned, for simplicity). One should, however, resist the temptation to qualify all interactions between the WTO and RTAs as political questions which cannot be tackled from a legal point of view. Conversely, it might prove particularly useful to look more deeply into State practice relating to RTAs and compare the attitude of WTO Members when they participate in WTO bodies and conferences, creating or implementing WTO rules on RTAs or discussing amendments to them, with the actual behaviour of WTO Members when acting as RTA contracting parties. Th is may show whether States, whilst appearing laissez faire, negligent or careless regarding relevant WTO obligations 15

16

17

Th is suggestion originates from an observation of P. Picone and A. Ligustro, Diritto dell’Organizzazione Mondiale del Commercio (Padua, CEDAM, 2002), p. 528. The expression ‘variable geometry’ means that commitments differ for different Members of the WTO. Special and different treatment is a form of variable geometry to give special recognition for developing country needs. RTAs should be considered as another example. See the 2004 Report by the Consultative Board to the DirectorGeneral, Supachai Panitchpakdi, on ‘The Future of the WTO – Addressing Institutional Challenges in the New Millennium’ (Sutherland Report), para. 292. For a possible resort to ‘variable geometry’ as a strategy to cope with the WTO–RTAs relationship, see A. Fabbricotti, ‘Remarks’, ASIL Panel on ‘Multilateralizing Regionalism and the Future Architecture of International Trade Law As a System of Law’, ASIL Proceedings, 103 (2009), forthcoming. The Enabling Clause is a GATT Contracting Parties Decision of 1979. The Clause should be considered as a treaty provision in that GATT 1994 paragraph 1(b)(iv) makes it clear that the GATT 1994 consists of ‘[…] other decisions of the Contracting Parties to GATT 1947’.

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concerning RTAs, may in those RTAs conduct themselves in a somewhat general, uniform and systematic way. At first sight, States’ negligence or carelessness appears so deliberate and widespread as to be logically perceived as symptoms of ‘autonomy’ of RTAs with respect to the WTO. If this is so, then what State practice suggests is that non-compliance with WTO rules should mean something more than being wrong under WTO law. If this is so, then it is crucial to ask whether non-compliant State practice can be interpreted as a tacit performance of an international customary right, freedom or obligation. The formation of a custom explaining otherwise non-compliant State practice is the ultimate question addressed in this chapter. To the best of the author’s knowledge, this is an argument that has never been investigated. When customary law is injected into the debate relating to the WTO and regionalism, it is done to demonstrate that WTO treaty rules have become or have reproduced international customs.18 Otherwise, customary law is discussed because of the express reference, in Article 3.2 DSU, and thus, in relation to the more far-reaching impact on the WTO system.19 Ultimately, all previous writings have explicitly or implicitly linked the issue of the existence of international customary law to the cause of the primacy of WTO law.

IV

Difficulties with the argument (and overcoming them?)

Clearly, the proposition submitted in the present chapter is likely to run up against some difficulties. Th ree potential concerns are canvassed below.

The attribution of RTAs’ behaviours to the Member States First, the idea that the existence of a customary rule could be inferred from RTAs’ attitudes and concrete behaviours poses problems. This view relies on a questionable paradigm of strict direct legal attribution based on the assumption that RTAs’ measures and concrete behaviours coincide with the State practice of the contracting parties. It also relies, rather unrealistically, on the idea that the individual stances of RTA members 18

19

See L. Hsu, ‘Applicability of WTO Law in Regional Trade Agreements: Identifying the Links’ in Bartels and Ortino (eds.), supra, note 3, pp. 525–52. This issue has been so extensively debated in doctrine that there is no point in providing a list of contributions here, even as a sample.

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are cumulatively transposed and enforced at a universal level through the intermediation of RTAs’ common organs. Also, it might be suggested that ‘instances of [State] practice have to be attributable to States, for which reason the practice of international organizations … is excluded’.20 An answer to these hypothetical comments is that the expression ‘RTAs’ autonomy’ has been used in this chapter more as a methodological fiction than with a strict legal exactitude. Indeed, as noted above, this chapter will consider State practice relating to RTAs’ concrete behaviours imputable only to States, not to the entities they created through the conclusion of RTAs.

The content of the customary rule Second, this argument requires identifying the exact content of the customary rule relating to RTAs that State practice evidences. This is particularly difficult and troublesome as modern RTAs may have very wide subject-matter coverage and in many substantive ways differ considerably from each other. Consequently, any attempt to extract a common essential element, principle or rule, from this complex network of different, overlapping, systems of norms, is likely to conclude that the very essence of all RTAs is the creation of ‘trade preferences’ or, correspondingly, ‘discrimination against third parties’. Although this common substance appears too wide and perhaps vague to form the content of an international customary rule prescribing obligations, in my view the validity of such a conjecture should not be excluded in principle, where the international custom instead reflects, transposes or reinforces a freedom or a right. It is commonly accepted that, under customary international law, States are essentially free to enter any agreement of any kind and content.21 Exceptions are jus cogens subject matter22 and/or principles and rules embodied in the UN Charter. Therefore, States are free to discriminate against third countries if they deem it convenient. In the domain of trade, this means freedom to conclude RTAs. On the one hand, this supposed customary freedom represents a pillar of international trade relations and should thus be promoted and 20

21

22

M. E. Villiger, Customary International Law and Treaties: A Manual on the Theory and Practice of the Interrelation of Sources, 2nd edn (The Hague, Kluwer, 1997), pp. 16–17. Cottier and Foltea, supra , note 4, p. 41. In general, on the unfettered freedom of States regarding the subject matter regulated by treaties, see A. Cassese, International Law, 2nd edn (Oxford University Press, 2005), p. 154. Articles 53 and 64 of the 1969 Vienna Convention on the Law of Treaties.

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safeguarded.23 Article 12 of the Charter of Economic Rights and Duties of States,24 which makes the participation of States in sub-regional, regional and interregional cooperation agreements in the pursuit of their economic and social development a right, and ranks corresponding expectations of third countries as mere legitimate interests, seems to confirm this view. Indeed, although the Charter does not possess a binding legal character per se, given the exhortative function and nature of UN General Assembly resolutions, it is assumed that its Art. 12, which is based on the ethos of Article 52 of the United Nations Charter, reiterates an established principle of international trade and of economic relations generally.25 On the other hand, a general obligation of non-discrimination does not limit this customary freedom, since most favoured nation (MFN) and national treatment can hardly be regarded as international customs. It is common knowledge that this potentially unlimited customary freedom is instead countered by treaty law, mainly through the non-discriminatory clauses contained in the WTO agreements.26 The International Law Commission’s Study Group on the Fragmentation of International Law has highlighted that regionalism plays an unusual role in international trade law compared to the functions it normally performs within other sub-systems of international law: It is often assumed that international law is or should be developed in a regional context because the relative homogeneity of the interests or outlooks of actors will then ensure a more efficient or equitable implementation of the relevant norms. … Nevertheless, one aspect deserves mention here, namely regionalism in regard to trade law. Despite the strong pull for a global trade regime within the GATT/WTO system, the conclusion of RTAs has not diminished, on the contrary … in view of the difficulties and controversies in developing the universal trade system, there appears presently to be no end in sight to the conclusion of RTAs.27 23 24

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E. Triggiani, Il trattamento della nazione più favorita (Naples, Jovene, 1984), p. 124. See G. A. Resolution 3281 (XXIX), in General Assembly Official Records (GAOR), 29th Session, Supplement N. 31, (UN Doc. A/9631, 1974), pp. 50–5. S. K. Chatterjee, ‘The Charter of Economic Rights and Duties of States: An Evaluation After 15 Years’, International and Comparative Law Quarterly, 40 (1991) 669, p. 677. Panel Report, Korea – Measures Affecting Government Procurement, WT/DS163/R, adopted 19 June 2000, para. 7.96. Th is noted: ‘Customary international law applies generally to the economic relations between WTO Members. Such international law applies to the extent that the WTO treaty agreements do not “contract out” from it.’ ILC, 58th Session, Report of the Study Group of the International Law Commission, fi nalised by Martti Koskenniemi, ‘Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of International Law’, (Doc. A/CN.4/ L.682, 2006), paras. 205 and 210.

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In 2005, the same Study Group had observed that ‘while members noted that “regionalism” generally fell under the problem of lex specialis, some still felt that this was not all that could be said about it. In some fields such as trade, for example, regionalism was influencing the general law in such great measure that it needed special highlighting.’28 If RTAs’ autonomy from WTO law is explained on the ground that, in their trade relations, States are either ‘free to prefer’ or have a ‘right to prefer’, this is likely to have unjustified devastating effects on the WTO legal order, the raison d’être of which is non-discrimination. The WTO and the MFN rules are still important, 29 though they recently seem to have lost their momentum, 30 meaning that the issue should be approached with extreme caution. Should the discourse on customary law fi nd some support in State practice, then a proper balance should be drawn in order to coordinate the co-existence of such custom with the treaty law of the WTO and their reciprocal deference. This might be achieved if the interplay between RTAs and the WTO is considered as a question of interrelation between different sources of international law.

Duration of the customary rule Another difficulty is, when did this hypothetical custom that envisages a freedom or right to discriminate in international trade relations come into existence? It could be that the considered custom has progressively developed in the course of an undefined period of time, though surely since 1947. It has principally manifested itself through a generalised disregard for GATT Article XXIV and other similar WTO provisions successively introduced

28

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ILC, 57th Session, ‘Report of the International Law Commission on the Work of its 57th Session’, (UN Doc. A/60/10, 2005), para. 461. Funnily, several scholars place emphasis on the opposite occurrence: ‘like it or not, RTAs are here to stay’ or ‘the political and legal reality is, therefore, that regional agreements are here to stay’! See Hsu, supra , note 18, p. 524; and Pauwelyn, Legal Avenues to ‘Multilateralizing Regionalism’, supra , note 8, p. 3; R. Baldwin and P. Thornton, Multilateralising Regionalism: Ideas for a WTO Action Plan on Regionalism, (London, CEPR, 2008), p. 2. The Sutherland Report, supra , note 16, para. 60, notes: ‘Yet nearly five decades after the founding of the GATT, MFN is no longer the rule; it is almost the exception … what has been termed the “spaghetti bowl” of customs unions, common markets, regional and bilateral free trade areas, preferences and an endless assortment of miscellaneous trade deals has almost reached the point where MFN treatment is exceptional treatment.’

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in the system.31 Such reasoning assumes that Article XXIV is a positive, prescriptive treaty provision. As a consequence, a custom derogating from it could only have formed successively. It could also be that Article XXIV derogated from a pre-existing custom when it entered into force. It follows from this that, since 1947 and until an imprecise date, the treaty norm of Article XXIV could have existed legally, in between two periods during which a supposed customary freedom or right to prefer prevailed in international trade relations. Alternatively, it could be argued that the custom in question is ancient and dates back to a period before 1947. That would mean that Article XXIV never produced its formal prescriptive effects, having always been ‘dormant’. In the present author’s opinion, this alternate view is not groundless, or even absurd, as it might appear at first sight. A recent study revealing the dubious origins of Article XXIV reinforces this position.32 A thorough assessment of the two above perspectives and their implications is beyond the scope of this chapter. However, whatever the answer to the above question might be, it seems likely that a customary right or freedom to agree on trade preferences with some partners and not to extend these preferences to other countries existed before 1947. There are indeed many arguments that support this view. First, the practice of bilateral commercial treaties, which dominated international trade relations before GATT, showing the steady presence in these dealings of a saving clause preserving the preferences accorded in other treaties. In other words these saving clauses maintained in force certain previously established – or even hypothetical future – preferences, without extending them, in force of the MFN standard, to the partner in the bilateral treaty containing such a saving clause.33 Second, a majority of the pre-1947 doctrine34 and some influential reports of the League of Nations35 considered that a ‘regional exception’, 31

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As explained below, in the following paragraph, evidence of such a custom might also be inferred from the extent of the ‘regional exception’ and from acquiescence by the WTO, that is, from the degree of enforcement and/or enforceability of the WTO rules relating to RTAs. See K. A. Chase, ‘Multilateralism Compromised: The Mysterious Origins of GATT Article XXIV’, World Trade Review, 5 (2006) 1. See United States Tariff Commission, Handbook of Commercial Treaties: Digests of Commercial Treaties, Conventions, and Other Agreements of Commercial Interest Between All Nations (Washington DC, Government Printing Office, 1923). See, for example, R. Riedl, La clause de la nation la plus favorisée (Vienna, Recueil Sirey, 1928), pp. 96–7. See, for example, League of Nations, ‘Recommendations of the Economic Committee Relating to Commercial Policy’, (Doc. C.138.M.53.1929.II, 1929), pp. 11–12; Société des

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recognised by tradition or accepted as custom, existed and that this exception had had the legal effect of precluding the formation of a customary MFN clause. Therefore, it has been argued that ‘throughout the years, a custom has formed, aiming at excluding from the operation of the MFN treatment clause all advantages and favours conceded as among the members of a customs union. Even without an express treaty provision, the practice supports this point of view.’36 Of note in relation to this quotation is that only customs unions were RTAs in the period preceding 1947.

V

Is there an international custom behind RTAs’ autonomy from WTO law? Theory/methodology

Further investigation into State practice should serve to ascertain the existence of the two requirements of international customary law, namely diuturnitas (consistent State practice) and opinio juris (acceptance of State practice as law).37 As regards the diuturnitas, this requirement is arguably already satisfied by the great number of existing RTAs. As of July 2007, a total of 380 RTAs, of which 205 were then in force, had been notified to the GATT/WTO.38 All but one WTO Member were parties to one or more RTAs. Therefore, it might be said that all these RTAs represent such a ‘pattern of treaties in the same form’39 which produces evidence of an international custom.40

36

37 38

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Nations, La politique commerciale dans le monde d’après guerre, Rapport des Comités économique et financier (Geneva, SdN Publications, 1945). My translation from French. See Henri François Oppenheim, La clause de la nation la plus favorisée dans la pratique internationale de la Suisse (Zurich, Éditions Polygraphiques, 1948), p. 114. Whether, in the absence of any express treaty provision, the entry into a customs union affects treaty obligations to accord most favoured nation treatment to a third State, see R. Jennings and Sir A. Watts (eds.), Oppenheim’s International Law, 9th edn, 2 vols. (Harlow, Longman, 1992), vol. I, pp. 1331–2. Article 38.1(b) Statute of the International Court of Justice. An up-to-date list of RTAs notified to the WTO is provided at www.wto.org/english/ tratop_e/region_e/region_e.htm (accessed 6 October 2008). See I. Brownlie, Principles of Public International Law, 6th edn (Oxford University Press, 2003), p. 6. Texts of treaties are top-listed among the forms of ‘Evidence of Customary International Law’. See ILC Yearbook 1950, Vol. II, p. 368. The view that treaties are evidence of the state of customary international law is generally shared in principle. See, for instance, R. R. Baxter, ‘Multilateral Treaties As Evidence of Customary International Law’, British Yearbook of International Law, 41 (1965–1966) 275.

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As to the other requirement (opinio juris), arguably, since they are treaties, all RTAs are inherently a practice accepted as law. In the North Sea Continental Shelf case, for example, the International Court of Justice confirmed that treaty norms could turn into custom.41 Furthermore, the Court has said that multilateral conventions ‘may have an important role in recording and defining rules deriving from custom or in developing them’.42 The same can be said of regional and bilateral treaties.43 These preliminary arguments based on classical theories should not prevent investigation of further State practice relating to RTAs.44 This should include a survey of the attitude of WTO Members when they participate in WTO bodies and conferences creating, implementing or amending WTO rules on RTAs and of the actual practice of WTO Members when acting as RTA contracting parties. While a complete analysis of such a practice is beyond the scope of this chapter, the following paragraphs will focus on what this author considers to be two major indicators of State practice: the extent of the ‘regional exception’ and the degree of RTAs’ autonomy in respect to the WTO legal order. Next, it is appropriate to analyse the relevant WTO jurisprudence in order to evaluate the degree of enforcement and/or enforceability of the WTO provisions relating to RTAs. This step appears indispensable because customary law is established by a pattern of claim and also by acquiescence, of the WTO and by other States (WTO Members not being party to a particular RTA).45 Indeed, as pointed out by one writer, in the development of customary rights the two processes – constant assertion of the right in question and consent in that assertion on the part of the 41

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‘North Sea Continental Shelf (Federal Republic of Germany/Denmark)’, (ICJ Reports 1969), para. 71. ‘The Continental Shelf (Tunisia v. Libyan Arab Jamahiriya)’, (ICJ Reports, 1985), para. 27. See also ‘Military and Paramilitary Activities in and Against Nicaragua (Nicaragua v USA)’, (ICJ Reports, 1986), paras. 174 and 181. On the relevance of bilateral treaties see Baxter, supra, note 40, pp. 275–6; A. A. D’Amato, The Concept of Custom in International Law (Ithaca, NJ, and London, Cornell University Press, 1971), p. 104, and Villiger, supra, note 20, p. 189, para. 296. Admittedly the above argument (‘since they are treaties, all RTAs are inherently a practice accepted as law’) is rather simplistic. Regarding treaties giving rise to customary law, ‘treaties do not, in most cases, articulate the norm as one of customary law (unless one assumes that laying down a rule in a treaty automatically means articulating the rule as a norm of customary law)’. See M. Akehurst, ‘Custom as a Source of International Law’, British Yearbook of International Law, 47 (1974–1975), p. 43, footnote 7. See also Nicaragua v USA, supra, note 42, paras. 174–82. See M. N. Shaw, International Law, 5th edn (Cambridge University Press, 2003), p. 84.

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affected States or intergovernmental entities – are complementary and mutually interdependent.46

The extent of the ‘regional exception’ Since State practice regarding RTAs is immense, it is inconceivable to review it analytically here and so certain ‘indicators’ are used to overcome this inconvenience. If one looks at State practice resulting from participation of WTO Members in WTO bodies and conferences creating, implementing or amending rules, significant elements can be inferred from the extent or scope of the ‘regional exception’.47 Rather than focusing on the individual WTO provisions relating to RTAs – each of which has its own role, meaning and scope within the WTO system – this chapter focuses on the overall legal significance and effect of all these treaty clauses on the multilateral trade legal system and, more generally, on the international legal order.

The concept of ‘regional exception’ The term ‘regional exception’ seems suitable to contextualise sociologically the WTO provisions concerning RTAs. Particularly, it gives expression to the fact that WTO Members (in the past, the GATT Contracting Parties) make the provisions. Since, as previously noted, all WTO Members but one are parties to one or more RTAs, the same States make the rules with which they have to comply. Apart from synthesis and depth, the concept of ‘regional exception’ has the advantage of comprehensiveness. It records and assimilates the effects of both categories of relevant WTO provisions, either those which expressly and directly ‘govern’ the formation of RTAs (the three basic sets of Article XXIV GATT, Article V GATS and the Enabling Clause) or those addressing themselves to RTAs implicitly and indirectly: examples are Article 6.3 of the Agreement on Technical Barriers to Trade (TBT), Article 4.2 of the Agreement on Sanitary and Phytosanitary Measures 46

47

See I. C. MacGibbon, ‘The Scope of Acquiescence in International Law’, British Yearbook of International Law, 31 (1954) 143, p. 150. This terminology does not belong properly to the language of international law. As noted by the ILC Study Group on the Fragmentation of International Law ‘the expression “regionalism” did not figure predominantly in treatises of international law and in the cases in which it was featured it rarely took the shape of a “rule” or a “principle”.’ See ILC, ‘Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of International Law’, supra, note 27, para. 450.

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(SPS), Article VII GATS and Article 5:2(b) of the Agreement on Safeguards (ASG). Commentary usually ignores the latter group of norms.48 Under WTO law, the extent of the ‘regional exception’ is measurable both in the positive and in the negative. A positive assessment can be approached both horizontally, in other words, from the point of view of its subject-matter coverage, and vertically, or through assessment of the recurrence with which the exception is invoked or restated. The extent of the exception also depends on a negative assessment of the ‘quantity’ and ‘quality’ of the specific requirements and criteria set down in WTO law, and this limits the possibility of concrete implementation of the exception to a restricted number of legitimate circumstances. However, given the above criticism on the effectiveness of GATT Article XXIV, this assessment will not be addressed in detail in the present chapter as it would likely lead to a deadlock.49 The evaluation of the enforceability of the WTO rules on RTAs will, in part, replace that discussion.

The horizontal dimension of the ‘regional exception’ As regards the horizontal dimension, the extent of the ‘regional exception’ goes beyond what can be deduced from the language and material scope of the specific WTO provisions concerning the RTAs. On the one hand, Article XXIV GATT coverage exceeds the sphere of application of the agreement to which it belongs. Since its origins in 1947, Article XXIV was conceived as a general exception from all GATT obligations and not an exemption only from the MFN rule.50 This is confirmed by the chapeau of paragraph 5 of Article XXIV which states that ‘the provisions of this Agreement shall not prevent …’. With the establishment of the WTO in 1995, WTO Members were persuaded that the provisions of this article would stretch to cover any kind of restriction in trade in goods referable to their participation in an RTA, no matter if the measure 48 49

50

A rare exception is offered by Cottier and Foltea, supra, note 4, pp. 50–1. With respect to the ‘quality’ of the requirements, suffice it to read the remarks already made by Dam in 1963: ‘Article XXIV appears, on first impression, to set forth a precise set of rules for determining the circumstances under which regional arrangements will be permitted. The apparent precision is quite illusory.’ K. W. Dam, ‘Regional Economic Arrangements and the GATT: the Legacy of a Misconception’, University of Chicago Law Review, 30 (1963) 615, p. 619. The opinion that Article XXIV is a particular exception is shared by A. Comba, Il neo liberismo internazionale (Milan, Giuff rè, 1995), p. 150; D. Carreau and P. Juillard, Droit international économique, 4th edn (Paris, LGDJ, 1998), p. 292; Picone and Ligustro, supra, note 15, p. 295.

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in question was violating the GATT or a different, more specialised, WTO agreement.51 (This is confirmed by the travaux préparatoires of the Marrakech Agreement.) On the other hand, in the intent of the Uruguay Round negotiators, additional special regimes for RTAs, provided for in several treaty texts other than GATT, would have considerably expanded the sphere of applicability of the ‘regional exception’, to accommodate almost all the remaining practical needs and expectations of RTAs. These additional disciplines are envisaged by those provisions permitting mutual recognition arrangements among a limited number of WTO Members, such as Articles 6.3 TBT, 4.2 SPS and VII GATS, by those provisions allowing selective safeguards in order to exclude regional partners from restrictive measures, such as Article 5:2(b) ASG, and, even more significantly, by the ‘waiver’ provisions of Article IX.3 of the WTO Agreement. The domain of safeguards gives a clear example of the interaction between GATT Article XXIV and the additional preferences for the benefit of RTAs provided in other 1994 WTO Agreements. RTAs usually provide for detailed regulation of the use of safeguards as among the Contracting Parties of such agreements.52 Safeguards are a physiological outcome of Article XXIV, since it would be contradictory to require the WTO Members entering an RTA to liberalise trade almost completely with their regional partners and at the same time prevent Members from using the ‘safety valve’ of safeguards in case of emergencies in import surpluses. If Article XXIV does not per se prohibit intraregional safeguards, they are allowed implicitly. It is beyond the scope of this chapter to explain why GATT Article XIX53 is not listed among the

51

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For a survey of the WTO agreements to which Article XXIV applies as an exception, see N. J. S. Lockhart and A. D. Mitchell, ‘ Regional Trade Agreements Under GATT 1994: An Exception And Its Limits’ in A. D. Mitchell (ed.), Challenges and Prospects for the WTO (London, Cameron May, 2005), pp. 217–52, especially pp. 228–31. On whether WTO Panels might interpret Article XXIV GATT as providing an exception from TBT Agreement, SPS Agreement or the Agreement on Safeguards obligations, see, respectively, J. P. Trachtman, ‘Toward Open Recognition? Standardization and Regional Integration Under Article XXIV GATT’, Journal of International Economic Law, 6 (2003) 459–92, and J. Pauwelyn, ‘The Puzzle of WTO Safeguards and Regional Trade Agreements’, Journal of International Economic Law, 7 (2004) 109. A few RTAs, like the EU, the ANZCERTA (CER Agreement) and the MERCOSUR, do not contain such a discipline, since they prohibit intra-regional safeguards, other than in exceptional and ‘of last resort’ circumstances. GATT Article XIX is the predecessor of the ASG. It has not been replaced by the discipline of the 1994 Agreement.

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exceptions envisaged in paragraph 8 of Article XXIV.54 A problem with such intra-regional regimes is that they are more permissive and flexible than the WTO discipline on global safeguards. In some RTAs, there is a diversification of the legitimate objectives that the safeguards can pursue. In others, there is a relaxation of the requirements (for example, absence of the ‘causal link’ between the increase in imports and the serious injury to domestic producers). In others there is neither an obligation for compensation for the State adopting the restrictive measures nor a corresponding right to countermeasure or retaliation for the State affected by safeguards. In sum, RTAs usually pave the way for the use of intra-regional safeguards. Furthermore, arguably the effects of RTA safeguard regimes are tantamount to an inter se agreement to restrict trade between WTO Members falling under the prohibition of ASG Article XI:1(b).55 A second related issue is the selectivity of global measures. Can a WTO Member exclude its RTA partners from the application of a WTO safeguard?56 GATT Article XIX’s silence about the non-discriminatory nature of safeguards led panels (somewhat paradoxically)57 to exclude selectivity. The controversial question of selectivity has been resolved in WTO jurisprudence through the ‘invention’ of the criterion of parallelism. According to this criterion, the legitimacy of a selective safeguard measure must be assessed on the basis of a strict correspondence between the scope of investigation (in other words, the sphere of the supplier States taken into account for purposes of assessment of the ‘serious injury’ to the domestic producers of like products) and the scope of application of the safeguard restriction (the sphere of the States affected by the measure).58 As well as ‘parallelism’, which represents an unexpected 54 55

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For this explanation, see Pauwelyn, supra, note 51, pp. 125–8. ASG Article XI:1(b) forbids ‘any voluntary export restraints, orderly marketing arrangements or any other similar measures on the export or the import side. These include actions taken by a single Member as well as actions under agreements, arrangements and understandings entered into by two or more Members.’ See M. C. E. J. Bronckers, Selective Safeguard Measures in Multilateral Trade Relations (The Hague, T.M.C. Asser Institut, 1985). According to Pauwelyn, supra, note 51, p. 121, it is possible to deduce the selective character of safeguards from Article XIX’s requirements of ‘unforeseen developments’ and ‘effect of the obligations incurred under the GATT’. The criterion of parallelism was fi rst enunciated by the Panel in Argentina – Safeguard Measures on Imports of Footwear, (Argentina – Footwear), WT/DS121/R, adopted as modified by the Appellate Body, 12 January 2000, para. 8.80, and later confirmed by the Appellate Body.

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outcome of the WTO jurisprudence,59 there is ASG Article 5.2(b). That article is an additional exception allowing discriminatory safeguards. It permits WTO Members, provided that consultations are conducted at the Committee on Safeguards, to allocate stricter import quotas to selected supplying countries when they can prove that imports from these countries have increased disproportionately to the total increase of imports of the product, ‘in the representative period’ (so-called criterion of proportionality). So far Article 5.2(b) has never been raised successfully in WTO dispute settlement.60 Both panels and the Appellate Body have discussed the merits of the selectivity issue only when choosing between the non-discriminatory rule of ASG Article 2.2 (‘safeguard measures shall be applied to a product being imported irrespective of its source’) and the parallelism rule. It seems, however, whether parallelism or proportionality is the basis of selectivity, that practical results do not change. WTO Members can either exclude their RTA partners from the application of the safeguard (parallelism) or allocate to them wider quotas of imports (proportionality). The real problem with either of these options might be that the requirements for applying the parallelism or the proportionality criteria could be ‘adjusted’, at the RTA level, through previous arrangements between contracting parties to temporarily restrict intra-regional trade or other kinds of understandings. NAFTA Article 802 is emblematic in this context. In principle, that Article, entitled ‘Global Actions’, reserves to each NAFTA Member the right to impose global safeguard measures allowed under GATT Article XIX and/or the ASG. However, as paragraph 1 of the Article makes clear, this right is excluded from action under WTO provisions regarding compensation or retaliation, to the extent that such provisions are inconsistent with the NAFTA Article. Also, any NAFTA Member taking a global action is obliged to exclude from its application imports from another NAFTA Member, unless these imports account for a substantial share of total imports and contribute 59

60

The theory of parallelism came out of the debate on the applicability of footnote 1 to ASG Article 2, concerning the applicability of a safeguard measure by a customs union either as a single unit or on behalf of a member State. For instance, the Appellate Body Report, United States – Definitive Safeguard Measures on Imports of Circular Welded Carbon Quality Line Pipe From Korea (US – Line Pipe), WT/DS202/AB/R, adopted 8 March 2002, para. 173, noted that Article 5.2(b) was not applicable in the case at issue since this explicit exception would have been granted in the case of ‘serious injury’ but not in a situation where only the ‘threat of serious injury’ persisted (a circumstance which is expressly excluded from the scope of the Article).

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importantly to the serious injury, or threat thereof, caused by imports. In United States – Definitive Safeguard Measures on Imports of Wheat Gluten from the European Communities, it is recorded that the US International Trade Commission61 excluded Canadian imports from the application of the US global safeguard because, although these accounted for a substantial share of US total imports, they did not play a significant role in causing serious injury or threat of injury.62 As a result, the terms and requirements of ASG Article 5.2(b) are overturned and presumably distorted.63 NAFTA Article 802 also disregards the parallelism rule. It provides for a NAFTA Member, in order to be excluded from the application of the safeguard, not to fall among the five principal suppliers of the product the restrictive measure affected after an investigation covering the last three years.

The vertical dimension of the ‘regional exception’ The appearance of a regional clause in WTO legal instruments from time to time (1947 GATT, 1979 Enabling Clause, 1994 WTO Agreements) occurred concomitantly with structural changes in the multilateral trading system (the ‘institutionalisation’ of non-reciprocity with respect to trade with developing countries and the replacement of the GATT with a fully-fledged international organisation). This reinforces the idea that the ‘regional exception’ is deeply rooted in State practice. The degree of RTAs’ autonomy in respect to the WTO legal order The three-level sequence of the analysis Looking at State practice resulting from participation of WTO Members in RTAs, the States’ actual behaviours and attitudes can vary considerably, showing a different degree of autonomy in respect to the WTO legal system.64 To capture the nuances and the dynamics of this phenomenon, 61 62

63

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See Investigation No. TA-201–67 (publication 3088; March 1998). See Panel Report, US – Wheat Gluten, WT/DS166/R, adopted 19 January 2001, paras. 8.162–8.184. According to the second paragraph of NAFTA Article 802, ‘Substantial Share of Total Imports’ will be assigned only to the top five suppliers of the good subject to the proceeding, and ‘Important Contribution to the Serious Injury or the Th reat Thereof’ will not be assessed if the growth rate of imports from the other NAFTA Party is appreciably lower than the growth rate of total imports from all sources over the same period. Consistent with the bottom-up approach suggested in this chapter, it is here preferred to use the expression ‘RTAs’ autonomy’ instead of ‘RTAs’ compatibility’.

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the ideal method of analysis involves three sequential levels, which reflect the progressive relaxation of the interdependence between WTO rules and States’ concrete behaviours. First, the autonomous conduct of RTAs (and that of their member states) is appraised through the relevant positive WTO rules. Second, the analysis aims to assess whether RTA Members’ autonomy depends on the existence of gaps in the WTO legal system or on obscure or controversial WTO rules. Third, an RTA’s autonomy is only observed empirically and described as a sociological, political and economical phenomenon. There are two important points about these three levels. First, the threshold between the first and the second level of the analysis is often missing or undefined. Since it is often unclear what exactly the WTO rules require in respect to a number of implementation issues, such as ‘substantially all the trade’, a considerable portion of State practice falls within a ‘grey area’ hardly capable of appraisal from a legal point of view. Therefore, the same RTA measure can easily be interpreted either as unlawful or as permitted under WTO law. Second, in strict legal terms, it is commonly understood that autonomy in State practice is measurable only if the relevant practice deviates from the positive rules of the State’s legal system. It is only within this narrow interpretation that autonomy in State practice may be considered of relevance for the ascertainment of customary law and/or for identification of other features of the international legal order. There are, however, grounds for suggesting that WTO Members’ conduct resulting from participation in RTAs, which are not directly referable to subjective legal situations under WTO law, and thus come into the second and third level of the analysis, can be of concern as well. The ‘grey area’ conduct is the result of gaps or misconceptions in the WTO rules which are, in turn, ascribable to the WTO Members themselves.65 Also, these grey areas often conflict with the spirit of WTO law and undermine its objectives and outcomes.66 It seems, therefore, unavoidable that these grey areas can be taken into account when framing the interplay between the WTO and RTAs. Importantly, such grey area conduct can be challenged under the non-violation complaint or the situation complaint procedures in Article 26 DSU, since they can nullify or impair the benefits accruing to other WTO Members. Under the former 65 66

See above, at sub-section ‘The concept of “regional exception”’. See, for instance, views illustrated above (at sub-section ‘The horizontal dimension of “regional exception”’) à propos intra-regional safeguards and the prohibition on voluntarily restricting trade among WTO Members.

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GATT dispute settlement system, Citrus was a non-violation complaint about injurious effects resulting from an RTA. The Panel report was not adopted.67 The main issue was that the United States had a legitimate expectation over certain benefits accruing from MFN, GATT Article I, and that these benefits had been impaired to the extent that preferential agreements of ‘unresolved GATT legality’ had caused damage.68

The first level Attention will now be focused on some examples of State practice. The first level of the analysis considers, through comparison to positive WTO law, State practices implementing the ‘substantially all the trade’ requirement of GATT Article XXIV:8. This might appear somewhat provocative since, as it is widely known, this requirement raises a number of interpretative issues. The most relevant interpretation issue is assessment of the threshold, from 85 per cent to ‘all the trade’, and the choice of a formula or technique to calculate the threshold. The 1994 Understanding on Interpretation of GATT Article XXIV suggests that this requirement should be assessed both quantitatively (in other words, the liberalisation should affect almost all the volume of intra-RTA trade) and qualitatively (as the intra-RTA liberalisation should affect all main trade sectors).69 State practice shows, however, that States do not regard the ‘substantially all’ threshold and its method of calculation as a problem. An overwhelming majority of RTAs exclude from liberalisation both a significant volume of trade and one or more important trade sectors. This is done in several ways, some of which are self-declaratory (such as the use of exemption lists of products and/or of sectors annexed to the RTA deal); others are disguised under permitted procedures with other stated purposes (such as those for the protection of non-trade values or those envisaging a different liberalisation speed among contracting parties in asymmetrical RTAs). Therefore, it seems that, wherever the threshold is placed or whatever the method of calculation chosen, the outcome is always a deviation from GATT Article XXIV:8.70 67

68

69 70

See Panel Report, EEC – Tariff Treatment of Citrus Products from Certain Mediterranean Countries, Doc. L/5776, unadopted 7 February 1985. R. E. Hudec, Enforcing International Trade Law: The Evolution of the Modern GATT Legal System (Salem NH, Butterworth, 1993), p. 160. Fourth recital of the Understanding Preamble. For a similar conclusion, see J. H. Mathis, ‘Regional Trade Agreements and Domestic Regulation: What Reach for ‘Other Restrictive Regulations of Commerce’?’ in Bartels and Ortino (eds.), supra, note 3, pp. 79–108, at p. 82.

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The second level The most evident example of State measures, showing the significant autonomy enjoyed by RTAs (mainly Free Trade Areas) with respect to the WTO legal system, is given by the preferential rules of origin. These rules allow RTA Members, through implementation of an often complex economic ratio or formula, to distinguish among RTA countries and nonRTA countries in order to apply preferential treatment only to the former. Preferential rules of origin are not prohibited, therefore they are permitted under WTO law. Nevertheless, they can have serious diverting effects on trade flows and can implicitly undermine the real purpose of the WTO requirements for RTAs. The third level Finally, the empirical observation of regionalism evidences a variety of phenomena which suggest potentially innumerable situations where RTAs’ autonomous behaviours de facto undermine the WTO legal order. A thorough description of these factual developments is beyond the scope of the present chapter.71 It suffices here to list the main features of modern regionalism: proliferation of RTAs; achievement of patterns of economic integration more advanced than free trade areas and customs unions; performance of hybrid modalities of economic integration; enlargement of the subject-matter coverage to include WTO-plus issues; augmentation of North-South RTAs; formation of regional groupings not based on a treaty and devoid of institutional structure; overlapping of RTAs; conclusion of RTAs between RTAs; and creation of RTAs between countries geographically distant.

The degree of enforceability of the WTO rules on RTAs Perhaps the only true innovation relating to RTAs has been the clarification contained in paragraph 12 of the Understanding on the Interpretation of GATT Article XXIV, stating that ‘the Dispute Settlement Understanding may be invoked with respect to any matters arising from the application of those provisions of Article XXIV relating to customs unions, free-trade 71

For a comprehensive survey, see R. V. Fiorentino, L. Verdeja and C. Toqueboeuf, ‘The Changing Landscape of Regional Trade Agreements: 2006 Update’, (WTO Discussion Paper No. 12, 2007).

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areas or interim agreements leading to the formation of a customs union or free-trade area’. From this step, panels became clearly competent to judicially review RTAs.72 In the past, the GATT machinery that monitored the conformity of RTAs with Article XXIV was exclusively political. Ad hoc GATT Working Parties were entrusted with the scrutiny of individual RTAs. From 1996 the monitoring of all RTAs notified to the WTO was transferred to a permanent Committee on Regional Trade Agreements (CRTA). Like the former Working Parties, the CRTA has systematically failed to check RTAs. The fi rst case in which a Panel and the Appellate Body took jurisdiction over RTAs was Turkey – Restrictions on Imports of Textile and Clothing Products (Turkey – Textiles) in 1999.73 On the merits, the Appellate Body found that Article XXIV justified the regional economic organisation’s adoption of a measure that was inconsistent with other GATT provisions, provided that two conditions are fulfi lled: (1) Only if the measure is introduced upon the formation of a customs union which fully meets the requirements of paragraphs 8 and 5 of Article XXIV (timing), and (2) only to the extent that the formation of the customs union would be prevented if the measure were not allowed (necessity). It is beyond the scope of this chapter to reopen a debate on this report. However, in general the Appellate Body did not escape criticism. Th is included, for example, that the timing and necessity requirements led to absurd results and that the Appellate Body had practised ‘judicial activism’. 74 There is an argument which deserves to be highlighted. The compromise reached in the Appellate Body’s decision on Turkey – Textiles has resulted in taking out of their traditional context the overall RTA compatibility conditions laid down in Article XXIV (that is to say, the internal and external requirements).75 They are now subsumed, for adjudication purposes, into a category of prerequisites. This leaves the conditions upon 72

73

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In the 1947 GATT era, the jurisdiction of Panels and Working Parties had been systematically rejected. Panel Report, Turkey – Restrictions on Imports of Textile and Clothing Products, WT/ DS34/R; Appellate Body Report, WT/DS34/AB/R, adopted 19 November 1999. This case has greatly attracted the attention of commentators. Pauwelyn, supra , note 51, pp. 132–5; L. Bartels, ‘The Separation of Powers in the WTO: How to Avoid Judicial Activism’, International and Comparative Law Quarterly, 53 (2004) 861; Devuyst and Serdarevic, supra, note 5, pp. 65–72. See supra, note 2.

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which Article XXIV can justify concrete RTA measures prima facie inconsistent with WTO law. (These conditions are the timing and the necessity tests.) The problem with this sequence is that WTO judicial bodies are technically unequipped to perform the task of assessing the overall compatibility of RTAs with WTO law.76 As a result, the second step of the procedure, that is, the evaluation of legitimacy of specific RTA measures, does not occur because the overall compatibility amounts to a prerequisite for deciding the concrete measure’s legitimacy. There have been several WTO disputes invoking GATT Article XXIV since Turkey – Textiles. In most of these instances, the issue was the discriminatory (selective) application of global safeguards. By introducing the concept of parallelism, the panels and the Appellate Body have avoided answering the question of whether Article XXIV can justify a violation of the non-discrimination rule of ASG Article 2.2.77 In one case, the Panel concluded that the United States had demonstrated that the NAFTA was consistent with Article XXIV; however, the Appellate Body found it unnecessary to address this issue and considered the Panel’s relevant conclusions as ‘moot’ and without ‘legal effect’.78 In the other reports, panels have, whenever possible, made use of the principle of judicial economy and, thus, have not scrutinised either the RTA in its entirety or the specific measure. In Brazil – Measures Affecting Imports of Retreaded Tyres, the specific RTA measure at issue was a MERCOSUR exemption from an import ban on retreaded tyres.79 The European Communities requested the Appellate Body to reverse the Panel’s decision to exercise judicial economy and to complete the legal analysis under GATT Article XXIV. This request was not fulfi lled because it was conditioned upon the Appellate Body upholding the Panel’s 76

77

78 79

Also, in a WTO dispute it is up to the member state invoking the defence of GATT Article XXIV to demonstrate the full consistency of the relevant RTA with the requirements of paragraphs 5 and 8 of the Article (Panel Report, Argentina – Textiles and Apparel, WT/DS56/R, adopted as modified by the Appellate Body 22 April 1998, paras. 6.34–6.40). The satisfying of the burden of proof is always the subject of further dispute. See Panel Report, Brazil – Measures Affecting Imports of Retreaded Tyres (Brazil – Tyres), WT/DS332/R, adopted as modified by the Appellate Body, 17 December 2007, paras. 4.378–4.402. See, for instance, Appellate Body Report, Argentina – Footwear, WT/DS121/AB/R, adopted 14 December 1999, para. 109. See Appellate Body Report, US – Line Pipe, supra, note 60, para. 199. Panel Report, Brazil – Tyres, supra, note 76, paras. 7.453–5.

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fi nding that the MERCOSUR exemption did not result in the import ban being applied inconsistently with the requirements of the chapeau of Article XX and, instead, the Appellate Body reversed this conclusion of the Panel.80

VI

Conclusion

In this chapter an attempt has been made to demonstrate that the interplay between the WTO and RTAs, which is usually approached doctrinally either as a challenge to WTO primacy or as a matter essentially political in nature, can equally be interpreted as a practical case of interrelation between different sources of international law. Those sources are the treaty law of the WTO and the customary law deriving from the formation of RTAs as evidenced by State practice and accepted as law. Th is reasoning was stimulated by the remark that RTAs usually do not conform to the requirements of GATT Article XXIV and other similar WTO provisions. How should one interpret this negligence and disregard with respect to WTO rules? Given the generalised spread of this attitude, it seems reasonable, from an international law perspective, to question whether non-compliant State practice could be interpreted as a tacit performance of an international custom instead of being considered simply as a generalised behaviour that is wrong under WTO law. The indicators this chapter employs to survey State practice relating to RTAs, viz. the extent of the ‘regional exception’ and the degree of RTAs’ autonomy in respect to the WTO legal order, provide some evidence of an international custom which might have the shape and content of a right or freedom of States to reciprocate trade preferences by way of agreement. The de facto non-enforceability of the WTO rules pertaining to RTAs, as a result of the systematic failure, which is likely to be seen as acquiescence, of the relevant WTO authorities to check regional agreements, confirms this. Prior to GATT 1947, the idea prevailed that the ‘regional exception’ to the most-favoured-nation clause was a part of international customary law. Th is deserves close consideration, not only to reinforce the

80

Appellate Body Report, Brazil – Tyres, WT/DS332/AB/R, adopted 17 December 2007, paras. 255–6.

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customary law argument, but also as a suggestion for future further analysis of the relationship between the WTO and RTAs.81 81

Some of the issues discussed in this chapter have been further developed by the author in Fabbricotti, ‘The Interplay Between the WTO and the RTAs: Is It a Question of Interrelation Between Different Sources of International Law?’, (SIEL Online Proceedings Working Paper No. 12/08, 2008), available at http://ssrn.com/abstract=1151386 (accessed 10 May 2010).

7 ‘Gambling’ with sovereignty: complying with international obligations or upholding national autonomy Henning Grosse Ruse-Khan

I

Introduction

A significant number of prominent WTO disputes, including EC – Hormones, US – Shrimp and US – Foreign Sales Corporations, have raised questions over state sovereignty in exercising control over important matters.1 Both anti-globalisation advocates and hard-core free traders often blame the WTO dispute settlement system for allowing its actors, especially the WTO Appellate Body, to allegedly go beyond their mandate and create new rules rather than applying existing ones.2 The US – Gambling dispute between the tiny Caribbean island nation of Antigua and Barbuda (Antigua) and the United States involved sovereignty-related issues over the extent the WTO judiciary may ‘interfere’ with US perceptions of public order and morality. However, this dispute points to further aspects affecting national autonomy and the reach of international obligations, which are this chapter’s focus. The continued US failure to comply with the recommendations and rulings of the Dispute Settlement Body (DSB) has led to arbitration over Antigua’s right to retaliate by suspending its obligations under the TRIPS Agreement in order to induce compliance. Rather than discussing the technical details of cross-retaliation, I focus 1

2

State sovereignty in this chapter is primarily understood as determining the scope of domestic freedom from outside interference. In this regard, I prefer to use the term autonomy, since it focuses on this particular aspect of state sovereignty within a wider understanding of the latter; see D. Sarooshi, ‘Sovereignty, Economic Autonomy, the United States, and the International Trading System: Representations of a Relationship’, European Journal of International Law, 15(4) (2004) 651. S. Esserman and R. Howse, ‘The WTO on Trial’, Foreign Affairs Magazine, 82 (2003) 130; see also R. Z. Lawrence, ‘The United States and the WTO Dispute Settlement System’, Council on Foreign Relations, (Special Report No.25, March 2007), available at www.cfr. org/ (accessed 11 May 2010).

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on the sovereignty aspects this type of retaliation raises. To what extent can the WTO dispute settlement system provide trade heavyweights and small economies with an effective mechanism to enforce international obligations under WTO law? Does the notion of suspending intellectual property (IP) protection give developing countries an effective tool, given the economic importance IP has for most industrialised economies? US – Gambling sets a precedent for another development which potentially has strong implications for the reach of international obligations and national autonomy. In order to avoid implementing the recommendations of the DSB, retaliation from Antigua or further disputes initiated by other, more powerful trading partners, the US wishes to modify its international obligations affecting its domestic policies on (online) gambling and betting. What does this imply for the obligation to comply with the DSB recommendations in US – Gambling? Which – if any – possible responses allow the respective modification procedures under the General Agreement on Trade in Services (GATS)? Again, I will focus on the implications for state sovereignty and WTO obligations. Is the option to modify existing WTO obligations an approach which should be broadened to give effect to crucial domestic policies and values whenever these conflict with WTO law?

II

General links between WTO dispute settlement and sovereignty

Panel and Appellate Body reports are frequently described as ‘automatically binding’. This has been hailed as one of the core features of the WTO and a key improvement over the former GATT system.3 There is no doubt about the important role of the negative consensus rule and the adoption of (Panel or Appellate Body) reports. However, adopting a report does not necessarily imply an international obligation to comply, let alone any effective method of enforcement in case of non-compliance. Nevertheless, the binding character of the WTO dispute settlement system has been a key issue in the claims by several observers and interest groups which allege undue interference with national sovereignty. This often takes the form of allegations that the Appellate Body is engaging in judicial activism or overreaching.4 3

4

A. F. Lowenfeld, ‘Remedies Along with Rights: Institutional Reform in the New GATT’, American Journal of International Law, 88 (1994) 477, pp. 479 and 481. See Esserman and Howse, supra, note 2; C. Barfield, ‘WTO Dispute Settlement System in Need of Change’, Intereconomics, 37 (2002) 131, pp. 131–5.

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Against the background of this debate on judicial activism, this section looks briefly at the legal foundations of WTO dispute settlement and how they might impact on state sovereignty.

Judicial activism and overreaching The most prominent claims relating to national autonomy and the WTO dispute settlement system allege that the WTO quasi-judicial organs create new rights and obligations rather than preserving and clarifying existing ones.5 The Uruguay Round negotiators addressed this fear in Art. 3.2 of the Dispute Settlement Understanding (DSU) which provides: The dispute settlement system of the WTO is a central element in providing security and predictability to the multilateral trading system. The Members recognize that it serves to preserve the rights and obligations of Members under the covered agreements, and to clarify the existing provisions of those agreements in accordance with customary rules of interpretation of public international law. Recommendations and rulings of the DSB cannot add to or diminish the rights and obligations provided in the covered agreements.6

Against this safeguard, one might ask if there is any room for deviation from a literal interpretation of WTO law under the dispute settlement rules. John Jackson has observed: If a nation has consented to a treaty and the norms it contains, why should it object to an external process which could rule on the consistency of nations’ actions with the treaty norms? It might be argued that such objections manifest a lack of intent to follow the norms, sort of accepting the treaty with fi ngers crossed behind the back … However, it could also be suggested that nervousness about international dispute procedures reflects a government’s desire to have some flexibility to resist future strict conformity to norms in certain special circumstances, particularly circumstances that could pose great danger to the essential national objectives. Th is is sort of an ‘escape clause’ idea where a nation could accept norms with sincere intent to follow them except in the 5

6

Esserman and Howse, supra, note 2; Barfield, supra, note 4; see also US Council on Foreign Relations, ‘Online debate: Is the WTO Dispute Settlement System fair?’, available online at www.cfr.org/publication/12665/is_the_wto_dispute_settlement_system_fair.html (accessed 11 May 2010). DSU, 1869 UNTS. 401, (15 April 1994), Article 3.2. With almost identical wording, DSU Article 19.2 states, ‘in accordance with paragraph 2 of Article 3, in their fi ndings and recommendations, the panel and Appellate Body cannot add to or diminish the rights and obligations provided in the covered agreements’.

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The need to safeguard vital interests evokes discussion about undue restraints on state sovereignty in WTO dispute settlement practice – especially in high-profi le cases decided by the Appellate Body,8 such as that pertaining to the Byrd Amendment (the Continued Dumping and Subsidy Offset Act of 2000).9 These complaints on overreaching have been associated with ‘constitutional flaws stemming from the imbalance between the powerful judicial system and the weak and ineffective rulemaking procedures’.10

Implementation of dispute settlement rulings and recommendations Yerxa describes WTO dispute settlement as ‘an adjudication process that respects national sovereignty yet gives Members a compelling reason to comply with its decisions’.11 This addresses the basic paradox between needing the negotiated and internationally agreed rules to mean something, while trying to avoid the transfer of control over domestic policies to an international body. Yerxa notes that the ‘unique feature of the WTO is that, unlike many international regimes, it has an adjudication process that is mandatory and binding’.12 But what does this binding character imply – in a world where national autonomy is safeguarded against direct effect and where there is ‘no WTO jail, and … no power to levy fines or other monetary sanctions’?13 Yerxa sees the answer in the system’s functioning on the basis of contractual remedies: What this means is that the violation of WTO rules by one Member gives adversely affected Members the right to withdraw some equivalent value of commitments in order to rebalance their respective rights 7

8

9 10 11

12

J. H. Jackson, ‘Dispute Settlement in the WTO: Policy and Jurisprudential Considerations, Research Seminar in International Economics’, (University of Michigan School of Public Policy Discussion Paper No. 419, 1998), p. 15. Such claims have been made in disputes involving sensitive domestic policies such as EC – Hormones and US – Shrimp as well as in recent trade remedy cases involving various controversial US antidumping practices; compare also Barfield, supra, note 4. US Council on Foreign Relations, supra, note 5. Barfield, supra, note 4. R. Yerxa, ‘The power of the WTO Dispute Settlement System’ in R. Yerxa and B. Wilson (eds.), Key Issues in WTO Dispute Settlement: The First Ten Years (Cambridge University Press, 2005), p. 3, at pp. 3–4. Ibid., p. 3. 13 Ibid.

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and obligations … However, the decision to ‘retaliate’ is entirely up to the aggrieved Member itself, just as the decision to correct a violation rests on the sovereign decision of the violator.14

He therefore concludes that ‘in essence, sanctions, just like compliance, must come from sovereign actions of the WTO’s Members’. The provisions of the DSU support these observations. There is arguably an obligation to implement the recommendations and rulings of the DSB. First, Art. 3.7 states that ‘in the absence of a mutually agreed solution, the first objective of the dispute settlement mechanism is usually to secure the withdrawal of the measures concerned if these are found to be inconsistent with the provisions of any of the covered agreements’. When a panel or the Appellate Body finds such inconsistencies, Art. 19.1 provides ‘it shall recommend that the Member concerned15 bring the measure into conformity with’ the relevant WTO agreement. Art 21.1 then states that ‘prompt compliance with recommendations or rulings of the DSB is essential in order to ensure effective resolution of disputes to the benefit of all Members’. It follows that an adopted panel or Appellate Body report16 becomes binding for the Member concerned.17 Art. 21 further requires the Member to ‘inform the DSB of its intentions in respect of implementation’ and generally allows ‘a reasonable period of time in which to do so’.18 If a Member does not comply, the DSU allows the suspension of concessions or other obligations as the last and temporary resort, unless both parties mutually agree on compensation. Also, Art. 22.3(a) establishes the general principle that the retaliating Member should consider suspending concessions or other obligations deriving from the same sector19 of the same agreement20 which the other Member violated. Under the further 14 15

16

17

18

19

Ibid., p. 4 (emphasis added). The ‘Member concerned’ is the party to the dispute to which the recommendations are directed. Adoption is – by virtue of the negative consensus rule – generally automatic. See DSU Articles 16.4 and 17.14. P. Van den Bossche, Th e Law and Policy of the World Trade Organization: Text , Cases and Materials (Cambridge University Press, 2005), p. 217; M. Matsushita, T. J. Schoenbaum and P. C. Mavroidis, Th e World Trade Organization (Oxford University Press, 2003), p. 25. Under Article 21.5, any disagreement ‘as to the existence or consistency with a covered agreement of measures taken to comply’ shall be decided ‘through recourse to these dispute settlement procedures, including wherever possible resort to the original panel’ (so-called 21.5 compliance panels). Defined in DSU Article 22.3(f). 20 See DSU Article 22.3(g).

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conditions in Art. 22.3(b) and (c), the retaliating Member can suspend obligations under other sectors or even under distinct WTO Agreements. Art. 22.4 requires the retaliating country to ensure equivalence between the level of concessions or other obligations suspended and the level of nullification or impairment of benefits.21 The non-complying Member can challenge the consistency of a request for retaliation through binding arbitration proceedings. The DSU enforcement mechanism limits the options of the retaliating country when responding to a perceived violation of WTO rules. Art. 23 prohibits any unilateral determination regarding (1) whether national measures are inconsistent with WTO law; (2) whether reasonable periods for implementation have been exceeded; or (3) how to retaliate against non-compliance. These limitations are likely intended to protect the national autonomy of the non-complying Member, which a strict enforcement regime would threaten.

The DSU, international obligations and national autonomy The DSU was carefully drafted to not interfere directly with a noncomplying Member’s autonomy to uphold or withdraw the WTOinconsistent measure. A Member can refuse to comply and choose to live with the retaliation – if implemented – without further consequences.22 Instead, the DSU provides for a rule-based system which allows affected Members to challenge national measures and – if they are found to be WTO-inconsistent – to respond to these inconsistencies in specific ways. These DSU provisions, limiting the options of other states to respond to (perceived) violations of WTO law, can be viewed as much stronger restrictions of the autonomy of the responding state than on the noncomplying state. Overall, the provisions of the DSU do not guarantee the enforcement of WTO obligations. Instead, this is left to the sovereign decisions of WTO Members. As a last resort, the DSU allows suspension of concessions or other WTO obligations. This provides a remedy which can be used to induce 21

22

The DSU offers no further guidance and arbitrators have generally taken an ‘equality-of-harm’ approach by comparing the detrimental effect of the inconsistent measure of the non-complying state with the detrimental effect of the retaliatory measure; see T. Sebastian, ‘World Trade Organization Remedies and the Assessment of Proportionality: Equivalence and Appropriateness’, Harvard International Law Journal, 48(2) (2007) 337, section V. Lawrence, supra, note 2, p. 14.

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compliance or to rebalance the reciprocity of negotiated commitments.23 Apart from other considerations,24 the risk of retaliation and its potential impact on domestic interests can be a key factor in deciding whether to implement the DSB recommendations. Therefore, the ‘enforcement mechanism’ has an indirect effect on that decision and thereby on the autonomy of the non-complying state. It offers an opportunity to enforce WTO obligations. However, this has to be assessed in the context of political and economic realities of the world trading system. The key question is whether opportunities for enforcement are equally open to, and effective for, all WTO Members. The WTO dispute settlement rules have been hailed as being rule-based instead of relying on (power-oriented) diplomacy. However, the lack of effective enforcement tools works against small economies and (most) developing countries.25 Can the DSU give equal opportunities to all WTO Members to induce compliance in a way that minimises the impact of trade, economic and political power on the ability to enforce WTO law?26 Using US – Gambling as an example, the next section examines the 23

24

25

26

Both rebalancing and inducing compliance fi nd support in the DSU and other mechanisms for retaliation in the WTO. While some relics of the traditional GATT system (such as the equality of harm approach in Article 22.4) emphasise a need for upholding the agreed bilateral balance of concessions, the rule-based approach in the WTO system aims to secure compliance with WTO rules and DSB rulings. See H. Grosse RuseKhan, ‘A Pirate of the Caribbean? The Attractions of Suspending TRIPS Obligations’, Journal of International Economic Law, 11(2) (2008) 313, pp. 325–30; compare also R. Malacrida, ‘Towards Sounder and Fairer WTO Retaliation: Suggestions for Possible Additional Procedural Rules Governing Members’ Preparation and Adoption of Retaliatory Measures’, Journal of World Trade, 42(1) (2008) 3, p. 5; Y. Fukunaga, ‘Securing Compliance through the WTO Dispute Settlement System: Implementation of DSB Recommendations’, Journal of International Economic Law, 9(2) (2006) 383, pp. 416–17; and M. Bronckers and N. van den Broek, ‘Financial Compensation in the WTO: Improving the Remedies of WTO Dispute Settlement’, Journal of International Economic Law, 8(1) (2006) 101, p. 102. A key motivation for compliance, even in sensitive disputes, may be a willingness to ensure, for all domestic commercial actors, security and predictability of the international trading system which could well be undermined by (continuous) noncompliance; see Jackson, supra, note 7, p. 17. Th is has been described as a power paradox in the DSU enforcement system which aims to overcome power-based economic relations and establish security, predictability and the rule of law on the one hand, but relies on economic state power for the enforcement of dispute settlement rulings; see N. van den Broek, ‘Power Paradoxes in Enforcement and Implementation of World Trade Organization Dispute Settlement Reports: Interdisciplinary Approaches and New Proposals’, Journal of World Trade, 37(1) (2003) 127, pp. 127–36. See DSU Article 3.2.

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effectiveness, especially for small economies, of WTO dispute settlement in general and the notion of suspending IP protection in particular to enforce WTO obligations.

III Suspending WTO obligations – a viable way to enforce international obligations? The ‘traditional’ form of trade retaliation was withdrawing tariff concessions, effectively raising tariffs for specific imports from the noncomplying country.27 Using US – Gambling as an example, I will show that this tool is inadequate, harmful and inefficient. The question is whether suspending obligations to protect IP under the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) is a meaningful alternative.

US – Gambling and the inadequacy of traditional retaliation US – Gambling concerned the denial of access to the US market for foreign internet gambling service operators.28 It pitted one of the smallest WTO Members, Antigua,29 against the United States, the world’s largest single economy. WTO judicial organs have consistently sided with Antigua – first finding the US measures inconsistent with its GATS obligations,30 then 27

28

29

30

Compare S. Charnovitz, ‘The WTO’s Problematic Last Resort Against Noncompliance’, (14 August 2003), pp. 9–10, available at www.worldtradelaw.net/articles/ charnovitzlastresort.pdf (accessed 11 May 2010); and W-M. Choi, ‘To Comply or Not to Comply? – Non-Implementation Problems in the WTO Dispute Settlement System’, Journal of World Trade, 41(5) (2007) 1043, pp. 1049–53; for statistics on retaliation in the GATT/WTO see Malacrida, supra, note 23, pp. 56–60 (Annex B). Antigua challenged the consistency of various US measures that had the cumulative effect of preventing the cross-border supply of its gambling and betting services, even though the US had made market access commitments in its schedule annexed to (and an integral part of) the General Agreement on Trade in Services (GATS). For commentary on the dispute see M. Krajewski, ‘Playing by the Rules of the Game?: Specific commitments after US – Gambling and Betting and the Current GATS Negotiations’, Legal Issues of Economic Integration, 32(4) (2005) 417; and F. Ortino, ‘Treaty Interpretation and the WTO Appellate Body Report in US– Gambling : A Critique’, Journal of International Economic Law, 9(1) (2006) 117. Antigua’s economy is dependent upon tourism and the provision of banking and other fi nancial services. See United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services – Recourse by Antigua and Barbuda to Article 22.2 of the DSU (United States – Gambling), WT/DS285/22, 22 June 2007, p. 3. Appellate Body Report, United States –Gambling, WT/DS285/AB/R, adopted 20 April 2005.

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holding that the US had failed to implement the DSB recommendations.31 To fi nally induce a change in US law, Antigua requested suspending equivalent WTO obligations against the US.32 Antigua did not ask for a right to raise tariffs, but instead primarily opted for suspending IP protection under TRIPS.33 This must be judged in light of the perception that traditional retaliation is an ineffective tool for small economies and developing countries. Due to the asymmetry in market size, suspending tariff concessions is unlikely to induce compliance, as a larger trading partner will not be harmed.34 Traditional retaliation, therefore, cannot offer a realistic option to enforce obligations.35 Further, suspending tariff concessions leads to more expensive and potentially fewer supplies for the domestic market; leading to less competition and price increases, which in turn negatively affect consumers and economic welfare.36 This applies not only to small economies, but also (to a lesser extent) to large trading nations. Raising tariffs amounts to trade contraction, and goes against WTO trade liberalising principles.37 Therefore, the use of retaliatory suspension of tariff concessions is arguably ‘shooting oneself in the foot’.38 Th is is particularly true for small economies. Consequently, although the WTO dispute settlement system aimed to enshrine the rule of law, the threat and use of sanctions reinforces the primacy of power.39 Lawrence has observed that ‘while all WTO members are formally equal, the system’s design gives some countries more power than others’.40 All these – and

31

32 34

35

36

37 38

39

Panel Report, United States – Gambling – Recourse to Article 21.5 of the DSU by Antigua and Barbuda, WT/DS285/RW, adopted 22 May 2007. 33 United States – Gambling, supra, note 29. Ibid. Compare the Decision by the Arbitrator, European Communities – Regime for the Importation , Sale and Distribution of Bananas (EC – Bananas III ) – Recourse to Arbitration by the European Communities under Article 22.6 of the DSU, WT/DS27/ARB/ ECU, 24 March 2000, para. 95, and A. Subramanian and J. Watal, ‘Can TRIPS Serve as an Enforcement Device for Developing Countries in the WTO?’, Journal of International Economic Law, 3(3) (2000) 403, p. 404. See also Charnovitz, supra , note 27, pp. 22–3; Bronckers and van den Broek, supra , note 23, p. 102. UNCTAD-ICTSD, Resource Book on TRIPS and Development, (Geneva, UNCTAD/ ICTSD, 2005), ch. 32, 7.6.1, available at www.iprsonline.org/unctadictsd/ ResourceBookIndex.htm (accessed 11 May 2010); EC – Bananas III (Ecuador) (Article 22.6 – EC), supra, note 34, para. 91. Bronckers and van den Broek, supra, note 23, p. 103. Subramanian and Watal, supra, note 34, p. 405; Bronckers and van den Broek, supra, note 23, p. 103. Charnovitz, supra, note 27, p. 28. 40 Lawrence, supra, note 2, p. 15.

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other41 – flaws of traditional trade retaliation lead to the conclusion that the mechanism not only fails to effectively enforce international obligations, but implies additional harm for a country attempting to retaliate. Antigua’s situation in US – Gambling confirms these general observations. With only ‘negligible natural resources’, very few exports and about 50 per cent of all goods and services being imported from the US, raising tariffs on US goods would have a disproportionately negative impact on Antigua.42 As a suspension of all trade with the US would affect less than 0.02 per cent of all US exports,43 such measures stand very little chance of inducing and forcing the US to comply with WTO obligations.

Cross-retaliation under TRIPS – a feasible alternative? Because of the continued US failure to implement the DSB recommend ations in US – Gambling , arbitrators awarded Antigua the right to retaliate by suspending obligations under TRIPS with an annual value of US$21 million.44 This raises the question whether suspending TRIPS obligations is a feasible and effective alternative to traditional retaliation. Generally speaking, the form of retaliation chosen should have the potential to inf lict (economic) loss on the noncomplying WTO Member – thereby providing an incentive to comply – and further should be beneficial (or at least not harmful) to the retaliating country.45 My analysis will not delve into the specific DSU legal conditions 46 nor address other issues of conf licting international obligations 47 or difficulties in implementing IP cross-retaliation in 41

42 44

45 46

47

See Bronckers and van den Broek, supra, note 23, pp. 103–4 (which stress the harm done to affected exporters as innocent bystanders and the lack of remedies for the industries affected by the initial WTO violation); see further Charnovitz, supra, note 27, pp. 10–14 and 23–4 (who discusses various other negative effects on third countries, the WTO as a whole and other international organisations). United States – Gambling, supra, note 30, pp. 2–3. 43 Ibid. Decision by the Arbitrator, United States – Gambling – Recourse to Arbitration by the United States under Article 22.6 of the DSU, WT/DS285/ARB, 21 December 2007, para. 6.1 For a more detailed analysis of the Article 22.6 arbitration see Grosse Ruse-Khan, supra, note 23, pp. 315–18). Subramanian and Watal, supra, note 34, pp. 405–6. See in particular the conditions set out in Article 22.3 DSU. Overall, the existing arbitral awards in EC – Bananas III, supra, note 34 and US – Gambling, supra, note 44 do not indicate significant legal hurdles. See Grosse Ruse-Khan, supra, note 23, pp. 340–7. As international IP regulation is fragmented, a right to suspend IP protection may confl ict with an obligation to protect the same subject matter under another multilateral, regional or bilateral agreement. See Subramanian and Watal, supra, note 34; and H. Grosse Ruse-Khan, ‘Suspension of Obligations under TRIPS as an Effective Means to

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national law.48 These aspects are dependent on individual circumstances and do not directly affect the general potential of IP crossretaliation to enforce international obligations. In order to evaluate the potential that IP cross-retaliation may offer, one must consider the role IP plays in the international trading regime, particularly for most industrialised and knowledge-based economies. Countries with a sector-specific comparative advantage49 in developing technological inventions and producing related innovative high-tech goods, engaging in creative activity on an industrial scale or in performing other kinds of innovation which require significant investment of time, money or labour but are easy to imitate or copy, generally favour stronger IP protection than those which are ‘net importers’ of IP-protected goods or services. In global trade, however, strong IP rights at home are not sufficient: effective IP protection in existing and potential markets is a central concern for industries wishing to trade their IP-protected products and services globally without risk of copying or imitation. For protection of IP assets on a global scale, TRIPS is the most important multilateral agreement.50 The value IP protection has for companies in industrialised countries, even in cases of asymmetric market size, means that suspending TRIPS obligations is likely to serve as an effective tool in inducing these countries to comply with DSB recommendations. While there is no precedent for suspending TRIPS obligations (and thus none for its effectiveness in practice),51 the potential harm withdrawing IP protection entails for

48

49

50

51

Induce Compliance?’, presented at the 7th BIICL/IIEL WTO Conference (London, May 2007), available at www.ip.mpg.de/shared/data/pdf/suspension_of_obligations_under_ trips_(h_grosse_ruse_-_khan_21_05_2007).pdf (accessed 19 June 2009). As IP rights flow from national laws, any authority to suspend IP protection must be accompanied by appropriate domestic regulation; for examples see Subramanian and Watal, supra , note 34; M. Basso and E. Beas, ‘Cross-retaliation through TRIPS in the Cotton Dispute?’, Bridges Monthly Review, 9(5) (2005) 1, pp. 19–20, available at http:// ictsd.org/downloads/bridges/bridges9-5.pdf (accessed 13 May 2010); and Grosse RuseKhan, supra, note 47. A discussion of comparative advantage can be found in Van den Bossche, supra, note 17, pp. 19–24. For an economist’s perspective see S. Brakman, H. Garretsen, C. van Marrewijk and A. van Witteloostuijn, Nations and Firms in the Global Economy (Cambridge University Press, 2006), pp. 63–95. It is the only international IP agreement which (1) contains provisions on IP rights; (2) integrates the other several international IP Agreements by reference; (3) includes enforcement of IP rights; and (4) binds more than 150 countries to the WTO’s dispute settlement system. Ecuador, the only country which (before Antigua in US – Gambling) had been awarded the right to suspend IP protection (see EC – Bananas III, supra, note 34), never resorted

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all IP-dependent industries strongly suggests its compliance-inducing effect on countries relying on such industries.52 Non-complying WTO Members for whom IP protection is a key asset are more likely to adhere to their international obligations – even if this requires acting against the interests of other important domestic stakeholders. Also, suspending IP protection may have positive welfare effects for a (developing) economy, especially in education and health. It can increase the availability of IP-protected goods or services in the domestic market and enable domestic research institutions and industry to access, experiment with and utilise protected technology and foster domestic innovation. These general observations suggest that a withdrawal of TRIPS obligations can serve as an effective enforcement tool. On this basis, it has been hailed as the perfect ‘retaliatory weapon in trade disputes’53 for developing countries and small economies. However, a closer look at the domestic economic feasibility and the retaliatory impact abroad calls this evaluation into question. Both positive enforcement and welfare effects identified above as the core rationale and attraction of IP cross-retaliation depend in large part on various factors in the retaliating country. First, sufficient domestic market size and consumer demand are crucial for IP suspension to have a significant impact on the non-complying country. Since withdrawal of TRIPS obligations is limited to the territory of the retaliating Member, exports to other countries where the products or services are IP-protected are, in principle, infringing.54 If, therefore, the domestic market is small or not

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to retaliation as it reached a mutually agreeable solution with the EC in June 2001. Th is may be because it was not economically feasible to suspend IP protection, but could also indicate the bargaining power it gained (i.e. the threat to suspend IP rights). See, for example, United States – Subsidies on Upland Cotton – Recourse to Article 7.9 of the SCM Agreement and Article 22.2 of the DSU by Brazil, WT/DS267/26, 7 October 2005. Subramanian and Watal, supra, note 34, p. 403. The principle of territoriality in IP law means protection results not from international agreements such as TRIPS but from national laws implementing these agreements. See L. Bently and B. Sherman, Intellectual Property Law, 2nd edn (Oxford University Press, 2004), pp. 5 and 929; A. Ilardi and M. Blakeney (eds.), International Encyclopaedia of Intellectual Property Treaties (Oxford University Press, 2004), p. 3; P. Katzenberger and A. Kur, ‘TRIPS and Intellectual Property’ in F-K. Beier and G. Schricker, From GATT to TRIPS: the Agreement on Trade-Related Aspects of Intellectual Property Rights, IIC Studies (New York, Max Planck Institute, 1996), vol. XVIII, p. 5; C. Arup, The New World Trade Organization Agreements (Cambridge University Press, 2000), p. 30. The existence and scope of protection is always limited to the domestic territory. Compare, for example, Article 5(2) of the Berne Convention, 25 UST 1341, 828 UNTS. 221, (9 September 1886), revised at Paris (24 July 1971). The arbitrators in EC – Bananas III arrived at the same

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relevant for IP industries of the non-complying country, the potential economic loss inflicted by free exploitation of IP-protected products or services on that market will be limited. The second relevant factor is the retaliating country’s technical capability to engage in quick and large-scale domestic production of copies. While digital technology makes this relatively easy for the soft ware or movie and music industries, this is not the case for producing pharmaceuticals (as demonstrated by the long debate about TRIPS and public health).55 Importing such competing goods/services is a feasible option only from countries where the respective good/service is not IP-protected. The third determining factor is the need for certainty that related investments for private sector based production of copies can be recouped.56 This requires certainty about the duration of IP suspension and could be seriously hampered if the non-complying Member complies, or the disputing parties agree to resolve the matter by other means. One way to tackle this problem would be to rely on state-owned enterprises, or state guarantees issued to private sector producers. Nevertheless, applying these three factors to Antigua, it has few chances to induce US compliance. There are, however, some options to extend the effect of suspending TRIPS obligation beyond the borders of the retaliating country and thus detach that effect from the size of the domestic market.57 First, the retaliating country may always export to countries where no IP protection applies58 to the goods produced under suspension, so that sales in these markets would increase the economic harm inflicted on the right holders. Also, any importing country could rely on the doctrine of international exhaustion of IP rights59 in order to (parallel) import goods which have

55

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result by pointing to the obligations under TRIPS Article 51 to offer border measures against certain types of IP infringing imports, see EC – Bananas III (Ecuador) (Article 22.6 – EC), supra, note 34, paras. 153–6. See Ministerial Conference, ‘Doha Declaration on the TRIPS Agreement and Public Health’, (WTO Doc. WT/MIN(01)/DEC/2, 2001), para. 6 and the subsequent negotiations leading to the ‘paragraph six solution’. See General Council, ‘Decision of 30 August 2003’, (WTO Doc. WT/L/540 and Corr.1, 2003); and General Council, ‘Decision of 6 December 2005’, (WTO Doc. WT/L/641, 2005). Subramanian and Watal, supra, note 34, p. 409. See Grosse Ruse-Khan, supra, note 23, pp. 354–62. For example, because the right holder did not apply for a patent or a trade mark or because the country is still benefiting from the extended transition periods for LDCs with regard to pharmaceutical product patents. Under this doctrine, certain first sales in one country allow the resale in another country. TRIPS Article 6 insulates domestic policies on (international) exhaustion from WTO challenge.

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been produced under IP suspension in the retaliating country.60 However, it is doubtful whether this doctrine can be expanded to cover goods produced under a WTO authorised suspension regime.61 Retaliating countries may consider utilising the global nature of the Internet by offering otherwise protected content for download online. The result is automatic worldwide availability, where no effective border control would limit the exploitation of that content.62 To ensure equivalence of harms under Art. 22.4 DSU, the retaliating country would need a sophisticated system which controls the number of downloads and places an economic value on them.63 One can conclude that, despite the options for legal exports, the size of the domestic market will significantly impact the economic harm inflicted on the non-complying country and thus its willingness to implement unpopular rulings. While IP cross-retaliation functions significantly better to enforce international obligations than raising tariffs, it is not the perfect retaliatory weapon for small economies. Judging the DSU retaliation mechanism in general, one sees a system failing significantly; for small economies, it neither offers security or predictability regarding other Members’ international trade obligations, nor does it give these countries an effective chance to enforce those obligations. However, IP cross-retaliation has potential value beyond inducing compliance. The retaliating country may experience positive welfare effects by utilising the authority to suspend TRIPS to increase domestic policy space and promote its comparative advantage in the innovationimitation paradigm. This is probably the most important and distinctive 60 61

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van den Broek, supra, note 25. The reference to goods marketed ‘by or with the consent of the right holder’ in footnote 13 to Article 51 TRIPS suggests that it builds on a more narrow understanding of the term ‘exhaustion’. Correa, however, has argued for a more liberal understanding; see C. M. Correa, Trade Related Aspects of Intellectual Property Rights: A Commentary on the TRIPS Agreement (Oxford University Press, 2007), pp. 82–7. However, the legality of these downloads of course depends on the law of the country where the download occurs and generally will infringe IP rights there. A related question then would have to address any potential liability of the retaliating country for ‘facilitating infringement’. The arbitrators in EC – Bananas III made clear that Ecuador’s proposed licensing mechanism to measure and control the utilisation of otherwise IP-protected subject matter was a necessary element to ensure equivalence under Article 22.4 DSU; see EC – Bananas III (Ecuador) (Article 22.6 – EC), supra, note 34, paras. 160–4. On the difficulties involved see S. Basheer, ‘Turning TRIPS on its Head: An “IP Cross Retaliation” Model’, ExpressO, Berkeley Electronic Press 2009, available at http://works.bepress.com/shamnad_ basheer/1 (accessed 7 July 2009).

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feature compared to the traditional forms of retaliation under existing WTO rules. TRIPS arguably establishes a system of global IP protection which in part imposes obligations well beyond the level suited to the comparative advantage of countries in stages of technological learning and imitation. Therefore, the ability to suspend TRIPS obligations has the potential to facilitate technological development and domestic innovation through imitation. It is this potential policy space which should be viewed as a gain in the national autonomy to tailor IP protection to domestic development needs.

IV Amending existing WTO commitments – a viable way to escape international obligations? This section examines options to withdraw or modify existing WTO obligations and their implications for the reach of international obligations and the scope of national autonomy. Again, the US – Gambling dispute provides an example of how this tool may be utilised to uphold national autonomy. The unprecedented move64 of the US to resolve the ongoing US – Gambling dispute by withdrawing its commitments does not purport to bring domestic US law into compliance with its international obligations. Rather, it takes the opposite route of modifying these international obligations to align them with existing US laws and practices.65 Regardless of the underlying motives for such action,66 it is clear that the 64

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There are, however, several precedents for modifying existing GATS commitments (under the relevant GATS Article XXI procedure). These follow from the accession to the EC in 2004 of several East and Central European WTO Members, which resulted in the EC’s notification of its intention to modify or withdraw various service commitments made by these acceding Members in order to align their scheduled commitments with those of other EC Members; see Council for Trade in Services, ‘Notification from the European Communities and its Member States Pursuant to Article V of the GATS’ (Original and Supplementary), (WTO Doc. S/SECRET/8, 2004; and S/SECRET/9, 2005). Revealing in this regard is the US statement that it is now bringing its GATS commitments ‘into conformity with its public policy on gambling’; see, WTO, ‘DSB Adopts Compliance Review Reports on US Gambling and Chile Price Band System’, 2007 News Items, (22 May 2007), available at www.wto.org/english/news_e/news07_e/dsb_22may07_e.htm (accessed 11 May 2010). It has been suggested that lobbying of US horseracing and related betting businesses on the one hand, and strong feelings regarding the right to regulate public policy and morality issues on the other, are the main underlying causes for leaving the (arguably discriminatory) current US laws and practices unchanged. See J. Bernabe, ‘Assessing

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US will not accept any interference with the way it regulates issues of public morals and order. The move therefore can be viewed as autonomy and sovereignty oriented, even though (purely monetary) cost–benefit evaluations may have played an equally important role.67 Does this set a precedent for others unwilling to implement DSB recommendations, and what are the implications for security and predictability in international trade? Or is it a welcome way to create domestic policy space where international obligations are perceived as conflicting with important domestic values and policies?

The system for withdrawing GATS commitments in the context of US – Gambling Shortly after an Art. 21.5 Panel had found the US measures to be in continued violation of its GATS commitments, the US announced that it would modify these commitments under GATS Art. XXI.68 That provision and implementation regulations issued by the GATS Council69 allow any WTO Member to ‘modify or withdraw any commitment in its schedule’. However, in case of such withdrawal or modification, ‘any Member the benefits of which under this Agreement may be affected ’70 can issue claims for compensatory adjustments.71 Here, eight WTO Members issued such claims72 against the US and subsequently negotiated

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the Implications of the Gambling Dispute’, Bridges Monthly Review, 11(4) (2007) 1, p. 8, available at http://ictsd.org/downloads/2009/03/bridges11-4.pdf (accessed 13 May 2010). The question whether continuous non-compliance with the DSB recommendations in US – Gambling (coupled with the danger of other WTO Members bringing similar cases) is the cheaper option compared to modifying its multilateral GATS commitments (coupled with the duty to compensate affected WTO Members; see below) is also dominated by autonomy considerations: it builds on the inability or unwillingness to change the domestic law as a starting point and then assesses the cheapest option to preserve this objective. See Bridges Weekly Trade News Digest, ‘US Snubs WTO Ruling on Internet Gambling’, 11(16) (2007), available at http://ictsd.net/i/news/bridgesweekly/6492/ (accessed 19 June 2009). Council for Trade in Services, ‘Procedures for the Implementation of Article XXI of the General Agreement on Trade in Services (GATS)’, (WTO Doc. S/L/80, 1999). Compare also Art. XXVIII GATT. Referred to as ‘affected Member’, GATS Article XXI.2(a), (emphasis added). See Article XXI.2(a) GATS and WTO Doc. S/L/80, supra , note 70, para. 3 (emphasis added). See World Trade Organization, ‘Notification of Claim of Interest’, (India, WTO Doc. S/L/288), (European Communities, WTO Doc. S/L/289), (Japan, WTO Doc. S/L/290),

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‘with a view to reaching agreement on any necessary compensatory adjustment’.73 While the US managed to reach agreement with most affected Members,74 those not satisfied initiated arbitration proceedings over compensatory adjustments.75 The US move to withdraw the relevant GATS commitments may lead to the complete elimination of Antigua’s ability to (cross-) retaliate under the DSU. Where the modification is conducted in accordance with GATS Art. XXI, the modified commitments become binding under GATS.76 As soon as the modified US commitments supersede and replace the original ones, US domestic law will arguably be in accordance with its GATS commitments and Antigua no longer has a case.77 However, GATS Art. XXI proceedings also offer a similar opportunity for retaliation upon which Antigua could rely. Where arbitration is completed, the modifying Member is free to implement a modification or withdrawal that is in conformity with the findings of the arbitration body.78 Similar to the regular dispute settlement system, the US therefore is under an international obligation to comply with the arbitration findings and offer compensatory service commitments accordingly. If, however, the modify ing Member implements its proposed modification or withdrawal and does not comply with the findings of the arbitration, any affected Member that participated in the arbitration may modify or withdraw substantially equivalent benefits in conformity with those fi ndings.79 Again similar

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(Costa Rica, WTO Doc. S/L/291), (Macao, China, WTO Doc. S/L/292), (Antigua and Barbuda, S/L/293), (Canada, WTO Doc. S/L/294), (Australia, WTO Doc.S/L/295); further, Bridges Weekly Trade News Digest, ‘Antigua Gambling Dispute: Major Economies Demand Compensation from US’, 11(24) (2007), available online at http://ictsd.net/i/ news/bridgesweekly/6527/ (accessed 11 May 2010). See GATS Article XXI.2(a) and WTO Doc. S/L/80, supra, note 69, para. 4. According to Article XXI:2(a), ‘the Members concerned shall endeavour to maintain a general level of mutually advantageous commitments not less favourable to trade than that provided for in Schedules of specific commitments prior to such negotiations’. Statement by USTR Spokeswoman Gretchen Hamel on Gambling, (17 December 2007), available at www.ustr.gov/about-us/press-office/press-releases/archives/2007/december/ statement-ustr-spokeswoman-gretchen-hame (accessed 13 May 2010). Under GATS Art. XXI.3(a) and paras.12, 13 WTO Doc. S/L/80. Aiming for an equivalent level of mutually advantageous commitments, Antigua and Costa Rica separately fi led arbitration requests on 28 January; see Reuters, ‘Antigua seeks WTO arbitration in US gambling dispute’, (1 February 2008), available at www.reuters.com/articlePrint? articleId=USL3165644020080131 (accessed 11 May 2010). See GATS Article XXI.1(a) and WTO Doc. S/L/80, supra, note 69, para. 20. Compare also Bernabe, supra, note 66, p. 8. See GATS Article XXI.4(a) and WTO Doc. S/L/80, supra, note 69, para.15. See GATS Article XXI.4(b) and WTO Doc. S/L/80, supra, note 69, para.16. Further details on this form of retaliation (duty to notify the commitments which are to be withdrawn or

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to the DSU, the enforcement of the international obligation is left to the WTO Members concerned, and therefore their effectiveness depends on their trade and economic power. Before the agreed modifications enter into force, other Members have 45 days to raise objections ‘on the ground that the draft schedule does not correctly reflect the results of the action under Article XXI and/or that the modification or withdrawal contained in the draft schedule exceed those initially notified’.80 If no objection is raised, the WTO Secretariat communicates to all Members that the certification procedure has been concluded, indicating the date of entry into force of the modifications. Any objecting Member must ‘enter into consultations with the modifying Member with a view to reaching a satisfactory resolution of the matter as soon as possible’.81 Unless the objection is withdrawn or Members agree over further modifications, the certification procedure is not completed and modifications cannot take effect.82 These certification proceedings thus offer an opportunity to assess whether the modifying Member has properly implemented either an agreement reached with the former or the findings of an arbitration body. In this regard, this procedure fulfi ls the same function as Art. 21.5 compliance proceedings under the DSU. A key difference, however, is that the DSU proceedings follow a legalistic approach where a Panel determines whether the recommendations of the DSB have been properly implemented. Under GATS, a diplomacyoriented approach is chosen, as testing compliance is left to Members, which need to consult with the modifying Member over any potential objections. I conclude that the procedures in GATS Art. XXI often differ from the dispute settlement system. In the following section, I contrast some key aspects relating to sovereignty and the enforcement of international obligations under GATS Art. XXI and under the DSU.

National autonomy versus international obligations under GATS Art. XXI and the DSU The options to retain autonomy under Art. XXI GATS and to enforce international obligations under the DSU follow distinct objectives, that

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modified in retaliation; termination as soon as the (initial) modifying Member complies with the arbitration) are regulated by paras. 17 and 18. See WTO Doc. S/L/80, supra, note 69, para. 20. 81 Ibid., para. 21. If these certification proceedings result in any changes to the draft schedule, these need to be circulated again to all Members which have the option again to raise objections; ibid., para. 22.

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is, retaining a balance of concessions when seeking to amend multilateral obligations, on the one hand,83 and the withdrawal of WTO-inconsistent measures, on the other.84 In US – Gambling, the DSU proceedings call for the US to amend its domestic measures which are inconsistent with WTO obligations. While this is not necessarily the only option the US has under the DSU, it is the type of dispute resolution which the DSU prefers over non-compliance plus compensation or retaliation.85 In an ideal scenario, WTO dispute resolution would call upon the US to amend its domestic laws – regardless of whether the US perceives them as crucial for the implementation of key public policies.86 The DSU hence entails a potentially significant curtailment of national autonomy.87 The GATS Art. XXI proceedings aim for the opposite. They allow Members to modify or withdraw WTO obligations (in the form of services commitments) and thereby provide an option to bring a WTO Member’s international obligations into line with its domestic laws. Though the modifying Member must provide compensatory adjustments, the GATS Art. XXI procedure functions exactly as the type of escape clause Jackson refers to – and allows maintaining (crucial) domestic policies in case these conflict with WTO obligations.88 GATS Art. XXI therefore can be perceived as a vehicle to effect national autonomy. Therefore, the two mechanisms perform opposite functions – one aiming to uphold international obligations, the other to give effect to domestic autonomy. Neither mechanism, however, pursues its main objectives in absolute terms. Under the DSU, the US certainly has the option not to comply with the DSB recommendations and face Antigua’s retaliation. Under GATS Art. XXI, the price for upholding national autonomy is to provide compensation. Nevertheless, the proceedings on modifying service commitments do not exclude the option for the US to implement its intended modifications without providing compensatory adjustments. Again, it has the option not to stick to its international obligations and face retaliation under GATS Art. XXI:4(b). An important similarity found in both mechanisms is an international obligation89 – but its enforcement is left to national measures that Members adopt. 83 85 86

87 88 89

See GATS Article XXI.1. 84 Compare DSU Article 3.7. See DSU Articles 3.7, 19.1, 21.1 and 22.1. Apart from the general exceptions under GATS Article XIV, there is no ‘escape clause’ to safeguard essential domestic interests and policies; compare Jackson, supra, note 7, p. 15. See also Barfield, supra, note 4. Jackson, supra, note 7, p. 15; and see Lawrence, supra, note 2, pp. 18–19. Either to comply with the DSB recommendations or with the duty to provide compensatory adjustments.

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Another important distinction is that dispute settlement is inter partes90 and the DSB recommendations only bind the disputants, whereas proceedings under GATS Art. XXI result in binding modified commitments applicable inter omnes.91 The DSB recommendation in US – Gambling applies only to Antigua and the US, while any modification resulting from the GATS Art. XXI procedure applies to all WTO Members. This inter partes character of dispute settlement proceedings could mean that simple non-compliance with the DSB recommendations in US – Gambling is the ‘cheaper’ alternative. Given Antigua’s rather limited options to inflict economic harm on the US, even when considering its options to suspend IP protection, the costs for upholding national autonomy could be less under the DSU. However, US – Gambling could serve as a precedent, allowing other countries to build on Antigua’s successful challenge and to increase the economic pressure on the US by also seeking retaliation under DSU Art. 22.92 It has been suggested that this scenario implies significantly higher costs for the US in upholding its public policies on gambling than to offer compensatory adjustments as demanded by all affected parties under GATS Art. XXI.2(a).93 From a sovereignty perspective, this would then speak in favour of the GATS Art. XXI route. The EC accession experience has shown the difficulty of proving to be an ‘affected’ Member under Art. XXI.2.94 These arguments are not as convincing as the GATS provisions suggest: both Art. XXI.2(a) and para. 3 S/L/80 go against a restrictive interpretation of ‘affected’ Members. The latter defi nes this term as ‘any Member which considers that its interests under the Agreement may be affected by the proposed modification or withdrawal’.95 Affectedness is therefore a matter of self-assessment, whereas under Art. XXI.2(a) GATS the modifying Member is obliged to enter consultations. While it is true that the EC had attempted to impose further restrictions on the ‘affected’ status,96 those Members which initiated claims for compensation, especially the US, countered these attempts with the arguments provided 90 91 92

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Even if this includes more than two parties; see DSU Article 9. See GATS Article XXI.1(a) and XXI.2(b). The various disputes over the practice of ‘zeroing’ in calculating antidumping margins are an example of successive challenges brought successfully by several WTO Members against the US. Bernabe, supra, note 66, p. 9. 94 Ibid. See WTO Doc. S/L/80, supra, note 69, para. 3 (emphasis added). See Council for Trade in Services, ‘Supplementary Notification from the European Communities and its Member States Pursuant to Article V of the GATS’, (WTO Doc.

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above.97 It would be difficult for the US now to turn around and argue that affectedness implies meeting certain substantive or procedural preconditions. The wording of GATS therefore does not set any significant hurdles for entering negotiations over compensation. As these aim to re-set the balance of commitments, affectedness will still play a key role in determining the amount of compensation, whether in negotiations or in arbitration proceedings. Compared to the requirement of benefits being nullified or impaired in dispute settlement proceedings,98 the mechanism for modifying commitments does not contain a presumption on the basis of a violation of WTO law.99 It rather entails a distinct, subjective hurdle, whereas the DSU builds primarily on the objective standard of an infringement of WTO obligations. This distinction reinforces the earlier observation that the GATS Art. XXI procedure is a diplomacy-oriented mechanism and the dispute settlement system is a legalistic tool. Overall, in upholding US national autonomy, there is a risk that other WTO Members might initiate disputes using US – Gambling as a precedent. This may include WTO Members that can actually engage in meaningful retaliation if the US insists on its non-compliance. Whether this equals the price the US is likely to pay under GATS Art. XXI will largely depend on the willingness of the US to offer compensatory service commitments which offset its intended withdrawal and are thus likely to find consent from the affected Members or to be upheld in arbitration proceedings. Assuming that adjustments which liberalise trade in services in other sectors should also be generally beneficial to the US, compensation then will not involve overall ‘costs’ but rather provide benefits. If, however, the US is unwilling to enter into agreements and, further, does not comply with arbitration findings, subsequent retaliation by the eight affected Members (including economic heavyweights such as the EU and Japan as well as Australia, India and Canada) will certainly exceed the costs of Antigua’s retaliation.100 This scenario leads to the final aspect

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S/SECRET/9, 2005), para. 6: the EC requested information on (1) which withdrawal the Member claims to affect its trade; (2) how such withdrawal affects its trade; and (3) the extent to which its trade is affected. See World Trade Organization, ‘Modification of Schedules – Notification of Claim of Interest from the United States’, (WTO Doc. S/L/217, 2005); and World Trade Organization, ‘Modification of Schedules – Notification of Claim of Interest from Hong Kong (China)’, (WTO Doc. S/L/219, 2005). 99 See GATT Article XXIII.1. See DSU Article 3.8. Whether GATS Article XXI is a form of ‘damage control’ (Bernabe, supra, note 66, p. 9) would only be correct when assuming that all affected Members would initiate dispute settlement proceedings against the US.

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of contrasting dispute settlement against modifying commitments: the options for the individual Members involved to enforce the international obligations existing under each of the mechanisms. As observed above, enforcing the obligation to comply with DSB recommendations as well as the obligation to provide compensatory adjustments depends on WTO Members. In both instances, the effectiveness of this enforcement mechanism as well as its characteristics are likely to serve as a key determining factor for the costs associated with not complying with the respective international obligations. Since this paradigm of ‘national’ enforcement strongly favours those which have political and economic weight to induce compliance,101 the question is which of the two mechanisms can better offset the inherent limitations placed on small economies? One way is the ability to engage in retaliation (or rebalancing) across the board of obligations contained in the WTO Agreements. Since the DSU allows for cross-retaliation such as Antigua’s request to suspend its TRIPS obligations, the question is whether cross-retaliation is possible under Art. XXI GATS. As described, GATS allows any affected Member that participated in the arbitration to ‘modify or withdraw substantially equivalent benefits in conformity with those findings’. However, several points suggest that this retaliation mechanism is limited to suspending benefits deriving from the GATS and its schedules only, and does not allow cross-retaliation: (1) all other aspects of the arbitration system under GATS Art. XXI (the commitments modified and the compensatory adjustment) relate to GATS only;102 (2) it is the GATS Council which has authority under Art. XXI.5 to establish the applicable rules of procedure and which is the competent authority for any notifications;103 and (3) the language authorising countries to ‘modify or withdraw substantially equivalent benefits’104 fits with identical language used regarding the modification or withdrawal of service commitments in Art. XXI.1. It follows that – alongside the notification, negotiation and arbitration over modification or withdrawal of commitments – retaliation relates to service commitments and does not extend to other WTO Agreements. From a systemic perspective, crossretaliation as an ‘interference’ with non-GATS subject matter should 101

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Compare Section III, sub-section ‘US – Gambling and the inadequacy of traditional retaliation’ above as well as Lawrence, supra, note 2, p. 15. See GATS Article XXI.1–3. See GATS Article XXI.1, 2, 5 and WTO Doc. S/L/80, supra, note 69. Used in GATS Article XXI.4(b) as well as in WTO Doc. S/L/80, supra, note 69, paras. 16 and 18.

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also not be part of GATS but rather be regulated in the DSU. Under the GATS Art. XXI proceedings, Antigua is therefore deprived of its option to suspend its TRIPS obligations. The DSU provides small economies with a greater chance of enforcing international obligations and thus contributes to more equality amongst WTO Members. In other words, non-compliance under Art. XXI GATS entails fewer risks of an effective response. Finally, under the DSU, Art. 21.5 compliance proceedings provide for an objective test of whether a WTO Member has actually implemented the DSB recommendations. Arbitration under Art. 22.6 DSU also entails an objective assessment of whether retaliation exceeds equivalence of harms and sticks to the principles of the DSU. These review procedures aim to ensure adherence to the rules of the dispute settlement system and thereby strengthen its rule-based approach. In comparison, under GATS, no objective review procedures exist which test: (1) compliance with fi ndings of the arbitration body over modifications and the respective compensatory adjustments; or (2) adherence to the principle of (substantial) equivalence when withdrawing commitments in response to non-compliance. To some extent, the certification procedure under paras. 20–22 of S/L/80 provides for an alternative mechanism to question compliance and fulfi ls a function similar to DSU Art. 21.5. It allows affected Members to object to draft schedules which the modifying Member claims to represent a negotiated agreement or the findings of the arbitration body. However it does not lead to an objective review of this matter (for example, by the original arbitration body), but leaves it to the Members concerned to resolve the matter in consultations. Th is in turn reinforces the diplomacy- (and thereby power-) oriented approach which GATS Art. XXI generally resembles. Consequently, the power-based consultation approach under Art. XXI GATS arguably works against small economies compared to an objective, rule-based assessment under the DSU. The DSU, therefore, is more apt to assist in enforcing the international obligation, whereas Art. XXI GATS provides a better opportunity for (powerful) WTO Members in neglecting or minimising the international obligation for compensation by exerting pressure in the consultation process. Arguably, the likeliness of these consultations involving several affected Members may reduce the influence of economic and political power. The existence of an objective review of the retaliatory measures under DSU Art. 22.6, and the lack of an equivalent mechanism under Art. XXI, will generally work in favour of any WTO Member adopting

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such measures. Under the DSU, the legality of retaliation can be tested against the review procedure which demands equivalence and adherence to the principles of DSU Art. 22.3. Whether countermeasures adopted under GATS Art. XXI.4(b) go beyond substantial equivalence can only be examined under new dispute settlement proceedings initiated with the claim of infringing Art. XXI.4(b) GATS. Again, this points to greater focus on legality under the DSU. The lack of an objective review under GATS Art. XXI however can de facto assist WTO Members that try to enforce international obligations under this mechanism. Whether, however, a small economy such as Antigua is effectively better off by not being tested over the equivalence of its response remains rather doubtful: it is more likely that no response whatsoever can actually reach the level of equivalence.

V

Conclusions

Implications of US – Gambling go beyond the ‘traditional’ debate over judicial activism and undue limitations on state sovereignty under the WTO dispute settlement system. Antigua’s move to suspend its obligations under TRIPS tests the ability of the rules-based system to live up to one of its core objectives: to enshrine ‘the rule of law in international economic and trade relations, thus setting universal rules and disciplines over temptations of unilateralism and the law of the jungle’.105 This implies a system which offers small economy WTO Members an effective mechanism to enforce international obligations. IP cross-retaliation can address some downsides of traditional retaliation and offers the added value of producing potential welfare effects for the retaliating country. However, the size and relative importance of the domestic market and economy in the retaliating country will continue to play a significant role, unless strategies are implemented which allow for exports of goods produced or services offered under IP suspension to other markets abroad. I have analysed the US countermove to modify its WTO obligations under the GATS Art. XXI procedure, primarily with regard to its function in upholding national autonomy. The dispute settlement system 105

Speech of King Hassan II of Morocco for the host government of the April 1994 Marrakech Ministerial Meeting to conclude the Uruguay Round and establish the WTO; quoted in J. H. Jackson, ‘Designing and Implementing Effective Dispute Settlement Procedures: WTO Dispute Settlement, Appraisal and Prospects’ in A. O. Krueger (ed.) The WTO as an International Organization (Chicago, Chicago University Press, 1998), 161, p. 168, footnote 7.

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seeks compliance with WTO obligations; however, the mechanism under GATS Art. XXI works the other way around. It allows Members to bring their international WTO obligations into compliance with their domestic policies, interests and values. Of course, the scope of application of this mechanism is limited to service commitments, while GATT Art. XXVIII contains an equivalent system for tariff concessions. Given this limitation, some argue in favour of introducing equivalent provisions for ‘rescheduling’ or re-negotiating WTO rules.106 One could imagine a system for negotiating waiver-type (temporary) exceptions, for example from obligations under TRIPS, the SPS Agreement or the Subsidies Code. While this would certainly come in handy for those who find existing WTO law imposes overly strict limits on national autonomy, it raises obvious concerns about certainty and predictability. These normative anxieties should not necessarily prevail over values such as additional flexibility and policy space, which could be implemented via a system for re-negotiating rules. However, one must carefully consider the consequences for other key principles such as the single undertaking and the overall balance of reciprocal commitments in the WTO. My main concern is that such an option to re-negotiate all kinds of WTO obligations would – by relying on diplomacy- and power-based approaches which are inherent in consultative processes – mainly serve the interests of trade and economic heavyweights. It is hard to imagine how those WTO Members, which may have the greatest need for flexibility and policy space, could attain either the resources or the political authority and influence to re-negotiate WTO obligations and so uphold their autonomy. This is confirmed, not only by the analysis of the GATS Art. XXI mechanism and its (potential) application in the US – Gambling scenario, but also by various bilateral trade deals with WTO-plus obligations for developing countries. The main antidote would be to allow for coalition-building amongst the (economically and politically) weaker WTO Members in the re-negotiation process. But then we are moving more and more towards the ordinary type of multilateral trade negotiations which have proven inefficient and unsuccessful ever since the launch of the Doha Round. Overall, there does not seem to be a truly satisfactory solution which resolves the inherent conflict between the scope of state autonomy and the reach of international obligations in a manner that also works for small economies in the WTO. The current system, which builds on the settlement of disputes with an international obligation to comply that in 106

See Lawrence, supra, note 2, p. 18.

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turn relies on national enforcement mechanisms, simply does not offer a level playing field. While the notion of IP cross-retaliation may correct some of these inequalities, its core limitation equally follows from the size of the domestic market as well as the economic and industrial capabilities of the retaliating country.

PA RT I I I Responding to international economic law commitments

8 Safety standards and indigenous products: what role for traditional knowledge? Meredith Kolsky Lewis

I

Introduction

Indigenous communities have used native plants as foods and for medicinal purposes for thousands of years. Some of these indigenous products1 have proven sufficiently popular that individuals outside the indigenous community have sought to consume, purchase and market them. In certain instances, new products have been derived from the indigenous plant and sold outside the indigenous community.2 In other cases, the indigenous product has been exported in its original form, but utilized in nontraditional ways in the export market.3 In recent years, various WTO Members have imposed bans and other restrictions on the importation of certain indigenous products on the basis of health and safety concerns. These restrictions tend to be blanket bans on the products as a whole, thus curtailing both the ability to consume indigenous products according to their traditional uses, as well as the adapted versions of such products. Th is chapter uses the example of the recent bans on kava from Pacific Island countries as context to argue that the safety of indigenous products with long histories of traditional use should be evaluated on their own merits. They should not be deemed the equivalent of new products with new uses that have been adapted from the indigenous plant, nor should their safety be assessed in combination with such new products. Bans on indigenous products may well be overbroad if they do not differentiate between traditional (quite possibly safe) uses and new (perhaps 1

2

3

In this chapter ‘indigenous products’ refers to plants and products derived from plants that are indigenous to a single country or a small subset of countries. Kava, indigenous to the Pacific Islands and discussed throughout this chapter, is an example. An example of this is the use of tea tree oil, a product derived from melaleuca alternifolia which is indigenous to New South Wales, Australia.

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not-so-safe) uses. The World Trade Organization’s (WTO) Sanitary and Phytosanitary Measures Agreement (SPS Agreement)4 applies inter alia to most food safety regulations. The SPS Agreement should not be interpreted to permit Members to apply undifferentiated bans to traditional and non-traditional uses of an indigenous product. Instead, WTO Members should be required to separately assess the safety of the traditional use so as to minimize the potential for overbroad, unduly traderestrictive regulations. This contention may be controversial – to the extent national autonomy issues are raised in the SPS context it is generally to voice concern that national autonomy is being unduly curtailed. Commentators and government officials regularly assert that the SPS Agreement should be interpreted with significant deference to the regulating Member, so that Members can make their own decisions about risk and the safety measures necessary to suit the particular needs and desires of their populations.5 In this chapter I take a different approach, and argue that, at least in the context of the safety of indigenous plant products, there may at present be too much flexibility for Members. The kava example demonstrates that indigenous products with traditional uses are being affected by safety concerns arising from adaptations or new uses of these indigenous products. Th is is problematic because the traditional uses have demonstrated indicia of safety by virtue of their enduring use, yet for purposes of risk assessments and safety analyses the traditional uses are being lumped together with the new, adapted uses by overseas regulators. This chapter suggests a conceptual framework for addressing this problem so as to strike a better balance between appropriate safety measures and national regulatory autonomy. I am not advocating changing the basic principles of the SPS Agreement,6 which allows Members to identify their own level of acceptable risk and to tailor their safety measures accordingly. Nor am 4

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Agreement on the Application of Sanitary and Phytosanitary Measures, Agreement Establishing the World Trade Organization, Annex 1A, (1994) 33 ILM 1125, (15 April 1994) [hereinafter ‘SPS Agreement’]. For example, in the Hormones dispute the European Communities argued that the panel had accorded insufficient deference to the EC’s SPS measures. See Appellate Body Report, European Communities – Measures Affecting Meat and Meat Products (EC – Hormones), WT/DS26/AB/R, adopted 13 February 1998, para. 13. As is discussed more fully in Section III, the Technical Barriers to Trade (TBT) Agreement and the GATT may also be applicable to some regulations on kava. Due to space constraints and the fact that most kava-related regulations are SPS rather than TBT measures, however, this chapter will primarily address SPS-related issues.

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I suggesting that, merely because indigenous products have a long history of use, they must be safe. However, there should be some process by which the traditional use is taken into account. Otherwise indigenous products with hundreds of years of use end up being treated like brand-new products, which is inappropriate, given the different historical records the two categories of products have. The chapter suggests that the concept of ‘traditional knowledge’ (TK), which in the WTO realm has thus far primarily been limited in application to the intellectual property (IP)/TRIPS context, could be applied usefully in the SPS context to differentiate the status that should be afforded to the traditional uses of indigenous products as compared with their newer, adapted uses. To the extent issue is taken with applying this IP term to the health and safety context, I would not quibble with assigning another term, so long as the intended meaning remained the same. However, I believe ‘traditional knowledge’ as a concept can and should translate into the SPS context, and expanding our conception of TK may assist developing countries in expanding their exports as well as providing recognition and compensation for inventions and other innovations arising from indigenous communities. Section II of the chapter provides an overview of the Pacific Islands’ experience with kava exports. Section III discusses the legal framework relevant to regulating indigenous plant products. Section IV assesses potential methods for preventing a repeat of the kava experience, and Section V argues that the concept of traditional knowledge should be extended to the SPS context to provide a better framework for assessing the risk of products with a history of traditional use.

II Too much regulatory autonomy? The Pacific Islands’ kava experience Background ‘Kava’ is the name for a drink reported to have relaxant as well as other favourable characteristics, and is made from the water extracts of the rhizome or root of the Piper methysticum plant.7 Kava and kava-containing products originate primarily from Pacific Island (PI) countries, including 7

Th is plant has also been referred to as ‘kava’ and ‘kava-kava’, particularly in Western countries. See World Health Organization, ‘Assessment of the Risk of Hepatotoxicity with Kava Products’, (2007), p. 4 [hereinafter ‘WHO Assessment’].

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Fiji, Samoa, Vanuatu, Tonga and Solomon Islands.8 These countries face significant obstacles to participating actively in the international trading system. All of the major kava-exporting countries are ‘small island developing states’,9 and Samoa, Solomon Islands and Vanuatu are least developed countries (LDCs).10 Kava has been used as a relaxant for many generations by the Pacific communities to which it is indigenous. The traditional use of kava, dating back hundreds of years, is to mix a powdered form of the plant root with water and to drink this mixture.11 More recently there has been interest in kava for its medicinal properties, and importing countries have made various new uses of the kava plant. Kava and kavacontaining products have been exported to overseas markets and marketed as alternatives to pharmaceutical tranquillizers and other relaxants. Unlike the water extracts traditionally used within the Pacific, in more recent years the European pharmaceutical companies have used acetone or ethanol to extract non-water-soluble, pharmacologically active, organic compounds (called kava lactones) from the kava plant, and processed them in concentrated form into capsules and pills.12 Thus European kava products have contained compounds not present in the traditional drink of water-soluble kava compounds. In addition, European companies extracted lactones from stem peelings from the kava plant – a part of the plant not commonly used to make the traditional kava drink.13 Exports of kava led to growth in the local industries, particularly in Fiji and Samoa. A significant amount of land was dedicated to growing more kava as the overseas markets expanded.14 Earnings were substantial. Fiji 8

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Among the major kava exporters, Fiji, Solomon Islands and Tonga are WTO Members. Vanuatu and Samoa have not yet completed the WTO accession process and currently have observer status. United Nations Office of the High Representative for the Least Developed Countries, Landlocked Developing Countries and Small Island Developing States, www.un.org/ special-rep/ohrlls/lldc/default.htm (accessed 9 December 2009). The WTO recognizes as LDCs the countries so-designated by the United Nations. See ‘Understanding the WTO: Least Developed Countries’, available at www.wto.org/ english/thewto_e/whatis_e/tif_e/org7_e.htm (accessed 9 December 2009). The United Nations currently identifies 49 countries as LDCs. See www.unohrlls.org/en/ldc/ related/62/ (accessed 9 December 2009). 13 WHO Assessment, supra, note 7, p. 7. 12 Ibid. Ibid., p. 8. Dr J. Gruenwald, Dr C. Mueller and J. Skrabal, Phytopharm Consulting, ‘Kava Report 2003: In-Depth Investigation into EU Member States Market Restrictions on Kava Products – Part I: Situation Analysis’, prepared for the Centre for the Development of Enterprise (Brussels, March 2003), p. I-10 [hereinafter ‘Kava Report 2003’].

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was the largest exporter of kava and in the late 1990s was earning over US$50 million per year.

Alarm bells Although kava in its traditional drink form has been consumed in the Pacific for thousands of years without any association with liver disease,15 starting in 2000, Germany’s Federal Institute for Drugs and Medical Devices, known as BfArM, drew a correlation between consumption of kava and severe liver problems.16 This ultimately led Germany, France and several other countries to ban kava imports beginning in 2002, on the basis that these products’ use was correlated with hepatotoxicity, and a number of other governments followed suit shortly thereafter with bans or other regulatory restrictions.17 These actions were all primarily based on the German data and some additional reports coming from Switzerland and the United Kingdom.18 The cumulative effect was significant and, unsurprisingly, was highly damaging for the Pacific Island communities that had been generating significant sources of export income based on kava.19 On initial consideration, the bans and other restrictions may seem justified. Liver failure is a significant problem and cannot be disregarded just because the product is coming from developing countries. And indeed WTO Members are permitted under the SPS Agreement to impose import restrictions on products that have been the subject of a scientific risk assessment and deemed too dangerous to meet the levels of protection the importing country wishes to impose. The SPS Agreement also allows temporary measures to be imposed while the safety of a product is being established.20 However, on further reflection these measures raise some significant concerns. Based on publicly available materials, it appears that in enacting these kava import bans, the importing countries did not distinguish between the safety of kava prepared in the traditional way as a drink and the safety 15 17

18 19

20

Ibid., p. 5. 16 WHO Assessment, supra, note 7, p. 56. WHO Assessment, supra, note 7, pp. 55–6. Some countries issued warnings or voluntary recalls rather than imposing bans. Ibid., pp. 56–7. For a comprehensive summary of the measures adopted worldwide, see Kava Report 2003, supra, note 14. WHO Assessment, supra, note 7, pp. 55–7. For a discussion of the economic impact of the kava restrictions, see Kava Report 2003, supra, note 14, p. I-10. SPS Agreement, supra, note 4, Article 5.7.

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of any of the more recent pharmacological adaptations. As an example, in a 2002 notification to the WTO’s SPS Committee, the United Kingdom notified emergency measures to ban kava importation and sale on grounds of food safety. The notification identifies evidence linking consumption of medicinal kava with liver damage and then notes that it proposes to ban both medicinal and food uses of kava because ‘there is no clear understanding of the nature of the hepatotoxicity, including its mechanism. Consequently, the FSA [Food Standards Agency] is proposing to prohibit food uses of Kava-kava.’21 Other countries soon followed suit.22 The bans were highly controversial because of the significant adverse effects they had on the Pacific Island economies and the belief that the evidence of liver toxicity from kava was unsubstantiated.23 Thus, kava and kava products used in the traditional manner, which has a very long history of apparently safe use, were lumped together with newer, untraditional uses, and all classified as unsafe. This had devastating consequences for Pacific Island kava producers.

The long road to exoneration Market access for traditional products is of critical importance to small states such as the Pacific Islands because these countries have only limited potential to generate export earnings. In this regard the Commonwealth countries specifically identified the kava ban as an issue that required expeditious resolution.24 Despite this urgency, Pacific Island countries had to spend several years attempting to get the bans overturned.25 The affected countries sought relief through the Africa-Caribbean-Pacific 21

22 23

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Committee on Sanitary and Phytosanitary Measures, ‘Notification of Emergency Measures’, (WTO Doc. G/SPS/N/GBR/3, 2002). WHO Assessment, supra, note 7, pp. 55–7. See generally the historical background provided by the International Kava Executive Council (IKEC) at www.ikec.org/history/index.html (accessed 9 December 2009). Abuja Communiqué, Commonwealth Heads of Government Meeting, (8 December 2003), para. 61. For a chronology of the kava bans and some of the efforts to get them lifted, see Pacific Network on Globalisation, ‘Lift the Kava Ban Now – Provide an Economic Lifeline for the Pacific!’, (September 2007), available at www.pang.org.fj/22.html (accessed 9 December 2009). Th is call for re-examination of kava bans and restrictions does seem to have led Germany to alter its ban in 2005, but this was only a nominal change as Germany was still determining on a case-by-case basis whether the ban for individual licences to sell kava products would be lifted. The ban on importing kava products remained intact. See, for example, M. Blumenthal, ‘German Government Reconsiders Kava’, HerbalGram, 67 (2005) 21; W. Morgan, ‘Time to End Kava Trade Ban’, Fiji Times, (23 September 2007), available at www.fijitimes.com/story.aspx?id=71049 (accessed 9 December 2009).

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(ACP) dialogue with the European Union, raising the issue at an ACP-EU Joint Parliamentary Assembly in 2004. This resulted in some cosmetic policy changes, but the bans effectively remained in place.26 The Pacific Islands Forum Secretariat, together with sympathetic European manufacturers and marketers, also established a joint representative body – the International Kava Executive Council (IKEC) – to attempt to re-establish kava trade between the Pacific and the EU.27 IKEC commissioned a study on the safety of kava and sought legal advice from the Advisory Centre on WTO Law in Geneva with respect to PI countries’ rights.28 After a significant amount of agitation by various interested parties, the World Health Organization (WHO) established an expert committee to review the alleged liver toxicity effects of medicinal kava products. This report was completed in 2007 and found that ‘it is clear that water extracts as taken in the South Pacific, with hardly any serious kava-related hepatotoxicity reported, are chemically different from the “kava” used to make kava pills in Europe and this difference could be responsible for the reported hepatotoxicity in some kava pill takers’.29 It concluded that the incidence of hepatotoxicity with kava is uncommon or rare, and that the small level of risk could be reduced by taking precautions such as using water-based suspensions of kava and avoiding acetonic and alcoholic extracts.30 Following the issuance of the WHO report, IKEC and others threatened to initiate WTO dispute settlement proceedings if the bans were not lifted.31 Finally, in November 2008, the European Commission lifted its ban on kava.32 26

27 28

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ACP-EU Joint Parliamentary Assembly, ‘Resolution on Cotton and other Commodities: Problems Encountered by ACP States’, ACP-EU Doc. 3668/04/fi n, adopted in Addis Ababa, (19 February 2004). Th is call for re-examination of kava bans and restrictions does seem to have led Germany to alter its ban in 2005, but this was only a nominal change as Germany was still determining on a case-by-case basis whether the ban for individual licenses to sell kava products would be lifted. The ban on importing kava products remained intact. See generally www.ikec.org/ (accessed 9 December 2009). Kava Report 2003, supra, note 14; see also C. Bowman, ‘Pacific Island Nations: Towards Shared Representation’ in P. Gallagher, P. Low and A. L. Stoler (eds.), Managing the Challenges of WTO Participation (Cambridge University Press, 2005), p. 450, at p. 455. Kava Report 2003, supra, note 14, p. 8. 30 WHO Assessment, supra, note 7, pp. 62–3. See, for example, Radio New Zealand International (2007), ‘Europe Gets One Last Chance to Lift Kava Ban before Pacific Producers Seek Help from WTO’, available at www.rnzi. com/pages/news.php?op=read&id=33852 (accessed 9 December 2009). IKEC, ‘Lift ing the German “Ban” on Kava Exports – Outcome and Strategies of IKEC-EU Consultations’, Press Release, (29 October 2008), available at www.acp-eu-trade.org/

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‘Success’ It has been suggested by some that the kava experience represents a major victory for small vulnerable states and that the regional and international cooperative efforts were a model to follow in the event of future similar conflicts.33 On the one hand, these platitudes are of course warranted. It is a positive development that many of the bans have been lifted and that the PI economies can resume exporting lucrative products. On the other hand, however, this experience arguably should not be seen as a success story or a model process at all. It took over six years for the ban on kava products to be lifted, even with the efforts of IKEC and the Pacific Islands Forum Representative Office, both of which receive funding from developed countries. Th is is a very long time for small countries to be deprived of a major source of revenue, particularly given that, in the end, the traditional use of the product was essentially vindicated. While the ultimate victory is positive, many exporters went out of business and suffered significant personal hardship. Although the European Commission lifted their ban without the need for Fiji to formally initiate WTO dispute settlement proceedings, it is deeply concerning that there was not a more streamlined way for small, vulnerable WTO Members such as Fiji to demonstrate the safety of their exports. This is particularly troubling, given that kava has been used in a traditional form for a traditional purpose for hundreds if not thousands of years. While there may have been legitimate cause for concern – even if ultimately unfounded – with respect to the adapted uses of kava, it appears overbroad to assess risk based on the adapted uses, and then to apply restrictions indiscriminately to all kava products.

33

library/files/IKEC _EN_291008_IKEC_Lifting-the-German-ban-on-Kava-exports. pdf (accessed 9 December 2009). Although the EU lifted its kava ban, some restrictions remain elsewhere. For example, Australia still has a ban in effect, see www.bilaterals. org/article.php3?id_article=13224&var_recherche=sparteca (accessed 9 December 2009). See, for example, Bowman, supra, note 28 (discussing the benefits for the Pacific Island WTO Members of having the Pacific Islands Forum Representative Office assist with participating in WTO negotiations and resolving disputes on a regional rather than a country-specific basis); http://worldtradelaw.typepad.com/ielpblog/2008/11/kava.html (International Economic Law and Policy blog entry characterizing the lift ing of the kava ban as an indication that the WTO ‘can work for the little guy’) (accessed 9 December 2009).

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III The WTO framework for regulating indigenous products In assessing the kava experience and how to avoid its recurrence, it is instructive to examine how the regulation of indigenous products fits within the WTO framework.

Which agreement applies? The question of which WTO rules will apply to regulation of indigenous products depends in part on whether the products are classified as foods or drugs. If a traditional health product is deemed a food, regulations affecting its importation will fall under the SPS Agreement. If, however, the product is deemed to be a drug or medicinal product, regulations affecting its importation more likely fall under the Technical Barriers to Trade (TBT) Agreement. It is also possible that a regulation impacting traditional herbal products could fall outside the scope of the TBT Agreement (and therefore the SPS Agreement), in which case there could still be a GATT violation.34 Furthermore, it would seem that, based on the recognition of cumulative obligations under multiple WTO agreements,35 it would be possible for a regulation relating to an indigenous product to be partly an SPS measure and partly a TBT measure at the same time, and to therefore be subject simultaneously to the disciplines of both agreements.36 In practice, kava has sometimes been classified as a food and sometimes as a drug, depending on the country imposing the regulations as 34

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For discussions of the interplay between the SPS Agreement, TBT Agreement and GATT, see P. Van den Bossche, The Law and Policy of the World Trade Organization (Cambridge University Press, 2005), pp. 458–61; G. Marceau and J. Trachtman, ‘The Technical Barriers to Trade Agreement, the Sanitary and Phytosanitary Measures Agreement, and the General Agreement on Tariffs and Trade’, Journal of World Trade, 36 (2002) 811; and J. Scott, The WTO Agreement on Sanitary and Phytosanitary Measures (Oxford University Press, 2007), pp. 27–30. See Appellate Body Report, European Communities – Regime for the Importation, Sale and Distribution of Bananas (EC – Bananas III ), WT/DS27/AB/R, adopted 25 September 1997, paras. 221–2 (in which the Appellate Body found that both the GATT and the GATS could apply to the EC’s bananas regime because the agreements have independent scope and application, and may therefore overlap). See also discussion in Marceau and Trachtman, supra, note 34, p. 863. The panel in the EC – Biotech dispute found this to be the case. Panel Report, European Communities – Measures Affecting the Approval and Marketing of Biotech Products (EC – Biotech), WT/DS291/R, adopted 21 November 2006, paras. 7.165 and 7.172–7.173. See also Marceau and Trachtman, supra, note 34, p. 865.

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well as the nature of the products. In a minority of countries, including Austria, Belgium, Brazil, Germany, Portugal and Switzerland, imported kava products have been largely pharmaceutical in nature and regulated as drugs.37 A larger number of countries, including Australia, Denmark, Finland, France, Greece, Italy, Singapore and Spain, have treated the kava products they import as food products and have regulated kava as a food.38 There are still other approaches. In the United States, kava products have been treated as neither foods nor drugs, but as herbal supplements or nutraceuticals, whereas Canada regulates kava as both a food and a drug.39 Notwithstanding the variety of measures described above, the majority of importing countries appear to regulate kava as a food, and almost all of the import restriction notifications were made under the SPS Agreement. Accordingly, this chapter will limit its focus to the relevant SPS issues; however, it is important to bear in mind the potential relevance of the TBT Agreement and the GATT to the regulation of indigenous products.

The SPS Agreement and indigenous products One of the areas in which the tension between national autonomy and the need for international rules is particularly acute is that of food and drug safety-standards setting. Some of the WTO’s most contentious cases, the EC – Hormones and EC – Biotech disputes, have arisen in this context. To the extent that indigenous plant-based products such as kava are regulated as foods or otherwise fall within the ambit of the SPS Agreement, such regulations must be based on a risk assessment40 which in turn must be supported by sound science.41 If there is insufficient relevant scientific evidence, Members may temporarily adopt provisional SPS measures.42 In making risk management determinations – i.e. deciding what level of protection the Member wishes to achieve – Members must, inter alia, ensure that their measures are not more trade-restrictive than necessary to achieve the desired level of protection.43

37 39 41

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WHO Assessment, supra, note 7, p.55. 38 Ibid. WHO Assessment, supra, note 7, p. 55. 40 SPS Agreement, supra, note 4, Article 5.1. See, for example, Appellate Body Report, Canada/United States – Continued Suspension of Obligations in the EC – Hormones Dispute (Canada/United States – Continued Suspension), WT/DS320/AB/R, WT/DS321/AB/R, adopted 14 November 2008, paras. 587–90. SPS Agreement, supra, note 4, Article 5.7. SPS Agreement, supra, note 4, Article 5.6.

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The SPS Agreement has an entire article – article 3 – devoted to harmonization. If WTO Members choose to base their SPS measures on international standards44 or conform their measures to such standards,45 their measures will presumptively be deemed consistent with the SPS Agreement and the GATT.46 However, Members retain significant regulatory autonomy to impose measures that achieve a higher level of protection than the relevant international standard, ‘if there is a scientific justification, or as a consequence of the level of sanitary or phytosanitary protection a Member determines to be appropriate in accordance with the relevant provisions of paragraphs 1 through 8 of Article 5’.47 A footnote to Article 3.3 clarifies that ‘there is a scientific justification’ if, after examining and evaluating the available scientific evidence in accordance with the rest of the SPS Agreement, a Member ‘determines that the relevant international standards … are not sufficient to achieve its appropriate level of sanitary or phytosanitary protection’.48 Notwithstanding the text of Articles 3.1 and 3.3, the Appellate Body has rejected the view that these provisions operate as a rule and exception. In EC – Hormones, the Appellate Body explained that ‘Article 3.1 of the SPS Agreement simply excludes from its scope of application the kinds of situations covered by Article 3.3 of that Agreement …’49 This interpretation has been subject to criticism as the text of Article 3.1 reads as a general obligation followed by an exception provision.50 Furthermore, the general obligation/exception structure appears in both GATT Article III and Article XX, yet the Appellate Body declined to recognize this structure in SPS Agreement Article 3.51 Instead, the Appellate Body elected to interpret the harmonization language of Article 3.1 as aspirational rather than mandatory: ‘It is clear to us that harmonization of SPS measures of Members on the basis of international standards is projected in the Agreement, as a goal, yet to be realized in the future.’52 Thus although 44 45 46 48 49 50

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SPS Agreement, supra, note 4, Article 3.1. SPS Agreement, supra, note 4, Article 3.2. Ibid. 47 SPS Agreement, supra, note 4, Article 3.3. SPS Agreement, supra, note 4, Article 3.3 n.2. EC – Hormones, supra, note 5, para. 104. W. J. Davey, ‘Reflections on the Appellate Body Decision in the Hormones Case and the Meaning of the SPS Agreement’ in G. A. Bermann and P. C. Mavroidis (eds.), Trade and Human Health and Safety (Cambridge University Press, 2006), p. 118, at p. 120. Davey argues (pp. 124–5) that this interpretation strips Article 3.1 not only of its logical meaning, but of any significant meaning at all. If 3.1 is actually optional, then it is unclear why Article 3.3 is needed. See ibid.; Appellate Body Report, EC – Hormones, supra, note 5, paras. 103–9. Appellate Body Report, EC – Hormones, supra, note 5, para. 165.

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Article 3.1 states that Members ‘shall’ base their SPS measures on international standards where they exist, in practice Members may set standards higher if they determine the Codex or other international standards do not satisfy their own acceptable level of protection and there is a scientific justification for therefore applying a higher standard. The SPS Agreement thus provides Members with a significant degree of regulatory autonomy to impose stringent safety measures, so long as the level of protection can be linked to a risk assessment. In the context of the kava bans, there are a number of uncertainties in this regard. Would a ban of all kava products be deemed sufficiently based on a risk assessment that showed potential correlations between new kava products and liver damage? Would the application of the ban to all kava products fall within the scope of the Member’s policy space to manage risk? Or would such a ban be deemed more trade restrictive than necessary? The EC – Hormones and United States/Canada – Continued Suspension reports suggest there must be direct links between the particular product (in those cases, specific hormones) and the particular product the Member seeks to minimize,53 but a scenario akin to that posed by the kava situation has yet to be adjudicated. Whether or not the SPS Agreement is sufficiently clear on this point, the kava experience signals that additional efforts should be considered to ensure that domestic regulations are not overbroad with respect to products that have multiple uses. In other words, regulations should be sufficiently narrowly tailored to only reach a harmful use of a product, rather than also capturing safe, alternative uses of the same product. For example, if a blend of A and B is toxic, it would seem appropriate to ban the use or sale of A and B together, but it would be overbroad to ban both A and B as toxic substances, even when sold separately. This concern is particularly acute in the context of indigenous products, as the long history of traditional use strongly suggests at least some measure of safety.

IV

Potential solutions for indigenous products

It is well documented that developing countries and small economies face a variety of challenges – both structural and financial – in their efforts to comply with SPS measures imposed by importing countries.54 Most of the 53

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Canada/United States – Continued Suspension, supra, note 41, paras. 556–64 (discussing EC – Hormones and the level of specificity required). See, for example, B. Shakya, ‘Nepal: Exports of Ayurvedic Herbal Remedies and SPS Issues’ in Gallagher et al., supra, note 28, p. 430 (using the example of good manufacturing practices (GMP) applicable to ayurvedic herbal remedies).

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attention has focused on the costs of establishing food safety procedures that will satisfy would-be importers.55 However, these countries can also experience a different form of obstacle when importing countries determine that the products at issue are inherently unsafe, rather than tainted or at risk of taint. Under this scenario, developing countries can find their precious export markets disappear overnight, and the process of demonstrating actual safety and rebuilding trust can be difficult and lengthy. While Aid for Trade and other capacity-building efforts have been used to address the former problem, the latter has not received much attention. Yet we should also be concerned about – and attempt to ameliorate – the burdens overbroad safety determinations impose on fragile exporting economies. As the kava saga demonstrates, there are good reasons to assess the safety of the traditional uses of indigenous products separately from the safety of newer, adapted uses. In particular, a risk assessment of an indigenous product which has a traditional use should assess the risk from the traditional use separate and in addition to, rather than aggregated together with, the assessment of risk from the adapted uses. To permit Members to do otherwise tilts the regulatory autonomy balance too far towards sovereignty at the expense of the legitimate expectations of particularly vulnerable members of the trading community. I am not proposing revisiting the right of members to set their own desired levels of risk, nor advocating scrutiny of the legitimacy of such levels nor of the policies underlying them. Instead I am suggesting that measures that aggregate risks of indigenous products in their traditional and adapted forms run a significant risk of being more restrictive than necessary. This section canvasses various options for addressing the problem of overbroad SPS measures in the indigenous products context, beginning with dispute settlement, which, although a valuable option, has its own limitations.

Dispute settlement It seems likely that Fiji56 could have successfully challenged the European regulations in a WTO dispute settlement proceeding as violating the SPS 55

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See, for example, J. E. Stiglitz and A. Charlton, Aid for Trade: A Report for the Commonwealth Secretariat (2006), p. 17, available at http://works.bepress.com/cgi/ viewcontent.cgi?article=1008&context=joseph_stiglitz (accessed 9 December 2009) (noting that Hungary spent over $40 million to improve the sanitation levels in its slaughterhouses in order to comply with importing members’ SPS measures). Fiji is the WTO Member most affected by the kava bans. The other countries most significantly affected – Samoa and Vanuatu – have yet to complete the WTO accession process

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Agreement for being more trade restrictive than necessary and, perhaps, for failing to align risk assessments with the measures taken. For developing countries, however, it is problematic to need to initiate dispute settlement to obtain market access. They face obstacles in the form of lack of resources, expertise and sufficient staffing, and fear of reprisal from aid donors, which may render it difficult or undesirable to initiate disputes.57 In addition, smaller and poorer countries do not have the economic wherewithal to retaliate in any significant way in order to induce compliance, in the event that the respondent member fails to comply with an adopted report.58 To the extent that dispute settlement is contemplated, however, the obstacles present in initiating a WTO dispute alleging violations of the SPS Agreement are all the higher due to the complexity and uncertainty of the legal, factual and scientific issues.59 In light of the Appellate Body’s recent decision in the Canada/United States – Hormones Suspension case, in which it imposed a more deferential standard of review of members’ SPS measures than had been applied in recent cases, it would be even more difficult for countries such as Fiji to challenge the EU’s SPS measures. The Appellate Body indicated that the proper inquiry in reviewing a risk assessment undertaken pursuant to SPS Agreement Article 5.1 is ‘not to determine whether the risk assessment undertaken by a WTO Member is correct, but rather to determine whether that risk assessment is supported by coherent reasoning and respectable scientific evidence and is, in this sense, objectively justifiable’.60 In addition, a panel should determine ‘whether the particular conclusions drawn by the Member assessing

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and thus could not resolve this problem themselves through WTO dispute settlement processes. For a discussion of the costs and effort involved for a developing country to initiate a dispute, see D. Tussie and V. Delich, ‘Dispute Settlement Between Developing Countries: Argentina and Chilean Price Bands’ in Gallagher et al., supra, note 28, p. 23; see also C. P. Bown and B. M. Hoekman, ‘WTO Dispute Settlement and the Missing Developing Country Cases: Engaging the Private Sector’, Journal of International Economic Law, 8 (2005) 861, p. 866. Scott, supra, note 34, p. 307; Bown and Hoekman, supra, note 57, p. 866; S. Charnovitz, ‘Rethinking WTO Trade Sanctions’, American Journal of International Law, 95 (2001) 792. In light of this problem Antigua recently sought and obtained permission to ‘crossretaliate’ by suspending TRIPS obligations in a dispute involving services commitments; however, Antigua has not as yet suspended any such obligations. See Panel Report, United States – Measures to Control the Cross-border Supply of Gambling and Betting Services, Recourse to Article 21.5 of the DSU by Antigua and Barbuda, WT/DS285/RW, adopted 22 May 2007. Scott, supra, note 34, p. 308. Canada/United States – Continued Suspension, supra, note 41, para. 590.

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the risk find sufficient support in the scientific evidence relied upon’ and whether ‘the results of the risk assessment “sufficiently warrant” the SPS measure at issue’.61 While this decision has been applauded by many as restoring deference to national regulatory autonomy to an appropriate level, at the same time it will make it more difficult for WTO members such as Fiji to demonstrate the WTO-inconsistency of measures such as the kava ban.

Harmonization One possible answer to the problem of overbroad SPS measures would be to increase harmonization. One of the common arguments in favour of more standardization in the SPS context is that it will improve developing countries’ ability to export. However, this appears to be borne out in practice only if the standardized approach is not too stringent. The existence of a Codex Alimentarius Commission (Codex) standard does not preclude countries from adopting higher standards if they can satisfy the requirements of the SPS Agreement. The EU adopts standards which apply across the EU and can thus be considered ‘harmonized’ but which may significantly exceed international standards. Empirical research has suggested that when this occurs, world exports, particularly from developing countries, are likely to decrease. If instead the EU were to adopt Codex guidelines in the form of an international standard, world exports would be more likely to rise significantly.62 This research suggests that, while harmonized food safety standards can lead to increased exports from developing countries, if the harmonized standard is set at a very high level it may negatively impact the ability of developing countries to export.63 The most broadly applicable method of harmonization would be for Codex to develop more safety standards for indigenous products.64 The 61 62

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Ibid., para 591. J. S. Wilson and T. Otsuki, ‘Food Safety and Trade: Winners and Losers in a NonHarmonized World’, Journal of Economic Integration, 18(2) (2003) 266, pp. 284–5. Ibid., p. 285. For a discussion of other implications of ‘regulatory export’ from stronger to weaker countries, see, for example, K. Raustiala, ‘The Architecture of International Cooperation: Transgovernmental Networks & the Future of International Law’, Virginia Journal of International Law, 43 (2002) 1; A.-M. Slaughter, ‘Sovereignty and Power in a Networked World Order’, Stanford Journal of International Law, 40 (2004) 283, pp. 293–7 (discussing Raustiala’s findings). Codex is jointly run by the World Health Organization and the UN’s Food and Agriculture Organization. It establishes international standards for food regulations

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WTO Committee on Sanitary and Phytosanitary Measures monitors ‘the process of international harmonization and coordinate[s] efforts in this regard with the relevant international organizations’.65 WTO Members are encouraged to play an active role in these organizations, which include Codex.66 The SPS Agreement encourages harmonization of standards and when a member’s food safety regulation is based on a Codex standard it will be presumed to be consistent with the SPS Agreement. If an indigenous product is deemed a food, the producers therefore will need to be aware of whether Codex has established any standards relating to the product. Indeed, at present, the kava-producing countries are seeking to have Codex establish standards for kava as it is traditionally used.67 Codex could agree to do this if it accepts the traditional use of kava as a food.68 Codex standards may or may not be helpful to the producers of indigenous products. First, developing countries may not have participated adequately in the standards-setting process.69 Because their voices are not always heard, a disconnect can result between standards established and the way products are used in the real world. Yet even without their participation, domestic product standards that conform to international standards are presumed to be consistent with WTO obligations. Notably in the EC – Sardines dispute, the Appellate Body confirmed this understanding with respect to Codex rules, even where adopted by a bare majority vote that might not have included the support of the WTO Members involved in a given dispute.70 Joel Trachtman has cautioned that ‘these types of quasi-legislation, delegated by the WTO to these other bodies, present important questions about democratic accountability, and about the capacity of developing states to participate’.71

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such as the acceptable levels of contaminants that can be present and other types of quantitative criteria. See generally www.codexalimentarius.net/web/index_en.jsp (accessed 9 December 2009). SPS Agreement, supra, note 4, Article 3.5. SPS Agreement, supra, note 4, Article 3.4. See Joint FAO/WHO Food Standards Programme, ‘Discussion Paper on the Development of a Standard for Kava’, CX/NASWP/08/10/7 (September 2008). The Pacific Island countries are not seeking to have Codex weigh in on the pharmacological uses because those uses fall outside Codex’s jurisdiction of food safety. See generally, Food and Agriculture Organization of the United Nations, ‘The Dynamics of Sanitary and Technical Requirements: Assisting the Poor to Cope’, (Rome, 2005), available at www.fao.org/docrep/009/a0011e/A0011E00.htm - TOC (accessed 9 December 2009). Appellate Body Report, European Communities – Trade Description of Sardines, WT/ DS231/AB/R, adopted 23 October 2002. Joel Trachtman, ‘The Constitutions of the WTO’, European Journal of International Law, 17 (2006) 623, p. 639.

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In addition, Codex standards can only address food/SPS uses, and therefore cannot resolve situations involving indigenous products with purely medicinal uses, such as tea tree oil. Some have even criticized the application of Codex rules to natural and traditional health products, arguing that these products are fundamentally different from foods and therefore the regulations may not be appropriate.72 Harmonization is probably, on balance, preferable to no harmonization, as an official international pronouncement of safe parameters is a useful benchmark to be able to point to. But because countries can adopt higher standards if they wish, harmonization cannot completely remove the problem of overbroad regulations.

Recognizing traditional uses When assessing the safety of a product that is, or is derived from, an indigenous product, a distinction should be made between the traditional use and any relevant adapted uses. While the safety of the traditional use should not be given a free pass, it should be assessed as a stand-alone consideration, separate from the assessment of the adapted uses (whether adapted by traditional or new users). In considering the safety of the traditional use, members are of course entitled to use traditional scientific measures of safety. However, it should be noted that there is precedent internationally for recognizing the safety of items that have been in the food supply for a long time. For example, in the United States these are called ‘GRAS’ or ‘generally recognized as safe’ items and include things such as vanilla, vinegar and caramel.73 Many years ago, a legal challenge was brought against an interpretation the US Food and Drug Administration (FDA) had made of its regulations in which it found that language which provided that food safety could be established based on ‘common use in food’ prior to 1958 meant ‘common

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On the other hand, these products also seem to be different from drugs. Thus some have suggested that a third category should be created whereby natural and traditional products would be subject to their own laws, distinct from those applicable to foods or medicines. This is the position of the New Zealand Health Trust, for example, which advocates for natural health and therapeutic products to be regulated as a third category of product, separate from either foods or medicines; www.nzhealthtrust.co.nz/pdf/ANZTPA_ Public_Briefing_Points_Summary_11_Feb_07.htm (accessed 9 December 2009). See, for example, Federal Food, Drug, and Cosmetic Act (Chemical Additives in Food): Hearings on HR 4475, Before a Subcomm. of the House Comm. on Interstate and Foreign Commerce, 84th Cong., 2d Sess. 28 (1956), pp. 460–4 (statement of FDA Commissioner George Larrick).

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use in the United States’.74 The court rejected the FDA interpretation and found that foreign practice could be looked at.75 Subsequently the FDA amended its food additive and drug regulations to take into account the experience of other countries in its determinations of whether a product is ‘generally recognized as safe’ based on a long history of use in food.76 Canada also differentiates between ordinary food products and ‘novel foods’, the latter of which are subject to a full review by Health Canada before they may be offered for sale. ‘Novel foods’ are those which, inter alia, do not ‘have a history of safe use as a food’.77 The EU is currently considering repealing its Regulation on Novel Foods (Regulation No 258/97)78 to, inter alia, introduce a new procedure for evaluating traditional foods from third countries. WTO Members have previously raised concerns regarding Regulation No 258/97 and its earlier proposed amendments, arguing that the current and proposed measures impose excessive requirements to demonstrate the safety of food products with a long history of traditional use.79 In response, the EU has been evaluating a revision which would impose less onerous requirements for traditional food products from third countries with a demonstrated history of safe food use, than would be required of ‘novel foods’.80 Thus there is precedent for recognizing products as having a traditional use, and according such products a distinct status.

V

What role for traditional knowledge?

This section considers how TK could be incorporated into assessments of SPS measures.

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Fmali Herb v. Heckler, 715 F2d 1385 (9th Cir., 1983). Ibid., pp. 1390–1. 76 21 C.F.R. § 170 (c)(2). For details on the process by which it is determined whether a product is a regular food product or a novel one, see www.hc-sc.gc.ca/fn-an/gmf-agm/pol/index-eng/php (accessed 9 December 2009). The regulatory defi nition of ‘novel food’ appears in Division 28 of the Food and Drug Regulations at CRC c. 870. Regulation (EC) No 258/97 of the European Parliament and of the Council of 27 January 1997. WTO Committee on Sanitary and Phytosanitary Measures, Note by the Secretariat, ‘Summary of the Meeting of 29–30 March 2006’, (WTO Doc. G/SPS/R/40, 2006), pp. 21–9. ‘Proposal for a Regulation of the European Parliament and of the Council on Novel Foods’, COM (2007) 872 fi nal, 2008/0002 (COD), Brussels, (14 January 2008), p. 8.

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Traditional use and traditional knowledge As a framework for looking at the traditional use of indigenous products, I propose importing the concept of ‘traditional knowledge’ or TK, which has heretofore been discussed in the WTO exclusively in the context of the TRIPS Agreement and intellectual property protection81 and which is commonly used to refer to plant and genetic resources of indigenous peoples. There is no one accepted definition of TK, but medicinal and herbal plants would seem to fall within the scope of many of the definitions.82 The TK issue is not yet even close to resolution in the TRIPS context, so it may be naïve to think it could be expanded to the SPS/TBT context. But it does seem that there is broad agreement that TK should be recognized. The issues are more to do with what value to assign to TK than whether it has a value, and in what contexts TK applies. If TK is recognized as having a value in the IP context, this must mean it is connected to marketable products. These products would not have marketable value if they were demonstrably dangerous. If this is the case, then perhaps for products recognized as TK, it is reasonable for that TK to be taken into account in some way in the SPS/TBT safety analysis, particularly where the product at issue has both a traditional use and new, adapted uses. This is not so different from the way Europeans currently address the safety of raw milk cheeses and cured meats. These products in many cases are accorded geographical indications – a form of intellectual property 81

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For example, whether traditional knowledge should be patentable or subject to other forms of intellectual property protection. This issue is primarily being considered in the context of TRIPS Article 27.3(b), which addresses the patentability or non-patentability of plant (and animal) inventions, and the protection to be afforded to plant varieties. Pursuant to the requirements of the TRIPS Agreement, a review is being conducted of Article 27.3(b). In addition, Paragraph 19 of the 2001 Doha Declaration calls for the TRIPS Council to look at, inter alia , the protection of traditional knowledge. See, for example, World Trade Organization, Council for Trade-Related Aspects of Intellectual Property Rights, ‘The Protection of Traditional Knowledge and Folklore: Summary of Issues Raised and Points Made’, (WTO Doc. IP/C/W/370/Rev.1, 2006); ‘TRIPS: Reviews, Article 27.3(b) and Related Issues’, available at www.wto.org/english/tratop_e/trips_e/ art27_3b_background_e.htm (accessed 9 December 2009). See T. Cottier and M. Panizzon, ‘Legal Perspectives on Traditional Knowledge: the Case for Intellectual Property Protection’, Journal of International Economic Law, 7 (2004) 371, p. 379. One defi nition referenced in WIPO’s Operational Terms and Definitions for TK is ‘accumulated knowledge that is vital for conservation and sustainable use of biological resources and/or which is of socio-economic value, and which has been developed over the years in indigenous/local communities.’ See ibid., n. 37.

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protection – and are deemed safe, based on a long history of experience rather than on modern-day scientific testing.83 There are numerous possible ways TK could be taken into account in the SPS context. One possibility would be to allocate Aid for Trade or other trade-related capacity-building funding to fast-track safety analyses of the traditional uses of such products. Another option would be for the SPS Committee to develop protocols for assessing the safety of the traditional uses of indigenous products. It is beyond the scope of this chapter to assess the potential methods for taking TK into account; for present purposes I merely want to suggest that traditional knowledge could be a useful concept to import into the safety context to help prevent overbroad regulation of products that in all likelihood are safe.

Culture The idea of using TK, or cultural knowledge, may seem inappropriate in the context of safety, which is usually seen as a scientific inquiry. However, ‘culture’ does play a role in scientific risk assessments. We see it most commonly in the context of regulatory autonomy, when it is often argued that deference must be given to each nation’s own policy choices as to what it wants to protect against. Common examples in this respect are the policy choices of the EU and the United States with respect to health measures. The EU is far more concerned than the US over the safety of genetically modified organisms and growth hormones. In contrast, the US seems more concerned with cancer risks than the EU and also requires more detailed information on labels regarding fat content and cholesterol than does the EU.84 These policy choices reflect different cultural values. 83

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M. A. Echols, ‘Food Safety Regulation in the European Union and the United States: Different Cultures, Different Laws’, Columbia Journal of European Law, 4 (1998) 525, p. 528. The recognition of geographical indications (GIs) for wine and spirits, and the ongoing discussions regarding expanding the scope of recognized geographical indications, reflect an acceptance that products originating from particular regions and production processes have a value that should be protected from exploitation by others. Although owners of geographical indications tend to reject a link between GIs and traditional knowledge, in fact the two seem to be highly analogous, if not the same. See S. Frankel, ‘Trademarks, Traditional Knowledge and Cultural Intellectual Property’ in G. B. Dinwoodie and M. D. Janis, (eds.), Trademark Law and Theory (Cheltenham, Edward Elgar, 2008), pp. 452–3. See, for example, B. A. Silverglade, ‘The WTO Agreement on Sanitary and Phytosanitary Measures: Weakening Food Safety Regulations to Facilitate Trade?’, Food and Drug Law Journal, 55 (2000) 517, p. 520 (noting EU objections to US labelling requirements).

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A further example is unpasteurized cheese. Due to the long experience in Europe with unpasteurized dairy products, unpasteurized cheese is widely available in Europe and generally considered to be safe. In the US, by contrast, pasteurization is associated with safety of dairy products and there are serious concerns about botulism and other problems being associated with unpasteurized cheese; hence, unpasteurized dairy products are heavily regulated in the US. At present the WTO permits these cultural differences by providing a degree of policy space for members to reach their own decisions as to what is worth protecting. Some would argue there is not enough policy space there, and that in particular more flexibility is needed to take into account consumer preferences and to be able to take precautionary measures even when a degree of scientific information is available. Regardless of whether one thinks the amount of policy space or regulatory autonomy is at an appropriate level, there surely is some room to make country-specific determinations as to what levels of risk are desired for different health and safety concerns. Science is then used, in the form of risk assessments, to implement these cultural decisions.85 The EU in particular has defended its measures on grounds of consumer preference, even where scientific evidence of risk is lacking – in essence, justifying deferring to cultural attitudes.86 What I am proposing could be seen as the flip side of the equation: that culture – in the form of traditional knowledge – should be taken into account in some way in determining how we go about the scientific process of safety assessment.87 In 85

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In the SPS context, the WTO has been criticized for not giving sufficient weight to the cultural factors that underlie risk assessments. See generally Scott, supra, note 34, p. 3. Contextual examples have included the EC’s restrictions on the importation of meat containing hormones, and EC member country restrictions on the importation of genetically modified organisms, both of which of course have given rise to contentious dispute settlement proceedings. See EC – Hormones, supra, note 5; EC – Biotech, supra, note 36. For example, EC – Hormones, supra, note 5, para. 245. For a discussion of the ways different cultural preferences for food safety regulation play out in the EU and the United States, see Echols, supra, note 83. See also M. Trebilcock and J. Soloway, ‘International Trade Policy and Domestic Food Safety Regulation: The Case for Substantial Deference by the WTO Dispute Settlement Body under the SPS Agreement’ in D. L. M. Kennedy and J. D. Southwick (eds.), The Political Economy of International Trade Law (Cambridge University Press, 2002), p. 557; H. F. Chang, ‘Risk Regulation, Endogenous Public Concerns, and the Hormones Dispute: Nothing to Fear but Fear Itself?’, Southern California Law Review, 77 (2004) 743, pp. 755–6 (discussing the EU’s preference for a precautionary approach in the areas of health and environmental protection). Joanne Scott has criticized the silencing of culture in the SPS Agreement, which she terms a technocratic zone. See ‘On Kith, Kine (and Crustaceans): Trade and Environment in the EU and WTO’ in J. H. H. Weiler (ed.), The EU, the WTO, and the NAFTA: Towards

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particular, when plants and plant products have a long history of a traditional, common usage as foods and/or medicines, some value should be given – some recognition afforded – to the enduring practices of the indigenous communities from which these products originate.

Room for culture in risk assessment? Risk assessment is the first component of a risk analysis. Once the risk is assessed, the second stage is risk management where policy-makers determine what the acceptable level of risk is and how best to keep risk at or below that level. The first of these processes – risk assessment – is widely seen as a technical phase where scientific analysis is conducted. The second phase, risk management, is where value judgements are traditionally identified.88 However, it is evident that the risk assessment phase also entails some decision-making. Risk assessment generally entails four stages identified over 25 years ago by the National Research Council in the United States. These stages are hazard identification, dose–response assessment, exposure assessment and risk characterization. Codex uses very similar categories – hazard identification, hazard characterization (which includes dose–response assessment), exposure assessment and risk characterization. 89 The SPS Agreement defi nes risk assessment similarly.90 While risk assessment is, on its surface, scientific and value-neutral, in fact scientists have to make all sorts of decisions, assumptions and other policy choices in conducting their analyses. An example would be deciding to use particular animal data to predict outcomes in humans, or to assume that the absorption rate in animals and humans is the same or close to the same.91 Indeed, these policy choices and assumptions are not consistent across regulatory bodies,

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a Common Law of International Trade? (Oxford University Press, 2000), p. 125, at p. 157; see also C. Button, The Power to Protect: Trade, Health and Uncertainty in the WTO (Oregon, Hart Publishing, 2004), ch. 4 (addressing the role of culture in shaping regulatory practice). Button, supra , note 87, pp. 96–7. The Appellate Body has rejected a rigid distinction between these two phases and appears to view at least some aspects of risk management as being within the SPS Agreement’s scope. See ibid., pp. 101–2; EC – Hormones, supra, note 5, para. 181. Button, supra, note 87, p. 96. 90 See SPS Agreement, supra, note 4, Annex A. Button, supra, note 87, p. 97. These policy choices are often recorded. For example, the risk assessment policies used in generating Codex standards are documented in a joint FAO/WHO Consultation, ‘Risk Management and Food Safety’, (FAO Food and Nutrition Paper 65, 1997), pp. 8–9 (cited in Button at p. 97 n. 17).

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meaning that different assumptions can lead to different outcomes. The risk assessment process has thus been subject to criticism as not being value-neutral in practice, and some argue the use of policy in the scientific process undermines the legitimacy of using science to assess risk as it may impact the outcomes reached.92 Furthermore, even hazard identification may have cultural assumptions embedded into it. Europeans have been eating unpasteurized cheeses for centuries and thus do not see them as a potential hazard. Other countries with different cultural experiences may see these same products as potentially dangerous. It would seem that it would be within the normal parameters of the risk assessment process to identify the various potential uses of the product being assessed, and to assess each potential use. Traditional knowledge can therefore be factored into the process merely by ensuring that the risk assessment includes a separate analysis of the safety of the traditional use. This would then avoid the problem of the traditional use being lumped together with the new uses. This approach would also be consistent with the Appellate Body’s guidance in the EC – Hormones dispute, in which it cautioned that risk assessments should not be limited to laboratory exercises but need to evaluate ‘risk in human societies as they actually exist where people live and work and die’.93

SPS Committee It would not require any sort of wholesale changes in WTO rules or even in practice to take traditional knowledge into account. This type of understanding could be reached within the SPS Committee, which meets several times a year and discusses particular concerns of members.94 And so doing might help prevent a repetition of situations such as the six-year ban on all kava products. It would be appropriate for this recognition to take place in the SPS Committee. Given the expense and time involved in bringing a dispute, it would be much better to resolve such issues informally. It would also be in keeping with the SPS Agreement’s provisions on special and differential treatment for developing countries. In particular, Article 10.1 provides: ‘In the preparation and application of sanitary or 92 93 94

See discussion in Button, supra, note 87, pp. 98–9 and footnotes therein. EC – Hormones, supra, note 5, para. 187. Article 12 of the SPS Agreement sets forth that the role of the SPS Committee is to serve as a forum for consultations relating to SPS issues.

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phytosanitary measures, Members shall take account of the special needs of developing country Members, and in particular of the least-developed country Members.’ This suggests that Members should assess the effects their SPS measures may have on developing countries, from the outset. The SPS Committee would be a useful forum for identifying traditional uses of products which Members are seeking to regulate.

VI

Conclusion

The kava example suggests that the WTO’s health and safety rules may be used by Members in a way that can lead to overly strict regulation of indigenous products. I question whether any measures can or should be taken to ensure that Members’ risk assessments give weight where appropriate to traditional knowledge and product usage such that overbroad regulations are minimized. In this regard, to the extent the safety of indigenous products are being called into question based on non-traditional uses, I posit that perhaps risk assessments of indigenous products should include an assessment of the safety of the product as it has been traditionally used, separate and apart from the analysis of the product as utilized inside the importing country. The concept of traditional knowledge may be a useful tool in identifying which products should be deemed to have a sufficient history of ‘traditional use’ to warrant a separate safety analysis.

9 The GATS and temporary migration policy R afael Leal-Arcas

I

Introduction

Th is chapter addresses the General Agreement on Trade in Services (GATS) in relation to temporary migration policy.1 It is argued that Mode 4 of the GATS remains essentially subject to strict domestic regulations and limitations. 2 Yet, many countries accept the importance of temporary migration as a necessary element to become more competitive in a knowledge-based society. 3 In the European Union (EU), for example, a new global approach is needed so that migration strikes the right balance amidst the risk of labour market shortages, economic impacts, negative social consequences, integration policies and external policy objectives.4 Moreover, the changing demands of an ageing society and a labour market in constant evolution have challenged established assumptions about migration from outside the EU. 5 Therefore, 1

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For the purposes of this chapter, a clear semantic and conceptual distinction is acknowledged between temporary migration (i.e., Mode 4 of the GATS) and immigration (which implies permanent residency in a country to which one is not native). Similar arguments are made by P. Lamy, ‘Terrorism is about increasing instability and global trade rules are about promoting stability’, in a speech to the International Institute for Strategic Studies on 8 September 2007, available at www.wto.org/english/news_e/ sppl_e/sppl66_e.htm (accessed 19 November 2008). J.–M. Barroso, ‘Opening remarks of President Barroso – Legal Immigration’, Press Conference, (Strasbourg, Speech/07/650, 23 October 2007). H. Brücker and J. von Weizsäcker, ‘Migration policy: at the Nexus of Internal and External Migration’ in A. Sapir (ed.), Fragmented Power: Europe and the Global Economy (Brussels, Bruegel, 2007), pp. 226–65, available at www.bruegel.org/Public/SimplePage. php?ID=4552 (accessed 19 November 2008). European Commission, ‘Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. The European Interest: Succeeding in the Age of Globalisation’, COM (2007) 581 final, (3 October 2007), pp. 4–5.

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it is argued that the EU needs more temporary migration from an economic point of view.6 The movement of people has increased markedly in recent decades, with international migration doubling since 1975. However, migration patterns today are very different from those in previous cycles of globalisation. Temporary migration, which is often work-related, has increased across the Organisation for Economic Cooperation and Development (OECD) countries over the past two decades, and migration of highlyskilled people has also become much more common. As competitiveness is increasingly shaped by a country’s ability to attract and retain a skilled workforce, competition among countries for highly-skilled workers is likely to continue to increase.7 This chapter is divided into seven Sections: following the introduction, Section II analyses the scope of the GATS; Section III deals with the socalled Mode 4 of the GATS; Section IV offers a debate on the progressive liberalisation of services trade as the best alternative to move forward with multilateralism; Section V provides an overview of the services trade negotiating positions of the European Community (EC) in the Doha Round, focusing solely on the offers by the EC; Section VI analyses the latest development of the Doha Round in services trade and looks at the future of multilateralism; and Section VII concludes with some final remarks.

II

Scope of the GATS

GATS Article I provides that the GATS covers ‘any service in any sector except services supplied in the exercise of governmental authority’,8 which means that no service is excluded a priori from the Agreement’s scope.9 All levels of government, ‘central, regional or local governments

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Similar arguments were brought forward by European business representatives who took part in an informal debate ahead of the EU summit on 15–16 October 2008. See EurActiv, ‘Business calls for EU deal on visas for skilled immigrants’, 13 October 2008, available at www.euractiv.com/en/innovation/business-calls-eu-deal-visas-skilled-immigrants/ article-176308 (accessed 21 November 2008). Cabinet Office and Foreign & Commonwealth Office, ‘Global Europe – Meeting the Economic and Security Challenges’, October 2007, p. 9. GATS, Article I.3(b). On the scope of the GATS and public services, see M. Krajewski, ‘Public Services and the Scope of the General Agreement on Trade in Services’, Center for International Environmental Law, (2001), available at www.ciel.org/Publications/PublicServicesScope. pdf (accessed 19 November 2008).

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and authorities’,10 must comply with the GATS terms, which means that the GATS covers local sewer systems, public hospitals, elementary education and water systems. The GATS constraints also cover actions of ‘nongovernmental bodies in the exercise of powers delegated by’11 any level of government. Examples are boards of universities, hospitals and professional organisations, such as legal bar associations. The GATS not only sets constraints on governmental policies directly relating to services, but also extends to ‘measures by [World Trade Organization (WTO)] Members affecting trade in services’.12 This rather broad definition of services means that all governmental policies that affect services, including those not specific to services such as general labour market policies or other broad regulations, are included under the GATS constraints. Also, the GATS clearly states that no sector is excluded a priori,13 which means that no sector can be carved out altogether, and countries are bound to follow some of the GATS rules even if they do not explicitly agree to subject a service sector to GATS coverage. In the view of Lori Wallach and Patrick Woodall, some GATS defenders wrongly claim that the GATS rules apply only to sectors that governments volunteer for coverage.14 Some GATS rules apply unconditionally to all service sectors, whether they are offered by a country to be covered by other GATS terms or not.15 According to Wallach and Woodall, those who defend the GATS argue that WTO Members were able to list exceptions to the most-favourednation (MFN) principle16 when initial commitments were made under 10 12

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GATS, Article I.3(a)(i). 11 GATS, Article I.3(a)(ii). GATS, Article I.1. In one of the few WTO decisions on the GATS, the meaning of this provision became a central question. The Panel ruled that ‘Article I.1 refers to measures in terms of their effect, which means that they could be of any type or relate to any domain of regulation.’ See Panel Report, European Communities – Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/R/USA, adopted as modified by the Appellate Body 25 September 1997, para. 7.280. GATS, Article V(1)(a), footnote 1 reads that ‘this condition is understood in terms of number of sectors, volume of trade affected and modes of supply. In order to meet this condition, agreements should not provide for the a priori exclusion of supply.’ See L. Wallach and P. Woodall, Whose Trade Organization? A Comprehensive Guide to the WTO (New York and London, The New Press, 2004), p. 116. In relation to the most-favoured-nation principle (MFN), GATS Article II provides that ‘with respect to any measure covered by this Agreement, each member shall accord immediately and unconditionally to services and service suppliers of any other member treatment which is no less favourable than that it accords to like services and service suppliers of any other country.’ MFN is a principle according to which each WTO Member must accord immediately and unconditionally services and service suppliers of any other member treatment no

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the GATS.17 However, GATS supporters hardly mention that under the GATS provisions, WTO Members are also to phase out such exemptions within 10 years and that ‘in any event, they shall be subject to negotiation in subsequent trade liberalizing rounds’.18 Another misinterpretation by the GATS supporters is that the GATS rules explicitly exclude all public services.19 Liberalisation and privatisation of essential public services20 would dramatically affect everyone’s day-to-day lives. Indeed, a serious public concern all over the world is the privatisation of public healthcare. Even in the narrowest interpretation of the GATS, there is no requirement that services be privatised. However, it is not dispositive. Following an argument based on one of the two main principles of international economic law (namely, the national treatment principle),21 this same principle creates enormous disincentives for public services to continue once

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21

less favourable than that it accords to services and service suppliers of any other country. Most-favoured-nation treatment (GATT Article I, GATS Article II and TRIPS Article 4), is the principle of not discriminating between one’s trading partners. In other words, the MFN principle is about treating other WTO Members equally. Under the WTO Agreements, countries cannot normally discriminate among their trading partners. If a special favour is granted to one Member (such as a lower customs duty rate for one of its products), then the same must be done for all other WTO Members. See Wallach and Woodall, supra, note 14, p. 117. GATS, Annex on Article II Exemptions, para. 6. On the GATS and public services, see R. Adlung, ‘Public Services and the GATS’, World Trade Organization, (Economic Research and Statistics Division Working Paper ERSD2005–03, 2005), available at www.wto.org/english/res_e/reser_e/ersd200503_e.doc (accessed 19 November 2008). Essential public services tend to be those considered so indispensable to modern life that for moral reasons their universal provision should be guaranteed, and they may be associated with fundamental human rights (such as the right to water). Examples of essential public services are: education, hospitals, social security, libraries, mail delivery, police and prisons, as well as water and sewage systems. See L. Wallach, ‘Backgrounder on WTO Service Sector Liberalization and Deregulation’, Public Citizen, (May 2005) available at www.citizen.org/documents/PC_Gats_Backgrounder_05–05.pdf (accessed 21 November 2008). National Treatment (GATS Article XVII) is a very important principle in the GATS. It requires giving others the same treatment as one’s own nationals. In other words, WTO Members must treat domestic and foreign goods, services and/or investors in the same manner for regulatory, tax and other purposes. The treatment must be either formally identical or formally different, so long as it is no less favourable. The treatment is considered less favourable if it modifies the conditions of competition in favour of the services or services suppliers of the WTO Member. It is also referred to as ‘non-discriminatory’ treatment. The GATS framework agreement includes a series of binding rules that facilitate the ability of service firms from one WTO member country to compete in another WTO member country’s service markets. These rules also place constraints on the

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some private sector services are permitted in the same sector. For example, US law requires pharmaceutical companies to offer medicines at reduced prices to Veterans Administration facilities22 and to hospitalised Medicare recipients.23 Yet, by requiring equal access to such public funds and benefits for private sector hospitals, the GATS would force the government to choose between either continuing the programme at a very high cost or ending the programme altogether, which would threaten the survival of the public facilities, leaving these populations without life saving medicine. The other main principle of international economic law, the most-favoured-nation principle, makes it difficult for countries to avoid privatisation by default, since any local government can open an entire sector merely by providing access to any foreign or private sector provider of a service otherwise exclusively performed by the government. Although the scope of the GATS is very wide and deals with all measures ‘affecting trade in services’,24 policy measures in some areas are not covered by GATS disciplines, provided the measures are not used to circumvent GATS obligations:25 • Immigration rules, provided they do not contravene commitments on temporary entry under Mode 4; • Services supplied in the exercise of governmental authority,26 defined as ‘any service which is supplied neither on a commercial basis, nor in competition with one or more service suppliers’;27 • Fiscal policy and taxation measures, provided the taxes do not discriminate against foreign services or service suppliers; • Import restrictions on equipment necessary for the supply of a service.

22 23

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regulatory authority of domestic policymakers at the national as well as state and local level. The Veterans Health Care Act of 1992 105–585 PL §§ 602–605. Ibid., § 602; W.–J. Scanlon, ‘Testimony Before the Subcommittee on Health and Subcommittee on Oversight and Investigation, Committee on Energy and Commerce, House of Representatives, Medicare Part B Drugs: Program Payments Should Reflect Market Prices’, (US General Accounting Office Doc. GAO-01–1142T, 2001), p. 6. GATS, Article I(1). A. Lanoszka, ‘Practicum about Multilateral Negotiations on Liberalizing International Trade in Services’, available at www.commercialdiplomacy.org/simulations/multilateral_negotiations.htm (accessed 21 November 2008). See E.–H. Leroux, ‘What is a “Service Supplied in the Exercise of Governmental Authority” Under Article I:3(b) and (c) of the General Agreement on Trade in Services?’, Journal of World Trade, 40 (2006) 345. GATS, Article I(3)(c).

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Other types of government measures have been put into the GATS work programme, though detailed rules are yet to be negotiated. These are: safeguard measures,28 rules for government procurement,29 disciplines on subsidies, and disciplines for domestic regulations.30 A provision in the GATS states that certain government-provided services are excluded from GATS coverage; however, the provision applies only to government services that are provided neither on a ‘commercial basis’ nor ‘in competition with one or more service suppliers.’31

III

GATS Mode 4

The GATS so-called ‘modes’ of supply refer to the means of delivering services. Modes of supply are defined in GATS Article I on the basis of the origins of the service supplier and the consumer, and the type of territorial presence that both have when the service is delivered. Although there are four modes of supply in the GATS, for purposes of this chapter I will focus solely on Mode 4. Examples of the mode 4 of supply (from the perspective of an importing country A) are when a foreign national provides a service within A as an independent supplier (e.g. consultant, health worker), or as an employee of a service supplier (e.g. consultancy firm, hospital, construction company). With its extensive use of skilled and unskilled labour, the construction sector is strongly affected by limitations on the movement of natural persons in WTO Members in general. Nationality and residency 28

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Safeguards are actions taken to protect a specific industry from an unexpected rise of imports. They are governed by the WTO Agreement on Safeguards and by Article XIX of GATT 1994. Government procurement is the purchase of goods and services by governments and state-owned enterprises. On domestic regulation, see H. Kox and H. Kyvik, ‘Services Trade and Domestic Regulation’, Organization for Economic Cooperation and Development, (Trade Policy Working Paper 49, 2007), available at http://mpra.ub.uni-muenchen.de/2116/ (accessed 20 November 2008). The authors found that it is not regulation as such which hampers international trade in services, but rather regulatory heterogeneity that has a relatively large negative impact on both market entry and subsequent trade flows. The message to policy makers is not to abandon regulation, but to harmonise with their trading partners. These lessons are especially important for small countries where harmonisation could substantially increase services exports. GATS, Article I (3)(b) provides that ‘services’ includes any service in any sector except services supplied in the exercise of government authority.’ GATS Article I(3)(c) provides that ‘“a service supplied in the exercise of governmental authority” means any service which is supplied neither on a commercial basis, nor in competition with one or more service suppliers’.

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requirements or other staffing requirements for persons employed by foreign firms could constitute limitations on market access and national treatment.32 Requirements to employ and train local staff may place a burden on the supplier. Such requirements, even if imposed on an equal basis to all domestic as well as foreign firms, could still constitute de facto national treatment limitations.33 Mode 4 commitments allow people to travel to another WTO Member to provide services for a short period of time. However, Mode 4 is not about access to local labour markets and should therefore be clearly distinguished from economic immigration.34 In fact, the GATS Annex on Movement of Natural Persons stipulates that the GATS ‘shall not apply to measures affecting natural persons seeking access to the employment market of a Member, nor shall it apply to measures regarding citizenship, residence or employment on a permanent basis’.35 Furthermore, the scope of coverage of Mode 4 is limited to the category of ‘service supplier’.36 Therefore, a controversy arises because Mode 4 can be associated with immigration policy by becoming the backdoor to immigration and can have implications for education, healthcare systems and other social benefits provided in the EU, for example, that do not exist in other countries. This relationship between the two concepts (Mode 4 and immigration policy), however, does not appear anywhere in the GATS. In this respect, 32

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According to the scheduling guidelines in WTO doc. MTN.GNS/W/164 (Explanatory Note, 1993), nationality requirements are normally considered as limitations on market access (equivalent to a zero quota), whereas a residency requirement would need to be judged on a case-by-case basis to determine whether it constitutes a de facto national treatment limitation or a non-discriminatory measure subject to the disciplines of Article VI.5. GATS, Article XVII.3 states that ‘Formally identical or formally different treatment shall be considered to be less favourable if it modifies the conditions of competition in favour of services or service suppliers of the Member compared to like services or service suppliers of any other Member.’ [Emphasis added.] Relevant literature on Mode 4 includes: R. Chanda, ‘Movement of Natural Persons and Trade in Services: Liberalizing the Temporary Movement of Labour Under the GATS’, India Council for International Economic Research , (Working Paper 51, 1999), available at www.icrier.org/pdf/RupaCh.pdf (accessed 19 November 2008); R. Chanda, ‘Movement of Natural Persons and the GATS’, World Economy, 24 (2001) 631; N. Mukherjee, ‘Exporting Labour Services and Market Access Commitments under GATS in the World Trade Organization – An Analysis from the Perspective of Developing Countries’, Journal of World Trade, 30(5) (1996) 21; Background Note by the Secretariat, ‘Presence of Natural Persons (Mode 4)’, (WTO doc. S/C/W/75, 1998). GATS, Annex on Movement of Natural Persons Supplying Services Under the Agreement, para. 2. GATS, Article I.2.(d).

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a major success of the Doha Development Agenda (DDA) would be for the WTO membership to agree conceptually on the scope of Mode 4. One benefit that Mode 4 brings to the world trading system is the alleviation of the lack of qualified workers in some developing country WTO Members.37 However, an issue of concern is whether exporting countries of Mode 4 will have enough human capital to actually benefit from the right to export qualified workers in a knowledge-based society. As it stands, some developing and least-developed country WTO Members might not even be able to benefit from Mode 4 for lack of (highly-) qualified professionals.38 The ability to look after the elderly, design software or engage in construction work at European, Japanese or American wages would immeasurably increase the incomes of mobile workers from developing countries.39 Since there is no categorisation in Mode 4, the only informal requirements are: (1) that the service be temporary; and (2) that the service provider not seek permanent entry in the labour market of the WTO Member where the service takes place. However, the question remains: which type of service providers will not seek permanent entry in the labour market? Once again, Mode 4 creates a division between developed and developing countries of the WTO in the sense that developed countries do not want Mode 4 to become a substitute for immigration – the argument being that there is already immigration in developed countries – whereas developing countries want full practice of Mode 4 as temporary migration.40 Mode 4 can be misinterpreted as an open door for migration. In the United States, members of Congress have warned on several occasions that they will oppose any concessions on Mode 4, arguing that the issue is an immigration issue rather than a trade matter.41 However, 37

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On the possible-trade creating effects of service trade liberalisation via Mode 4, see M. Jansen and R. Piermartini, ‘The Impact of Mode 4 Liberalization on Bilateral Trade Flows’, World Trade Organization, (Economic Research and Statistics Division Staff Working Paper ERSD-2005–06, 2005), available at www.wto.org/english/res_e/reser_e/ ersd200506_e.doc (accessed 19 November 2008). However, developing and least-developed countries always have the possibility of exporting non-highly qualified workers, such as domestic help, which is a major source of Mode 4 at present. See L.–A. Winters, ‘The Economic Implications of Liberalizing Mode 4 Trade’ in A. Mattoo and A. Carzaniga (eds.), Moving People to Deliver Services (Washington DC, Oxford University Press and The World Bank, 2003), pp. 59–91. Interview with Mr Plaza, Spanish trade diplomat dealing with international services trade, on 15 March 2006. See D. Pruzin, ‘U.S. Signals Possible Movement on Mode 4 in WTO Services Talks’, BNA International Trade Reporter, 25 (2008) 1090.

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the United States has been under pressure from developing countries to improve its commitments on Mode 4. India, in particular, wants Washington to allow more of its computer professionals to work temporarily in the United States, but the issue is extremely controversial because of its link to immigration issues, particularly since the 11 September 2001 terrorist attacks and heightened security in the wake of those attacks.42 According to Pascal Lamy, opening Mode 4 may generate benefits for both originating and receiving countries. For originating countries the benefits are in terms of remittances and the development of human capital. Receiving countries also benefit from the increased mobility of services suppliers. Mode 4 can therefore be a win-win game.43 Yet, it is in Mode 4 where we find the greatest discrepancy among EU Member States in services trade: some EU countries are in favour of liberalising Mode 4, whereas others are more reluctant. Although in principle outside the scope of the GATS, immigration policy, labour market regulations and levies and charges for social security would also impact the sector significantly. For example, labour market regulations such as those extending minimum wages and regulations on work hours to foreign workers employed on a temporary basis on construction sites, as well as requirements on foreign workers to participate in social security systems, would tend to reduce the cost advantages of the foreign workforce. Although the movement of natural persons under the GATS represents a very small subset of overall migration, some WTO Members argue that certain issues being discussed in the overall context of migration might inform the work of the Council for Trade in Services at the WTO on Mode 4 .44 The Swiss delegation to the WTO has proposed a method which seeks to improve transparency and comparability of assessing the quality of offers numerically.45

42 43

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Ibid. See speech by P. Lamy, ‘Why services are crucial for concluding the WTO Doha Round’, presented at the European Services Forum and the London School of Economics Conference, (London, 15 October 2007), p. 7, available at www.lse.ac.uk/ collections/LSEPublicLecturesAndEvents/pdf/20071015_Lamy.pdf (accessed 19 November 2008). Special Session of the Council for Trade in Services, ‘Report by the Chairman to the Trade Negotiations Committee’, (WTO doc. TN/S/22, 2005), para. 12. Communication from Switzerland, ‘Methodology to assess Schedules of commitments under the GATS’, (WTO doc. TN/S/W/51, 2005).

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IV

Progressive liberalisation of services trade: the best way forward46 An analysis of the term ‘liberalisation’

The term liberalisation is often used incorrectly in academic and political debates. In the interest of clarifying what oftentimes is a misconception of the term, I would like to provide a definition in order to have a clear framework of analysis. As a political concept and from a broader viewpoint, liberalisation is often associated with a critical view of governmental intervention as well as greater reliance on market processes. From a narrower point of view, liberalisation is understood as the removal of legal and other barriers to competition. Liberalisation can also be referred to in the context of privatising former public monopolies.47 Since liberalisation can be understood as the process of having more market access (whether domestic or international), this requires the removal of obstacles to market entry and competition. Restrictions on trade in services have costs in terms of higher prices for businesses and consumers in the domestic economy. By limiting domestic and international competition, a barrier-ridden environment in services lowers efficiency and increases transaction costs. High transaction costs can impede economic growth. Some analysts even argue that transaction costs are the most serious hurdles.48 For liberalisation to take place, it may require the reduction of regulations or the abolition or replacement of the regulatory regime. Seeking further trade liberalisation can also play a valuable part in helping to achieve other global objectives. International liberalisation oftentimes aligns with domestic liberalisation. In services, this statement is certainly the case.49 The GATS is to services trade liberalisation what the WTO is to trade liberalisation. In 46

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P. Dee and K. Hanslow, ‘Multilateral Liberalization of Services Trade’ in R. Stern (ed.), Services in the International Economy (University of Michigan Press, 2001), pp. 117–39. In this sense, see M. Krajewski, National Regulation and Trade Liberalization in Services: The Legal Impact of the General Agreement on Trade in Services (GATS) on National Regulatory Autonomy, (The Hague, London, New York, Kluwer Law International, 2003), pp. 7–9. Collier and Gunning found that they were the most significant bottleneck to growth endeavours in Africa. See P. Collier and J.–W. Gunning, ‘Why Has Africa Grown Slowly?’, Journal of Economic Perspectives, 13 (1999) 3, pp. 3–18. See L. Schmid, ‘Barbados: Telecommunications Liberalization’ in P. Gallagher, P. Low and A. L. Stoler (eds.), Managing the Challenges of WTO Participation: 45 Case Studies, (2005), Case Study 4, available at www.wto.org/english/res_e/booksp_e/casestudies_e/ case4_e.htm (accessed 19 November 2008).

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the definition of trade in services in the GATS, the distinction between domestic and international supply of services often depends only on the nationality of the service supplier or consumer. In such cases, when the liberalisation of trade in services demands the abolition of certain regulatory measures, it also contributes to domestic liberalisation. The liberalisation of international trade in services can contribute to growth in two distinct ways. First, multilateral negotiations on trade in services can stimulate the removal of barriers to domestic competition within individual countries, thereby eliminating internal constraints to the achievement of greater economic efficiency in providing services. Second, multilateral negotiations on services trade can eradicate the barriers to external competition in services, thereby making available the gains from increased trade such as domestic gains in productivity as domestic producers respond to international competition, expanded markets for competitively produced services, and lower prices for consumers.50 In the specific case of developing countries, the significance of liberalising services trade arises from several factors: what an efficient service sector can provide to economic development; the consequences of curbing international service transactions; the growing role of services in the economic output and international trade of most developing nations; the growing dynamism of services markets; and the limited level of market access for services trade achieved during the Uruguay Round.51 In my opinion, governments should continue to push toward further global (services) trade liberalisation, as is the case in the Doha Round, where governments also look at non-tariff barriers52 to goods and

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G. Feketekuty, ‘Regulatory Reform and Trade Liberalization in Services’ in P. Sauvé and R. Stern (eds.), GATS 2000. New Directions in Services Trade Liberalization (Washington DC, Brookings Institution Press, 2000), pp. 225–40, at p. 239. J. Bernabe and S. Cheng, ‘The Doha Round Negotiations on Services: An Overview’, paper presented at Realizing the Doha Development Agenda as if the Future Mattered, (Salzburg, Austria, 16–21 February 2007), p. 1, unpublished seminar paper, on fi le with author. The WTO characterises any law or policy that is not a tariff, but has the effect of limiting trade, as a non-tariff barrier. In other words, barriers to international trade other than tariffs. For example, a law that prohibits the importing of food containing carcinogenic pesticide residues could be considered a non-tariff barrier to trade, since it restricts trade in food. The WTO sets very narrow rules for which non-tariff barriers are permitted. The fact that a regulation that affects trade is aimed at health or environmental protection, or is applied equally to domestic goods and imports, does not necessarily mean that it is a permissible non-tariff barrier under WTO rules.

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services, in addition to tariffs on goods. This removal of trade barriers will imply greater economic growth worldwide.

Historical background Since the early 1980s, developing economies have been sceptical about the multilateral liberalisation of services trade. Led by Brazil and India, these economies opposed the inclusion of services trade as an agenda item in the GATT Ministerial Meeting of 1982 held in Geneva. Their main reason for scepticism was their perception that the services sector in developing economies is rather inefficient and cannot compete against the highly resourceful services suppliers from the industrialised economies. Moreover, their concern about multilateral negotiations was based on the perception that future negotiations in services would likely be favourable to just one side, and would produce no benefits to developing economies.53 This view was further emphasised by the argument that, because of the strong bargaining position of industrialised economies during multilateral trade negotiations, firms from industrialised countries would easily gain access to markets in developing economies, while the reverse would not happen. Indeed, based on empirical evidence we know that, after the completion of the Uruguay Round, many developing economies not only believed that they had overcommitted, but also felt that they had become party to an uneven and detrimental agreement. In the transatlantic spectrum, as opposition to more trade liberalisation grows in the US Congress, Members of the European Parliament (MEPs) have voted for a transatlantic market without barriers to be implemented within the next ten years. An owninitiative report on transatlantic economic relations written by MEP Erika Mann (PES, Germany), and adopted in the European Parliament’s Committee on International Trade on 18 April 2006, stops short of calling for the abolition of tariffs. Instead, it calls for the abolition of non-tariff barriers in financial services by 2010, and in a number of other key markets by 2015. An agreement envisaged would rest on three pillars: 1. Cooperation on regulatory issues; 2. A set of operational cooperation tools (an early warning system, a bilateral mechanism for settling trade disputes, and a third-generation agreement on the application of competition law); and 3. Sectoral economic cooperation Agreements building on the joint EC-US work program.

53

In addition, the MEPs call for a strengthening of the parliamentary dimension of the transatlantic dialogue on trade. Peter Sutherland has a completely opposite view, arguing that ‘services liberalisation is a win-win issue for both developed and developing countries alike.’ See P. Sutherland, ‘Why Services are Crucial for Concluding the Doha Round’, presented at European Services Forum and the London School of Economics Conference, (London, 15 October 2007), pp. 3–4.

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Furthermore, developing economies feared that trade in services negotiations would translate into large adjustments in their domestic economies. Examples which show hostility to services liberalisation include the entertainment industry, where most countries resent foreign ownership in their audiovisual industry because most societies tend to see it as part of their national cultural identity. Foreign ownership in the movie industry is perceived as an unacceptable intrusion.54 Unlike trade in goods, multilateral services trade did not have a multilateral liberalisation movement. Th at only developed after the GATS came into force. The reason was that services were initially, although incorrectly, perceived as non-tradable. GATS Articles XIX to XXI deal with progressive liberalisation (GATS Article XIX on the negotiation of specific commitments; Article XX on the schedules of specific commitments; and Article XXI on the modification of schedules).55 The GATS requires further negotiations, which began officially in early 2000 under the WTO Council for Trade in Services, 56 as well as regular meetings of its relevant subsidiary committees or working parties and are now part of the Doha Development Agenda, 57 and whose aim is to achieve a higher level of liberalisation of trade in services. Th is liberalisation will be aimed at enhancing the level of commitments in 54

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R. Leal-Arcas, ‘The Resumption of the Doha Round and the Future of Services Trade’, Loyola of Los Angeles International and Comparative Law Review, 29 (2007) 339, pp. 376–7. Some authors question the ability of the GATS to promote liberalisation on a reciprocal basis. See B. Hoekman and P. Messerlin, ‘Liberalizing Trade in Services: Reciprocal Negotiations and Regulatory Reform’ in Sauvé and Stern, supra , note 50, pp. 487–508. As part of the WTO structure, the WTO Council for Trade in Services is one of the three councils of the General Council, in addition to the WTO Council for Trade in Goods and the WTO Council for Trade-Related Aspects of Intellectual Property Rights. It operates under the guidance of the General Council and is responsible for overseeing the functioning of the GATS. It is open to all WTO Members and can create subsidiary bodies as required. Before the creation of the Doha Round in 2001, developing and least-developed countries had been marginalised in the world trading system, which brought with it serious economic implications. In 2001 in Doha (Qatar), developing countries were promised inclusion in the world trading system in order to achieve a higher level of justice and equity in the world. That is why the current round is called the development agenda (DDA). The argument is that a more open and equitable trading system brings peace to the world and, in this sense, the DDA should not be approached as a zero-sum game – as many developing countries seem to perceive it – but as a win-win situation. The Doha Round was the result of widespread agreement among delegates at the 4th WTO Ministerial Conference in Doha that it was time to address the imbalances of previous rounds and to offer developing countries the prospect of trade talks which they could see were to their benefit.

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the schedules and reducing the adverse effect of measures taken by governments.58 In 1999, the attempt by the EC (and others) to launch a new round of WTO trade negotiations at the Seattle WTO Ministerial Conference was spectacularly unsuccessful, and the accompanying street protests raised the question of whether new negotiations to liberalise trade in services were appropriate at all.59 While the opposition to negotiations seemed to be inspired by innumerable unconnected issues, certain themes were perceptible.60 The principal question seemed to be whether trade in services liberalisation was in itself an appropriate goal or whether it should be accompanied by or subordinated to other concerns, such as those related to the environment,61 working conditions, human rights,62 and the right of communities to choose and apply their own policies and standards.

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European Commission, ‘Aspects relating to trade in services’, available at http://europa. eu.int/scadplus/leg/en/lvb/r11012.htm (accessed 19 November 2008). The criticisms of the WTO were quite diverse in nature, oscillating from opposition to its existence to suggesting a serious internal reform. Among the many charges against the WTO are the following: (1) The WTO system of internal governance tends to concentrate power among a small group of developed countries, to the detriment of less-developed country interests; (2) The WTO is undemocratic in its control over national trade policies; (3) The WTO system tramples upon its Members’ sovereignty; (4) The WTO system favours open markets (capitalism, profits, the interests of multinational corporations) over environmental protection, labour standards and human rights; (5) The WTO system prevents governments from protecting the interests of working people displaced by import competition.

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Publications critical of the WTO include: K. Danaher and R. Burback (eds.), Globalize This! The Battle Against the World Trade Organization and Corporate Rule (Maine, Common Courage Press, 2000); S. Shrybman, Th e World Trade Organization: A Citizen’s Guide, 2nd edn (Toronto, Canadian Centre for Policy Alternatives and James Lorimer & Company Ltd, 2001); Working Groups on the WTO/MAI, A Citizen’s Guide to the World Trade Organization (New York, Apex Press, 1999). According to Charles Finny, the failure of the Seattle WTO Ministerial Conference was due to poor management by the WTO Secretariat and the US Government. These views were presented by Charles Finny at the conference International Economic Law and National Autonomy: Convergence or Divergence? (Victoria University of Wellington Law School, Wellington, New Zealand, 14 December 2007). Within the environment, on the specific issue of the clean development mechanism, see G. Wiser, ‘Frontiers in Trade: the Clean Development Mechanism and the General Agreement on Trade in Services’, International Journal of Global Environmental Issues, 2 (2002) 288. S.–H. Cleveland, ‘Human Rights Sanctions and International Trade: A Theory of Compatibility’, Journal of International Economic Law, 5 (2002) 133.

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V Services trade negotiating positions of the EC in the Doha Round The WTO mini-ministerial conference of July 2008 ended in breakdown. This raises the question of how to move forward in this complex international trade negotiations scenario.63 In order to achieve a successful deal, Pascal Lamy has said in the past that the basic ingredients of a Doha deal are clear: the United States must agree to deeper cuts to its ceiling on trade-distorting farm subsidies, the EC must offer more agricultural market access, and developing countries such as Brazil and India must further reduce their industrial tariffs.64 Certainly, political leadership from major WTO Members is essential. The deadlock in agriculture and non-agricultural market access (NAMA) has haunted both bilateral and plurilateral consultations on services. The sooner the uncertainty in agriculture and NAMA is cleared, the better the chances of a more ambitious services package. However, services negotiations are not simply driven by negotiations in other fields; they also play a role in pushing forward the Doha Round. This is so because trade in services is of high importance for the economies of both developed and developing countries and, therefore, there remains substantial scope for many WTO Members to make further commitments towards greater liberalisation within the services sectors and within all modes of supply provided in the GATS. Expectations of WTO Members about services trade may need to be modified in accordance with the overall development of Doha Round negotiations. On market access, certain major developed countries may have very little room to offer anything that would constitute a breakthrough in Mode 4. The US is caught up with security concerns and border control measures against illegal migration stemming from its border with Mexico, whereas the EU continues to have political difficulty managing the intra-EU migration pressure. These internal difficulties are reflected in the initial and revised EC offers in services trade negotiations. 63

64

Mercurio argues that systemic ‘institutional impediments still exist, which not only hinder the successful conclusion of the Doha Round, but also prevent effective longterm institutional governance and vision’. B. Mercurio, ‘The WTO and its Institutional Impediments’, University of New South Wales (Faculty of Law Research Series Working Paper 46, 2007), available at http://law.bepress.com/unswwps/fl rps/art46/ (accessed 19 November 2008). See International Centre for Trade and Sustainable Development (ICTSD), ‘Doha Negotiations Set To Pick Up Despite Lack Of New Offers’, Bridges Weekly Trade News Digest, 11(3) (2007), available at http://ictsd.net/i/news/bridgesweekly/6425/ (accessed 30 November 2008).

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Initial offers The EC and its Member States,65 after giving careful consideration to the requests submitted by WTO Members, in particular by developing countries, tabled in April 2003 their initial offer in the framework of the ongoing services negotiations under the GATS and in the context of the DDA.66 The decision on the Doha Agenda work programme (the socalled July package), reached by the WTO General Council on 1 August 2004, provided renewed impetus to the services negotiations and set out a process for improving the quality of the offers submitted. Following the conditional offer from the EC and its Member States in services trade on 29 April 2003,67 the EC had been accused by developing countries of being protectionist in this sector. The EC offer was conditioned on the submission of substantive offers from WTO Members in sectors where the EC had made requests. The EC, therefore, retained its right to withdraw any elements of its offer at any time during the negotiations. Already in July 2002, the EC had submitted its initial requests for improved market access in services to WTO Members.68 The sectors where the Commission proposed that the EC make no offer were health, audiovisual services and education. On the other hand, the sectors where the Commission proposed that the EC make an offer were professional services, computer services, business services, postal services, telecommunications services, construction and related engineering services, distribution, environmental services, financial services, tourism, news agencies, transport and energy services. Moreover, all horizontal commitments were included (public utilities, investment, real estate, subsidies and Mode 4). While the EU has important offensive interests in the area covered by Mode 4, developing countries have placed a particular emphasis on Mode 4. Many developing countries are dissatisfied with developed

65 66

67

68

The EC does not have a common external policy in services trade. R.–J. Langhammer, ‘The EU Offer of Service Trade Liberalization in the Doha Round: Evidence of a Not-Yet-Perfect Customs Union’, Journal of Common Market Studies, 43 (2005) 311. See Communication from the European Communities and their Member States, (Conditional Offer) on 29 April 2003, available at http://trade.ec.europa.eu/doclib/ docs/2004/march/tradoc_113003.pdf (accessed 19 November 2008). See European Commission, Summary of the EC’s Initial Requests to Th ird Countries in the GATS Negotiations, July 1, 2002, available at http://trade.ec.europa.eu/doclib/ docs/2004/april/tradoc_116821.pdf (accessed 19 November 2008).

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countries’ offers to them in Mode 4.69 Developing countries want industrialised nations to allow more skilled professionals from developing countries to work temporarily in developed countries, but the issue is extremely controversial because of its link to immigration issues. The lack of quality offers in Mode 4 is often cited by delegations as a basis for their reluctance to commit to opening their services markets in other areas. Some developing countries also maintain that the lack of progress on negotiating issues of importance to them in agriculture, industrial goods and rules hinders their ability and inclination to table more liberal offers in services. On the other hand, developed countries argue that developing countries bear the responsibility for the poor quality of offers. In the view of developed countries, the issue of linkage with other negotiating areas is a two-way street; in other words, substantial offers in services could facilitate negotiations in other areas of the trade agenda.70 Furthermore, some people argue that Mode 4 can actually be used as an incentive for making sure that developing countries conclude the Doha Round as well as future bilateral trade agreements.71

Revised offers On 2 June 2005, the EC submitted a revised services offer.72 The new proposal outlines how the EC is prepared to further open access to its services market in exchange for improved access to other WTO Members’ markets. As in the initial offer, the revised offer of the EC was conditional on other WTO Members making substantive offers in sectors where the EC has made requests.73 While ambitious in scope and responding in many ways to requests for access from developing countries, the EC’s offer safeguards public services such as education, health and audiovisual

69 71

72

73

Bernabe and Cheng, supra, note 51, p.3. 70 Ibid. Personal views expressed by Charles Finny at the conference International Economic Law and National Autonomy: Convergence or Divergence? (Victoria University of Wellington Law School, Wellington, New Zealand, 14 December 2007). Communication from the European Communities and their Member States, (Conditional Revised Offer) on 2 June 2005, available at http://trade.ec.europa.eu/ doclib/docs/2005/june/tradoc_123488.reduced%20cells%20v2.pdf (accessed 19 November 2008). Prior to the Hong Kong Ministerial Conference in 2005, GATS negotiations proceeded on a bilateral ‘request/offer’ basis. This meant that one nation issued a request document for service sector liberalisation to another, and indicated what it was willing to offer in a second document. Then the two nations bargained on a bilateral basis.

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services.74 It would allow lawyers, accountants, bookkeepers, architects and engineers to open offices in the EU or to offer their services from abroad. Specialists such as computer programmers could obtain shortterm residence permits through Mode 4. In all such cases, EU and national working conditions, minimum wage requirements and collective wage agreements would apply. EU Member States would continue to be able to refuse entry to persons who pose a security threat or are considered to be at risk of abusing the terms of their entry. By furthering the improvements contained in the initial offer which the EC had tabled in 2003, the revised EC offer provides additional opportunities regarding the movement of highly qualified natural persons. Following the May 2004 enlargement of the EU, the revised offer will extend access conditions offered in the EU to the new EU Member States. The offer therefore contains a significant number of commitments on the part of the new Member States, which they undertake in order to match the degree of liberalisation already offered in the rest of the EU. This notably concerns the permitted length of stay, the number of sectors that are covered, and the length of the underlying contract. In general, no economic needs test75 can be applied within a numerical ceiling, whose level will be determined in the course of the negotiations. As a result, services companies will, for example, be able to transfer management trainees to their affi liated companies in the enlarged EU, so as to allow them to get up to one year of European work experience. Overseas companies with a contract to provide services in 21 important sectors will be able to send skilled employees to the EU to provide these services for up to six months at a time. Another improvement brought by the revised offer is to add legal services to those sectors where selfemployed services suppliers based overseas will be able to enter the EU for 74

75

Public services is a term usually used to mean services provided by the government to its citizens, either directly (through the public sector) or by fi nancing private provisions of services. The term is associated with a social consensus (usually expressed through democratic elections) that certain services should be available to all, regardless of income. Even where public services are neither publicly-provided nor publicly-fi nanced, for social and political reasons they are usually subject to regulation going beyond that applying to most economic sectors. Economic needs tests are ‘a mechanism controlled by government, industry or professional associations to decide whether the entry into the market of new foreign, and sometimes domestic, firms is warranted on economic grounds’. This mechanism may be discretionary and protectionist. GATS, Article XVI, which sets out market access rules, permits the use of economic needs tests. See W. Goode, Dictionary of Trade Policy Terms, 5th edn (Cambridge University Press, 2007), pp. 144–5.

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up to six months at a time to provide services to clients based in any of the 27 EU Member States. More recently, India requested ‘a symposium on Mode 4 issue[s] around February or March 2008. The US alone opposed the notion at the Council on Trade in Services session on 6 December [2007]. The WTO Secretariat, however, said that the absence of consensus meant that no symposium could be arranged. South Africa, supported by other developing countries, questioned this interpretation of consensus, given that a services text seemed to be in the offing despite the express opposition of three countries. Several [WTO Members] said that movement on Mode 4 would be essential to progress in the [Doha] negotiations.’76

VI

Quo vadis, multilateralism?

Governments’ latest attempt to salvage a deal in the Doha Round broke down on 29 July 2008, as ministers acknowledged that they were unable to reach a compromise after nine days of a WTO mini-ministerial summit. Th is was due to a demand that the possibility of increasing tariffs by developing countries be incorporated in the deal to protect farmers from import surges under a special safeguard mechanism.77 Importsensitive China and India were pitted against the US’s demands for predictable market access for farm products. A rational explanation for the failure of the multilateral trade talks is that countries such as India want to protect their poor and subsistence farmers, while the US and the EC negotiators are under pressure from powerful farm lobbies. The services negotiating committee met during the mini-ministerial conference ‘to fi nalise work on a text aimed at providing guidance on how to proceed in the services talks, ahead of the “signalling conference” that ha[d] been […] scheduled [during the mini-ministerial conference]. Bolivia, Cuba, and Venezuela maintained their opposition to the most recent services text, joined this time by Nicaragua. Those countries maintain that there is no need for […] a “roadmap” for the talks, arguing that the 76

77

International Centre for Trade and Sustainable Development (ICTSD), ‘Services Talks Pick Up Momentum’, Bridges Weekly Trade News Digest, 11(44) (2007), available at http:// ictsd.net/i/news/bridgesweekly/6606/ (accessed 21 November 2008). The special safeguard mechanism is a system available under the WTO Agreement on Agriculture to WTO ‘members that have converted non-tariff measures to tariff protection. It allows WTO members to impose additional tariffs on agricultural products if import volumes exceed defi ned trigger levels or import prices fall below defined trigger prices.’ See Goode, supra, note 75, p. 396.

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services provisions of the Hong Kong Ministerial Declaration provide sufficient guidance for the negotiations.’78 Although the mini-ministerial conference was going to focus on agriculture and industrial goods, trade in services is a central part of any final Doha Agreement. At the mini-ministerial conference there was a signalling conference, in which WTO Members signalled where and how they plan to improve access to their services markets for other WTO Members. ‘It was understood that, while the signals exchanged were important in measuring progress, they would not represent the final outcome of the negotiations.’79 Such a signalling conference was just meant to provide a credible signal that the negotiations were moving forward. The signals would therefore provide comfort to WTO Members by reflecting real progress in the services negotiations. WTO Members acknowledged that, while they ‘proceeded with services liberalisation in their economies, the gap between existing levels of openness and current commitments continued to widen. Some participants stressed that a satisfactory outcome of the services negotiations could be one of the most significant dividends of the DDA, as a development Round.’80 In conclusion, ‘most participants indicated their readiness to improve access conditions for Mode 4’.81 On Mode 4, Indian commerce minister Kamal Nath was pleased about the ‘good movement by the US and by the EU’82 since both WTO Members were prepared to allow more professionals from India and other developing countries to work temporarily in their markets.83 Mr Nath stressed the importance of the domestic regulation aspect of the services negotiations. EU Member States use two main instruments to enforce their national policy guidelines. The first is the economic needs test, which is permitted by GATS Article XVI:2. Through such a test, when it comes to wholesale and retail services trade, the governments of Belgium, Denmark, France, Italy and Portugal set a limit on the number of department stores in 78

79 80 82

83

International Centre for Trade and Sustainable Development (ICTSD), ‘WTO MiniMinisterial, Day Th ree: and Then There Were Seven’, 24 July 2008, available at http:// ictsd.net/i/wto/englishupdates/14095/ (accessed 12 September 2008). P. Lamy, ‘Services Signalling Conference’, (WTO Doc. JOB(08)/93, 2008), para. 1. Ibid., para. 3. 81 Ibid., para. 48. International Centre for Trade and Sustainable Development (ICTSD), ‘Members Give Mixed Reactions to Lamy Compromise, Take “A Good Step Forward” on Services’, Bridges Daily Update, (27 July 2008), available at http://ictsd.net/i/wto/englishupdates/14681/ (accessed 21 November 2008). D. Pruzin, ‘U.S., EU Cite Moves in “Signaling” Talks On Services; India Likes “Mode 4” Openings’, BNA International Trade Reporter, 25 (2008) 1128.

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order to prevent ruinous competition, to facilitate transport infrastructure planning and to regulate the special distribution of stores. These needs tests create uncertainty about the stability of market access.84 In the mini-ministerial summit, an Indian trade official said that the EC had suggested that it might consider lift ing economic needs tests, a regulatory requirement that can make it nearly impossible to use Mode 4 access. The second instrument to enforce national policy guidelines is residence criteria. Companies are restricted in supplying specific insurance services through Mode 1 only if the head office is based in the EU. Residence criteria are also applicable to natural persons if they act in a position of responsibility on behalf of the company (in other words, the CEO, founder, board of directors, supervisory council, etc). Such restrictions are often found in offers for trade in financial and insurance services. Although the exercise of the July 2008 WTO mini-ministerial conference does not represent the final outcome of the services negotiations, it has represented a step forward. However, as Robert Zoellick argues, the events of September and October 2008 on the global financial crisis could be a tipping point for many developing countries. As always, the poor are the most defenceless. Voices around the world are blaming free markets. Others are asking about the failures of governmental institutions. We cannot turn back the clock on globalisation. So we must learn lessons from the past, as we build for the future. We must modernise multilateralism and markets for a changing world economy. The new multilateralism, suiting our times, will need to be a flexible network, not a fi xed one. It needs to maximise the strengths of interconnecting and overlapping actors and institutions, public and private. It should be oriented around pragmatic problem-solving that fosters a culture of cooperation.85 In the absence of a global deal to liberalise trade, Zoellick argues that countries should focus on forging regional trade agreements ‘linked to global disciplines’,86 and that they should try to use trade facilitation measures to decrease the costs of cross-border commerce. As argued earlier, immigration is different from temporary migration. However, the EU is tackling its lack of temporary migrants with the creation of a new EU 84

85

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P. Low and A. Mattoo, ‘Is there a Better Way? Alternative Approaches to Liberalization under the GATS’ in Sauvé and Stern, supra, note 50, pp. 449–72. R. Zoellick, ‘Modernizing Multilateralism and Markets’, speech given at the Peterson Institute for International Economics (Washington DC, 6 October 2008), available at www.iie.com/publications/papers/print.cfm?doc=pub&ResearchID=1012 (accessed 21 November 2008). Ibid.

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immigration pact. EU leaders are trying to increase the attractiveness of Europe for highly-skilled people, students and researchers in order to fill its looming demographic crisis and related skills shortage.87 Although not legally binding, the pact builds upon the EU Blue Card88 initiative and the European Commission’s Policy Plan on Legal Migration,89 currently under debate in the EU institutions. It aims to make it easier for skilled migrants to come to the EU by replacing 27 different national visa regimes with a single European one. EU Member States seem to disagree on the definition of high-skilled worker for the purpose of the EU Blue Card. In the end, it was agreed that to qualify for a European Blue Card, immigrants must find an employer which offers a salary at least 1.5 times higher than the average pay in the host country, with derogations to lower the pay to 1.2 times the national average for sectors with acute labour shortages.90 EU governments also seem to disagree on how quickly the Blue Card should be handed out following the date of application. The aim is to do it as soon as possible. For some, this means 30 days, but for others 60 or even 90 days. Businesses, by contrast, say they could wait two weeks at most. They therefore lament that the current Blue Card scheme remains rather unattractive from a business point of view and call for a more ambitious plan.91

VII

Final remarks

Although agriculture seems to be the key issue to disentangle the Doha talks, as evidenced by the breakdown of the WTO mini-ministerial conference of July 2008, opening up service markets remains a vital aspect of a successful outcome from the Doha Round. In this respect, many developing countries see sending services suppliers under Mode 4 of the GATS 87

88

89

90

91

See Council of the European Union, ‘2890th Council meeting, Justice and Home Affairs’, Press Release 12923/08 (Presse 250), (25 September 2008), available at www.consilium. europa.eu/ueDocs/cms_Data/docs/pressData/en/jha/103072.pdf (accessed 20 November 2008). The Blue Card is the EU’s main policy initiative in the global competition for the best, highly mobile brains. The aim is to create a single application procedure for non-EU workers to reside and work within the EU. The proposal aims to attract up to 20 million highly skilled workers from outside the EU. European Commission, ‘Policy Plan on Legal Migration’, SEC(2005)1680, COM/ 2005/0669 final, 21 December 2005. EurActiv, ‘EU eyes higher pay for skilled immigrants’, (24 September 2008), available at www.euractiv.com/en/justice/eu-eyes-higher-pay-skilled-immigrants/article-175649 (accessed 16 October 2008). EurActiv, ‘Business calls for EU deal on visas for skilled immigrants’, supra, note 6.

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to lucrative markets as one of the principal areas of negotiations during the Doha Round. Whether the development promise of the Doha Round is achieved will depend in part on the extent to which the present level of commitments under Mode 4 is expanded. Furthermore, the regulation and progressive liberalisation of services implies that the legislator must go well beyond market regulation and the national-treatment principle. Examples are the services directives in the EU which, by law, leave room for maneuvre to EU Member States, since they affect the national regulatory system. Hence, when regulating the progressive liberalisation of services trade, even when the subject matter of these directives is international trade, we are nevertheless dealing with domestic regulation. Finally, the EU needs more immigration from an economic point of view. Although the EU should be firm against illegal immigration, it should remain open towards family reunion.

10 A different approach to the external trade requirement of GATT Article XXIV: assessing ‘other regulations of commerce’ in the context of EU enlargement and its heightened regulatory standards Pinar Artir an

I

Introduction

Disappointed with the pace of multilateral trade talks, WTO members have turned towards regionalism, which has undermined the global trading system. Thus, regionalism has been influenced by political and other socioeconomic factors. Moreover, in some regulatory fields, multilateral rules have not been sufficiently developed or are not easily susceptible to consensus. Therefore, regional trade agreements (RTAs) operate increasingly in those fields, which may be problematic for third countries affected by regional trade. Developing countries might especially be affected by RTAs since there are no effectively enforced multilateral rules and thus no meaningful control mechanisms over RTAs. Some RTAs are particularly advanced in achieving WTO-plus provisions in the absence of multilateral rules.1 This feature of RTAs has led some to assess them as ‘building blocks’ since they argue that RTAs serve as a platform for new rule-making exercises. Others, who are critical about regionalist trends, point out the risk the multilateral trading system (MTS) runs due to fragmenting trade rules at the regional level, and thus increases the difficulty in agreeing multilaterally on new issues. Furthermore, it is largely accepted that GATT Article XXIV, which regulates regional trade agreements, lacks clarity. There have been several attempts to clarify it and an Understanding on the Interpretation 1

See, for instance, NAFTA Chapter 11 on Investment or the EU Treaty provisions on Competition.

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of Article XXIV2 has been reached, yet questions remain. Arguably, the Understanding brings significant clarification of the text of Article XXIV through legislative action only to the internal trade requirement in relation to customs unions (CU).3 The purpose of this chapter is to reflect upon the still unclarified external trade requirement of Article XXIV. This chapter is part of a broader study on the controversies emanating from GATT Article XXIV. Th is chapter, therefore, departs from the provisions regarding the external effects of RTAs, to instead analyse the extent the test in para. 5 is applicable and efficient for regulatory standards. With a view towards highlighting the problematic wording of Article XXIV, it first deals with the question of how to assess the evolving nature of food safety standards undertaken by a given RTA. In particular, it looks at the case of the European Union’s4 intricate food safety regulation regime and its expanded application through enlargement (under the provisions of Article XXIV:5 linked with para. 8). There are cases where the imposition of some of those standards represents an inevitable and arguably unjustified increase of barriers to trade with third countries, compared to what existed before the formation of the customs union. Following the fall of tariffs and the elimination of quantitative restrictions, regulatory barriers are the main obstacles to trade. Product standards are even considered to constitute a higher level of protection than tariffs.5 Second, the chapter reflects on the economic test and the ‘necessity requirement’ that the WTO Appellate Body introduced in Turkey – Textiles, since the GATTconformity of preferential application of standards within RTAs appears to depend critically on whether those measures are ‘necessary’ for the formation of RTAs in the sense of GATT Article XXIV:5 and 8. To conclude, because new generation RTAs with detailed regulatory practices can and do form non-tariff trade barriers, the chapter suggests a reinterpretation by the WTO adjudicating bodies to adapt Article XXIV to today’s needs. 2

3

4

5

Understanding on the Interpretation of Article XXIV of the General Agreement on Tariffs and Trade 1994. See P. C. Mavroidis, ‘If I Don’t Do It, Somebody Else Will (Or Won’t): Testing the Compliance of Preferential Trade Agreements With the Multilateral Rules’, Journal of World Trade, 40 (2006) 187, p. 197. Since 1 December 2009 ‘European Union’ has been the official name in the WTO as well as in the outside world. Before that, ‘European Communities’ was the official name in WTO business for legal reasons, and that name continues to appear in older material; see www. wto.org/english/thewto_e/countries_e/european_communities_e.htm (30 June 2010). See K. E. Maskus and J. S. Wilson (eds.), Quantifying the Impact of Technical Barriers to Trade: Can it be done? (Ann Arbor, University of Michigan Press, 2001).

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II The external trade requirement in Article XXIV paras. 5 and 8: problematic application of mixed requirements Article XXIV:4 recognises that the purpose of a CU or a free trade area (FTA) is to facilitate trade between the constituent territories and not to raise barriers to trade originating from other contracting parties. This dual approach is significant in the sense that the GATT drafters recognised that the formation of an RTA might eventually lead to undesirable effects on non-parties to the RTA. Therefore, one of the critical issues relating to Article XXIV is the way in which third countries can be protected. In this context, Article XXIV:5, linked with para. 8, lays down the obligations and the restrictions that govern the RTA members in their external trade with non-RTA members. Article XXIV:5 provides that RTA members6 must not increase the overall7 level of trade barriers towards non-member countries once the agreement is concluded. On the other hand, Article XXIV:8, which regulates the ‘internal affairs’ of an RTA, lays down in its sub-para. (a)(ii) that a CU is required to apply substantially the same duties and other regulations of commerce (ORCs) in its external trade. There are several interpretative problems with Article XXIV:5, particularly as to the scope of the obligation of duties and ORC. First, customs duties should not disadvantage non-member countries after the formation of the RTA, but it is unclear how to decide whether the way the ORCs were put into practice gives rise to restrictive implications for non-members. Second, RTAs, when harmonising standards, in accordance with Article XXIV:8(a)(i), may aim at facilitating intra-RTA trade, but they inevitably risk raising barriers against non-members to the 6

7

Note that there is a difference between the assessment of FTA and a CU as to the application of the external trade requirement. In the case of a CU, the other regulations of commerce imposed at the institution of any such union in respect of trade with contracting parties which are not members of such union shall not on the whole be higher or more restrictive than the general incidence of the duties and regulations of commerce applicable in the constituent territories prior to the formation of such union or the adoption of such interim agreement [emphasis added]. In addition, however, its members shall apply the same other regulations of commerce vis-à-vis third countries. The members thereby become a single customs territory. As for FTAs, the twofold requirements are the same; however, there is no such obligation for an FTA to apply the same import ORCs vis-à-vis third countries. The overall assessment of the incidence of ORCs for which quantification and aggregation exists are difficult, the GATT 1994 Analytical Index refers to the examination of individual measures, regulations, products covered and the requirement of affected trade flows. Available at www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_09_ e.htm - fnt785 (accessed 15 August 2008).

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RTA. What Trachtman calls a ‘fortress’, which might arise through the establishment of harmonised standards discriminating against outside commerce or regulating unnecessarily,8 is the consequence of the tension embedded in Article XXIV. Although he argues that ‘Article XXIV:8 most likely does not require either harmonization or rules of recognition’,9 and one might argue that, on the face of it, this is so, the practice based on this wording might well lead to harmonisation efforts by the RTA members.10 Third, in accordance with Article XXIV:8(a)(ii), members of a CU must apply the same duties and ORCs towards third countries. How can one reconcile the inherent contradiction of Article XXIV:5(a) and Article XXIV:8(a)(ii)? In other words, how can an RTA make sure that it passes test 1 which requires that ‘the ORCs imposed at the institution of the CU shall not on the whole be higher or more restrictive than prior to the formation of such union’, combined with test 2 stipulating that ‘substantially the same other regulations of commerce are applied by each of the members of the union to the trade of territories not included in the union’? For example, what would be the optimum way for a CU, which engages in harmonisation of food safety standards, to apply substantially the same ORCs to trade with non-members of the union and yet ensure that this practice will not amount to an increase or more restrictiveness for those non-members, compared to the situation before harmonisation? The basic problem with para. 5 is how to calculate the general incidence of duties and ORCs and determine whether they are ‘on the whole higher or more restrictive’. As for the wording of para. 8, the question arises as to whether parties to CUs are required to apply substantially the same duties and ORCs. Although WTO members seem to agree that parties to CUs have to apply substantially the same duties and other restrictive regulations of commerce (ORRCs) from the outset, they disagree on whether newcomers to the CU must adopt those commercial practices upon their accession, if they were not applying such restrictions beforehand. This issue is of particular interest in the case of the EU’s enlargements. 8

9 10

See J. P. Trachtman, ‘Toward Open Recognition? Standardization and Regional Integration Under Article XXIV of GATT’, Journal of International Economic Law, 6 (2003) 459, p. 477. Ibid. For a similar view shared by some of the WTO Contracting Parties, see Negotiating Group on Rules – Background Note by the Secretariat, ‘Compendium of Issues Related to Regional Trade Agreements’, (WTO Doc. TN/RL/W/8/Rev.1, 2002), paras. 54 and 70. See also A. D. Mitchell and N. J. S. Lockhart, ‘Legal Requirements for PTAs under the WTO’ in S. Lester and B. Mercurio (eds.), Bilateral and Regional Trade Agreements: Commentary and Analysis (Cambridge University Press, 2009), p. 81, at pp. 106–7.

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The only WTO dispute to address this problem is Turkey – Textiles,11 where consequent to its CU with the EU, Turkey started applying the restrictions on textiles and clothing products that the EU maintained. Upon challenge, Turkey sought to justify its measures on the basis of Article XXIV:8(a)(ii), which obliges parties to CUs to apply ‘substantially the same duties and other regulations of commerce’.12 The Panel concluded that, although parties to an RTA could adopt inconsistent WTO measures in some situations, in this case, Turkey had failed to prove that the challenged measures were necessary.13 Confirming the Panel’s findings, the Appellate Body opined that the CU between Turkey and the EU did not require Turkey to adopt the same quantitative restrictions that the EU applied in order to be in compliance with the requirements of sub-para. 8(a)(i): We recall our conclusion that the terms of sub-paragraph 8(a)(i) offer some – though limited – flexibility to the constituent members of a customs union when liberalizing their internal trade … There are other alternatives available to Turkey and the European Communities to prevent any possible trade diversion, while at the same time meeting the requirements of sub-paragraph 8(a)(i).14

The Panel’s approach, endorsed by the Appellate Body, is important for future disputes where restrictive measures will be judged upon whether they are ‘necessary’ or whether the RTA has recourse to less restrictive measures in order not to hamper trade with third countries.

The concepts of ‘other regulations of commerce’ and ‘other restrictive regulations of commerce’ Article XXIV:5 provides that ‘the general incidence of duties and other restrictive regulations of commerce shall not on the whole be higher or more restrictive than the corresponding duties and other regulations 11

12

13 14

See Panel Report, Turkey – Restrictions on Imports of Textile and Clothing Products, WT/ DS34/R, 31 May 1999; Appellate Body Report, Turkey – Restrictions on Imports of Textile and Clothing Products, WT/DS34/AB/R, adopted 19 November 1999. Turkey argued that, since trade in textiles and clothing products constituted about 40% of its trade with the EU, it was important for them to apply the same regulations, otherwise there could be massive trade diversion such as to fundamentally weaken the common commercial policy of the EU. See Panel Report, Turkey – Textiles, supra, note 11, para. 9.152. See Appellate Body Report, Turkey – Textiles, supra, note 11, para. 62.

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of commerce existing in the same constituent territories prior to the formation of the RTA’. There is not much controversy about the meaning of the term ‘duties’. However, no consensus has been reached as to the meaning of ORCs and ORRCs. The negotiating history shows that the concepts of ORCs and ORRCs have regularly been discussed among the Working Groups and the Committee on Regional Trade Agreements (CRTA). The early Working Party reports issued on EC (now EU) accessions show that GATT members that are not parties to the CU expressed their concerns related to paras. 5 and 8, but they did so particularly in connection with the rules of origin and the exclusion of most agricultural products from the scope of the CU.15 It was clear that tariffs formed one of the main concerns of non-parties to an RTA, but nothing conclusive was decided regarding the definition or coverage of ‘ORRCs’ and ‘ORCs’, apart from citing examples of regulations that are relevant to this concept.

‘Other regulations of commerce’ as an evolving concept: standards Trade barriers may arise through harmonised Technical Barriers to Trade/Sanitary and Phytosanitary Standards (TBT/SPS) that discriminate against trade partners that are not parties to the RTA, or that impose excessive regulations. GATT Articles I and III, the TBT and the SPS Agreements prohibit such discrimination. Regulatory harmonisation may also disadvantage foreign producers without any intent to discriminate or failure of necessity. In other words, arguably by harmonising, and creating a single market, insiders gain an advantage in accessing the market, compared to outsiders. Harmonised standards within an RTA carry both advantages and disadvantages. On the one hand, it will benefit nonmembers by ensuring a uniform application within the territory of the CU or FTA, but, on the other hand, if the integration and harmonisation lead to higher standards, it will be harder to meet those standards, particularly for developing countries. WTO legal texts do not provide the necessary tools to defi ne and evaluate the coverage and implications of ORCs. The Understanding 15

See Report of the GATT, ‘Treaty Establishing the European Economic Community: Replies From the Interim Committee for the Common Market and Euratom to the Questions Submitted by Contracting Parties’, (GATT Doc. L/656, 1957), pp. 24–32; Report of the GATT, ‘Agreements Between the European Communities and Austria: Report of the Working Party’, (GATT Doc. L/3900, 1973), p. 3.

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on Article XXIV does not defi ne or elucidate the coverage but refers to ‘measures, regulations, products’ which are clearly different from tariffs.16 Referring to regulations of commerce in an explicit way, it provides that ‘for the purpose of the overall assessment of the incidence of ORCs for which quantification and aggregation are difficult, the examination of individual measures, regulations, products covered and trade flows affected may be required’. While not clarified in the ‘legislative package’ administering RTAs, Turkey – Textiles gave the first hint. There, the Panel stated that any regulation having an impact on trade is deemed to be an ORC. Given that the Appellate Body did not reject this statement, one can presume that ‘regulatory standards’, be they sanitary–phytosanitary, technical, or environmental, fall within the scope of ORCs and are thus caught by Article XXIV disciplines.17 Thus, for purposes of this chapter, food safety standards are considered to be ORCs. Then, how do we assess their implications for third countries as well as their compatibility with GATT 1994 rules?18 In order to assess the impact of standards that are ORCs and decide upon their compatibility with Article XXIV, we need to establish whether: (1) this Article is solely a ‘shield norm’, which comes into play only in circumstances where there is a breach of another WTO provision and an RTA makes recourse to a ‘defence’ provided by Article XXIV;19 or 16 17

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See para. 2 of the Understanding on Article XXIV. Mathis argues that despite its broad nature, the defi nition provided in the Panel report is likely to endure since para. 5 seeks to assess the implications of RTA practices for nonparties. See J. H. Mathis, Regional Trade Agreements in the GATT/WTO: Article XXIV and the Internal Trade Requirement (The Hague, T.M.C. Asser Press, 2002), p. 251. Similarly, Marceau and Reiman argue that the use of the term ‘other’ implies a rather wide coverage of measures, including any measure, or any regulation, that is not a duty. See G. Marceau and C. Reiman, ‘When and How Is a Regional Trade Agreement Compatible with the WTO? ’, Legal Issues of Economic Integration, 28 (2001) 297, p. 321. See Panel Report, Turkey – Textiles, supra, note 11, para. 9.120: ‘While there is no agreed definition between Members as to the scope of this concept of “other regulations of commerce”, for our purposes, it is clear that this concept includes quantitative restrictions. More broadly, the ordinary meaning of the terms “other regulations of commerce” could be understood to include any regulation having an impact on trade (such as measures in the fields covered by WTO rules, e.g., sanitary and phytosanitary, customs valuation, anti-dumping, technical barriers to trade; as well as any other trade-related domestic regulation, e.g., environmental standards, export credit schemes). Given the dynamic nature of regional trade agreements, we consider that this is an evolving concept.’ See Panel Report, Turkey – Textiles, supra, note 11, para. 9.163: ‘We read in these parallel objectives a recognition that the provisions of Article XXIV (together with those of the GATT 1994 Understanding on Article XXIV) do not constitute a shield from other

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(2) Article XXIV is also a norm that needs to be assessed and applied in its own right. The latter assessment is also closely linked with how we define ORCs under Article XXIV:5. The 1994 Understanding provided that the evaluation of the general incidence of the duties and ORCs before and after the formation of a CU under para. 5(a) would be based on weighted average tariff rates using applied rates. Some commentators argue that the Understanding has clarified the issue of ‘the general incidence of duties and ORCs’.20 While the Understanding has clarified assessing the implications of tariff barriers, there still needs to be a way to assess the negative impact of ORCs and thus non-tariff (regulatory) barriers on trade with third countries. Paras. 5(a) and (b) stipulate that customs duties and ORCs should not be made higher or more restrictive against third countries upon the formation of the RTA. Consequently, any increase in regulatory standards, that affect trade with third countries compared to the situation before the formation of the CU, is relevant to this discussion. In an RTA model such as the EU, this feature is quite significant because of the evolving nature of EU food safety regulation.21

III The EU’s evolving food safety regulation: (a matter of increase in trade barriers through ORCs?) How can the formation of an RTA affect non-parties to the RTA during the implementation of the RTA’s regulatory policies? In order to point out the possibility of raising trade barriers against third countries by harmonising RTA standards, particular reference will be made to the EU as an enlarging customs union model and to its evolving regulatory framework in the field of food safety. According to the WTO’s Trade Policy Reviews, the EU regulations and standards now represent the most significant barriers to market access for industrial goods for its trading partners.22

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GATT/WTO prohibitions, or a justification for the introduction of measures which are considered generally to be ipso facto incompatible with GATT/WTO.’ J-A. Crawford and S. Laird, ‘Regional Trade Agreements and the WTO’, North American Journal of Economics and Finance, 12 (2001) 193, p. 204. Marceau and Reiman propose that the WTO Secretariat should compare the regulatory situation of RTA member states before and after the formation of the RTA on the basis of the information initially collected from the RTA states. They add that the exercise of identifying such changes in the regulatory situation of RTA states would ease the task of the CRTA in assessing the incidence of ORCs. See Marceau and Reiman, supra, note 17, p. 322. See the WTO Trade Policy Review Body – Report by the Secretariat, ‘Trade Policy Review: European Union’, (WTO Doc. WT/TPR/S/102, 2002), paras. 29–31; WTO Trade Policy

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However, the aim of this chapter is not to criticise the EU regulatory standards per se, but rather to illustrate the gap in the rules regulating the external operation of RTAs in Article XXIV:5.

The EU’s status as a customs union within the WTO The EEC was notified to the GATT as a CU in 1957. 23 Subsequent enlargements have been notified to the GATT and the WTO. The EU has evolved from a relatively small regional market of six nations, in 1957, into a world renowned and successful RTA model with 27 members. This unprecedented rise of the RTA led some authors to compare the foundation and features of the EU with the multilateral trading scheme which is still under construction.24 Moreover, a federal structure has been highly debated and a constitution was even drafted although ultimately it was not adopted. Eeckhout rightly argues that ‘much of the EU’s international action is conducted within the framework of the WTO’. He further points out the EU’s unique situation as the only customs union which is a founding member of the WTO in its own right . 25 The EU and its Member States enjoy a joint membership in the WTO. According to Article XI:1 of the WTO agreement ‘the contracting parties to GATT 1947 … and the European Communities … shall become original Members of the WTO’. 26

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Review Body – Report by the Secretariat, ‘Trade Policy Review: European Communities’, (WTO Doc. WT/TPR/S/136, 2004), para. 12; WTO Trade Policy Review Body – Report by the Secretariat, ‘Trade Policy Review: European Communities’, (WTO Doc. WT/ TPR/S/177, 2007), para. 12, available at www.wto.org/english/tratop_e/tpr_e/tp_rep_e. htm - bycountry (accessed 10 September 2008). For an interesting historical account of the impact of the European integration project on draft ing Article XXIV, particularly the views expressed by the United States, see K. Chase, ‘Multilateralism Compromised: The Mysterious Origins of GATT Article XXIV’, World Trade Review, 5 (2006) 1. See M. Hilf, ‘The Single European Act and 1992: Legal Implications for Third Countries’, European Journal of International Law, 1 (1990) 89, p. 113: ‘From a European point of view, the SEA could well turn into a successful example of the regionalization of world trade. If so – what will be the destiny of the world’s multilateral trading system?’ See P. Eeckhout, ‘The EU and its Member States in the WTO – Issues of Responsibility’ in L. Bartels and F. Ortino (eds.), Regional Trade Agreements and the WTO Legal System (Oxford University Press, 2007), p. 449, at p. 450. The Panel in European Communities – Customs Matters highlighted the same issue. See Panel Report, European Communities – Selected Customs Matters, WT /DS315/R, 16 June 2006, para. 4.87.

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The practical result of this determination is that all WTO Agreements are as applicable to the EU as to any individual WTO Member, yet the EU’s status as a CU remains. This begs the question whether the EU’s CU status is only of use when enlargement notifications are made to the WTO and compensation mechanisms are put into effect according to Article XXIV:6, or whether there are also other instances where Article XXIV can come into play with regard to the EU’s trade practices. Assessing the compatibility of the Treaty of Rome with the requirements of Article XXIV was politically complicated. 27 Hudec reported that the EEC never conceded that the Treaty might violate GATT and described the deadlock situation faced by the Working Group as follows: ‘The options open to GATT were merely two: wait-and-see (as the EEC suggested), or risk a head-on collision.’ 28 Th is was in 1958. Fift y years later, the new generation working group, which is the CRTA, also seems to have its hands tied in assessing the compatibility of the notified RTAs.29 The EU model might face legitimacy problems just like the WTO. Nonetheless, even if the EU as a regional trading bloc is incompatible with regionalism rules and gives rise to concerns in terms of multilateral governance, this needs to be confi rmed by a specialised body authorised to make such an assessment. The fact that the CRTA is inefficient in producing accurate reports on the compatibility of RTAs with the multilateral rules, and especially in the case of the EU, engenders a lack of confidence in the Committee and gives rise to indifference to its work. 27

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See A. Von Bogdandy and T. Makatsch, ‘Collision, Co-existence or Co-operation? Prospects for the Relationship between WTO Law and European Union Law’ in G. de Búrca and J. Scott (eds.), The EU and the WTO: Legal and Constitutional Issues (Oxford and Portland OR, Hart Publishing, 2001), p. 131, at p.137. See R. Hudec, ‘Discussion on “GATT’s Influence on Regional Arrangements” by J. M. Finger’ in J. de Melo and A. Panagariya (eds.), New Dimensions in Regional Integration (Centre for Economic Policy Research, Cambridge University Press, 1993), p. 148, at p. 152. The CRTA, established by the Singapore Ministerial Meeting in 1996 to examine RTAs and assess their compatibility with WTO rules, has been unable to come up with concrete results. Th is is mainly due to divergent views between the contracting parties that are members of a specific RTA(s) and consequently benefit from the preferential trade arrangements, and those outside the given RTA who suffer from discrimination. The only exception to this deadlock situation is the compatibility assessment made of the CU between Czech Republic and Slovakia. For general information on the work of the CRTA and its terms of reference, see Committee on Regional Trade Agreements, ‘Decision of 6 February 1996’, (WTO Doc. WT/L/127, 1996).

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The EU argues that a CU has a special status and has to be exempted from other GATT obligations ‘insofar as the application of these provisions would constitute obstacles to the formation of the CUs and to the achievement of its objectives’.30 This view is not convincing, as Bartels rightly argues that ‘such a broad interpretation of Article XXIV would have permitted all manner of measures in violation of WTO rules so long as they could be justified as serving the objectives of the European Community’.31 The Appellate Body, in Turkey – Textiles, took a more restrictive approach towards RTAs and pointed out that, although Article XXIV GATT provides an exception for RTA formation and operation, this exception is limited to the framework laid down in the Article itself. The Appellate Body enumerated two conditions that need to be met in order to invoke Article XXIV as a defence for measures in breach of WTO rules.32 First, the party claiming the benefit of this ‘defence’ must demonstrate that the measure at issue was introduced upon the formation of the CU that fully meets the requirements of sub-paras. 8(a) and 5(a) of Article XXIV. Second, that party must demonstrate that the formation of the CU would be prevented if it were not allowed to introduce the measure at issue. In other words, the party must prove that the measure in issue was necessary for the formation of the CU. Quantifying the implications of ORCs for trading partners after the formation of the CU and its subsequent enlargements is not an easy task. Furthermore, the wording of Article XXIV:5(a), which requires that the increase of restrictiveness can only be judged on the whole, makes the test harder. The Appellate Body’s response to this difficulty, with reference to the Understanding, points only to the mysterious assessment of the incidence of ORCs by examining individual measures, regulations, products covered and trade flows affected.33 The question remains unanswered because neither the Working Groups, earlier in the GATT era, nor the CRTA in the WTO era, have decided whether the EU is compatible with Article XXIV.34 30

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GATT Working Party Report, ‘The European Economic Community’, adopted 29 November 1957, L/778, BISD 6S/70, p. 77. L. Bartels, ‘The Legality of the EC Mutual Recognition Clause under WTO Law’, Journal of International Economic Law, 8 (2005) 691, pp. 711–12. See Appellate Body Report, Turkey – Textiles, supra, note 11, para. 58. Ibid., para. 54. See J. H. Jackson, W. J. Davey and A. O. Sykes, Legal Problems of International Economic Relations, Cases, Materials and Text on the National and International Regulation of Transnational Economic Relations, 4th edn (St Paul, MN, West Group, 2002), p. 454.

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The internal market and the EU’s evolving regulatory system in food safety: a historical account Before discussing harmonisation in food safety, we need to look briefly at the EU’s general harmonisation efforts, since 1986, to create a single market. Article 30 (now Article 34 of the Treaty on the Functioning of the European Union) of the EEC Treaty provided that all quantitative restrictions and measures having an equivalent effect35 should be prohibited. This provision and the judgements of the European Court of Justice (ECJ) judgements36 together created an unprecedented regional integration model. The idea of establishing an internal market by the end of 1992 was brought to the EEC Treaty by the Single European Act.37 The work undertaken in the field of harmonisation was thus put into practice in two different forms: (1) the old approach of complex directives and regulations; and (2) the new approach consisting of directives including only essential requirements for certain characteristics of products.38 National regulations vary in EU Member States, particularly in the field of food safety regulations, due to different attitudes about risk management. Therefore, for the purposes of successful market integration, the EU opted for common rules to achieve positive integration. Young39 argues that common rules have the potential to impede imports. Although regulatory harmonisation might be beneficial to third country firms trading with the EU, because they would not have to comply with differing national requirements, common rules tend to be stricter than the national ones they replaced. This could particularly be the case where production 35

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The term ‘measures having equivalent effect’ has been clarified by the ECJ in the Dassonville judgement as ‘all trading rules enacted by member states which are capable of hindering, directly or indirectly, actually or potentially, intra-Community trade’. Procureur du Roi v. Dassonville, Case 8/74 (1974) ECR 837; (1974) 2 CMLR 436. See P. Craig and G. de Búrca, EU Law: Text, Cases and Materials, 2nd edn (Oxford University Press, 1998), p. 1100. The contribution of the SEA to the single market project was put into effect in the form of two important legislative norms: Article 7a (the current Article 26 of the TFEU) and Article 100a (the current Article 114 of the TFEU). Under Article 3 of the EEC Treaty, the main characteristic of EU market integration was the harmonisation of national legislation. In the 1960s, this practice consisted of elaborate draft ing of intricate directives and regulations. Th is old approach broke down in the early 1980s as it was insufficient and inefficient in dealing with complex issues. See J. Pelkmans, ‘The New Approach to Technical Harmonization and Standardization’, Journal of Common Market Studies, 25 (1987) 249, pp. 252–3. See in general A. R. Young, ‘The Incidental Fortress: The Single European Market and World Trade’, Journal of Common Market Studies, 42 (2004) 393.

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processes are concerned, which might lead to problems for imports from third-country firms. The WTO disputes over hormone-treated beef and agricultural biotechnology may be assessed within this context. Although it produced a better regulatory environment for the EU, arguably the new approach to EU harmonisation tended towards high initial standards because of the influence of the EU’s wealthiest and strongest Member States. Thus, a uniform and harmonised application of those stringent standards by the whole CU produced considerable implications for the EU’s trading partners.40 European food law has developed in several stages. From the establishment of the EU until the BSE (bovine spongiform encephalitis; ‘mad cow disease’) crisis in the mid-1990s, the focus was mainly on creating an internal market for food products in the EU. Adoption of common legislation and harmonisation of national legislation through vertical directives achieved that aim. Following the landmark ‘Cassis de Dijon’41 case, another phase took place – harmonisation through horizontal directives. In its Green Paper, the Commission referred to the desirable objectives of simplifying and rationalising Community legislation. It also said that this rationalisation should not lead to lesser protection of public health or consumers.42 The Commission then issued its White Paper43 on Food Safety,44 where it underlined its commitment to restoring consumer and 40

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See M. X. Chen and A. Mattoo, ‘Regionalism in Standards: Good or Bad For Trade?’, World Bank Working Paper Series, (Working Paper 3458, 2004), p. 4. See Rewe-Zentrale AG v. Bundesmonopolverwaltung für Branntwein, Case 120/78 (1979) ECR 649; (1979) 3 CMLR 494. Cassis de Dijon is a fruit liqueur produced in France. A German importer was given the right to sell it in Germany, even though the French product did not fulfi l the German regulatory requirements of fruit liquor and was banned. The importer argued that the ban constituted a measure equivalent to a quantitative restriction because it prevented Cassis de Dijon from being freely marketed in Germany. The ruling set an important precedent for future non-tariff barriers to trade in regulatory standards of the EU’s free movement of goods and services. Commission Green Paper, ‘The General Principle of Food Law in the European Union’, COM (1997) 176 final, (30 April 1997). A White Paper is a document containing an official set of proposals for Community action in a specific area and is used as a vehicle for their development. Green Papers, which can be followed by a White Paper, are discussion papers published by the Commission on a specific policy area presented for public discussion and can eventually provide an impetus for legislation. European Commission, ‘White Paper on Food Safety’, COM (1999) 719 fi nal, (12 January 2000). The White Paper defi ned the overall aim of the Commission as putting into place a ‘comprehensive and integrated approach’ that will guarantee the highest possible level of protection for consumers in the consumption of food. This approach basically consists

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trading partner confidence45 by having the most up-to-date and effective food safety regime in the world. It laid down an action plan for food safety legislation and provided for the adoption of a general food law directive as well as a framework for surveillance and monitoring of food at the EU level.46 On 21 February 2002, Regulation 178/2002,47 on the general principles of food law and establishment of the European Food Safety Authority, entered into force. It harmonised the concepts, principles and procedures to be used by each Member State in the adoption of national food safety standards.

The implications of EU food safety regulation and the impact of enlargement The evolution of the EU food safety regulation has inevitable implications for its trading partners. The restrictiveness of stringent measures and regulations on all EU Member States, as well as on third countries trading with the EU, needs to be assessed. The complaints brought to the WTO against the EU about food safety (e.g. the Growth Hormones in Beef Production48 and Agricultural Biotechnology49 cases) targeted EU measures on the basis of the SPS Agreement. Could this mean that, as far as trade implications for non-members of the RTA are concerned, Article XXIV GATT and the covered agreements will apply concurrently? The Appellate Body in Turkey – Textiles ruled that Article XXIV provides for a ‘defence’ when two conditions are met. In other words, according to the Appellate Body’s jurisprudence, for Article XXIV to be applied as a shield,

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of, on the one hand, the industry bearing the primary responsibility and consumers having a role to protect themselves, on the other. See D. Holland and H. Pope, EU Food Law and Policy (The Hague/London/New York, Kluwer Law International, 2004), p. 2. Consumer confidence had been badly affected by the various food alerts and crises of the late 1990s. Therefore, the proposals in the White Paper fundamentally addressed consumers’ legitimate concerns in order to restore and maintain their confidence in food safety. Food safety activities cover the entire food production chain, ranging from animal and plant health to the labelling of food products. Regulation (EC) No. 178/2002 of the European Parliament and of the Council of 28 January 2002, Official Journal L 031, 1 February 2002, pp. 1–24. See Appellate Body Report, European Communities – Measures Concerning Meat and Meat Products (Hormones), WT/DS26/AB/R, WT/DS48/AB/R, adopted 13 February 1998. See Panel Report, European Communities – Measures Affecting the Approval and Marketing of Biotech Products, WT/DS291/R, WT/DS292/R, WT/DS293/R, Add.1 to Add.9, and Corr.1, adopted 21 November 2006.

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an RTA member’s measure first has to be in breach of a specific provision of the WTO Agreement or covered agreements. Then the issue becomes whether this breach can be disregarded because of Article XXIV. Now, let us assume that following the enlargement process, a certain third country’s trade volume in food with the newly acceding country has dropped due to its implementation of the EU’s stringent food safety regulations. The existing EU food safety standards are inevitably higher than its regulatory standards scheme laid down prior to the formation of the CU and related enlargements, due to their evolving nature. Thus, a potential challenge based on Article XXIV could target the increase in trade barriers after the formation of the CU and particularly after each enlargement. The increased number of Member States applying the stringent food safety regulation (which evolves constantly due to legislative activities of the EU) and the possible consequent decrease in trade volumes can be an ORC, under Article XXIV:5, that becomes more restrictive against third countries upon the formation of the RTA. However, this would not be so if the decrease in the third country’s trade volume must represent a threshold which is ‘on the whole’ higher or more restrictive compared to the situation before the establishment of the customs union as well as the enlargement. For an industrialised trading partner, the latter might not be the case; however, for a developing African country whose trade is based on agriculture, the increase in the new EU member’s trade barriers might be significant enough to reach the threshold. It can be argued, however, that if standards were not implemented on an EU-wide basis, the EU might be in breach of its obligations under Article XXIV:8(a)(ii), since the requirement of applying substantially the same ORCs would not be met. Moreover, compliance with standards increases production costs and a lack of harmonisation of standards increases costs even further, with adverse implications for trade.50

Applying the Article XXIV tests to EU regulatory standards It is difficult to establish which set of rules is applicable to RTAs after their formation. Does Article XXIV take effect at the formation or after the establishment of the RTA, or both? There is no clear answer since 50

See Z. Drabek, ‘Regionalism and Trade Discipline’ in Z. Drabek (ed.), Can Regional Integration Arrangements Enforce Trade Discipline? The Story of the EU Enlargement (New York, Palgrave Macmillan, 2005), p. 19, at pp. 39–40.

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Article XXIV regulates only the formation of RTAs and is unfortunately silent regarding their operation. What happens to restrictive or on the whole higher measures which come into practice after the formation of a given RTA?51 In the case of a challenge from a WTO Member that is affected by RTA regulatory standards after the formation of the RTA, are only the relevant WTO rules applicable or is Article XXIV also applicable? An RTA is assessed based on the compatibility criteria laid down in Article XXIV at its formation. The chapeau of Article XXIV:5 provides that GATT 1994 shall not prevent ‘the formation of a CU or an FTA’ [emphasis added]. According to the Appellate Body, the word ‘formation’ indicates that measures imposed by WTO Members that would otherwise be inconsistent with GATT 1994 do not fall within Article XXIV:5 if they are not introduced upon the formation of a CU. 52 The Panel in US – Line Pipe considered that Article XXIV should not be limited to the measures introduced upon the formation of the RTA and that it is sufficient that the mechanism providing for the measure is established upon its formation.53 However, the Appellate Body declared this approach as ‘moot and without any effect’. Therefore the question remains as to whether Article XXIV is still applicable after the formation and throughout the existence of an RTA as a ‘watchdog’, or whether it should be invoked only as a ‘defence’ provision. Trachtman argues that, where the harmonisation of rules ‘discriminate or unnecessarily burden outsiders, the normal WTO rules apply to discipline these, just as they would if a particular WTO member state adopted discriminatory or unnecessary regulation’.54 The unusual dual nature of the EU renders its treatment difficult as far as its status as an RTA is concerned. While assessing the implications of the EU food safety standards for trade partners, a crucial question is whether the EU is a single WTO member, a CU or a sui generis institution 51

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See, with regard to the timing issue, R. Bhala, ‘The Forgotten Mercy: GATT Article XXIV:11 and Trade on the Subcontinent’, New Zealand Law Review, (2002) 301, p. 329; J. Pauwelyn, ‘The Puzzle of WTO Safeguards and Regional Trade Agreements’, Journal of International Economic Law, 7 (2004) 109, pp. 131–8. See Appellate Body Report, Turkey – Textiles, supra , note 11, paras. 45–6. See also N. J. S. Lockhart and A. D. Mitchell, ‘Regional Trade Agreements Under GATT 1994: An Exception and Its Limits’ in A. D. Mitchell (ed.), Challenges and Prospects for the WTO (London, Cameron May, 2005), p. 217. See Panel Report, United States – Definitive Safeguard Measures on Imports of Circular Welded Carbon Quality Line Pipe from Korea, WT/DS202/R, 29 October 2001, footnote 128. See Trachtman, supra, note 8, p. 463.

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with special status in the WTO.55 When treated as a single WTO member, the SPS Agreement rules would be applied and consequently one could determine that the EU is free to adopt a higher level of protection than the level provided by international regulations. The EU is a member of the WTO, but is also the most important CU in the MTS.56 The EU enters into negotiations after each enlargement (following the notification of the new CU to the WTO) for compensatory adjustment with those WTO Members that are outside the CU and who run the risk of facing negative changes from the enlargement.57 Th is strengthens the status of the EU as a CU.58 In a deeply integrated CU model such as the EU, the constantly evolving regulatory regime will likely amount to a higher level of barriers after the formation of the CU compared to beforehand. Also, with each expansion, the applicable area of the regulatory regime enlarges. There is no compatibility report from the CRTA regarding the implications of such an enlargement, or whether the ORCs did not on the whole become higher or more restrictive than the general incidence of regulations of commerce applicable in the constituent territories prior to the formation of the union. In order to meet the conditions laid down for CUs, the EU must internally eliminate duties and other trade restrictions on ‘substantially all the trade’ between its members in originating products, under Article XXIV:8(a)(i). Turkey – Textiles provided that this does not mean all trade, but means more than just part of the trade.59 As for the external trade requirement, para. 5(a) requires duties and trade restrictions applied to non-EU WTO members not to be higher, as a whole, than the corresponding duties and restrictions applied by each EU member before the 55

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For a reflection on whether or not the EU has a special status, see Bartels, supra, note 31, pp. 715–17. Similarly, see the Panel confirming the sui generis character of the EU in Panel Report, European Communities – Protection of Trademarks and Geographical Indications for Agricultural Products and Foodstuffs, WT/DS174/R, adopted 20 April 2005, para. 7.158. The EU was recognised as a customs territory in European Communities – Trademarks/ GIs (US), supra, note 55, para. 7.162. See the discussions held (26 and 28 February 2007) between the EU and WTO Members at the meeting of the Trade Policy Review Body, ‘Trade Policy Review – European Communities – Minutes of Meeting – Addendum’, (WTO Doc. WT/TPR/ M/177/Add.1, 2007). See the self-recognition of its CU status by the EU in ‘Trade Implications of the EU Enlargement: Facts and Figures’, Memo/04/23, (Brussels, 4 February 2004), p. 4. See Appellate Body Report, Turkey – Textiles, supra, note 11, para. 48.

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formation of the CU. However, sub-para. 8(a)(ii) orders that the EU applies ‘substantially the same’ ORCs to external trade with third countries.60 The Understanding provides that ‘the overall’ assessment of the incidence of ORCs, for which quantification and aggregation are difficult (such as in the case of standards), might involve a case-by-case examination. It is hard to see how this examination would succeed, as in measuring the effect of standards. Can the EU invoke the Article XXIV defence, regarding an EU food safety measure, which is highly restrictive on trading partners, claiming that the restrictive food safety measures were introduced upon the formation of the CU that fully meets the requirements of paras. 8(a) and 5(a), especially in the absence of a compatibility report? Moreover, can it argue that the formation of the CU would be prevented if it were not allowed to set up the regulatory framework and its measures? In the case of a legal challenge targeting specific regulatory practices, the EU would fi rst have to establish that it fully meets the requirements of sub-paras. 8(a) and 5(a) and, second, simultaneously prove that the formation of the CU would be prevented if it were not allowed to introduce the measure at issue.61 If the CU is compatible with paras. 5(a) and 8(a), based on the Panel practice in the Turkey – Textiles case,62 the EU would likely receive a green light during Panel proceedings. It is difficult to conclude that the EU’s constantly evolving food safety standards would not potentially have a more restrictive effect on third countries. However, the wording of para. 5(a) and the Appellate Body’s interpretation in Turkey – Textiles make the possibility of challenging an EU measure on this basis harder, since what is important for the assessment is not the specific measure but the overall impact of the ORCs. When assessing the compatibility of ‘ORCs’ and more particularly ‘food safety standards’, the necessity test introduced by the Appellate Body in the Turkey – Textiles case applies. The economic test requires striking 60

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However, the Appellate Body made a distinction and ruled that ‘sub-paragraph 8(a)(ii) does not require each constituent member of a CU to apply the same duties and ORCs as other constituent members with respect to trade with third countries; instead, it requires that substantially the same duties and ORCs shall be applied’. See Appellate Body Report, Turkey – Textiles, supra, note 11, para. 49. See Appellate Body Report, Turkey – Textiles, supra, note 11, para. 58. The Panel Report in Turkey – Textiles assumed that the arrangement between Turkey and the EU was compatible with the requirements of paras. 5(a) and 8(a) despite the nonexistence of a compatibility report. See in this respect Panel Report, Turkey – Textiles, supra, note 11, para. 9.55 and Appellate Body Report, Turkey – Textiles, supra, note 11, para. 60.

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a balance between the two requirements of internal trade facilitation and external barrier prevention of a CU, as mentioned in Article XXIV:4.63 According to the twofold necessity test, a CU which seeks to invoke Article XXIV must prove, first, that it complies with the requirements of Article XXIV:5 and 8, and second, that the measure taken was necessary for the formation of this given CU.64 Therefore, as established in Turkey – Textiles, there must not be a less trade-restrictive measure that the CU could have recourse to in order to achieve the same purpose. In the light of these criteria, the compatibility of RTA regulatory practices depends on whether or not those measures are ‘necessary’ for the formation of RTAs in the sense of Article XXIV:5 and 8. If quantitative restrictions on textile products were not necessary for the formation and operation of the CU between Turkey and the EU, are the intricate and highly advanced regulations on food safety, or a de facto moratorium on genetically modified food, necessary for the formation and functioning of the EU, where there are alternative international standards, such as Codex Alimentarius, upon which the EU could rely? The SPS Agreement65 allows WTO Members to adopt higher standards than those foreseen by international agreements in cases where there is a scientific justification or valid risk assessment to support this choice, but again: how should one assess EU regulatory standards? Another crucial question is the timing for applying the different sets of rules and the relationship between Article XXIV and other GATT/WTO rules. In other words, how do we define the set of rules applicable to the operation of RTAs once they are formed? Article XXIV regulates the formation of the RTAs but remains silent on their operation. It is important to emphasise that the rationale behind Article XXIV is to facilitate trade among members, but not to raise barriers to trade with external trade partners. Once the RTA is established and becomes a part of the WTO system, the GATT/WTO Agreements should be applied to RTA practices. However, the continuing application of Article XXIV GATT should not be ruled out. That EU practices have been challenged, as if the EU were like any other single member of the WTO, does not exclude the possibility of a legal challenge against its practices where it might have to invoke the Article XXIV 63 64 65

See Appellate Body Report, Turkey – Textiles, supra, note 11, paras. 55–7. Ibid., para. 58. See Article 3.3 of the Agreement on the Application of Sanitary and Phytosanitary Measures.

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defence as a CU.66 The complex nature of the EU as an integration model makes the case hard to solve and, short of proper tools and clear principles, the issue is likely to remain. As for the problems related to the expansion of RTAs, GATT Article XXIV:6 regulates the mechanism to compensate for the negative implications of a given expansion, but deals only with customs duties and does not refer to damages caused by non-tariff barriers. Leaving aside nontariff barriers, even the existing compensation mechanism in para. 6 is flawed and engenders criticism.67 In fact, an essential problem arises when it comes to assessing and compensating the trade impact of ORCs, including standards, since their effects can be difficult to quantify. How could one evaluate the implications of the enlargement of existing RTAs, such as in the case of the EU? Young argues that enlargement complicates the already delicate regulatory balance within the EU, due to the increasing diversity of membership.68 Another problem which might come into play in relation to the expansion of the EU is the inconsistent application and lack of implementation by new EU Member States of ‘harmonised’ food safety legislation. The EU regulation of food safety standards sets a benchmark for minimum safety requirements, but does not require full harmonisation. The EU Member States can and do unilaterally lay down more stringent regulations than the EU regulations, with a view to protecting health and safety. During the genetically modified food crisis, Britain, Denmark and France called a partial halt to GM crop approvals while Austria, France, Greece and Luxembourg all imposed unilateral bans on certain new crops, regardless of whether or not these GM varieties had received EU approval. This fragmentation regarding the implementation and application of laws and regulations among CU members might be considered a breach of the requirement of applying ‘substantially the same ORC’, as laid down in Article XXIV:8(a)(ii).69 Even though the Appellate Body in Turkey – Textiles agreed with the Panel that

66

67

68 69

The reality that politically no Member would want to take that road is another matter that is beyond the scope of this chapter. See, in this respect, J. McMillan, ‘Does Regional Integration Foster Open Trade? Economic Theory and GATT’s Article XXIV’ in K. Anderson and R. Blackhurst (eds.), Regional Integration and the Global Trading System (London, Harvester Wheatsheaf, 1993), p. 292. See Young, supra, note 39. For a similar view on the issue of regulatory fragmentation among the RTA members, see S. Cho, ‘Defragmenting World Trade’, Northwestern Journal of International Law and Business, 27 (2006) 39, p. 69.

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the terms of sub-para. 8(a)(ii) and, in particular, the phrase ‘substantially the same’, offer a certain degree of ‘flexibility’ to the constituent members of a customs union in ‘the creation of a common commercial policy’,70 it nonetheless noted that this ‘flexibility’ is limited. Pointing out that the word ‘substantially’ qualifies the words ‘the same’, it opined that something closely approximating ‘sameness’ is required by Article XXIV:8(a) (ii). It further ruled that ‘comparable trade regulations having similar effects’ do not meet the external trade standard and that a higher degree of ‘sameness’ is required by the terms of sub-para. 8(a)(ii).71

IV

Multilevel and transnational governance issues of EU food safety standards

The implications of the European approach to food safety and quality may expand well beyond Europe.72 Therefore, the EU’s regulatory practices in this field are highly debated, to the point that some scholars call the current situation a ‘credibility crisis’73 as well as an example of ‘contested governance’.74 Moreover, looking at the trade dispute statistics regarding the EU in the WTO, one can easily see that a considerable proportion relate to food safety disputes. Arguably, the reason why the EU food safety rules tend to pose problems for its trading partners is a side effect of the process of market integration within the EU. Some of these regulations have also been subject to several criticisms from the EU’s trading partners, pointing out that they are much stricter than international regulations (e.g. Codex Alimentarius and OIE), and there are high administrative costs in meeting them. Referring to the 70 71 72

73

74

Panel Report, Turkey – Textiles, supra, note 11, para. 9.148. Appellate Body Report, Turkey – Textiles, supra, note 11, para. 50. A World Bank study showed that the implementation of new aflatoxin standards in the EU would affect African exports of cereals, dried fruits and nuts to the EU. See T. Otsuki, J. S. Wilson and M. Sewadeh, ‘Saving Two in a Billion: Quantifying the Trade Effect of European Food Safety Standards on African Exports’, Food Policy, 26 (2001) 495. G. Majone, ‘The Credibility Crisis of Community Regulation’, Journal of Common Market Studies, 38 (2000) 273. See C. Ansell and D. Vogel, ‘The Contested Governance of European Food Safety’, University of California , (Institute of Governmental Studies Paper WP2005’38, 2005), available at http://repositories.cdlib.org/igs/WP2005-38 (accessed 11 September 2009). Evaluating the EU practice in food safety, Vogel and Ansell use the term contested governance to describe ‘pervasive confl ict in policy arenas that goes beyond politics-as-usual to challenge who should make decisions and where, how and on what basis they should be made and implemented’. Contested governance entails a significant challenge to the legitimacy of existing institutional arrangements.

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contribution of homogenisation to the growing anti-WTO movement, it is even argued that the homogenised European food regulation unintentionally undermines the global trade regime and thus forms a hegemonic culture.75 Arguably, the evolving nature of the EU food safety standards is partly due to the substantial degree of discretion given to EU member states with respect to food safety matters, coupled with the fact that some member states and their citizens are more risk averse, resulting in an increase of the stringency of EU-wide regulation.76 Linked to this hypothesis, some contend that the outcome of multi-level dynamics of food safety regulation among EU member-states (especially ‘trading-up’ dynamics) creates spill-over conflicts for the WTO regime.77 A recent WTO report asserts that the web of different regulatory regimes represents a threat for the MTS, by way of undermining the principles of transparency and predictability of regulatory regimes.78 It further refers to a recent study that notes that a number of regional arrangements, having the EU as the hub, provide for harmonising of the ‘spoke-partner’ country’s standards to the EU ones. As a consequence, this alignment with the EU standards renders the progress in multilateral liberalisation costly in that spoke-partner countries will need to make investments in order to lock themselves into the RTA with the EU.79 Apart from having a generally restrictive character, the measures adopted by a large trading bloc, such as the EU, have another impact on trade in relation to the situation of developing countries. It is generally recognised that health and safety standards are often regulatory barriers to entry; the standards can be excessively strict and the compliance costly, which weighs disproportionately on producers in low-income, developing countries. Developing countries might need to bring their standards 75

76

77

78 79

See L. Buonanno, S. Zablotney and R. Keefer, ‘Politics versus Science in the Making of a New Regulatory Regime for Food in Europe’, European Integration Online Papers, 5 (2001) 1. See T. Bernauer and L. Caduff, ‘European Food Safety: Multilevel Governance, Re-Nationalization or Centralization?’, University of Zürich, (Center for Comparative and International Studies Working Paper No. 3, 2004). See A. R. Young and P. Holmes, ‘Protection or Protectionism? EU Food Safety and the WTO’ in C. Ansell and D. Vogel (eds.), What’s the Beef? The Contested Governance of European Food Safety Regulation (London, MIT Press, 2006), p. 281. See World Trade Organization, World Trade Report 2007 (Geneva, 2007), p. 315. See R. Piermartini and M. Budetta, ‘A Mapping of Regional Rules on Technical Barriers to Trade’, presented workshops on Regional Rules and the Global Trading System (Washington DC, 26–27 July 2006).

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up to those of the RTAs, in order to gain access to the EU markets. This implies that the developing countries will bear additional costs of adopting high standards in order to be able to export to the most rewarding markets.80 In order to maximise an RTA’s convergence with the MTS and to minimise any distortive effects, it would be desirable to create a mechanism through which Article XXIV will include more balanced references to tariffs and non-tariff measures altogether, as well as tools to address the current needs of the multilateral trading system, where the operation of an RTA has become much more important than its formation. Furthermore it would be fair to emphasise the importance of the review mechanism foreseen for RTAs. In the absence of prior approval and regular scrutiny of RTA schemes, the MTS has to endure constant erosion.81 One of the controversial issues, with regard to the Article XXIV consistency of an RTA, is the role the WTO adjudicating bodies might have to play. Article XXIV, the Working Party and CRTA reports show that, when confronted with a question dealing with the implications of an RTA’s regulatory practices, a future Panel or the Appellate Body might have to judge upon the unjustified restrictiveness and thus inconsistency of a given ORC with Article XXIV. Nevertheless, the arguably ‘judicial activist’ approach taken by the Appellate Body in Turkey – Textiles seems likely to form a barrier for RTAs invoking the Article XXIV defence in future compatibility tests to be applied to CUs and FTAs.82 80

81

82

Theoretical and empirical results of research by the World Bank demonstrate that the harmonisation of standards within a region, while boosting exports of excluded industrial countries to the region, will on the other hand reduce exports of excluded developing countries. The explanation provided for this implication is related to the lack of capacity lack of developing country fi rms in meeting increasingly stringent standards, and thus their unlikelihood to benefit from economies of scale in integrated markets. See Chen and Mattoo, supra, note 40. See also Trade Note, ‘Food Safety and Agricultural Health Standards and Developing Country Exports: Rethinking the Impacts and the Policy Agenda’, the World Bank, 14 September 2005, available at http://siteresources.worldbank. org/INTRANETTRADE/Resources/239054-–1126812419270/TradeNote25_Jaffee.pdf (accessed 15 August 2008). The formal approval of a new transparency mechanism for all RTAs by the Negotiating Group on Rules provides for early announcement and notification of any RTA to the WTO. Whether the outcome of this decision will be of significant help remains to be seen. See Negotiating Group on Rules, ‘Transparency Mechanism for Regional Trade Agreements, Decision of 14 December 2006’, (WTO Doc. WT/L/671, 2006), available at www.wto.org/english/tratop_e/region_e/trans_mecha_e.htm (accessed 11 September 2009). With regard to the ‘judicial activist’ criticism (e.g., panel, and on appeal itself, is competent to examine the overall consistency of a regional trade agreement with

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Conclusion

Through proliferation of RTAs83 and, in particular, due to the occurrence of more deepening integration models, one of the central pillars of the world trading system, the MFN principle, has been weakened greatly84 and the overall role that the WTO rules and procedures have played regarding regionalism has been limited. Moreover, another deficiency of Article XXIV is that it regulates the formation of RTAs85 but remains silent on their operation. Thus, the obscure and ill-equipped wording of Article XXIV is prone to future trade disputes involving RTA practices. With reference to the above-mentioned shortcomings of Article XXIV, this chapter sought to analyse the problem through a case study of regulatory standards. Assuming that sanitary and phytosanitary standards are ORCs under Article XXIV paras. 5 and 8, this chapter argued that in the case of a deeply integrated CU model, such as the EU, evolving and expanding regulatory standards might occur as an increase of trade barriers for trading partners after the formation of the CU and thus breach the external trade requirement under Article XXIV:5(a) linked with para. 8(a)(ii).

83

84

85

Article XXIV of GATT 1994, though the conditions of this provision are notoriously difficult to interpret and apply), see, for example, C-D. Ehlermann, ‘Some Personal Experiences as Member of the Appellate Body of the WTO’, European University Institute, Robert Schuman Centre for Advanced Studies, (Policy Paper No.02/9, 2002), p. 38. F. Roessler, ‘Are the Judicial Organs Overburdened?’, presented at Conference in honour of Raymond Vernon, (Harvard University, Kennedy School, 2000), cited in P. C. Mavroidis, ‘Judicial Supremacy, Judicial Restraint, and the Issue of Consistency of Preferential Trade Agreements with the WTO: The Apple in the Picture’ in D. L. M. Kennedy and J. D. Southwick (eds.), The Political Economy of International Trade Law: Essays in Honor of Robert E. Hudec (Cambridge University Press, 2002), p. 583, at p. 593. R. Howse, ‘The Most Dangerous Branch? WTO Appellate Body Jurisprudence on the Nature and Limits of the Judicial Power’ in T. Cottier and P. C. Mavroidis (eds.), P. Blatter (ass. ed.), The Role of the Judge in International Trade Regulation: Experience and Lessons for the WTO, The World Trade Forum, 4 vols. (Ann Arbor MI, University of Michigan Press, 2003), p. 11, at p. 33. See Report by the WTO Consultative Board to the Director-General Supachai Panitchpakdi, The Future of the WTO – Addressing Institutional Challenges in the New Millenium (Geneva, WTO, 2004), pp. 19–27. See P. Sutherland, ‘Political Challenges to the World Trading System’ in E-U. Petersmann (ed.), Reforming the World Trading System, Legitimacy, Efficiency and Democratic Governance (Oxford University Press, 2005), p. 39, at p. 42 and K. W. Dam, ‘Cordell Hull, Reciprocity and the WTO’ in Petersmann (ed.), Reforming the World Trading System, Legitimacy, Efficiency and Democratic Governance (Oxford University Press, 2005), p. 83, at p. 90. For a similar criticism, see Cho, supra, note 69, p. 70.

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Nevertheless, the main question remains whether the MTS is capable of coping with fully-fledged RTAs, which could deepen to its detriment, or whether it would be wiser to insist on more controlled RTAs, which would operate in a limited area. It would certainly be unrealistic to expect WTO Members to cease their regional integration projects where multilateral trade talks face problems for a number of reasons. By the same token, it would be irrational to argue that a deep integration model such as the EU is a defect of the MTS. The right approach to solve the ongoing tension between regionalism and multilateralism is to be found in a better-constructed legal regime for the regulation of RTAs under the WTO system. Moreover, as long as the review mechanism proves to be inefficient, the WTO adjudicators will need to assume the role of reinterpreting Article XXIV in a way that will safeguard the MTS. No matter how unrealistic this expectation is, given the ‘member driven’ structure of the WTO, it is nonetheless hoped that the adjudicators, particularly the Appellate Body, will perform this task. This is necessary if it is destined to reach the rank of its peers as an ‘international court’. Finally, there is a choice to make for WTO Members: either they will opt for living in the current ‘obscure clarity’ through a journey to future trade blocs, or they will help to rehabilitate the existing mechanism to create a framework where multilateralism and ‘responsible regionalism’ will live together peacefully.

PA RT I V Transformations in international economic law

11 Foreign investors vs sovereign states: towards a global framework, BIT by BIT Ko-Yung Tung

I

Introduction

In his letter to Queen Victoria of Great Britain in 1838, Commissioner Lin Tse-Hsu, the Chinese Imperial Customs Commissioner in Canton, wrote: Magnificently our great Emperor soothes and pacifies [the Middle Kingdom] and the foreign countries, regarding all with the same kindness. If there is profit, then he shares it with the peoples of the world; if there is harm, then he removes it on behalf of the world … We have read your successive tributary memorials saying ‘In general our countrymen who go to trade in China have always received His Majesty the Emperor’s gracious treatment and equal justice.’ … The profit from trade from afar has been enjoyed by them for two hundred years … But … there are those who smuggle opium to seduce the Chinese people and so cause the spread of the poison to all provinces. Such persons who only care to profit themselves, and disregard their harm to others, are not tolerated by the laws of heaven and are unanimously hated by human beings. His Majesty the Emperor [is enraged]. … By what right do they then in return use the poisonous drug to injure the Chinese people? … Let us ask, where is your conscience? I have heard that the smoking of opium is very strictly forbidden by your country; that is because the harm caused by opium is clearly understood. Since it is not permitted to do harm to your own country, then even less should you let it be passed on to the harm of other countries – how much less to China! … Suppose there were people from another country who carried opium for sale to England and seduced your people into buying and smoking it; certainly your honorable ruler would deeply hate it and be bitterly aroused … Suppose a man of another country comes to England to trade, he still has to obey the English laws; how much more should he obey in China the laws of the Celestial Dynasty?1 1

Lin Tse-Hsu, ‘Moral Advice to Queen Victoria’ (1839) in S. Teng and J. Fairbank, China’s Response to the West: A Documentary Survey 1839–1923 (Cambridge, Harvard University

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Queen Victoria did not respond to Commissioner Lin’s letter2 and the British traders ignored the warning. Commissioner Lin then confiscated 20,183 chests of opium from British ships and warehouses in Canton Harbor, thereby igniting the First Opium War, which lasted from 1839 to 1842. The British invaded Canton, massacred thousands of Chinese, brought the Ch’ing dynasty to her knees and exacted reparations of $21 million.3 Commissioner Lin was also fired, at the insistence of the British. Similar events re-erupted with the Second Opium War (1856–60). After the British committed further massacres and pillaged the Summer Palace in Beijing, they ultimately received Hong Kong as their reward, under a ninety-nine year lease. This was typical of how foreign investment disputes were settled up through the nineteenth century – by so-called gunboat diplomacy. How much has changed since the Opium Wars? Although the method of dispute resolution has changed from guns to legal proceedings, what is interesting is that the principles and norms for foreign trade and investments have not changed significantly. Even in the nineteenth century, the British acknowledged that they were receiving equitable treatment (‘our countrymen … have always received His Majesty the Emperor’s gracious treatment and equal justice’). Commissioner Lin recognised ‘most favored nation’ treatment (the Emperor ‘regard[s] all with the same kindness. If there is profit, then he shares it with the peoples of the world’), and invoked principles of reciprocity (‘since [opium] is not permitted to do harm to your own country, then even less shall you let it be passed on to the harm of other countries’), the right to exercise police power and enforce public policy (‘those who smuggle opium to seduce the Chinese people and so cause the spread of the poison … are not tolerated by the laws of heaven’), and national treatment (‘suppose a man of another country comes to England to trade, he still has to obey the English laws’).4 What has changed is the method of dispute resolution. Globalisation has significantly altered how international transactions are conducted.

2

3 4

Press, 1954), pp. 24–7. The author has made slight translation changes [indicated within brackets] from the Fairbank translation. Lin Tse-Hsu is also spelled Lin Ze-xiu in pinyin. It is not known whether the letter was actually sent to and read by Queen Victoria. Most historians believe it was not sent, but just published in the local Chinese newspaper where the local British authorities would have presumably read it and conveyed it to the Queen. All monetary currency in this chapter is in US dollars, unless otherwise specified. See supra, note 1.

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‘The world is flat’, declared New York Times columnist Thomas Friedman in his best-selling book by the same title.5 The flatness symbolises the ease and speed with which goods, services and ideas, as well as drugs, terrorist money and diseases, zip around the world, often with just the push of a computer button. Globalisation, it seems, has erased the boundary lines between countries in many respects. However, while anachronistic in today’s nanosecond world, in the context of international investments, national boundaries are still very much present in the form of a baffl ing array of laws, regulations and rules promulgated by sovereign states, as well as multilateral regimes from above, and by local authorities from below. Th is chapter will discuss: (1) the evolution of foreign investments; (2) how globalisation has fundamentally transformed these investments; (3) some recent investment dispute cases that illustrate the tension between international norms and domestic issues; and (4) the outlook for a trend towards a global framework.

II Foreign investments: an evolving new paradigm Global foreign investments6 have grown exponentially over the last two decades. Global foreign direct investments (FDI) grew more than 900 per cent from about US$200 billion in 1990 to $1.8 trillion in 2007.7 The pace of this growth is accelerating at an astounding speed – aggregate FDI stock grew from $1.9 trillion in 1990 to $5.8 trillion in 2000 (an increase of almost 30 per cent per year over 10 years), and to over $10 trillion in 2005 (a growth of 174 per cent in five years).8 Today, FDI enterprises directly employ well over 60 million workers in host countries and account for annual sales of almost $20 trillion.9 Not only has the volume of FDI increased immensely, but the investments have changed in other ways that have profound implications. 5

6

7

8

T. Friedman, The World is Flat: A Brief History of the Twenty-first Century (New York, Farrar, Straus & Giroux, 2005). Foreign direct investment is defi ned by UNCTAD as ‘an investment involving a longterm relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor’. See UN Conference on Trade and Development (UNCTAD), ‘World Investment Report 2007: Transnational Corporations, Extractive Industries and Development’, (2007), p. 245. UNCTAD, ‘World Investment Report 2008’, statistics available at http://stats.unctad.org/ FDI/TableViewer/tableView.aspx?ReportId=1254 (accessed 8 January 2009). Ibid. 9 Ibid.

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Traditionally, the prototype of a foreign investment involved a multinational enterprise from a developed country investing in a host developing country, predominantly in extraction of natural resources and raw materials, such as petroleum, rubber and minerals. Today, that paradigm no longer holds; each element of the traditional paradigm has drastically changed – the industry in which the foreign investment is made, the character of the investors, the direction of the investment, and the emergence of novel players in the field. These changes complicate the dynamics of treaty negotiations and may necessitate a new paradigm for dispute resolution.

Industry Foreign investors now focus on different industries than they have traditionally. Rather than natural resources and raw materials extraction, today FDI is mostly in services, particularly in the financial, communications and technology sectors. Additionally, the services component of manufacturing has seen a steady rise. As conditions improve for the provision of key consumer services, especially in areas such as health, education, water and sanitation, living standards and increased investments in human resources will aid in overall development.10 Investments into natural resources are easier to identify – they are discrete investments of a large sum, and the reaping of the profits takes a long time. The invested amount is usually ‘in the ground’ in terms of oil wells or areas of land from which the resources are extracted. Th is allows the host country to expropriate such assets easily. Investments into services and intellectual property, on the other hand, are less easily identified, quantified and regulated. The up-front investment may not be as large as for natural resource exploitation, the costs of entry may be much lower and the assets more difficult to expropriate or otherwise control by the host country.

Investors Not only have the types of investments multiplied, the nature of the investors has also diversified. Today’s foreign investors are no longer just multinational resource companies, such as ExxonMobil and British 10

See generally UNCTAD, ‘World Investment Report 2004: The Shift Towards Services’, (2004).

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Petroleum, but also retailers like Nike and Benetton, whose products are manufactured in developing countries. Even hospitals now outsource their diagnostic services offshore to India, and educational service companies enable high-school students in Omaha, Nebraska, to call a tutor in Bangalore to solve their math problems.11 From an economic standpoint, it is uncertain that the economies of scale that have made outsourcing so profitable for big business will extend to the consumer market; cultural and language issues are also likely to have more of an effect on personal and customer services than they have on traditional transnational corporations.12 Unlike global natural resource companies, services industry and intellectual property investors can be small companies located solely in one country, or small start-up hi-tech soft ware firms. Just as it may be more difficult for the host country to expropriate or control such investments and take advantage of them, these firms may not have the resources to mount an expensive international arbitration proceeding should a dispute arise.

Directions The directions of foreign investments have also diversified. No longer is it only from the developed North to the developing South, but now there are significant South–South as well as South–North investments.13 Recently Mittal Steel, whose founder and CEO is from India, purchased Europe’s largest steelmaker, Arcelor, creating the world’s largest steel company; in 2005, China’s Lenovo acquired the personal computer unit of IBM.14

11

12 13

14

See S. Lohr, ‘Hello, India? I Need Help With my Math’, New York Times, (31 October 2007), p. C1. Ibid. Portfolio investments are generically quite different from direct investments. Portfolio investments are in stocks, bonds and other financial instruments which are quite liquid and traded in a f luid way. The abrupt withdrawal of foreign portfolio investments from Thailand and other Southeast Asian economies was one of the causes of the Asian financial crisis of the late 1990s. Direct investments, on the other hand, are investments into ‘hard’ assets, such as factories, and are therefore not f luid or liquid. See H. Timmons and A. Giridharadas, ‘Arcelor Deal With Mittal Establishes Steel Giant’, New York Times, (26 June 2006), p. C1; E. Ramstad, ‘Lenovo Completes Its Acquisition of IBM’s Personal-Computer Unit’, Wall Street Journal, (2 May 2005), p. B5.

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Table 11.1 The world’s seven largest sovereign wealth funds (ranked by assets)

Country

Name

UAE

Abu Dhabi Investment Authority (ADIA) GIC, Temasek Government Pension Fund of Norway (GPF) Various Kuwait Reserve Fund for Future Generations China Investment Corporation (CIC) Stabilization Fund of the Russian Federation (SFRF)

Singapore Norway Saudi Arabia Kuwait China Russia

Assets (US$ billion)

Year formed

87515

1976

539.216 38017

1981, 1974 1990

30018 25019

N/A 1953

20020

2007

157.421

2004

Novel players In addition to these private sector investors, public entities have become significant actors, in the form of state-owned or -controlled companies, or investment funds of the state known as sovereign wealth funds (SWFs).22 The largest SWFs are listed in Table 11.1. The public nature of SWFs raises a whole set of novel issues. As agencies of sovereign governments, they are looked at with curiosity, if not with suspicion. Unlike private investors whose motivation is simply profit, SWFs may be instruments of foreign governments’ political or strategic

15

16 21

22

‘Sovereign Wealth Funds: Asset-Backed Insecurity’, The Economist, (17 January 2008), p. 79, available at www.economist.com/fi nance/displaystory.cfm?story_id=10533428 (accessed 4 December 2008). Ibid. 17 Ibid. 18 Ibid. 19 Ibid. 20 Ibid. Ministry of Finance of the Russian Federation, ‘Stabilization Fund of the Russian Federation: Aggregate amount of the Stabilization Fund of the Russian Federation’, www.minfin.ru/en/stabfund/statistics/aggregate/ (accessed 4 December 2008). R. Gnodde, ‘New Actors Play a Vital Role in Global Economy’, Financial Times, (12 November 2007), p. 11; S. R. Weisman, ‘Oil Producers See the World and Buy It Up’, New York Times, (28 November 2007).

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goals. For example, in 2005, Dubai Ports World, which is indirectly owned by the government of Dubai, sought to buy Peninsular & Oriental Steam Navigation Company, a British company which then managed six major US ports. US politicians killed the transaction on the basis of national security. The implication was that a private British company could be trusted, but an Arab government-controlled company should not be allowed to manage US port gateways. China, with the world’s largest foreign reserve of over $1.4 trillion, has also become a formidable force. The $18.8 billion bid by China National Overseas Oil Company (CNOOC) for the medium-sized US oil company UNOCAL was opposed by most members of the US Congress because of fears that critical oil assets would be controlled by a not too friendly country.23 China’s SWF recently acquired a nearly 10 per cent stake in Blackstone, a prominent US private equity firm, for $3 billion. The largest FDI in Africa to date was the acquisition by China’s Industrial and Commercial Bank of 20 per cent of the Standard Bank of South Africa, Africa’s largest bank, for $5.5 billion.24 More recently, the Abu Dhabi Investment Authority invested $7.5 billion to rescue the credit-hobbled CitiGroup, then the world’s biggest fi nancial institution.25 In early December 2007, it was announced that Singapore’s SWF and an unidentified Middle Eastern investor would invest $9.7 billion and $1.8 billion respectively in UBS, one of the world’s largest financial institutions. If SWFs continue on their current path of unprecedented growth, they will become increasingly important players on the global economic stage. Their activities will most likely continue to be perceived, correctly or not, as being motivated by factors other than pure market forces. Indeed, many Western leaders, particularly in Europe, have expressed concerns and the G-7 has asked the International Monetary Fund to come up with guidelines for SWFs.26 The possible political and national security implications of SWF investments in sectors such as telecommunications, energy and defence may

23

24

25

26

M. Pottinger, R. Gold, M. M. Phillips and K. Linebaugh, ‘CNOOC Drops Offer for Unocal, Exposing U.S.-Chinese Tensions’, Wall Street Journal, (3 August 2005), p. A1. R. Carew, J. Leow and J. T. Areddy, ‘China Makes Splash, Again: ICBC Takes 20 per cent Stake in South African Bank’, Wall Street Journal, (26 October 2007), p. C1. H. Timmons and J. Werdigier, ‘For Abu Dhabi and Citi, Credit Crisis Drove Deal’, New York Times, (28 November 2007), p. C1. S. E. Eizenstat and A. Larson, ‘The Sovereign Wealth Explosion’, Wall Street Journal, (1 November 2007), p. A19.

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even lead some governments to adopt protectionist policies, which could have major economic repercussions.27 In the context of foreign investment, the treatment of SWFs may pose novel issues. As a sovereign entity, does an SWF enjoy sovereign immunity? Under a bilateral investment treaty (BIT), is it an enterprise of a contracting party, or is it the contracting party itself, taking it out of the BIT? Would a dispute be between two Contracting Parties and the jurisdiction move from mixed investor–host arbitration to the International Court of Justice? In addition to new patterns in FDI participants, we are also seeing new trends in the way FDIs are transacted.

III International attempts to establish FDI standards of rights and obligations We have observed the exponential growth of the volume and forms of foreign investments, as well as the new types of investors and the direction of outflows. We have also noted the benefits flowing from globalisation and foreign investment. Yet, globalisation has not, unfortunately, been a panacea – it has brought both good and bad and has created not only winners but also losers. Contrary to the philosophy underlying the so-called Washington Consensus, a rising tide did not raise all boats.28 The globalised flat earth facilitates financial crises across borders as easily as it does the flow of commerce. This phenomenon was witnessed in the Asian financial crisis of the late 1990s, which started with the run on the Thai baht that spread to afflict most of south and east Asia, then leapt across the Pacific to Mexico, and then crossed the Atlantic to the newly formed Russian Federation. More recently, the subprime mortgage defaults on home loans in Florida and California have triggered a seismic tremor throughout the globalised financial system, resulting in the collapse of global investment firms, banks and stock markets, and the insolvency of a sovereign nation, Iceland, all necessitating gigantic bailouts by governments around the world.29 Some foreign investments have 27

28

29

See S. Pearlstein, ‘As Governments Invest, Motives Blur’, Washington Post, (25 July 2007), p. D1. See, for example, J. K. Sundaram and R. Von Arnim, ‘Economic Liberalization and Constraints to Development in Sub-Saharan Africa’, United Nations, (Department of Economic and Social Affairs Working Paper No. 67 (ST/ESA/2008/DWP/67, 2008), available at www.un.org/esa/desa/papers/2008 (accessed 13 January 2009). See C. Mollenkamp, D. Reilly and E. Taylor, ‘Subprime Hits Seem Likely To Keep Coming’, Wall Street Journal , (15 November 2007), p. C1 (discussing effects of the

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had deleterious effects on the local environment, and globalisation has facilitated immigration, causing economic, religious and cultural friction. So it is not surprising that there has been a backlash, making ‘foreign investment’ and ‘free trade’ bad words in certain circles. Even in the United States, regarded by some as the world’s champion of free trade and foreign investment, themes like globalisation, free trade and foreign investment are being attacked from the left as well as the right.30 The last two decades of the twentieth century were a period of relative quiescence in terms of expropriation. Entering the twenty-first century, we even started to dare to think that expropriations were a thing of the past. But recent events have disabused us of that. Old-fashioned outright nationalisations as well as modern forms of ‘creeping expropriation’31 have emerged in various parts of the developing world, particularly in Latin American countries, which had suffered considerably from the disarray and disparities resulting from the free private enterprise model preached by the Washington Consensus.32 Most recently, populist leaders – such as Hugo Chavez in Venezuela, Evo Morales in Bolivia, Rafael Correa in Ecuador and Daniel Ortega in Nicaragua – have been elected on campaign slogans advocating nationalisation of their industrial and natural resources for the benefit of the people. In light of the suspicion of many developing countries (and sometimes even in developed countries) toward foreign investments, there must be increased efforts to make foreign investments more transparent and to incorporate the needs of the peoples of the host countries and

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subprime mortgage crisis on banks such as Citigroup and Merrill Lynch); J. Werdigier, ‘Options Narrowing as Britain Tries to Stabilize Bank’, New York Times, (20 November 2007), p. C2 (discussing turmoil at Britain’s Northern Rock). At the Democratic presidential candidates’ debate on 15 November 2007 in Las Vegas, all seven candidates condemned NAFTA, proposing that it be totally scrapped or at least thoroughly amended, and opposed the free trade agreements with Panama, Colombia, Peru and South Korea currently under Congressional consideration. See ‘Transcript: The Democratic Debate’, New York Times, (15 November 2007), available at www.nytimes. com/2007/11/15/us/politics/15debate-transcript.html (accessed 4 December 2008). Only Barack Obama supported the FTA with Peru, but he opposed the others, on the ground that Peru was a small economy and that the FTA included the environmental and labour protections he wanted. See generally C. McLachlan, L. Shore and M. Weiniger, International Investment Arbitration: Substantive Principles (Oxford University Press, 2007), pp. 293–4. J. E. Stiglitz, Globalization and Its Discontents (New York, W. W. Norton, 2002), pp. 53–88; J. E. Stiglitz, Making Globalization Work (London, Allen Lane, 2006), pp. 29–30, 35–6 and 44.

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communities. Initiatives such as Corporate Social Responsibility by leading global companies and the Extractive Industry Transparency Initiative are welcome signs that foreign investors are sensitive to these concerns. Given the economic incentives to foreign investors as well as host countries, there have been numerous multilateral, regional and bilateral attempts at bringing order, stability and predictability, as well as fairness and equity, to investment standards and dispute settlement mechanisms. Unfortunately, the standards of treatment still lack clarity with respect to the rights of foreign investors and obligations of host countries. This ambiguity, I believe, is both deliberate as well as unavoidable. As precise definitions to cover the whole spectrum and evolving nature of foreign investments are impossible, and an exact balance of rights and obligations cannot be agreed upon between the two sides, drafters have defaulted to imprecise formulaic phrases, leaving the text for future judges or arbitrators to interpret. On the one side are the investors, who want maximum protection of their property and opportunities for profit. On the other side are sovereign states that want to encourage foreign investments, while extracting taxes and other benefits for their citizens. That conflict existed at the time of the Opium Wars and it still exists today, now on an increasingly global scale. It is axiomatic that negotiations among multiple parties are more difficult than between only two parties; so too are negotiations in the arena of international politics. Heroic efforts have been attempted bilaterally, regionally and internationally to bring substantive equity as well as procedural predictability to this conflict. Some have failed utterly, some have been somewhat successful and some have unfortunately aggravated or at least confused the situation. Even like-minded and similarly situated countries have encountered unbridgeable differences in defi ning governments’ obligations and duties regarding the treatment to be afforded to foreign investments. Despite many years of intense negotiations, the OECD33 failed to adopt a Multilateral Agreement on Investment (MAI). Similarly, the AsiaPacific Economic Cooperation (APEC)34 managed to come up with only 33

34

The current members of the OECD are Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey, United Kingdom and the United States. See generally Organisation for Economic Co-Operation and Development, www.oecd.org/ (accessed 16 June 2009). The member economies of APEC are Australia, Brunei Darussalam, Canada, Chile, People’s Republic of China, Hong Kong (China), Indonesia, Japan, Republic of Korea,

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a preliminary draft of a set of ‘Non-Binding Investment Principles’ in 1994. Under these circumstances, doing business internationally these days can be quite bewildering. There is a confusing and disparate repertoire of separate procedural rules and substantive standards set up by the so-called ‘spaghetti bowl’ of myriad differing, sometimes overlapping, treaty regimes and regional groupings, such as NAFTA,35 APEC, ASEAN, CAFTA, Mercosur, the Energy Charter, the European Union and the CIS. Mixed into this spaghetti bowl is an alphabet soup of various rules and forums for dispute settlement, including UNCITRAL, ICSID, ICC, AAA, PCA, LCIA, CIETAC and many others. Rather than adding to this complex mix, efforts to rationalise and harmonise these different regimes and standards are needed at the international and regional level.

IV

Bilateral investment treaties

Given the difficulty of negotiating and concluding regional or multilateral conventions or treaties, more countries are resorting to BITs. One-on-one bilateral negotiations are much easier than multilateral negotiations, both substantively and politically, because the parties’ respective interests, as well as their relative bargaining power, are clearer. Moreover, countries in like situations do not necessarily share identical goals – each country hopes to gain an advantage over its competitors.36

Common provisions At the end of 2005, there were 2495 bilateral investment treaties and the number is increasing at a heightening pace.37 Bilateral investment treaties generally cover the following issues with regard to foreign investments: (1) general obligations toward investment; (2) standards for expropriation; (3) currency transfer standards; and (4) dispute settlement procedures,

35

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Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, The Republic of the Philippines, The Russian Federation, Singapore, Chinese Taipei, Thailand, United States of America and Viet Nam. North American Free Trade Agreement, U.S.-Can.-Mex., (1993) 32 ILM 289, (17 December 1992). See generally A. T. Guzman, ‘Why LDCs Sign Treaties That Hurt Them: Explaining the Popularity of Bilateral Investment Treaties’, Virginia Journal of International Law, 38 (1998) 639. See McLachlan et al., supra, note 31, p. 26.

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often including designation of a forum such as the International Centre for the Settlement of Investment Disputes (ICSID). While exact wording and formulations may differ from BIT to BIT, the standards of treatment of foreign investments are essentially: (1) ‘national treatment’; (2) ‘most favoured nation’ treatment; (3) ‘fair and equitable treatment’; (4) ‘full protection and security for investment’; (5) treatment at least as favourable as that provided by international law; and (6) no arbitrary, unreasonable or discriminatory conduct.38 Expropriation is permitted only if it is done: (1) for a public purpose; (2) in a non-discriminatory manner; (3) in accordance with due process of law; and (4) with ‘full, adequate and effective compensation’ promptly paid.39 Each of these criteria has been a subject of great debate and litigation.40 As more countries negotiate and re-negotiate these treaties in their dual roles as both investor and investee, hopefully there will be more convergence and harmonisation.

Dispute settlement Although the 2700-plus existing BITs may provide for different forums for settling international investment disputes,41 the most common by far (whether sole or as one of several available) is ICSID,42 which entered into force in 1966 and currently has 155 member states. Under the traditional doctrine of sovereign immunity, the king who was the source of laws was immune from private civil suits. Certainly a foreigner would have even less standing to sue a host sovereign. ICSID was the first permanent forum whereby many countries, both developed 38 41

42

See ibid., p. 30. 39 See generally ibid., ch. 8. 40 See ibid., pp. 265–349. Other than ICSID, some of the other often used formal forums for investment disputes are the International Chamber of Commerce, London Court of Arbitration, the American Arbitration Association and the Stockholm Arbitration Centre. See A. H. Ali and A. de Gramont, ‘The Arbitration Review of The Americas 2008: ICSID Arbitration in the Americas’, Global Arbitration Review, available at www. globalarbitrationreview.com/handbooks/4/sections/7/chapters/50/icsid-arbitrationamericas (accessed 4 December 2008). ICSID was created pursuant to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, commonly referred to as either the ICSID Convention or the Washington Convention. The principal mover and draft sman was Aron Broches, one of my predecessors as General Counsel of the World Bank. The main sources for much of this discussion on ICSID come from its primary sources as well as Christoph H. Schreuer, The ICSID Convention: A Commentary (New York, Cambridge University Press, 2001); and R. D. Bishop, J. Crawford and W. M. Reisman (eds.), Foreign Investment Disputes: Cases, Materials and Commentary (The Hague, Kluwer Law International, 2005).

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and developing, gave their a priori consent to be brought to binding international arbitration by private parties. In 1978, ICSID’s jurisdiction was expanded by the Additional Facility Rules to encompass investment disputes between an investor from a contracting state and a non-contracting state or an investor from a noncontracting state and a contracting state, so long as both parties consent pursuant to the ICSID Convention. The fi rst decade of its inception was rather uneventful for ICSID, with only about one case registered per year. Then the nationalisations in Latin America and elsewhere in the late 1970s resulted in the registration of more claims. In 2002, under my incumbency as Secretary General, ICSID registered its one hundredth claim.43 The beginning of the twenty-fi rst century saw an explosion of ICSID cases, due to several factors. First, more and more international practitioners became aware of the existence of ICSID and its comparative virtues (to be discussed below), and advised their clients to bring their claims to ICSID rather than other forums. The second reason was the proliferation of BITs with ICSID as a dispute settlement forum. Th ird, under Article 1120 of NAFTA, disputing investors may submit a claim to ICSID through its Additional Facility44 – and a number have done so. One observer has described Chapter 11 of NAFTA as ‘a bilateral investment treaty (BIT) inserted into a multilateral free trade agreement’.45 Fourth, a local fi nancial crisis in one country can now spread to multiple other countries due to the globalisation of the fi nancial markets, as was witnessed in the Asian fi nancial crisis of 1997 and the current credit crunch of 2008–9. In order to control and manage their economic situations, countries adopted various measures, such as restricting repatriation of foreign investment, reducing contracted payments and restricting licences. Argentina’s ‘pesification’ of its currency (delinking its peso parity with the US dollar) dramatically affected all foreign investors as well as its citizens, as the value of the peso fell by 70 per cent against the 43

44

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M. Stevens, ‘Arbitration and Investment Disputes – Are we Heading in the Right Direction?’, ICSID News, (Spring 2002) 9, available at http://icsid.worldbank.org/ICSID/ (accessed 8 December 2008). Because Canada and Mexico are not parties to the ICSID convention, Chapter 11 arbitrations involving the United States or US-based claimants must be brought under the ICSID Additional Facility rules. See J. J. Coe, Jr, ‘Taking Stock of NAFTA Chapter 11 in Its Tenth Year: An Interim Sketch of Selected Themes, Issues, and Methods’, Vanderbilt Journal of Transnational Law, 36 (2003) 1384, p. 1391. The Metalclad, Methanex and Loewen arbitrations discussed below all arose under NAFTA Chapter 11.

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US dollar.46 As of the end of 2008, pending cases registered at ICSID against Argentina alone add up to 33 out of the total 120, or over 27 per cent.47 With nationalisation or creeping expropriation incidences in Venezuela, Bolivia, Peru and Ecuador, one can expect more investment disputes.48 In the future, cases involving China, either as claimant or respondent, can be expected to increase. China is the largest recipient of foreign investment among developing economies,49 and is now becoming one of the largest foreign investors.50 Reflecting its shift in role from investee to investor, China has changed its BITs to expand the jurisdictional scope of their investment dispute settlement clauses. Until recently, mainly as a recipient of foreign investments (hence as a potential respondent in an investment dispute), the Chinese formulation of dispute resolution in its BITs restricted jurisdiction to ‘disputes over compensation resulting from expropriation and nationalization’ only, not whether there was expropriation itself.51 Now that China has become a significant foreign investor nation (and, hence, a potential claimant in an investment dispute), especially in natural resources, its more current BITs provide arbitration for ‘any dispute[s] concerning investments’.52 The dual roles as both investor (a potential claimant) and investee (a potential respondent) by an increasing number of countries, both developed and developing, may result naturally in a more neutral formulation of BITs and dispute resolution provisions. The following section discusses a number of important investment disputes, each of which was brought under ICSID or the ICSID Additional Facility. 46

47

48 49

50 51

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Republic of Argentina Emergency Law No. 25,561 (01/06/02); see IMF, ‘The Role of the IMF in Argentina, 1991–2002’, (July 2003), available at www.imf.org/External/NP/ ieo/2003/arg/ (accessed 10 December 2008). ICSID: List of Pending Cases, see http://icsid.worldbank.org/ICSID/ (accessed 8 December 2008). Ominously, Bolivia withdrew from ICSID in 2007. A. E. Cha, ‘China Gets Cold Feet for Foreign Investment: New Regulations Spawn Fears of Economic Nationalism’, Washington Post, (2 February 2007), p. D1. See ‘Sovereign Wealth Funds: Asset-Backed Insecurity’, supra, note 16. See China’s accession to ICSID at www.worldbank.org/icsid/ (accessed 10 December 2008). Note that Article 25(4) of the Convention establishes that ‘any Contracting State may, at the time of ratification, acceptance or approval of this Convention or at any time thereafter, notify the Centre of the class or classes of disputes which it would or would not consider submitting to the jurisdiction of the Centre’. See K.-Y. Tung and R. CoxAlomar, ‘The New Generation of China BITs in light of Tza Yap Shum v. Republic of Peru’, American Review of International Arbitration, 17 (2006) 461, p. 464. Tung and Cox-Alomar, ibid., p. 462.

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V Application of international standards to sovereign states There are critics who observe that these international standards and enforcement by supranational entities have encroached upon the proper jurisdiction of sovereign states – some have described a shift in ‘ investor-state provisions from their traditional role as a defensive investor protection mechanism to a potent offensive strategic tool’53 that has resulted in an ‘alarming’ loss of sovereignty.54 I will concentrate on two issues where that charge has been most loudly heard – environment and ‘denial of justice’, as well as the implications of the relatively recent Maffezini case.

Environment The tension between the conduct of business and the preservation of the environment can take many forms. In the context of investment disputes, one commentator has observed that ‘environmental organizations are concerned about a chilling effect on governmental protection of the environment, resulting from investor claims that environmental regulation amounts to expropriation’.55 These themes were visited in the following cases.

Metalclad While the facts of the case are complicated, in essence Metalclad,56 a US company, bought a local company to construct and operate a transfer station for hazardous waste in La Pedrera, a valley located in the state of San Luis Potosí, Mexico. In 1993, the local company was granted by a sub-agency of the Mexican federal government a federal permit to construct a landfi ll at the site and, soon after, it received a provisional state land use permit for landfi ll construction. However, due to local community opposition based principally on environmental concerns, the 53

54

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56

H. Mann and K. Von Moltke, ‘NAFTA’s Chapter 11 and the Environment: Addressing the Impacts of the Investor-State Process on the Environment’, International Institute for Sustainable Development, (Working Paper, 1999), p. 15, available at www.iisd.org/pdf/ nafta.pdf (accessed 8 December 2008). S. Ganguly, ‘The Investor-State Dispute Mechanism (ISDM) and a Sovereign’s Power To Protect Public Health’, Columbia Journal of Transnational Law, 38 (1999) 113, p. 126. Dr. R. Geiger, ‘Towards a Multilateral Agreement on Investment’, Cornell International Law Journal, 31 (1998) 467, p. 471. Metalclad Corp. v. United Mexican States, ICSID Case No. ARB(AF)/97/1 Award, (30 August 2000).

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local authorities did not issue a building permit; and eventually the state designated the area including the landfi ll a ‘natural area’ for the protection of rare cactii.57 In its claim before ICSID, Metalclad alleged that in October 1994, local Mexican officials had, in violation of NAFTA, interfered with the development and operation of the landfill. This was despite Metalclad having had a permit from the Mexican federal agency and having relied on federal officials, who told Metalclad that it had ‘all the authority necessary’ to proceed and that it should apply for a permit with the municipality in order to ‘facilitate an amicable relationship’, after which the local authorities would issue the permit ‘as a matter of course’.58 The ICSID Tribunal held that the landfi ll’s municipality had acted ‘outside its authority’ in denying Metalclad’s application on environmental and geological grounds rather than on the basis of either the proposed physical construction or any defect in the landfi ll site, and concluded that ‘these measures, taken together with the representations of the Mexican federal government, on which Metalclad relied, and the absence of a timely, orderly or substantive basis for the denial by the Municipality of the local construction permit, amount to an indirect expropriation’.59 Further, the Tribunal faulted Mexico for failing to ensure a ‘transparent and predictable framework’ for Metalclad’s business planning and investment.60 It found that Mexico had violated its NAFTA obligations by not according Metalclad ‘fair and equitable treatment in accordance with international law’.61 Mexico was ordered to pay almost $16 million to Metalclad.62 The Metalclad decision has been criticised, particularly by environmentalists, as foreign investment taking precedence over national or local environmental concerns. While that criticism may be overstating the 57 60 62

Ibid., para. 59. 58 Ibid., para. 41. 59 Ibid., paras. 106–7. Ibid., para. 99. 61 Ibid., para. 74. Ibid., para. 131. As this was an Additional Facility proceeding under NAFTA pursuant to the New York Convention, the tribunal’s award could be appealed to the court where the tribunal sat. In this case, Mexico appealed to the Supreme Court of British Columbia. Though Justice Tysoe found the tribunal’s conclusion erroneous, he found that his court did not have jurisdiction to review the award as it was ‘commercial’ in nature. United Mexican States v. Metalclad Corp. [2001] 89 BCLR 3d 359. See also S. D. Franck, ‘The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law Through Inconsistent Decisions’, Fordham Law Review, 73 (2005) 1521, pp. 1556–7; J. Paulsson, Denial of Justice in International Law (Cambridge University Press, 2005), specifically pp. 111, 229, 246. The Canadian International Arbitration Act is based on the UNCITRAL Model Law.

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case, the Tribunal seemed to be focused almost exclusively on the rights of the foreign investor despite the language in NAFTA itself, which reserves the right of the host sovereign to protect its environment. Curiously, the Tribunal did not even bother to get an opinion of the Mexican Supreme Court or the Minister of Justice as to the legal necessity of the local permits. In fact, although the appeal was dismissed on other grounds, the Supreme Court of British Columbia found that the Tribunal’s legal conclusion was in error.63

Methanex Th is case involved a chemical compound known as MTBE (methyl tertiary-butyl ether), which was used in the 1990s as a gasoline additive to reduce air pollution. After several instances of MTBE drinking water contamination, the California State Senate commissioned a University of California study that found high risks of contamination and high removal costs. As a result, in 1999, Governor Gray Davis issued an executive order calling for MTBE use to be phased out by 2002. Subsequent to this order, the Canadian corporation Methanex64 fi led an ICSID claim under NAFTA, claiming it was due approximately $970 million in compensation from the United States for losses caused by California’s MTBE ban, in violation of the minimum standard of treatment requirement of NAFTA Article 1105(1), as well as Articles 1102 (discrimination on the basis of nationality) and 1110 (protection from measures ‘tantamount to expropriation’). Although Methanex was the world’s largest producer of methanol, from which MTBE is produced, it did not actually produce or sell MTBE. In its partial and fi nal awards, the ICSID Tribunal focused on the NAFTA Article 1101(1) requirement that measures by one Party must be found to ‘relat[e] to’ investors of another Party, fi nding that ‘the phrase “relating to” signifies something more than the mere effect of a measure on an investor or an investment and that it requires a legally significant connection between them’. 65 Accordingly, it found that Governor Davis made the executive order banning MTBE ‘without any

63 64

65

United Mexican States v. Metalclad Corp. [2001] 89 BCLR 3d 359. Methanex Corp. v. United States (2005) 44 ILM 1345, (3 August 2005), Final Award of the Tribunal on Jurisdiction and Merits, available at www.state.gov/documents/ organization/51052.pdf (accessed 8 December 2008). Methanex v. United States, First Partial Award, (7 August 2002), para. 147, available at www.state.gov/documents/organization/12613.pdf (accessed 8 December 2008).

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intent to harm methanol or Methanex and without any intent to favour ethanol or [American ethanol producers]’.66 The Tribunal thus concluded that, without an ‘illicit pretext’ or ‘inten[t] to harm foreign methanol producers … or benefit domestic ethanol producers’ on the part of the United States, there was ‘no legally significant connection between the US measures, Methanex and its investments’.67 Thus, the United States succeeded on a jurisdictional challenge, and the Tribunal found that it lacked jurisdiction to decide Methanex’s substantive claims. While the Tribunal’s decision does not limit the type of government measures subject to challenge under NAFTA, it does shut out those investors who are only indirectly affected by a particular measure, effectively reducing the number of investors who can bring a claim. It is interesting to speculate how the Tribunal would have ruled if the claimant had been a direct manufacturer of MTBE. Following its reasoning, the California environmental measure could have been found to violate NAFTA, and the US government could have been liable. Metalclad and Methanex, among other cases, raise the issue whether foreign investment treaties and dispute resolution proceedings adequately address non-investment issues, such as the environment.

Denial of justice Treatment of foreigners and their property by the host sovereign has always been a contentious issue, both politically and emotionally.68 The norm during the feudal era was that foreigners either had no rights or, at best, the same rights as the natives. During the eighteenth and nineteenth centuries, as Western nations expanded to doing trade overseas and having expatriate citizens living abroad, there were concerns about their well-being – are their people and property being treated humanely and fairly by the host country? Many of the so-called Friendship, Navigation and Commerce treaties had provisions which exempted foreigners from local jurisdiction. The main rationale was that the host country, at that time, Japan or China, was barbaric and not a member of the ‘civilised nations’, and the Western citizens could not be subject 66 68

Methanex Final Award, supra, note 64, para. 60. 67 Ibid., para. 22. Th is section draws significantly from A. K. Bjorklund, ‘Reconciling State Sovereignty and Investor Protection in Denial of Justice Claims’, Virginia Journal of International Law, 45 (2005) 809.

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to such non-civilised justice systems. These extraterritorial provisions were, of course, not mutual; they ran only one way, and were thus known as unequal treaties. This same suspicion and lack of confidence in the host country’s laws and justice system were rationale for the creation of many international dispute resolution forums, including ICSID. While old-fashioned outright expropriation became rarer, and international law on investments became, it seemed, clearer, this did not mean that investor disputes diminished. On the contrary, they have exploded. There will always be disputes and unhappy foreign investors. Many unhappy foreign investors today bring an amorphous, catch-all claim that they have been denied justice, in one form or another. With the proliferation of BITs and other treaties, and with MFN treatment as expanded by the Maffezini award (discussed below), an unhappy foreign investor may well fi nd an international forum, such as ICSID, to review the judgement of a domestic court on the grounds that he was denied justice in that court, in other words, a ‘denial of justice’. Some have likened this procedure as creating an ‘international supra-Supreme Court’.

Loewen The Loewen case is such a colourful tale that it was even written up in a popular magazine, The New Yorker.70 The factual case involved Mr Raymond Loewen, who started out as the owner of a family funeral home in rural Canada. Th rough aggressive acquisitions, his company became the largest funeral home owner in North America. Eventually he entered into a contract to buy a funeral home business in Biloxi, Mississippi, from Mr Jeremiah O’Keefe, Sr, for approximately $2.5 million. Something went awry, and Mr O’Keefe sued Mr Loewen’s American subsidiary for breach of contract in a local Biloxi court. Mr Loewen counter-sued for non-performance. The local jury ruled in Mr O’Keefe’s favour and astonishingly awarded Mr O’Keefe half a billion dollars in damages, including $75 million for emotional distress and $400 million in punitive damages, all for a contractual dispute involving no more than $2.5 million. 69

69

70

Loewen Group, Inc. v. United States, ICSID Case No. ARB(AF)/98/3 Award, (26 June 2003); (2003) 42 ILM 811. J. Harr, ‘The Burial’, New Yorker, (1 November 1999), p. 70.

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Mr Loewen wished to appeal this verdict. But to appeal, he had to post a bond for 125 per cent of the judgment, equivalent to three-quarters of a billion dollars. Under law, the Mississippi appeals court could reduce the amount of the bond for ‘good cause’, but it declined to do so. Without the bond, Mr Loewen could not appeal, and without an appeal he would be liable for half a billion dollars that would render him bankrupt. So Mr Loewen initiated a case against the United States under NAFTA at ICSID, based upon ‘denial of justice’. During the 50 days of the original Mississippi trial, Mr O’Keefe was represented by Mr Willie E. Gary, a famously (or infamously in some quarters) flamboyant, mesmerising trial lawyer. He turned the trial into David versus Goliath, an American versus a Canadian, and an honest local businessman versus a greedy foreign conglomerate. This denial of justice claim was framed before the Tribunal as: ‘whether the whole trial, and its resultant verdict, satisfied minimum standards of international law, or the fair and equitable treatment and full protection and security that the Contracting States pledged in Article 1105 of NAFTA’.71 After studying volumes of documentary evidence and hearing oral arguments, the Tribunal observed that: ‘by any standard of measurement, the trial involving O’Keefe and Loewen was a disgrace. By any standard of review, the tactics of O’Keefe’s lawyers, particularly Mr Gary, were impermissible. By any standard of evaluation, the trial judge failed to afford Loewen the process that was due’,72 that ‘the trial and its $500,000,000 verdict cannot be countenanced’ 73 and that ‘the whole trial and its resultant verdict were clearly improper and discreditable and cannot be squared with minimum standards of international law and fair and equitable treatment’.74 Indeed, several attorneys general of other US states filed affidavits saying that the entire trial was a farce. Notwithstanding these observations, the Tribunal dismissed the claim, noting that: [W]e fi nd nothing in NAFTA to justify the exercise by this Tribunal of an appellate function parallel to that which belongs to the courts of the host nation. In the last resort, a failure by that nation to provide adequate

71

72

Loewen, supra, note 69, para. 121. Article 1105 of NAFTA, headed ‘Minimum Standard of Treatment’, provides: ‘(1) Each party shall accord to investments of investors of another party treatment in accordance with international law, including fair and equitable treatment and full protection and security.’ 74 Loewen, supra, note 69, para. 119. 73 Ibid., para.120. Ibid., para.137.

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means of remedy may amount to an international wrong but only in the last resort. The line may be hard to draw, but it is real … The natural instinct, when someone observes a miscarriage of justice, is to step in and try to put it right, but the interests of the international investing community demand that we must observe the principles which we have been appointed to apply, and stay our hands.75

Th is may have been the right outcome, but it raises a host of questions. Were the members of the Tribunal influenced by the fact that the respondent was the United States, a country with a credible ‘rule of law’? What if the respondent had been a country where the judiciary does not enjoy that credibility? Who makes that decision? Was the Tribunal aware that, although effectively closed out of appeal in the Mississippi state courts, Loewen could still have taken one more legal step – fi ling for a writ of certiorari with the United States Supreme Court? What if Loewen did fi le for cert and was denied, how would the Tribunal have ruled then?

Mondev International Ltd. v. United States In this case, Mondev,76 a Canadian company, entered into an urban commercial real estate development contract with the City of Boston and the Boston Redevelopment Authority (BRA). Mondev sued both the City of Boston and BRA for breach of the redevelopment contract. The lawsuit went all the way to the Supreme Judicial Court of Massachusetts, which essentially affi rmed that both the City and BRA were immune from suit – the City because it was the city, and BRA because it was ruled to be a ‘public employer’ and therefore immune from intentional tort suits under the Massachusetts Tort Claims Act.77 Mondev brought a NAFTA claim against the United States under the ICSID Additional Facility, claiming that the conferral to BRA of statutory immunity denied justice to Mondev. The Tribunal dismissed the claim on the basis that such immunity itself did not violate the international minimum standards provided in Section 1105(1) of NAFTA.78 Mondev had in fact entered into a contract with two parties, both of whom were legally immune. 75 76

77 78

Ibid., para. 242. Mondev Int’l Ltd. v. United States of America, ICSID Case No. ARB(AF)/99/2 Award (11 October 2002), 42 ICSID Rep. 192; 125 I.L.R. 110 (2004), available at www.state.gov/ documents/organization/14442.pdf. Lafayette Place Associates v. Boston Redevelopment Authority (1998) 427 Mass. 509. Mondev Int’l Ltd. v. United States, supra, note 76, p. 151.

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This may seem to be an obvious case and award, but what is worth noting is the extent to which the Tribunal scrutinised whether the Massachusetts law was legitimate and consistent with international law and practice. It even reviewed the judgement made by the highest court of Massachusetts, a judgement which the United States Supreme Court declined to review. In a way, the Tribunal at least thought like an international supra appellate court, even if it did not act as one. While denying that it was acting in such a capacity, the Tribunal found that there was no established international practice or law with respect to legislative grant of immunities, so a breach could not be found. The Loewen and Mondev decisions, taken together, read Chapter 11 as authorising broad review of judicial actions to determine whether they violate NAFTA’s investor protection provisions. As such, we are likely to see an increasing volume of challenges to domestic judicial rulings under Chapter 11.

The ‘highest common denominator’ treatment? Implications of Maffezini BITs are supposed to provide predictability to the standards of treatment and remedies; however, a recent case has created a ‘chaotic situation’.80 The claimant in this dispute, Mr Emilio Agustin Maffezini,79 an Argentine, had invested in a business for the production and distribution of chemical products in the Spanish region of Galicia. The dispute settlement article of the BIT between Argentina and Spain provided in relevant part as follows: 1. Disputes … shall, if possible, be settled amicably by the parties to the dispute. 2. If the dispute cannot be thus settled within six months …, it shall be submitted to [courts of the host country]. 3. The dispute may be submitted to international arbitration … (a) at the request of one of the parties to the dispute, if no decision has been rendered on the merits of the claim after … eighteen months from the date on which the proceedings referred to in paragraph 2 of this Article have been initiated, or if such 79

80

Maffezini v. Spain, ICSID Case No. ARB/97/7 Decision of the Tribunal on Objections to Jurisdiction, (25 January 2000); (2001) 40 ILM 1129. Plama Consortium Ltd. v. Republic of Bulgaria, ICSID Case No. ARB/03/24 Decision on Jurisdiction, (8 February 2005), para. 219. See generally McLachlan et al., supra, note 31.

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decision has been rendered, but the dispute between the parties continues …81 Mr Maffezini fi led a complaint with ICSID without having first brought a claim in a Spanish court. Spain claimed that ICSID had no jurisdiction as Mr Maffezini did not start a lawsuit in a Spanish court – thus the eighteen-month period had never started and of course there was no decision. Mr Maffezini countered that he was entitled to the dispute resolution provisions available to Chileans through the application of the most favoured nation clause in the Argentina–Spain BIT, which provides ‘in all matters subject to this [BIT], this treatment shall not be less favorable than that extended by each Party to the investments made in its territory by investors of a third country’.82 The dispute settlement provision in the Chile–Spain BIT did not impose a condition of first going to the domestic courts. Under that BIT, the investor could go straight to ICSID after a six-month negotiation period. Spain countered that ‘matters’ subject to the MFN treatment referred only to substantive treatment, not procedural, such as dispute settlement procedure. The Tribunal posed the issue as ‘the question whether the provisions on dispute settlement contained in a third-party treaty can be considered to be reasonably related to the fair and equitable treatment to which the most favored nation clause applies under basic treaties on commerce, navigation or investments and, hence, whether they can be regarded as subject matter covered by the [MFN] clause’.83 The Maffezini Tribunal relied heavily on the Ambatielos award by the Commission of Arbitration in 1953.84 Noting that ‘the most-favored-nation clause can only attract matters belonging to the same category of subject as that to which the clause itself relates’, that commission went on to hold the ‘administration of justice’ an essential aspect of the protection of the rights of traders and hence subject to the application of the MFN clause.85 81

82 84 85

Acuerdo Para la Promoción y Protección Recíprocas de Inversions [Agreement for the Reciprocal Promotion and Protection of Investments], Argentina–Spain, (3 October 1991), as translated in Maffezini v. Spain, supra, note 79, para. 19 (emphasis added). Ibid., para. 38. 83 Ibid., para. 46. Ambatielos Claim (Greece/UK), 1953 ICJ Reports 10; (1956) 12 RIAA 83. ‘It is true that the “administration of justice”, when viewed in isolation, is a subject-matter other than “commerce and navigation”, but this is not necessarily so when it is viewed in connection with the protection of the rights of traders. Protection of the rights of traders naturally fi nds a place among the matters dealt with by treaties of commerce and navigation. Therefore it cannot be said that the administration of justice, in so far as it is

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Following the Ambatielos reasoning, the Maffezini Tribunal held that the dispute settlement provision of the Chile–Spain BIT would be incorporated through the application of the Argentina–Spain BIT MFN clause. In so finding, the Tribunal noted in its decision on jurisdiction that ‘today dispute settlement arrangements are inextricably related to the protection of foreign investors, as they are also related to the protection of rights of traders under treaties of commerce’,86 and expanded that: International arbitration and other dispute settlement arrangements have replaced these older and frequently abusive practices of the past. These modern developments are essential, however, to the protection of the rights envisaged under the pertinent treaties; they are also closely linked to the material aspects of the treatment. Traders and investors, like their States of nationality, have traditionally felt that their rights and interests are better protected by recourse to international arbitration than by submission of disputes to domestic courts …87

Fearing this interpretation of the MFN clause may, by its broad application, incorporate the ‘highest common denominators’ from all BITs, the Tribunal tried to fence in the application by erecting, without much discussion, four exceptions:88 1. If one contracting party has conditioned its consent to arbitration on the exhaustion of local remedies; 2. If the parties have agreed to a dispute settlement arrangement which includes the so-called fork in the road, that is, a choice between submission to domestic courts or to international arbitration, and where the choice once made becomes final and irreversible; 3. If the agreement provides for a particular arbitration forum, such as ICSID; and 4. If the parties have agreed to a highly institutionalised system of arbitration that incorporates precise rules of procedure, for example in NAFTA. The Tribunal added that ‘other elements of public policy limiting the operation of the clause will no doubt be identified by the parties

86

concerned with the protection of these rights, must necessarily be excluded from the field of application of the most-favored-nation clause, when the latter includes “all matters relating to commerce and navigation”. The question can only be determined in accordance with the intention of the Contracting Parties as deduced from a reasonable interpretation of the Treaty.’ Quoted in Maffezini, supra, note 79, para. 49, quoting United Nations, ‘Reports of International Arbitral Awards’, (1963), p. 107. Ibid., para. 54. 87 Ibid., para. 55. 88 Ibid., para. 63.

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or tribunals. It is clear, in any event, that a distinction has to be made between the legitimate extension of rights and benefits by means of the operation of the clause, on the one hand, and disruptive treaty-shopping that would play havoc with the policy objectives of underlying specific treaty provisions, on the other hand.’89 While the Maffezini reasoning has been followed in a few cases,90 it has been rejected in others.91 One Tribunal declared that following Maffezini would create a ‘chaotic situation’ rather than promoting harmonisation of BITs under the MFN clause.92 It will be very interesting to see how the scope of this cross-incorporation by operation of the MFN clause will be expanded and limited in the future. Treaties are difficult documents to re-negotiate, and the old ones certainly did not have Maffezini in mind when they were negotiated, drafted and adopted. Future BITs will be mindful of Maffezini and may explicitly limit the application of the MFN provisions to certain specified provisions only, and may force treaty negotiators and drafters to harmonise BIT provisions across countries.

VI

Conclusion

Official multinational attempts to establish clear standards for the treatment of foreign investments and predictable settlement of investment disputes have encountered seemingly insurmountable obstacles in the past. The future, unfortunately, does not look any better. Ironically, this is due to several changes that one would surmise were favourable developmental forces. First, it is no longer automatically the capital-exporting North versus the capital-importing South. Many countries now wear both hats – one as foreign investor, and another as host country. This creates an internal domestic conflict of interest, with intense internal domestic lobbies and constituents. This development is further complicated by the rise of democracy in many developing countries. Previously, some non-democratic rulers of developing countries invited foreign investments with open arms so long as they themselves benefited 89 90

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Ibid., para. 63. See Tecnicas Medioambientales TECMED S.A. v. Mexico, ICSID Case No. ARB (AF)/00/2, (29 May 2003); Siemens A.G. v. Argentine Republic, ICSID Case No. ARB/02/8, (6 February 2007). See Salini Costruttori S.p.A. and Italstrade S.p.A. v. Jordan, ICSID Case No. ARB/02/13, (31 January 2006); Plama Consortium Ltd, supra, note 80. Plama Consortium Ltd , supra , note 80, para. 219. For a critique of Maffezini, see McLachlan et al., supra, note 31, p. 256.

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from the investments, whether as corrupt payments into their Swiss bank accounts or to bring investments to their own tribal constituents, without much concern for the domestic environment or other issues affected by foreign investment. Now democracies in those countries have instilled transparency and given voice to equity, health and other public interests. Under these circumstances, official diplomats are put in extremely difficult negotiating postures, not only vis-à-vis the other countries, but also vis-à-vis their own diverse national constituencies. While these obstacles may hinder official multilateral solutions, the answer may come, not by conscious official efforts, but from the natural flow of events. As a country becomes both an investor as well as an investee, it will have to balance its internal conflicts in a manner that is acceptable to both the investor as well as the investee domestic constituencies. This dilemma was starkly on display recently when NAFTA was a crucial issue for democratic presidential candidates, Senators Hillary Clinton and Barack Obama. In Ohio, they denounced NAFTA in order to appeal to voters who believed they had lost their jobs to Mexico. Yet the candidates extolled the benefits of NAFTA in New York, where Wall Street benefits from free trade and investments.93 Amid these confl icting domestic views – countries like the United States will negotiate with counterparty countries with the same or similar issues – the lines between investor countries versus investee countries will become blurred. As that blurring progresses, the BITs that are negotiated and concluded will fairly accommodate both sides. As they proliferate, BIT by BIT, a web of interlocking investment treaties may perhaps weave itself into a global framework, if not a formal international convention, on the treatment of foreign investments and dispute settlement. In that sense, perhaps the earth will be flattened after all. 93

See M. Luo, ‘Despite Nafta Attacks, Clinton and Obama Haven’t Been Free Trade Foes’, New York Times, (28 February 2008), available at www.nytimes.com/2008/02/28/ us/politics/28naft a.html?_r=1&scp=1&sq=Obama%20NAFTA&st=cse (accessed 10 December 2008).

12 How ‘trade in services’ transforms the regulation of temporary migration for remittances in poor countries Jane Kelsey

I

Introduction

The ‘services economy’ is a proxy term for the transformation of capitalism in the later twentieth century. By the 1960s, the golden age of industrial capitalism supported by the Keynesian nation-state was in decline. Twenty years later, it was over. The prospects for the future prosperity of Western economies now rested on the transnational service-driven economy, later embraced within a technology-enhanced ‘knowledge economy’. To realise this potential it was necessary to replace the regime that had regulated services for a range of social, cultural, democratic, economic and developmental objectives with one that privileged a commodified notion of services that could be traded within internationalised markets. The non-market dimensions of services and the primary factors of their production – labour, capital and knowledge – had to be reconceived within the new paradigm. Th is regulatory transformation began at the national level through neoliberalism. States were then urged to entrench their commitment to market regulation through a supranational regime that functions as enabler, catalyst and enforcer of open international services markets. The standard-bearer for that regime is the World Trade Organization’s General Agreement on Trade in Services (GATS). Th is multilateral treaty sets the ideological parameters and legal minimum content for a plethora of bilateral and regional agreements that have overtaken it in depth and scope in recent years. Progressively, national regulatory autonomy and the multifaceted priorities accorded by governments to the regulation of services activities have become subordinated, on pain of economic sanctions, to this panoply of international trade treaties. 269

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A key element of the new paradigm is the redefinition of temporary labour migration as a mode of delivering trade in services. This chapter argues that the labour content of internationalised services markets reflects long-standing structural inequalities of class and national origin. The legal abstraction known as ‘Mode 4’ of the GATS reifies services activities from these social relations. It also purports a neutrality that encourages the governments of poor countries to seek guaranteed ‘market access’ for their lower-skilled nationals to prime destination countries. That seductive prospect is rendered illusory by the positive list approach to commitments under the GATS, and is explicitly denied them in the new generation of regional and bilateral agreements that cover only managerial, professional and higher-skilled labour and exclude the mundane services workforce. Undeterred in their pursuit of the unattainable, the governments of many poor countries have rationalised their dependency on temporary migration for remittances as a positive trade strategy. These constraints on governments’ national regulatory autonomy are self-imposed. The need to address the economic and political factors that drive people to seek work offshore is subsumed by the newly dominant trade paradigm, as are competing social priorities and human rights obligations. Paradoxically, lower-skilled services workers from those countries end up being excluded from, but still regulated in terms of, the trade regime. This argument is developed with reference to both the GATS and the more recent Economic Partnership Agreement between the European Community and its Member States and CARIFORUM states. The broader policy and regulatory implications of redefining temporary migration for remittances as ‘trade’ are then discussed in the context of the small Pacific Island state of Fiji.

II The transnational market for services labour The burgeoning number and value of services transactions between sellers and consumers from different countries is a defi ning feature of contemporary capitalism. Their distribution reveals a ‘global’ services/ knowledge economy that is sharply delineated by spatial and social geography. A study conducted by the WTO in 2006 estimated the value of international trade in ‘commercial services’ at over $1.71 trillion.2 1 2

All dollar amounts are in US dollars unless stated otherwise. WTO, ‘International Trade Statistics 2006’, Tables A.8, 1.7 and 1.8 and Chart IV.2, available at www.wto.org/english/res_e/statis_e/its2006_e/its06_toc_e.htm (accessed

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European and US services corporations overwhelmingly dominated these transactions, with 27.1 per cent and 14.7 per cent of commercial services exports respectively. Next, but far behind, came Japan, the People’s Republic of China (post-WTO accession), Hong Kong China SAR, India and Canada. The EU and US were also the largest importers of commercial services. That spatial distribution largely mirrors historical North/South divisions. 3 Some countries or regions, such as newly industrialised countries in East and Southeast Asia and more recently China and India, have changed their position within the hierarchy. But these countries are exceptions. At the other extreme come the least developed countries, small vulnerable economies and small-island developing states, like the islands of the South Pacific, which are geographically, economically and strategically peripheral in the international services economy. The rapid expansion of cross-border services transactions has also transformed the nature and social relations of labour in various ways. Hardt and Negri observe a shift in focus from manual to mental labour or ‘immaterial labour’ that produces an immaterial service, cultural product, knowledge or communication, especially in Western economies.4 They identify three categories of immaterial labour. The first category involves work in informationalised industrial production, where manufacturing, mining, fisheries and agriculture are themselves conceived of as services and linked through technology-dependent supply chains to transport, wholesale and retail distribution networks. The second category is labour that performs analytical and symbolic tasks, which Hardt and Negri further divide between creative and intelligent manipulation and routine tasks. The distinction between the managerial class and ‘unskilled’ workers in this category reflects a trend to valorise and differentiate labour on the basis of knowledge content and status. The third group of ‘affective labour’ engages in human contact and interaction, such as care-givers, teachers, health professionals, hotel workers, educators and creative artists, who may deliver services in a physical or virtual form.

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11 November 2008). These figures draw on international service transactions recorded in balance of payments statistics for the categories of transport, travel and other commercial services. They do not correspond to the GATS defi nition, where foreign direct investment is deemed a mode of ‘trade’. A. Hoogvelt, Globalization and the Postcolonial World: The New Political Economy of Development, 2nd edn (Baltimore MD, Johns Hopkins University Press, 2001), pp. 75–6. M. Hardt and A. Negri, Empire (Cambridge MA, Harvard University Press, 2000), pp. 290–3.

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As services activities have become increasingly transnationalised, the quest to maximise productivity and profitability has further differentiated the status of – and value placed on – these categories of services labour. At one level, transnational corporations require unfettered international mobility for their executives, managers and specialists and associated professionals. At the same time, they seek to minimise the cost of the mundane labour component of services through labour and immigration policies that maintain a mobile, flexible, compliant and fiercely competitive workforce, irrespective of how the service is delivered – remotely across the border, such as by call centre operators; to visiting foreign consumers by local workers, such as hotel staff; through employees of foreign-owned domestic firms, such as cleaners for transnational contracting firms; or by temporary migrants, such as construction labourers and domestic servants. The increased scale and economic significance of services has the potential to make the inequality of the international division of labour more visible. With the production of goods, such as food or industrial products, the social relations between labour and capital are obscured through the fi nal form of the commodity – a process that Marx called ‘commodity fetishism’.5 The separation of the worker from the product of their labour makes it easier to regulate the trade in that commodity in purely market terms, without engaging with the social conditions under which it was produced. Services are different. The very word denotes an immaterial activity that involves an embodied relationship between a performer and a recipient. Sometimes the description of an activity as a service, rather than a good, is a matter of perception; Hardt and Negri’s first category of immaterial labour effectively redefines the labour component of industrial production as a service. In that case, the labour content remains concealed in the commodity. In their second and third categories, however, it is the performance of labour itself that is being bought and sold. When these services are provided at a local level, the relationship between the worker and the consumer is often highly personal. When the provision of services is conducted on an international scale, it frequently requires

5

C. Calhoun (ed.), Dictionary of the Social Sciences (Oxford University Press, 2002). Accessed at Oxford Reference Online, Oxford University Press, Auckland University, at www.oxfordreference.com.ezproxy.auckland.ac.nz/views/ENTRY. html?subview=Main&entry=t104.e302 (accessed 15 December 2008); and see generally K. Marx, Capital, 3 vols. (Trans. B. Fowkes, London, Penguin, 1990), vol. I, p. 165.

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the movement of real people across borders, making the labour content of the transaction much more visible. When corporate-led demands for mobility differentiate between different classes of services labour the inequality of the international division of labour is also starkly exposed. These complexities make it very difficult to legitimise the regulation of trade in services in purely market terms without impinging on competing regulatory domains of employment, immigration and human rights – a challenge that did not confront the old General Agreement on Tariffs and Trade (GATT).6

III

GATS Mode 4 as legal fetishism

The next section of the chapter analyses how this challenge is addressed through the treatment of temporary labour migration within the General Agreement on Trade in Services. The GATS was negotiated in a parallel process to the GATT negotiations during the Uruguay Round and entered into force on 1 January 1995, under the umbrella of the World Trade Organization (WTO). As a result of its novelty and highly contested genesis, the GATS differs from the other WTO agreements in its legal architecture and the scope for Members to apply its normative rules selectively through positive list commitments in particular services sectors.7 The initial discussion examines the GATS as a normative instrument, using Valerie Kerruish’s notion of fetishisation through law as ‘the substitution of one thing for another … together with a loss or lack of awareness, a forgetting, that the substitution has taken place’.8 It explains how the legal text abstracts the service transaction from its intrinsically social context and, in so doing, screens out competing policy and regulatory considerations. When this is applied specifically to labour, the artifice that reconstitutes cross-border movement of workers as a ‘mode of supply’ subjects a long-recognised subject of national employment and immigration policy to the disciplines of an international trade treaty. 6

7

8

The closest analogy is the extension of GATT rules to behind the border non-tariff barriers, especially in relation to Sanitary and Phytosanitary Measures and Technical Barriers to Trade. See J. Kelsey, Serving Whose Interests? The Political Economy of Trade in Services Agreements (London, Routledge, 2008), ch 2. V. Kerruish, Jurisprudence as Ideology (London, Routledge, 1991), p. 166.

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Shifting the regulatory paradigm Drake and Nicolaidis suggest that the redefinition of services as ‘trade’ involves a process of ‘socioregulatory adjustment’: Both the intellectual frameworks in which services industries were visualized and the vast array of social interests and institutions related to regulations would now have to be judged according to the narrow commercial criterion of whether they impeded trade.9

The primacy this process accords to the trade discourse precludes any challenge to the wisdom or ethics of ‘socio-regulatory adjustment’ in favour of ‘narrow commercial criteria’. That ideological closure is reflected in the legal text of the GATS itself. The very notion of ‘trade in services’ is defined in terms of the cross-border movement of factors of production – information, capital and labour. These factors are reified within GATS Article 1:2 as disaggregated modes of supply, devoid of any context or social dimension. The service itself is the subject of the first two modes: Mode 1, supply of the service across the territorial border (for example, by the Internet); and Mode 2, consumption of the service abroad (for example, by a tourist). The other two modes refer to the supplier: Mode 3 establishing a commercial presence (foreign direct investment); and Mode 4 the temporary presence of foreign personnel in another Member’s territory to deliver a service. Services ‘exports’ are understood in terms of the nationality of the service provider and services ‘imports’ by reference to that of the consumer.10 That approach facilitates the inclusion of foreign direct investment by removing the need for both the supplier and consumer to be located in their countries of origin when the transaction takes place. These abstractions effectively strip out the social relations embedded in services activities and represent them as de-personalised commercial transactions within disembodied markets. The reification of the service is reinforced by the way that services are denominated for the purpose of GATS commitments under document W/120,11 based on the UN provisional Central Product Classification of 1991:12 a midwife performs a 9

10

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W. Drake and K. Nicolaidis, ‘Ideas, Interests and Institutionalization: “Trade in Services” and the Uruguay Round’, International Organization, 46 (1992) 37, p. 63. G. Feketekuty, International Trade in Services: An Overview and Blueprint for Negotiations, (Cambridge MA, Ballinger, 1988), pp. 28–9. Note by the Secretariat, ‘Services Sectoral Classification List’, (WTO Doc. MTN.GNS/ W/120, 1991). Available at http://unstats.un.org/unsd/cr/registry/regcst.asp?Cl=9&Lg=1 (accessed 11 November 2008).

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business service to her pregnant foreign customer,13 a helpdesk operator in a Bangalore call centre is delivering a telecommunications service to a caller in Sydney,14 and the checkout operator for Tesco in Bangkok is engaged in retail distribution.15 Relational discourses that reflect the experience of the people and communities that provide and use these services are displaced by a transactional depiction that is premised on classical contracts; the right of governments to pursue non-market objectives in regulating those services becomes contingent on how far they impede trade. Yet, services are neither performed nor used in abstract markets; their production, consumption and function remain socially embedded. The national autonomy of governments to regulate services as a social, rather than a purely commercial, phenomenon is seriously undermined when trade rules become the normative reference point for judging their legitimacy.

Redefining labour mobility as trade According to the Drake and Nicolaidis imperative of ‘socioregulatory adjustment’, the intellectual framework for viewing the labour dimension of services is narrowly commercial. Consistent with this approach, the GATS redefines the cross-border movement of workers (historically a matter for employment and immigration policy) as a form of trade. There are two main legal provisions. Article 1.2 defines the ways in which services can be traded. This includes the presence of foreign personnel in another Member’s territory to deliver a service, known as Mode 4. The natural person who performs labour in a foreign country is perceived as accessing the services market of the purchaser, rather than the employment market of the host state. The Annex on Movement of Natural Persons expands on that definition: ‘The Agreement shall not apply to measures affecting natural persons seeking access to the employment market of a Member, nor shall it apply to measures regarding citizenship, residence or employment on a permanent basis ’ (emphasis added). Chanda reinforces 13

14

15

Note by the Secretariat, supra, note 11. Designated as 1. Business services A: Professional services k: services provided by midwives, nurses, physiotherapists and para-medical personnel, UNCPC prov 93191. Ibid. Designated as 2. Communication services C. Telecommunications services. However, these services have rapidly expanded since 1991 and there are arguments on whether call centre transactions should come under the content of the service (e.g. banking) rather than the carriage (telecommunications). Ibid. Designated as 4. Distribution services C. Retailing services UNCPC prov 631+632.

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this distinction when she claims that Mode 4 ‘conceptually does not fall under the administrative machinery applicable to permanent migration’16 (emphasis added). The rationale that underpins Mode 4 and the Annex is premised on several unsustainable assumptions. The first is that foreign workers who engage in delivering services (who according to the GATS Mode 4 are participating in trade) are qualitatively different from foreign workers in non-service activities (who are still perceived as temporary migrants seeking to enter the employment market of the destination state). Second, the distinction between temporary presence and permanent migration assumes a sharp and objective boundary between foreign services workers who gain entry to a host country for the short and longer term. However, ‘temporary’ is not defined in the GATS. Indeed, widely varying periods of stay are specified in WTO members’ schedules of Mode 4 commitments, ranging from three months maximum for most business visitors to between two and five years for intra-corporate transferees.17 Th ird, any attempt to apply the rationale selectively by claiming that executives, professionals and skilled technicians do not compete in the local employment market, whereas semi-skilled workers and mundane labourers do, is untenable; all are engaged in employment tasks that could potentially be performed by locals who had the requisite qualifications. The fuzzy logic that underpins the Mode 4 rationale is compounded by the circular assurance in the GATS Annex that every WTO Member retains the right to regulate the entry and temporary stay of people in its territory – so long as those measures are not applied in ways that nullify or impair the commitments contained in the Member’s schedule. In other words, a GATS commitment to allow the entry of people to deliver services inside the country does restrict the national autonomy of current and future governments to adopt immigration and employment laws and policies, such as labour market tests or quotas on professionals, unless the right to adopt such measures has been explicitly reserved.

16

17

R. Chanda, ‘Movement and Presence of Natural Persons: Issues and Proposals for the GATS Negotiations’, Trade-related Agenda, Development and Equity, (South Centre Working Paper 19, 2004), p. 1. Background Note by the Secretariat, ‘Presence of Natural Persons (Mode 4)’, (WTO Doc. S/C/W/75, 1998), p. 1.

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The illusion of neutrality The abstraction of Mode 4 is complemented by its neutrality. In a normative sense, Mode 4 holds out the promise that lower-valued workers from poor countries may secure a guaranteed right to supply services in richer destinations. That possibility seems counter-intuitive. As noted above, the international market for services labour is demarcated by social and spatial geography: mobility for the managerial and professional class, primarily from the global North, who are integral to the establishment, operations and higher-level servicing of transnational enterprises; a territorially bounded competitive market for immobile lower-skilled services workers, primarily in the global South; and a cheap services workforce whose international mobility is contingent according to demand, price and prejudice and governed by fluid national immigration laws. Indeed, given that the objective of the GATS is to facilitate the expansion of the transnational services economy, its sponsors might have been expected to seek guaranteed rights of entry for managerial, but not proletarian, services labour. While national immigration laws have often conferred that kind of privilege, individual countries’ laws are notoriously idiosyncratic and typically vest considerable discretion in those who administer them. The GATS was an opportunity to legitimise that privilege and stabilise it through an enforceable treaty. That is actually what the US had in mind when it began promoting the GATS on behalf of its services corporations in 1980.18 National immigration laws that impeded the international movement of executives, managers, professionals and highly skilled technicians were among the ‘trade barriers’ to be removed. The primary targets were economic needs and labour market tests, requirements that foreign investors recruit and train local personnel, lack of recognition for professional qualifications, closed shop professions and complex visa requirements and procedures.19 The Canada, US Free Trade 18

19

The first major paper tabled by the US Delegation at the OECD Trade Committee discussions on services in December 1980, listed a large number of barriers to trade in services based on an ‘Inventory of Impediments to Trade in Services’. These included the ability of service companies to move personnel in and out of a country, and problems for professional service providers with visas, professional licensing, work permits and professional qualifications. Jagdish Bhagwati described the US position on trade in services and temporary migration of services workers as ‘hypocritical’. J. Bhagwati, ‘Splintering and Disembodiment of Services and Developing Nations’, The World Economy, 7 (1984) 133, p. 141. There was an equally arguable economic logic for fi rms in richer countries to ease the entry of lower-skilled services migrants to meet labour shortages, drive down local wages

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Agreement (CUSFTA) of 1987 established a precedent for this position, with Chapter 15 applying exclusively to the Temporary Entry of Business Persons. However, such a narrow approach to Mode 4 was conceptually and politically problematic. Conceptually, a definition that restricted mobility of services personnel to the elite would have sat uncomfortably with the stated objective of achieving open and non-discriminatory international services markets. On a political level, such exclusive rights would have confirmed the prophecies of those countries that opposed the very idea of a GATS, led by India and Brazil, who denounced it as a Trojan horse for recolonisation through transnational corporations.20 Similar arguments continued during the Uruguay Round (and beyond), as developing countries insisted that entry for their workers to richer destinations was essential to balance the gains made by transnational companies from linking Mode 3 (commercial establishment) and Mode 4 (mobility for executives).21 Consequently, Mode 4 was defined in Article 1:2(d) as the ‘supply of a service by a service supplier of one Member, through presence of natural persons of a Member in the territory of any other Member’. The Annex on Movement of Natural Persons Supplying Services under the Agreement is similarly neutral across both services and skills.22

Selectivity through GATS schedules The previous section explained how the GATS reifies and dehumanises services at a normative level. The nominal neutrality of Mode 4 is then reconciled with the economic objectives of the agreement through its operational provisions. The primary vehicle for this is the positive list approach in Article XX: Schedules of Specific Commitments. WTO

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and conditions, and deunionise the workforce. But that could not be achieved under the rubric of trade in services, which was marketed in OECD countries as a vehicle for expanding export opportunities. C. Raghavan, ‘A Rollback of the Th ird World?’, International Foundation for Development Alternatives Dossier 52, (March–April 1986), pp. 57–61; see also S. P. Shukla, ‘From GATT to WTO and Beyond’, UNU World Institute for Development Economic Research, (Working Paper 195, 2000), pp. 14–15 and 32–6. J. Croome, Reshaping the World Trading System: A History of the Uruguay Round (Geneva, WTO, 1995), pp. 124 and 314. Paragraph 1: ‘Th is Annex applies to measures affecting natural persons who are service suppliers of a Member, and to natural persons of a Member who are employed by a service supplier of a Member, in respect of the supply of a service.’

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Members schedule their commitments to national treatment and market access rules by sector and mode, and can list specific limitations. This approach enabled states that dominate the international services market, which are also the major destination countries, to differentiate between managerial/professional and mundane labour by restricting their commitments on Mode 4 to the elite services workforce. The WTO Secretariat reports that: ‘An overview of commitments for individual suppliers shows that the majority of the entries scheduled – close to 240 out of a total of 328 – concern executives, managers and specialists. Of these, 135 entries explicitly relate to intra-corporate transferees; their economic value is thus determined by Mode 3 commitments.’23 The de facto exclusion of lower-skilled services workers from the GATS was revisited in the ‘GATS 2000’ negotiations mandated under Article XIX: Progressive Liberalisation. The goal of the new round of negotiations was to extend the coverage of market access and national treatment commitments and remove limitations made during the Uruguay Round. Competing proposals on Mode 4 emerged from developed, large developing and poor countries. Almost all Southern governments continued to identify labour as their major – and often only – offensive interest. India’s ascendancy in the international services economy, driven largely by information technology (IT), made it an aggressive demandeur seeking Mode 4 access for IT professionals and skilled contractors, mainly to the US and Europe, and Mode 1 for outsourcing.24 The US and EU, in return, continued to seek greater market access through Modes 3 and 4, while defending their own labour markets from new commitments.25 The 40-odd initial offers on Mode 4 (EC as 1) showed very limited movement from the GATS 1994. Most offers reflected Members’ own offensive interests.26 The US made no improvements on its GATS 1994 commitments in Mode 4.27 In a paper written for the South Centre that advocated the Indian position and criticised the US, Rupa Chanda 23 24

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27

Background Note by the Secretariat, supra, note 17, para. 41. Special Session of the Council for Trade in Services (CTS-SS), ‘Communication from India. Proposed Liberalisation of Movement of Professionals under General Agreement on Trade in Services (GATS)’, (WTO Doc. S/CSS/W/12, 2000). The EU’s requests centre on intra-corporate transferees, business visitors and contract service suppliers; for the leaked requests see www.gatswatch.org/requests-offers.html outgoing (accessed 15 December 2008). ICTSD, ‘WTO Services Council. Members Find Services Offers Disappointing’, Bridges Trade Weekly, 8(13) (2004), available at http://ictsd.net/i/news/bridgesweekly/5904/ (accessed 11 November 2008). Chanda, supra, note 16, p. 23.

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complained that: ‘There is still no clear separation of mode 4 from immigration rules and procedures and the distinction between permanent and temporary movement is still not evident from the commitments.’28 In other words, India had been unable to break down the GATS 1994 distinction whereby major destination governments defined elite services workers, primarily from their own countries, as ‘trade in services’, and other categories, including skilled IT workers, from the global South as more properly the subjects of immigration policy. India’s demands became a powerful undercurrent in the Doha Round, especially once the so-called ‘new Quad’ of the US, EU, Brazil and India emerged in the lead-up to the sixth WTO ministerial conference in Hong Kong in 2005.29 In April 2005, acting United States Trade Representative (USTR) Peter Allgeier described Mode 4 as a ‘critical pillar’ to successful Doha negotiations.30 However, under the US Constitution it is the Congress that has plenary power over immigration policy, including the level of the H-1B visas that India was seeking.31 As successive USTRs considered the US offer on Mode 4 in the Doha Round, senior members of Congress warned them not to negotiate any further immigration provisions in trade agreements that would restrict its plenary power and prevent Congress from making future adjustments in response to changing national circumstances.32 Services became one of the key points of dissension at the Hong Kong ministerial. India demanded increased Mode 4 access for contract workers and IT specialists before making concessions on agriculture 28 29

30

31

32

Ibid. W. Bello, ‘The Real Meaning of Hong Kong: Brazil and India Join the Big Boys’ Club’, Focus on the Global South, (22 December 2005), available at www.tni.org/detail_page. phtml?page=archives_bello_meaningofh k (accessed 11 November 2008). S. Anderson, ‘U.S. Immigration Policy on the Table at the WTO’, (Foreign Policy in Focus Discussion Paper, 30 November 2005), available at www.fpif.org/fpift xt/2962 (accessed 11 November 2008). H-1B visas cover ‘specialty occupations’ and are the most common form of temporary worker in the US. The Congress created the H-1B visa category for ‘guest workers’ in 1990 to alleviate labour shortages by allowing entry to a modest number of professionals and technicians. The level of the quota fluctuated from 65,000, which the US committed to in its GATS 1994 schedule, to 115,000 for 1999/2000 and 195,000 for 2001/3. The total was cut back to 65,000 for fiscal year 2004 in response to a US economic downturn. L. Wallach and T. Tucker, ‘Debunking the Myth of Mode 4 and the U.S. H-1B Visa Program’, Public Citizen’s Global Trade Watch, (2006), available at www.citizen.org/documents/Mode_ Four_H1B_Visa_Memo.pdf (accessed 11 November 2008). F. James Sensenbrenner Jr to Hon Peter Allgeier, (3 March 2005). On fi le with author; Sen. Dianne Feinstein to Hon Robert Portman, 5 December 2005, available at http://feinstein. senate.gov/05releases/r-mode-portman.htm (accessed 11 November 2008).

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and non-agricultural market access (NAMA). Brazil was more concerned with ensuring an outcome on agriculture and was ambivalent on services. India, Brazil and the developed countries brokered Annex C of the Ministerial Declaration to keep the round afloat. It showed some concessions to India. The specific objectives identified for Mode 4 targeted the removal or reduction of economic needs tests for contractual service suppliers, independent professionals, intra-corporate transferees and business visitors. New commitments to that effect should be de-linked from commercial presence. It also authorised a process of plurilateral negotiations as a complement to bilateral requests and offers. Significantly, however, Annex C offered nothing to Southern governments in lowerskilled services categories. The idea of a model schedule on Mode 4 re-emerged in a diluted form in the 2006 plurilateral request that was led by India on behalf of larger developing countries and made to nine other Members.33 The request drew little response. Throughout 2006 and 2007, the services negotiations languished in the shadow of those on agriculture and NAMA. An attempt was made to reinvigorate the GATS negotiations with a ‘signalling conference’ among 32 WTO Members (EC as 1) in late July 2008. The Chair’s official report of that meeting disclosed ‘signals’ of possible improvements in Mode 4 offers in ‘virtually all relevant categories, including intra-corporate transferees, business visitors, contractual service suppliers, and independent professionals’.34 Media reports from the services industry lobbies suggested that the EC had made a further offer for entry of professionals and that US trade officials had been ‘given permission to discuss the visa issue’ for IT specialists and professionals after lengthy consultation with White House national security officials and key members of Congress.35 Such ‘signals’ were a long way from a firm offer by either party. Whether they would deliver and if so, on what terms, may never be known. Within days the negotiations on agriculture and NAMA had collapsed and the future of the Doha Round was again plunged into uncertainty. The one thing that was confirmed from the signalling conference was that poorer 33

34

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‘Collective Request. Mode 4 – Movement of Natural Persons’, (undated). Available at http://commerce.nic.in/trade/Plurilateral Requests in Mode 4.pdf (accessed 11 November 2008). Report by the Chairman of the Trade Negotiations Committee, ‘Services Signalling Conference’, (WTO Doc. JOB(08)/93, 2008), para. 46 (emphasis added). D. Palmer, ‘US mulling WTO offer on key India services demand’, Reuters India, (24 July 2008), available at http://in.reuters.com/article/domesticNews/idINL3104845220080723 (accessed 11 November 2008).

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countries had no prospect of securing guaranteed access for their lowerskilled workers into the services markets of the major powers through the GATS.

IV

Redefining Mode 4 through regional and bilateral agreements

The multilateral level was also dysfunctional from the perspective of the major services exporters. There was no realistic prospect of revisiting significant elements of the GATS, including the neutrality of Mode 4, so they would more directly meet the needs of the transnational corporations. The major players, especially the US and EC, turned to the bilateral and regional trade negotiations, over which they could exercise more direct control. Many of the resulting agreements now eclipse the GATS in both their scope and the depth of sectoral commitments. This includes a substantive revision of the GATS modes to restrict the scope of labour mobility, along the lines originally established in the CUSFTA and extended to Mexico through Chapter 16 of the North America Free Trade Agreement in 1993. In return for agreeing to GATS-plus concessions, developing countries again pressed their case for ‘market access’ for their lowerskilled workers, to little or no avail. A stark illustration of this strategy is the Economic Partnership Agreement (EPA) between the European Communities and the CARIFORUM states, that was initialled in December 2007.36 Part II, Title II covers Investment, Services and E-commerce. The legal architecture departs significantly from the GATS by reorganising the four modes of supply into Chapter 2: Commercial Presence (covering both Mode 3 in services and non-services investments), Chapter 3: Cross Border Supply of Services (GATS Modes 1 and 2) and Chapter 4: Temporary Presence of Natural Persons for Business Purpose [sic] (Mode 4).37 As the title implies, Chapter 4 narrows the scope of GATS Mode 4 to temporary presence for a business purpose. It severely restricts the 36

37

Formally the parties are 15 CARIFORUM states, being Antigua and Barbuda, the Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, Saint Lucia, St Kitts and Nevis, St Vincent and the Grenadines, Suriname, Trinidad and Tobago, plus the Dominican Republic, on one hand, and the European Commission, and the 27 member states of the European Union, on the other. Economic Partnership Agreement between the CARIFORUM States, of the one part, and the European Community and its Member States, of the other part, initialled on 16 December 2007. For the full text of the agreement see http://trade.ec.europa.eu/doclib/ html/137971.htm (accessed 11 November 2008).

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potential for workers from CARIFORUM states to secure guaranteed access to Europe, even for independent professionals and contractual service suppliers. Article 80(1) of the EPA specifies six categories of natural persons that are covered by the agreement: key personnel, graduate trainees, business services sellers, contractual service suppliers, independent professionals and short-term visitors. That closed defi nition leaves no legal space to recognise other categories of lesser-skilled workers. Under Article 80, key personnel applies to ‘business visitors’ responsible for setting up a commercial presence and managerial or specialist ‘intracorporate transfers’. Graduate trainees must have a university degree and already be working for the company in the other party. Business services sellers are seeking temporary entry to sell a wholesale service and must be paid from outside the host state. Contractual service suppliers must work for a company that has no commercial presence in the host and has concluded a bona fide contract to supply services to a final consumer, excluding contracts that were secured through an agency that is defined under CPC872 (an employment or personnel agency). Independent professionals must have a contract that requires their temporary presence to perform the service, again excluding contracts secured through employment and personnel agencies. Short-term visitors can enter for a number of tightly restricted business purposes. The two categories that are not linked to foreign investment – being independent professionals and contractual service suppliers – face onerous criteria relating to the duration of the contract and their qualifications and experience. Their entry is tied tightly to a specific pre-existing contract, with remuneration from outside the country – presumably to support the argument that they are not participating in the local employment market. Having circumscribed the range of services personnel eligible for coverage, Article 81 introduces a presumption of market access for key personnel and graduate trainees for any sector that has been liberalised under the investment chapter (comprising both GATS Mode 3 and non-services investment). The provision specifically prohibits numerical quotas or economic needs tests and discriminatory measures. States wanting to reserve such measures must record a limitation through what effectively becomes a negative list schedule. A presumption of entry applies for contractual service suppliers and independent professionals even if sectoral commitments have not been made, but this is again subject to reservations in the party’s relevant schedule. Under Article 83, that obligation applies to CARIFORUM

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states in all sectors, but to the EU only for sectors listed. The EU’s list covers 29 sub-sectors for contractual service suppliers, but the corresponding list for independent professionals has only 11 sub-sectors and excludes, for example, medical and dental, veterinary, midwives, nurses and paramedics, chefs, private higher education, tourism-related services and entertainers. CARIFORUM negotiators have hailed the specific provisions of Article 83(2)(c) for entry into Europe by fashion models, chefs and entertainers as a major gain from the agreement.38 However, these are subject to most of the same restrictive criteria as contractual service suppliers. The individual must have more than three years’ professional experience and have been employed for at least one year by a home-based contract service supplier, which has secured a contractual for less than twelve months in the EU, not through a recruitment agency.

V

The Mode 4 conundrum

Developing countries face a conundrum. Most are now WTO Members, so they have no choice but to operate within the trade in services arena. According to neoclassical trade theory, even the poorest country has some ‘comparative advantage’ to exploit in return for locking open their services, food production, fisheries, mineral extraction and small industry to foreign competition.39 Southern governments have consistently argued that their main, sometimes only, comparative advantage is their people.40 Yet, their requests for the guaranteed right to ‘export’ their labour temporarily to preferred destinations under Mode 4 have consistently been rebuffed.41 These countries, especially the least developed, have responded with stalling tactics at the multilateral level and made minimal if any services offers in the GATS 2000 round. However, the stark power 38

39

40 41

E. Humphrey, ‘CARIFORUM EPA Negotiations: Initial Reflections on the Outcome’, presented to a DG Trade-organised workshop on the CARIFORUM-EC EPA, (Brussels, 31 February 2008), p. 4. Even some mainstream trade economists have cast doubt on the validity of this theory for small vulnerable economies; see A. Winters and P. Martins, ‘Small isn’t Beautiful: the Cost Disadvantages of Small Remote Economies’, CentrePiece, (2005), 24–8. Their argument is articulated in Chanda, supra, note 16, pp. 9–10. J. Kategekwa, ‘Extension of Mode 4 commitments to include unskilled workers in the WTO: A win win situation, especially for LDCs’ (undated), available at www.wto.org/ english/forums_e/public_forum_e/potentials_for_unskilled_worker_liberalisation_ in_gats.doc (accessed 11 November 2008).

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imbalances make a similar approach much more difficult in bilateral negotiations.42 It would be simplistic to blame this conundrum on the major powers not playing by the rules. Their refusal to treat mundane services labour as trade has an intrinsic logic. The purpose of trade in services agreements is to expand the international services economy. The transnational corporations that dominate that economy require the mobility of elite labour. The corporations are strongly aligned with the major powers in a deeply unequal international division of labour. Trade in services agreements reflect that reality. However, this quandary generates another, less obvious, consequence for national regulation. Even though the process of socioregulatory adjustment may not have paid dividends at the negotiating table, many Southern governments have internalised their argument that temporary migration is a matter of trade policy. The desperation of poor countries to secure guaranteed access under Mode 4 reflects their growing economic dependency, in the past decade, on temporary migration for remittances. A World Bank report put official remittances from overseas workers to developing countries in 2005 at $167 billion, up 73 per cent in four years.43 The informal remittance sector was estimated to take the figure at least 50 per cent higher.44 Many Southern governments rely on temporary emigration to soak up unemployment, provide income to struggling communities and alleviate the balance of payments deficit. They would usually prefer to export their lower-skilled and unemployed, rather than their professionals. However, wealthier destination states cherry-pick the executive, professional and educated migrants, often allowing them to enter on a semi-permanent basis, while retaining their discretion to change those immigration laws at will. They generally eschew any moral responsibility for the resulting brain drain, loss of educational investment or stunted economic and social development in the ‘exporting’ countries. Foreign services workers with fewer skills are kept on a much shorter leash, or kept out altogether. 42

43

44

The Pacific ACP states have told the EC that they want to delay EPA negotiations on services for three years. Hon. Joe Keil to Mr Peter Mandelson, PACP-EC Economic Partnership Agreement Negotiations 2008, 11 June 2008, on fi le with author. However, the same countries are pursuing a regional services agreement amongst themselves that would involve extensive trade in services commitments. D. Ratha and W. Shaw, Global Economic Prospects 2006: The economic implications of remittances and migration (Washington DC, The World Bank, 2006), p. 88, Table 4.1. Ibid., p. 92.

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Destination governments rely on the discretionary and flexible nature of their immigration laws and policies to meet their fluctuating labour needs, manage anti-immigration politics and limit their exposure to social security obligations. The governments of poorer countries embrace the illusion of Mode 4 in a futile hope that they may secure guaranteed rights of access under the guise of trade that are impossible to achieve when they are defined as labour or immigration policy. The responsibility for developing policy and regulation on labour mobility is either relocated to their trade ministries, or existing ministries adopt the trade paradigm. In a clear example of what Drake and Nicolaidis refer to as ‘socioregulatory adjustment’, the competing social, cultural, human rights and developmental objectives of domestic regulation are subordinated to narrow commercial criteria.45 The broader rights and interests of workers, their communities and the long-term development vision of the country are often left out of the equation altogether. The fetishisation of temporary migration for remittances as ‘Mode 4’ of trade in services conceals that transformation. Socioregulatory adjustment plays out on many levels. One consequence is the closure of debates over economic development. The preoccupation with Mode 4 removes the need for a government to address the push and pull factors that impel its people to leave their communities and work abroad. As Saskia Sassen observes: ‘Migrations do not just happen: they are one outcome or one systemic tendency in a more general dynamic of change.’46 Trade liberalisation is itself a key contributor that dynamic. Mariama Williams has criticised the stylised assumptions and beliefs about societies and economies that underpin structural adjustment and trade liberalisation as disregarding the real consequences for national economies, let alone for local markets and the micro-level of households.47 The secretary general of United Filipinos in Hong Kong observed, at the time of the sixth WTO ministerial conference in 2005, that ‘even without GATS, we are already affected by the WTO because other agreements are actually destroying the livelihood and the economy and the environment of the countries we come from’.48 Deepening poverty and 45 46

47

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Drake and Nicolaidis, supra, note 9, p. 63. S. Sassen, Globalization and Its Discontents: Essays on the New Mobility of People and money (New York, The New Press, 1998), p. 116. M. Williams, ‘Economic Policy, Social Reproduction and Gender in Latin America and the Caribbean’, (IGTN-Caribbean, 2003), available at www.igtn.org/page/457/1/ (accessed 11 November 2008). A. Wong, ‘Maids plan WTO show of strength’, The Standard , (27 September 2005), available at www.thestandard.com.hk/news_detail.asp?pp_cat=11&art_id=2157&sid= 4733918&con_type=1 (accessed 11 November 2008).

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the prospect of earning over twenty times more than they can at home have made temporary migration-for-remittances a worldwide strategy for household survival. Trade in services agreements also mask the personal realities of remittance migration, ‘as if the migrant service workers are devoid of feelings and emotions and that they are not geographically transported away from their homes’.49 The international literature records how recruitment agencies commonly keep women who work as nurses and care-givers isolated and deunionised.50 The more private the workplace, the greater the risks. This applies even where governments, such as the Philippines, operate the programme. As ‘guest workers’ these women have no direct access to the labour market, no prospect of permanent employment, no job security, and no guarantee of a living weekly income. As migrants, they have no entitlement to social security benefits and are liable to sudden changes in regulations. As women, they face intrusion on their privacy and even their bodies. Constitutionally, they have no access to permanent residence or citizenship in the destination country, and can become disenfranchised citizens if there is no right for nationals living offshore to vote at home. If they overstay, they become criminals; children born to them can fall into a stateless void. The ‘trade’ discourse makes these human costs invisible and removes any need for home (and host) governments to regulate effectively to protect these workers from abuse, exploitation and racism. Protections for migrant workers are further undermined when ministries with responsibility for social, labour, gender and other human rights are displaced by the trade bureaucracy or adapt to the perception of temporary migration as ‘trade’. A further consequence flows from the mutual dependency of source and destination states on the secondary industry that facilitates and profits from the cross-border trade in people and associated capital flows.51 Transnational supply chains of immigration consultants, personnel agencies, training providers, lenders and money brokers are embedded within what Mahler and Pessar call ‘recruitment geographies’, where

49

50

51

L. Lindio-McGovern, ‘Alienation and Labor Export in the Context of Globalization’, Critical Asian Studies, 36 (2004) 217, p. 222. A. Manchester, ‘Filipino Nurses Suffer Abuse and Exploitation’, Kai Tiaki Nursing New Zealand, 11 (2005) 12, p. 12. R. Kurian, ‘The Globalisation of Care Service Provision: A Value Chain Approach’, paper presented at the fi ft h Pan-American International Conference, (The Hague, 9–11 September 2004).

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they ‘sculpt the labor force and shuttle workers into different employment niches that reflect ideologies of gender, race, class, and civilization’.52 Even when their activities are formally regulated, governments that depend on remittance revenue may turn a blind eye to the exploitative practices of private firms. Indonesian, Thai and Filipino domestic workers who spoke out during the 2005 WTO ministerial conference in Hong Kong condemned the payment of agency fees as ‘debt bondage’.53 Similar criticisms are made where public agencies operate the ‘export industry’. The Philippines government has overseen the temporary export of its citizens as a formal policy since 1982. The Philippine Overseas Employment Administration (POEA) is often heralded as a prototype for managed temporary migration.54 However, organisations representing Filipino workers object that government interests take precedence over the rights and welfare of the workers.55 The preference for light-handed regulation of the remittance supply chain is reinforced by trade in services commitments in the many relevant sub-sectors, especially in business and financial services.

VI

Socioregulatory adjustment and Mode 4 in Fiji

The Pacific island of Fiji exemplifies both the process of socioregulatory adjustment and its consequences. For several decades, Fiji dutifully pursued the goal of a competitive export-driven economy.56 Its fragile export 52

53 54

55

56

S. J. Mahler and P. R. Pessar, ‘Gender Matters: Ethnographers Bring Gender from the Periphery Toward the Core of Migration Studies’, International Migration Review, 40 (2006) 27, p. 49. Wong, supra, note 48. S. Bach, ‘International Migration of Health Workers: Labour and Social Issues’, (ILO Doc. WP.209, 2003), p. 21, available at www.ilo.org/public/english/dialogue/sector/ papers/health/wp209.pdf (accessed 15 December 2008). The POEA announced plans in August 2008 to introduce mandatory psychological tests for departing migrant workers, based on reported mental illness of maids who were convicted of murder in the Middle East. Critics pointed out that migrants often developed psychological problems while overseas. Migrants accused the government of failing to address the deplorable working conditions, widespread verbal, physical, emotional and sexual abuse, and non-payment of wages that ‘are major factors that drive [overseas Filipino workers] to the brink of insanity’. J. Aning, ‘Migrant group slams mandatory psychiatric tests for OFWs’, Philippine Daily Inquirer, (23 August 2008), available at http://philbrgysocietyinnigeria.wordpress.com/2008/08/23/migrant-group-slamsmandatory-psychiatric-tests-for-ofws/ (accessed 11 November 2008). See generally C. Slatter, ‘Neo-Liberalism and the Disciplining of Pacific Islands States – the Dual Challenges of a Global Economic Creed and a Changed Geopolitical Order’ in M. Powles (ed.) Pacific Futures (Canberra, Pandanus Books, 2006), pp. 91–110.

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base depends on eroding trade preferences for sugar and garments. The former are now WTO-illegal. The government initialled a highly inequitable interim agreement on trade in goods with the EC in November 2007, in order to maintain the short-term viability of the sugar industry.57 The garment preferences are captive to periodic short-term re-negotiations with Australia.58 Fiji’s public sector has undergone repeated rounds of restructuring that have failed to deliver the promised end to corruption, but have left Fiji’s physical and social infrastructure in disarray.59 Even subsistence lifestyles at the village level are severely stressed in an increasingly cash-based consumer economy. Fiji’s economy took a further hit in December 2006 when the country suffered its fourth military-led coup in twenty years. Each coup has impacted heavily on tourism, Fiji’s other major foreign exchange earner, and on the broader economy. The coups have prompted the exodus of a range of skilled professional and trades people who can gain permanent entry into countries such as Australia, New Zealand and Canada. Reflecting the ethnically charged nature of the coups, the majority of these migrants are Fiji Islanders of Indian descent.60 There has also been an upsurge in temporary migration. For years, Fijian women have sought better-paid work in Australia and New Zealand, the US and the Gulf states, mainly as nurses, care-givers and teachers. Men from the regular Army and the reserves have signed up for well-paid UN peacekeeping duties61 or, along with civilians, joined 57

58

59 60

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Interim Partnership Agreement between Certain Pacific States, on the one part, and the European Community, on the other part, initialled by the governments of Fiji and Papua New Guinea and the EC on 23 November 2007. For full text see www.bilaterals. org/article.php3?id_article=10605 (accessed 11 November 2008). Under the September 2006 revision of the SPARTECA-TCF scheme, the preferential arrangement expires on 31 December 2011. See Article 1.3.1 of the SPARTECA (TCF Provisions) Scheme, Terms and Conditions, September 2006. Available at http://209.85.173.104/search?q=cache:1qpMYqnjkQYJ:www.innovation.gov.au/ Industry/TextileClothingandFootwearTCF/Documents/STCFTermsandConditions Sept0620060928150223.pdf+sparteca+tcf+renewal&hl=en&ct=clnk&cd=1&gl=nz&client= firefox-a (accessed 11 November 2008). Slatter, supra, note 56. Around 120,000 Fijian Indians are believed to have migrated from the country since the first coup in 1987. The fourth coup was expected to exacerbate the situation. The employment of new contingents of Fijian soldiers as peacekeepers was suspended in April 2009 following a United Nations Security Council resolution that called for the military government to return to democracy and hold elections at the earliest possible time. United Nations, ‘Daily Press Briefi ng by the Office of the Spokesperson for the Secretary-General’, (28 April 2009), available at www.un.org/News/briefings/docs/2009/ db090428.doc.htm (accessed 6 May 2009).

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the British Army. New ‘market opportunities’ have emerged since 2000 with the chronic international shortage of nurses and care-givers and the wars in Afghanistan and Iraq. By 2006, official remittances comprised the country’s second largest foreign exchange earner after tourism;62 informal remittances would make the figure much higher. Faced with a cumulative crisis in unemployment, poverty and balance of payments, and encouraged by both the World Bank and the Asian Development Bank,63 the Fiji government embraced remittances as a positive development strategy. Critics argue that, in economic terms, the outflow of ‘human capital’ from Fiji each year has been estimated to cost the economy, directly and indirectly, some F$44.5 ($28) million a year. Nursing migration has been an especially significant factor.64 Private recruitment agencies, often acting as brokers for further layers of personnel agencies and sub-contractors, have descended on the remittance workforce. The Fijian Ministry of Labour conceded in 2006 that its process for vetting the contracts of its offshore workers was ineffectual.65 The impacts of poor regulation on migrant workers reflect the highly gendered nature of Fiji’s migration for remittances. Women with unrecognised care-giver qualifications – and who have no possibility of migrating permanently – are the most vulnerable to abuse and exploitation. Unusually, Fiji’s more dominant human export is male security workers to confl ict zones. By 2006, an estimated 3000 Fijian men were working in Iraq as private contractors or soldiers with the British Army. Fiji’s politics, economy and culture are highly militarised. The Army offers attractive job options, primarily for indigenous Fijian men. Teresia 62

63

64

65

Asian Development Bank, Asian Development Outlook 2006: II. Economic Trends and Prospects in Developing Asia: Fiji Islands, (Hong Kong, Asian Development Bank, 2006), available at www.adb.org/Documents/Books/ADO/2006/fij.asp (accessed 11 November 2008). Remittance income amounted to 5.8 per cent of GDP. D. Ratha and Z. Xu, ‘Migration and Remittances Factbook, Development Prospects Group’, The World Bank, available at http://siteresources.worldbank.org/INTPROSPECTS/Resources/334934– 1199807908806/Fiji.pdf (accessed 11 November 2008). The World Bank, At Home and Away: Expanding Job Opportunities for Pacific Islanders through Labour Mobility, (Washington DC, The World Bank, 2006); J. Connell and R. P. C. Brown, Remittances in the Pacific: An Overview (Manila, Asian Development Bank, 2005). D. Storey, ‘Pacific Migration and Development Desk Study’, New Zealand Agency for International Development (NZAID), (2005), pp. 11–12; see also M. Reddy, M. Mohanty and V. Naidu, ‘Economic Cost of Human Capital Loss from Fiji: Implications for Sustainable Development’, International Migration Review, 38 (2004) 1447. Interview of Ministry of Labour Official, on fi le with author, May 2006.

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Teaiwa cites unofficial estimates of the standing army of regular forces and territorials in 2005 as 10,000, ‘making Fiji the most militarized independent nation in the Pacific.’66 The men can earn double their Fijian wages as UN peacekeepers. Other soldiers and civilians sell their skills to offshore armies, even straight from school. The ‘reconstruction and relief contracts’ in post-invasion Iraq have generated a massive demand for foreign security workers to guard bases, energy infrastructure and commercial premises, or to drive and escort convoys. These are privatised military operations that depend on welldisciplined workers who are willing to risk their lives for high returns. In 2006, a ‘quartermaster’ conducting guard and escort duties was paid $2000 a month;67 the estimated poverty wage in Fiji was $115 a month. The lead contracts in Iraq have been awarded to companies of US coalition partners or ‘contributing nations’ and operate through a complex chain of sub-contractors across many countries. Major British and US recruitment firms, such as Homeland Security, ArmorGroup, Global Risk Security and Control Risk, set up subsidiaries in Fiji, alongside a locally owned but Kuwaiti-based firm, Meridian. All recruited former Fijian military or police officers to run them and exploit their deep bonds with the powerful elite of politicians, bureaucrats and military. The government initially welcomed the economic opportunity to capitalise on the country’s military capacity. The acting head of the Ministry of Labour said: We are very happy, because it helps to solve our unemployment problem and brings in remittances … We are adopting an open market policy. But we are advising people, instead of sending money home every week, to invest it wisely so they will have a more long-term future.68

The foreign exchange earned by security workers was then equivalent to 45 per cent of the national budget, almost double the earnings from sugar.69 The Cabinet eventually approved an overseas recruitment policy 66

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69

T. K. Teaiwa, ‘Articulated Cultures: Militarism and Masculinities in Fiji during the mid1990s’, Fijian Studies, 3 (2005) 201, p. 202. A British ex-SAS officer in 2003 could reportedly command $1000 a day. I. Traynor, ‘The Privatisation of War’, The Guardian International, (10 December 2003), available at www. endwar.net/theprivatisationofwar.htm (accessed 11 November 2008). E. Keenan, ‘Idle Hands for Export’, Time South Pacific Magazine, (1 February 2005), available at www.time.com/time/magazine/article/0,9171,1023453,00.html?iid=digg_ share (accessed 1 November 2008). S. Pareti, ‘Fiji Rakes in $m from Overseas Jobs’, Islands Business (undated), available at www.islandsbusiness.com/islands_business/index_dynamic/containerNameToRe place=MiddleMiddle/focusModuleID=4977/overideSkinName=issueArticle-full.tpl (accessed 15 December 2008).

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for the licensing of local agents, which required bonds to be lodged as security for wages and various employment protections,70 but this was not enforced. At the end of its visit to Fiji in May 2007, the UN Working Group on the Use of Mercenaries expressed concern over the lack of national legislation and measures to protect security workers from exploitative treatment and human rights violations and to reintegrate them safely into their communities.71 By mid-2007, eighteen Fijian contractors had been killed in Iraq; a further eleven Fijian soldiers with the British Army had died.72 The spectre of more deaths hangs over a remittance economy that has become dependent on war and a society that becomes ever more militarised. The Fijian situation illustrates the need for a multidimensional approach to regulating migration-for-remittances. Instead, successive Fijian governments embraced the ‘trade’ discourse, arguing that market access in Mode 4 for categories like teaching, nursing, tourism and security would allow the island to capitalise on its comparative advantage and encourage temporary, rather than permanent, migration.73 This rationale informed Fiji’s Mode 4 requests in the GATS 2000 and the EPA negotiations with the EU. In return for a guaranteed entry quota, Fiji was willing to consider further liberalisation of agriculture, goods, services and investment – a shortsighted trade-off that would deepen the economy’s remittance dependency. The prospect of concessions in Mode 4 was also the primary objective for all the Pacific Island countries when contemplating negotiations with Australia and New Zealand for a regional economic integration agreement under the Pacific Agreement on Closer Economic Relations (PACER).74 By late 2007, there was no prospect that Fiji would achieve significant new access under Mode 4 from anywhere. The CARIFORUM-EC 70

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73 74

D. Tabureguci and E. Baselala, ‘Who’s Who in the Kuwait Affair’, Islands Business, available at www.islandsbusiness.com/archives/islands_business/index_dynamic/container NameToReplace=MiddleMiddle/focusModuleID=4699/overideSkinName=issueArticlefull.tpl (accessed 15 December 2008). ‘UN Working Group on the Use of Mercenaries Concludes Visit to Fiji’, statement issued in Suva, Fiji on 18 May 2007. On fi le with author. ‘Fijian Lad Dies in Iraq’, Fiji Times, (11 July 2007), available at www.fijitimes.com/story. aspx?id=66053 (accessed 11 November 2008). Government of Fiji, ‘Services Negotiating Strategy’. On fi le with author. ‘Pacific Agreement on Closer Economic Relations (PACER) Plus Issues’, Pacific ACP Trade Ministers Meeting (PACPTOM), (PIFS (08) PACPTOM.01.5), (21 February 2008), para. 22.

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EPA, discussed earlier, set the precedent for negotiations on services with the EU if and when they occurred. Following the 2006 coup, Fiji was suspended from the New Zealand Recognised Seasonal Employers Scheme, which provided for temporary entry of 5000 seasonal workers from the Pacific Islands. Neither the Australian nor New Zealand governments would surrender that foreign policy tool lightly. Migration for remittances from Fiji continued to grow as a socioeconomic response to push and pull factors. Australia and New Zealand seemed content to continue sucking out nurses and teachers, trained at Fijian taxpayer expense or with aid funding, to compensate for their own loss of skilled workers, failed health policies and under-investment in training and social services. The demand for security workers in Iraq and other conflict zones also seemed, tragically, insatiable. From the destination viewpoint, a plentiful supply meant trade commitments were unnecessary. The fiction that this organic outflow of people was part of Fiji’s trade strategy absolved the government from examining the broader economic, social, cultural and development implications. Foreign and local commercial interests also took advantage of Fiji’s remittance dependency, weak regulatory capacity and trade rubric to exploit ‘a form of 21st century black-birding’ without effective constraints.75 Fijian women and men will continue to seek temporary work offshore as nurses, care-givers and security workers to sustain their families and communities, irrespective of whether their government secures trade in services commitments under Mode 4. But the trade discourse encourages the government to eschew a whole-of-government approach that might address the long-term economic, social, or cultural impacts on villages, urban communities and the country and to divest its responsibility to explore alternative development strategies. Avelina Rokoduru describes ‘almost a conspiracy of silence about workers’ rights, in the rush to establish worker mobility in the interests of the “market” and the “big players”.’76 Equally, the internalisation of the artifice of Mode 4 allows the transnational corporations and the destination powers to take advantage of Fiji’s ‘trade strategy’ without needing to make any trade commitments in return. 75 76

Pareti, supra, note 69. A. Rokoduru, ‘Fiji’s Women Migrant Workers and Human Rights: The Cases of Nurses and Teachers in the Republic of the Marshall Islands’, Journal of Pacific Studies, 27 (2004) 205, p. 225.

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VII

Conclusion

Assessments of how trade agreements impact on a nation’s regulatory autonomy often take the legal text as the starting point and treat the rules themselves as a given. This chapter has exposed the more subtle and complex ways in which trade regimes encourage governments to rearticulate their policy and regulatory priorities and impose disciplines on themselves without the formal obligation of legal rules. The coercive context of these regimes can have as much or more influence on governments as the treaty itself. In the case of ‘Mode 4 trade in services’, the governments of poor countries have internalised a trade discourse that has no prospect of achieving the concrete commitments through binding treaties that they are seeking, but which has significantly affected their approach to policy and regulation in the domestic domain. Temporary migration for remittances has been transformed from an organic response of people to distressing economic, political and social conditions to a matter of trade policy that screens out those dimensions. The legal text of the trade in services agreements conceals this transition through the reification of services as ‘trade’ and the fetishisation of temporary migration for remittances such as Mode 4. Likewise, the disembodied nature of the Mode 4 discourse excises the human realities of remittance migration and the accompanying need for protective regulation, irrespective of whether those workers are the subject of actual trade commitments. By restoring the intrinsically social nature of services and services labour, recognising the structural inequalities of the international division of labour in today’s global services/knowledge economy, re-embedding migration for remittances in their social relations and rendering the workers and their communities truly visible, it becomes possible to understand at a deeper level the implications of ‘Mode 4 trade in services’ for national regulatory autonomy.

13 Reconceptualising international investment law: bringing the public interest into private business K ate Miles

I

Introduction

Recent investor-state arbitration has heightened awareness of public interest issues in international investment disputes and illustrated its capacity to constrain the regulatory autonomy of host states. Procedurally, these disputes employ the model of international commercial arbitration, which emphasises confidentiality, closed proceedings and commercial considerations.1 Th is model is largely uncontroversial when applied to an international commercial dispute between private parties. However, investor-state arbitration is a different creature. Matters of public interest are inherently involved in investor-state disputes.2 And yet, the current arbitration model is ill-equipped to address these wider issues. This is most evident where public service sectors are implicated or where domestic regulation enacted for public welfare purposes is the subject of complaint.3 Although these cases resolve questions that can 1

2

3

M. Sornarajah, ‘The Clash of Globalizations and the International Law on Foreign Investment: The Simon Reisman Lecture in International Trade Policy’, Canadian Foreign Policy, 10(2) (2003) 1, pp. 13–17; K. Tienhaara, ‘Th ird Party Participation in InvestmentEnvironment Disputes: Recent Developments’, Review of European Community and International Environmental Law, 16(2) (2007) 230, pp. 230–1. The public interest in investor-state arbitration is derived from the involvement of public service sectors, public welfare regulation, good governance requirements attaching to state activities, and the impact of defence and/or compensation costs on public resources. See Tienhaara, supra, note 1, 230; International Institute for Sustainable Development (IISD), ‘Revising the UNCITRAL Arbitration Rules to Address Investor-State Arbitrations’ (September 2007), available at www.iisd.org/pdf/2007/investment_revising_uncitral_ arbitration_september.pdf (accessed 17 November 2007). See, for example, ‘Methanex Corporation v. United States of America’, International Legal Materials, 44 (2005) 1345; ‘Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania’,

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affect significant matters of public policy, the public generally does not have access to the documents, the proceedings are conducted behind closed doors, and the submission of amicus curiae briefs is restricted, if permitted at all.4 In addition to the procedural issues, investor-state arbitration has also highlighted an imbalance in the substantive principles of international investment law. There is little room for the consideration of the public interest in a regime so heavily weighted towards investor protection. 5 Therefore, there is a need for more balanced international investment agreements that retain strong investor protection but impose corresponding levels of investor responsibility.6 There is also a need for greater engagement with principles from other areas of international law. Although international investment agreements do not exist in a vacuum,7 the logical consequences of this appreciation are not often embraced in arbitral awards or investment treaty negotiation. If they were, we would already have seen the development of more socially and environmentally responsible norms of international investment law – and more emphasis on protecting the host state’s right to regulate in the public interest. This chapter argues that reluctance within the international investment community to take adequate account of the public interest and to integrate principles from international environmental and human rights law is out of step with current trends in public international law. Transformations in international law and international relations have been occurring at a core conceptual level for some time.8 This can be seen in the emergence

4

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Procedural Order No. 5 (2 February 2007), available at www.worldbank.org/icsid/cases/ pdf/ARB0522_ProceduralOrdNo5.pdf (accessed 21 May 2010). See also the discussion in Tienhaara, supra, note 1. Tienhaara, supra, note 1; G. Van Harten, Investment Treaty Arbitration and Public Law (Oxford University Press, 2007). A. Cosbey, H. Mann, L. E. Peterson and K. von Moltke, Investment and Sustainable Development: A Guide to the Use and Potential of International Investment Agreements (Manitoba, International Institute for Sustainable Development, 2004), available at www. iisd.org/pdf/2004/investment_invest_and_sd.pdf (accessed 21 May 2010); H. Mann, K. von Moltke, L. E. Peterson and A. Cosbey, IISD Model International Agreement on Investment for Sustainable Development: Negotiator’s Handbook , 2nd edn (Manitoba, International Institute for Sustainable Development, 2006), available at www.iisd.org/ pdf/2005/investment_model_int_handbook.pdf (accessed 21 May 2010). Cosbey et al., supra, note 5; Mann et al., supra, note 5. See for example, C. McLachlan QC, L. Shore and M. Weiniger, International Investment Arbitration: Substantive Principles (Oxford University Press, 2007), p. 15. P. Sands, ‘Turtles and Torturers: The Transformation of International Law’, New York University Journal of International Law and Politics , 33 (2001) 527; A.-M. Slaughter,

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of transnational networks as a form of global governance.9 The internal affairs of states are now often of legitimate interest to the international community.10 Concepts and principles are transferred between traditionally discrete areas of international law and vertical interaction occurs between domestic, regional and international legal systems.11 Treaties are considered in light of rules of international customary law.12 There is a sense that, where proceedings in international courts and tribunals impact significantly on public interest issues, voices in addition to those of states should be present.13 International legal scholars maintain that these developments indicate a transformation of the international legal system towards one which has public law at its base and has a fluid approach, interrelating national, regional and international law.14 There is no reason to exempt international investment law from these processes transforming the international legal system. Emerging principles of global public law such as transparency and accountability are not fully implemented in investor-state arbitration. National regulatory autonomy of host states is being constrained. The public interest is not given equal consideration with investor protection. This chapter argues that it ought to be. As such, these disputes should be determined by rules that allow for the balancing of all relevant interests. Arbitrators, investors, policy-makers and treaty negotiators ought not to exclude these considerations, nor the values reflected in other areas of international law.

A New World Order (Princeton NJ, Princeton University Press, 2004); N. Krisch and B. Kingsbury, ‘Introduction: Global Governance and Global Administrative Law in the International Legal Order’, European Journal of International Law, 17(1) (2006) 1; F. Garcia, ‘Globalization and the Theory of International Law’, International Legal Theory, 11 (2005) 9. 9 Slaughter, supra, note 8, pp. 2–18. 10 Sands, supra, note 8, pp. 530 and 535. 11 Ibid., p. 549; P. Sands, ‘Searching for Balance: Concluding Remarks’ in ‘The Colloquium on Regulatory Expropriations in International Law’, New York University School of Law Environmental Law Journal, 11 (2002–3) 198; P. Sands, ‘Treaty, Custom and the CrossFertilization of International Law’, Yale Human Rights and Development Law Journal, 1 (1998) 85; G. D. Triggs, International Law: Contemporary Principles and Practices (Australia, LexisNexis Butterworths, 2006), p. 20. 12 See, for example, Appellate Body Report, United States Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R, circulated 12 October 1998, adopted 6 November 1998 (US – Shrimp); Gabčikovo-Nagymaros Project (Hungary/Slovakia), Judgement, ICJ. Reports 1997, p. 7 (25 September 1997), paras. 112, 140; Sands, supra, note 8, pp. 549–50; P. W. Birnie and A. E. Boyle, International Law and the Environment, 2nd edn (Oxford University Press, 2002), pp. 80–1. 13 Sands, supra, note 8, p. 546. 14 Ibid., pp. 530 and 556–7; Krisch and Kingsbury, supra, note 8; Garcia, supra, note 8.

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Section II of this chapter outlines key structural transformations in the international legal system and considers their implications for international investment law. Section III examines the treaty-based option, calling for a balanced multilateral agreement on investment,15 while Section IV examines substantive change grounded in customary international law. It analyses the way in which norms of international investment law may be affected by international environmental law, corporate social responsibility standards and the sustainable fi nance movement. Section V considers procedural reform of the dispute settlement system to induce a more balanced consideration of public interest issues. It examines the International Centre for the Settlement of Investment Disputes (ICSID),16 the calls for an international investment court,17 and arguments for the inclusion of an appellate body structure within an entirely new multilateral agreement to regulate international investment.18 Th is chapter argues that one central appellate body for investment disputes would address both the consistency problems of the current system and the substantive issues in need of reform. An appellate body has the potential to produce a more sophisticated reading of international investment law, utilising an integrated approach in much the same way as the World Trade Organization (WTO) Appellate Body has done in the context of international trade disputes.19 By considering principles from other areas of international law, the broader social and environmental issues involved in investor-state arbitration likely would have a more receptive hearing than is currently the case. These arguments also draw attention to the attributes of arbitrators in the current system, the selection process for their appointment to tribunals, and the implications of a systemic ‘investor bias’ within investment dispute resolution.20 Section VI considers whether the path to a transformed international investment law also lies in pursuing a less formal approach. It considers 15 16

17 19 20

Mann et al., supra, note 5. Convention on the Settlement of Investment Disputes between States and Nationals of Other States, opened for signature, 575 UNTS 159, 18 March 1965 (entered into force 14 October 1966). Van Harten, supra, note 4, pp. 180–4. 18 Mann et al., supra, note 5. See, for example, Appellate Body Report, US – Shrimp, supra, note 12. C. J. Tams, ‘An Appealing Option? The Debate about an ICSID Appellate Structure’, Essays in Transnational Economic Law, 57 (2006), Institut für Wirtschaftsrecht, 31–3, available at www.wirtschaft srecht.uni-halle.de/Heft 57.pdf (accessed 15 August 2007); Cosbey et al., supra, note 5, p. 6.

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the application of theories on transnational networks to the foreign investment sector.21 It explores theories on the role of global social frameworks in the collision of international investment law and international human rights and environmental norms, 22 and asks whether the most effective way forward is to focus on shifting the culture of existent networks in arbitration circles and international business. It argues that there is a place for a multi-layered approach to changing the law, policies, practices and culture of actors in the foreign investment sector. This approach includes effecting change through the influence of ‘networks’ to broaden the perspectives and understandings of those in international investment arbitration circles and foreign investment policy development. This informal approach could assist in accelerating a cultural shift within the foreign investment sector to one which welcomes the incorporation of social and environmental considerations into international investment law and policy. Efforts to implement the substantive and procedural measures suggested will encounter significant obstacles. A key stumbling-block is the reluctance of developed states to loosen investor rights.23 This issue, however, may be addressed through a re-framing of global objectives, aligning promotion of foreign investment with goals of sustainable development. The political perspective of developed states also shows signs of a slight shift, as they find themselves on the receiving end of investor-state complaints.24 Increasingly, there is a realisation that environmental, health or financial regulation in the United States or United Kingdom is vulnerable to challenge, just as it is in Mexico or Argentina, and this is leading to a re-evaluation of the system of investor-state arbitration and of substantive investor protection measures.25 This process should ultimately result in a more appropriate balance between investor protection and host state national autonomy.

21

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23 24

25

See, for example, Slaughter, supra , note 8, p. 264; P. Haas, ‘Epistemic Communities’ in D. Bodansky, J. Brunnée and E. Hey (eds.), The Oxford Handbook of International Environmental Law (Oxford University Press, 2007), p. 791. A. Fischer-Lescano and G. Teubner, ‘Regime-Collisions: The Vain Search for Legal Unity in the Fragmentation of Global Law’ in ‘Diversity or Cacophony? New Sources of Norms in International Law Symposium’, Michigan Journal of International Law, 25 (2003–4) 999. Cosbey et al., supra, note 5, p. 27; van Harten, supra, note 4, p. 179. P. Sands, Lawless World: America and the Making and Breaking of Global Rules (London, Penguin Group, 2005), pp. 121–2 and 139–41. Ibid.

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II

Transformations in public international law

International law is an organic system, continuously evolving both in its content and in its structures.26 This has become increasingly apparent over the last 40 years. As Crawford observes, international law is presently in ‘a period of comparative openness and re-formation’27 and there is a ‘sense of fluidity, opportunity and uncertainty’.28 Key frameworks and mechanisms remain in place, such as the state and the use of treatymaking and customary rules, but a reconceptualisation of many facets of the international legal system is in progress.29 The classical model of international law is of a system concerned solely with the governing of relations between states.30 As it developed throughout the eighteenth and nineteenth centuries, the focus for international law was very much on the preservation of sovereign rights, and the central tenet was non-interference in the internal affairs of other states.31 Furthermore, there was a presumption that states were entitled to act as they wished unless there was an express restriction on their conduct. And as the primary objective of the system was the avoidance of military conflict between states, the range of subject matter regulated by international law was limited.32

Non-state actors, soft law and the interaction of principles International law, as a system, has been moving away from this classical model for some time.33 A gradual shift in perspective towards globalism has been instrumental in this re-appraisal.34 The recognition that global issues are complex, interrelated and require a correspondingly sophisticated approach to their resolution has been a significant catalyst in the remoulding of international law and its mechanisms.35 It has led to the 26

27 30

31 34 35

J. Crawford, International Law as an Open System: Selected Essays (London, Cameron May, 2002), p. 17; Sands, supra , note 8; Triggs, supra , note 11, pp. 17–20; P. J. Spiro, ‘Globalization, International Law, and the Academy’, New York University Journal of International Law and Politics, 32 (1999–2000) 567. Crawford, supra, note 26, p. 17. 28 Ibid. 29 Ibid; Sands, supra, note 8. J. L. Brierly, The Law of Nations, 6th edn (Oxford University Press, 1963), p. 1; Sands, supra, note 8; Triggs, supra, note 11, pp. 11–12 and 23. Sands, supra, note 8, pp. 529–30. 32 Ibid. 33 Ibid., p. 527. Garcia, supra, note 8, pp. 9–10; Sands, supra, note 8, pp. 537–8. See in the context of international environmental law, B. Boer, ‘The Globalisation of Environmental Law: The Role of the United Nations’, Melbourne University Law Review, 20 (1995–6) 101.

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increasing use of ‘soft law’ instruments in the search for more dynamic and responsive tools to address global issues.36 It has also seen the emergence of new substantive areas in international law and new actors on the international plane.37 The rate of international law-making has accelerated, the number of international rules has multiplied, and the fora in which to hear international disputes have proliferated.38 Indeed, the ‘globalisation’ of international law has made significant encroachments on the traditional impregnability of state sovereignty – what occurs within state borders is now of legitimate legal interest to the international community.39 Th is era has seen not only the emergence of new principles and rules of customary international law, but also new categories of international rules, introducing structural changes to the regulatory system. With the acceleration of international law-making it has now become commonplace to talk of ‘emerging ’ principles of international law and ‘emerging ’ rules of international customary law.40 These emerging norms do not yet have full legal status, but they do represent a new class of obligation. They evidence current state practice, set out the way in which states are expected to conduct themselves, and indicate the principles that are most likely to form rules of customary international law.41 ‘Soft law’ instruments have become increasingly important in the development of these new concepts and principles and, in fact, are even contributing to the development of new branches of law, as evidenced by the burgeoning area of international law on sustainable development since 36

37

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39 40

41

P.-M. Dupuy, ‘Soft Law and the International Law of the Environment’, Michigan Journal of International Law, 12 (1991) 420; P.-M. Dupuy, ‘Formation of Customary International Law and General Principles’ in Bodansky et al., supra, note 21, p. 458. Sands, supra , note 8, pp. 548–9; K. Raustiala, ‘The “Participatory Revolution” in International Environmental Law’, Harvard Environmental Law Review, 21 (1997) 537; Spiro, supra , note 26, p. 570; J. Mertus, ‘Considering Nonstate Actors in the New Millennium: Toward Expanded Participation in Norm Generation and Norm Application’, New York University Journal of International Law and Politics, 32 (1999– 2000) 537. Sands, supra , note 8, pp. 548–9. See also the discussion in C. P. R. Romano, ‘The Proliferation of International Judicial Bodies: The Pieces of the Puzzle’, New York University Journal of International Law and Politics, 31 (1999) 709. Sands, supra, note 8, pp. 537–8. P. Sands, Principles of International Environmental Law, 2nd edn (Cambridge University Press, 2003), pp. 231–2; see also C. G. Weeramantry, Universalising International Law (Leiden, Martinus Nijhoff Publishers, 2004), pp. 432–4 and 456–63, for a discussion on the evolution of the concept of sustainable development into a part of international law, and for a discussion on ‘Some Emerging Principles of International Law’. Sands, supra, note 40, pp. 124 and 231–2.

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the Rio Declaration and Agenda 21.42 The transfer of concepts and principles between substantively distinct areas of law and between domestic, regional and international legal systems has also been important to this process.43 The classical conception of international law is, of course, as a series of discrete fields.44 However, recent models have adopted more integrated approaches to the substantive development of international law, seeking to balance interests and to allow for the interchange of principles between fields of international law.45

Global public law These developments have led scholars to argue that international law is evolving into ‘global public law’.46 The ideas put forward envisage a system in which states remain important, but are by no means the only significant actors.47 Slaughter describes a world of government networks that form around subject areas, such as defence, trade, financial regulation, environmental protection, crime and dispute resolution, in which information is exchanged and programmes are coordinated.48 She argues for the development of informal norms of global governance to regulate these networks: principles of global deliberative equality,49 legitimate difference, positive comity, checks and balances, and subsidiarity.50 Garcia makes the case for a system of global public law, grounded in justice, to structure and regulate the emergent global community at the ‘meta-state’ level.51 Sands explores the fundamental transformations in international law embodied in the emergence of non-state actors, new international norms, 42

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44 45

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48 49 50

B. Boer, ‘Sustainability Law for the New Millennium and the Role of Environmental Legal Education’, Water, Air, and Soil Pollution, 123 (2000) 447; Dupuy, ‘Formation of Customary International Law and General Principles’, supra, note 36. Sands, ‘Searching for Balance’, supra, note 11; Sands, ‘Cross-Fertilization of International Law’, supra, note 11; see also the discussion in C. McLachlan, ‘The Principle of Systemic Integration and Article 31(3)(c) of the Vienna Convention’, International and Comparative Law Quarterly, 54 (2005) 279. Sands, supra, note 8, p. 549. Sands, ‘Searching for Balance’, supra, note 11, pp. 200–2; Sands, ‘Cross-Fertilization of International Law’, supra, note 11. See, for example, Sands, supra , note 8, pp. 530, 557; Garcia, supra , note 8; Krisch and Kingsbury, supra, note 8; Slaughter, supra, note 8. Sands, supra, note 8, pp. 530, 556–7; Garcia, supra, note 8, pp. 18–25; Slaughter, supra, note 8, pp. 244–60. Slaughter, supra, note 8. ‘Global deliberative equality’ refers to principles of equal participation in processes. Slaughter, supra, note 8, pp. 244–60. 51 Garcia, supra, note 8, pp. 18–25.

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and the proliferation of international dispute resolution mechanisms.52 Sands argues that these developments are ‘challeng[ing] some of the most basic assumptions that have dominated international legal relations for much of the past century’53 and considers that they are taking us towards a new global manifestation of public law, one that interrelates national, regional and international law.54

Reorienting international investment law What do these developments mean for international investment law? They point to the need for its reconceptualisation. Its principles, treaties and dispute resolution systems need to be brought into alignment with the current direction of public international law. It ought to reflect the wider trends towards greater transparency, public participation and accommodation of the public interest. International investment law needs to embrace the principle of integration and the fluidity of international norms. It needs to cease operating as a self-contained regime, impervious to the requirements of global public law, international environmental principles and international human rights. General trends in the international legal system will increasingly require a more flexible, transparent, balanced and socially and environmentally responsible international investment law for the twenty-first century. The following sections examine a number of paths through which this reconceptualised international investment law could be realised.

III

Treaty-based reform

One current proposal to induce more responsible investment practices is the Model International Agreement on Investment for Sustainable Development drafted by the International Institute for Sustainable Development (IISD Agreement).55

IISD Agreement on Investment for Sustainable Development Although attempts to negotiate the Multilateral Agreement on Investment failed in 1998, 56 states remain interested in developing a global 52 54 56

Sands, supra, note 8. 53 Ibid., p. 527. Ibid., pp. 530 and 556–7. 55 Mann et al., supra, note 5. See the text of the draft Multilateral Agreement on Investment (MAI) at OECD Negotiating Group on the Multilateral Agreement on Investment, Draft Consolidated

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regulatory framework for international investment.57 There are indications that the emphasis is shift ing to the possible accommodation of investor responsibilities within that framework. 58 Against this backdrop, a number of approaches have been explored by NGOs, 59 the most developed of which is IISD’s proposal which uses sustainable development as its platform.60 The IISD Agreement recognises that foreign investment is a crucial element in the promotion of sustainable development and, as such, does not argue that investor protection should be removed or investment discouraged.61 It does assert, however, that the prevailing model for bilateral investment treaties was developed over 50 years ago and, as a creature of its own political context, focused solely on protection for foreign investors.62 The International Institute for Sustainable Development argues that the one-sided approach of bilateral investment treaties is untenable in the twenty-first century.63 The IISD Agreement seeks to maintain high levels of investor protection,64 but also to prescribe social and environmental obligations to the investor65 and to ensure that foreign investment contributes to sustainable development in the host country.66 To this end, the IISD Agreement includes the promotion of sustainable development in the Preamble and Objectives provisions.67 It modifies national treatment and most-favoured-nation treatment standards, expanding the criteria for ‘like circumstances’ beyond commercial considerations.68 It places bona fide non-discriminatory regulation outside the scope of indirect expropriation.69 It introduces new pre-establishment obligations such as public access to environmental and social impact assessments70 and the

57

58 61 64 66 68

Text, 22 April 1998, available at www.oecd.org/daf/mai/pdf/ng/ng987rle.pdf (accessed 2 September 2008). See further for a discussion on the MAI, R. Geiger, ‘Regulatory Expropriations in International Law: Lessons from the Multilateral Agreement on Investment’, New York University Environmental Law Journal , 11 (2002–3) 94, pp. 96–7; J. McDonald, ‘The Multilateral Agreement on Investment: Heyday or Mai-Day for Ecologically Sustainable Development?’, Melbourne University Law Review, 22 (1998) 617. J. A. Zerk, Multinationals and Corporate Social Responsibility: Limitations and Opportunities in International Law (Cambridge University Press, 2006), p. 280; J. Werksman, K. A. Baumert and N. K. Dubash, ‘Will International Investment Rules Obstruct Climate Protection Policies? An Examination of the Clean Development Mechanism’, International Environmental Agreements: Politics, Law and Economics, 3 (2003) 59, p. 79. Zerk, supra, note 57, p. 280. 59 Ibid. 60 Mann et al., supra, note 5. Ibid., pp. x–xi. 62 Ibid. 63 Ibid., pp. x–xi. Ibid., pp. 12–20, Articles 5–10. 65 Ibid., pp. 22–30, Articles 12–18. Ibid., p. 4, Article 1. 67 Ibid., Preamble, Article 1. Ibid., Article 5(E). 69 Ibid., Article 8(I). 70 Ibid., Article 12(C).

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application of the precautionary principle to investor decision-making on receipt of the impact assessment.71 It takes an integrated approach, drawing on international standards from outside investment law to design its post-establishment obligations.72 And it enables the use of home state courts for civil actions for significant damage, personal injury or loss of life in the host state as a result of acts or decisions of the investor.73 The IISD Agreement reclaims national regulatory autonomy for the host state. It also makes significant progress towards the development of more socially and environmentally responsible international investment norms. Its careful articulation of rights and obligations, the balancing of investor protection with investor responsibilities, and the framing of the Agreement within the concept of sustainable development demonstrate that a more balanced approach to international investment law is possible. It is also feasible to take the reconceptualisation even further to ensure that the public interest, international human rights and ecological sustainability are reflected in its general principles, and that a cultural shift ultimately occurs within the foreign investment sector. There are already signs that this process is under way. For example, the calls for more transparency and for the involvement of NGOs in investorstate arbitration are beginning to make an impact. They have led to the acceptance of amicus curiae briefs in a number of recent environmentrelated investment arbitral proceedings.74 They have also led to the inclusion of specific provisions in the United States’ and Canadian model bilateral investment agreements allowing for the acceptance of amicus briefs and public access to the proceedings, documents and awards.75 Substantively, it can be seen in the recent Parkerings award, which considered cultural heritage and environmental impacts as criteria for determining whether investment projects were in ‘like circumstances’.76 Developments such as these indicate that the foreign investment sector is being forced to respond to pressure from civil society and the shift in the global political climate. 71 74

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Ibid., Article 12(D). 72 Ibid., Article 14. 73 Ibid., Article 17. See Methanex Corporation v. United States of America , supra , note 3; Biwater Gauff Limited v. United Republic of Tanzania, supra, note 3. See the discussion in Tienhaara, supra, note 1. The Canadian Model BIT is available at http://ita.law.uvic.ca/documents/Canadian2004FIPA-model-en.pdf; The US Model BIT is available at http://ita.law.uvic.ca/documents/ USmodelbitnov04.pdf (accessed 21 May 2010). Parkerings-Compagniet AS v. Republic of Lithuania , ICSID Arbitration Case No. ARB/05/8, Award, 11 September 2007, para. 371, available at http://ita.law.uvic.ca/ documents/Parkerings.pdf (accessed 2 October 2007).

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This chapter considers that this is only the beginning of the process of opening up international investment law, and that, in the future, we may see socially and environmentally responsible substantive measures, such as those set out in the IISD Agreement, appearing in international investment agreements. In this way, the imbalance between host state national autonomy and investor protection will increasingly be addressed.

IV Emerging principles of sustainability and corporate social and environmental responsibility A treaty-based option is not the only mechanism through which foreign investment law and practices can be transformed. It is likely that customary international law will also play a role. And if an integrated approach to the interpretation of international law is adopted, principles emerging out of international environmental law, sustainable development law, corporate social responsibility standards and the sustainable fi nance movement may affect the future evolution of norms in international investment law. Key emerging sustainability and corporate social responsibility principles include sustainable development, the precautionary principle, transparency requirements and supply chain responsibility.77 These principles have the potential to transform international investment law in fundamental ways. They recognise that corporate operations do not occur in a vacuum, but have flow-on effects at local and global levels. As such, if infused throughout the foreign investment sector, what form might such principles take? It is likely that mandatory procedural norms would develop. This would see the introduction of compulsory social and environmental impact assessment at the pre-establishment stage, public reporting on localised impacts throughout the life of the investment, carbon disclosure requirements for investment projects, sustainability reporting for corporations, and required procedures for consultation with local and indigenous communities. Such procedural norms would begin to place investor activity within its wider context. This approach could be furthered through the integration 77

Other principles include the principle of integration, socially and environmentally responsible lending practices for fi nanciers, requirements to conduct environmental impact assessments, minimum international environmental, social justice, human rights and health and safety standards, consultation with local and indigenous communities, obligations to warn of risks posed by corporate activities or products, access to information and public participation, and carbon disclosure. See Zerk, supra , note 57, pp. 262–76.

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of principles from other areas of international law into substantive investment norms. The principle of sustainable development would be fundamental, framing foreign investment decision-making, international investment agreements and the resolution of investor-state disputes. Tribunals could no longer exclude the consideration of sustainable development in assessing investor claims, and it would be less likely that host state measures taken in pursuit of sustainability would be found in breach of treaty provisions. It would not be permissible to disregard host state obligations under multilateral environmental agreements, international human rights conventions or international labour standards. Indeed, the fact that the disputed state action was taken pursuant to these obligations would be relevant in determining whether a treaty violation had occurred. In this way, the domestic regulatory needs of host states could be better accommodated.

V Reform of the dispute settlement system It is clear that treaty-based reform and the application of principles of sustainability and corporate social and environmental responsibility to the investment sector would reshape the substance of international investment law. However, reform of the dispute settlement system is also a crucial link in the realisation of a more responsible international investment legal framework. There are inherent consistency, transparency and legitimacy problems in the current system of investor-state arbitration. These structural and procedural issues impact on the ways in which public interest issues are addressed in investor-state arbitration. They perpetuate a system and culture that is antagonistic to the proper consideration of public policy issues in investment disputes.78 And ultimately they affect the ability of states to implement more stringent social and environmental regulation. The key procedural problems stem from the decentralised system of non-permanent arbitral tribunals, its commercial emphasis, and the confidentiality surrounding proceedings. The lack of any governing framework leads to inconsistent decisions on the same issues, and has 78

See the discussion on the views of members of the investment sector ‘that an arbitrator is not the guardian of public policy, that his duties are towards the parties only, and that he must confi ne himself to the determination of disputes involving private interests’ in P. Mayer, ‘Reflections on the International Arbitrator’s Duty to Apply the Law: The 2000 Freshfields Lecture’, Arbitration International, 17(3) (2001) 235, pp. 246–7.

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even done so on essentially the same dispute.79 The lack of transparency, whereby proceedings are largely held behind closed doors and awards are only published if the parties consent, is a lamentable violation of public law principles.80 As a result, the legitimacy of the system of investor-state arbitration is increasingly questioned.81 There are allegations of systemic ‘investor bias’ in the determination of investment disputes.82 The very structure of the dispute settlement model is based on private commercial dispute resolution,83 and, as such, is not currently a system designed to accommodate adequate consideration of the social, environmental, ethical and human rights issues that arise in investor-state disputes.84 This predisposition towards the primacy of commercial interests is compounded by the method of selecting an arbitral tribunal, in which there is no security of tenure for arbitrators, and the parties, or the arbitral facility, choose the arbitrators.85 The choice of arbitrator is a crucial component of the arbitral process. Dezalay and Garth point out that: both the processes and the outcomes of particular cases and arbitration in general depend on the characteristics of the arbitrators … the selection is a key decision in winning or losing. The attorneys for the parties well understand that the ‘authority’ and ‘expertise’ of arbitrators determine their clout within the tribunal. The operation of the market in the selection of arbitrators therefore provides a key to understanding the justice that emerges from the decisions of arbitrators.86

Their research indicates that, when considering the way in which the public interest is addressed in investor-state arbitration, attention

79

80 81

82 83 84 85 86

See, for example, the Lauder Cases: In the Matter of an UNCITRAL Arbitration between Ronald S. Lauder and the Czech Republic, Final Award, 3 September 2001; CME Czech Republic B.V. (the Netherlands) v. Czech Republic, Partial Award, 13 September 2001, Final Award, 14 March 2003. Van Harten, supra, note 4, p. 159. See, for example, C. N. Brower, C. H. Brower II and J. K. Sharpe, ‘The Coming Crisis in the Global Adjudication System’, Arbitration International, 19(4) (2003) 415. Tams, supra, note 20, pp. 31–3. Sornarajah, supra, note 1, pp. 13–17; Tienhaara, supra, note 1, pp. 230–1. Sornarajah, supra, note 1, p. 17. Ibid; Cosbey et al., supra, note 5, p. 6; Van Harten, supra, note 4, pp. 168–72. Y. Dezalay and B. G. Garth, Dealing in Virtue: International Commercial Arbitration and the Construction of a Transnational Legal Order (London, University of Chicago Press, 1996), pp. 8–9. Dezalay and Garth include investor-state arbitration as falling within their study of international commercial arbitration. As such, their comments on arbitrators are applicable to both solely private-party arbitration and investor-state disputes.

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must also be given to who the decision-makers are in these disputes. The community of international commercial arbitrators is small.87 Arbitrators interviewed by Dezalay and Garth describe the inner circle as the ‘mafia’ or the ‘club’, a community which is difficult to join.88 Divided along generational lines, the community is characterised as comprising two groups, that of the ‘grand old men of arbitration’, being the pioneers of international arbitration, and the younger ‘technocrats’, who emphasise their technical skill, business know-how and specialisation in arbitration.89 The overall mode of organisation, however, is one of: an epistemic community or issue network organised around certain beliefs in an ideal of international private justice, but it is also an extremely competitive market involving big business and megalawyering. To understand it requires an understanding of both the ideals and the competition for business.90

This characterisation has significant implications for the resistance of arbitrators to incorporating environmental, social and ethical considerations into their decision-making in investor-state disputes. Dezalay and Garth contend that arbitrators and counsel are engaged in a dual process of creating a legitimate transnational legal order for commercial dispute resolution, while simultaneously needing to court the continued purchase of their services from business entities.91 At the very least, this reliance on the business community for its survival creates a slant in the system towards accommodating the needs and values of that community. However, the authors also point to the fiercely competitive nature of the market for securing large and prestigious arbitral instructions, and how this competitiveness shapes the field of international arbitration in fundamental ways.92 Arbitrators and potential arbitrators note the factors that are valued in the marketplace, that lead to re-appointments, and adjust their own conduct to display those characteristics and align themselves with ‘successful’ arbitrators.93 To a certain degree, this inevitably involves demonstrating an affi nity with the objectives of international commerce.94 Sornarajah expresses disquiet at this system, which encourages its decision-makers to have one eye on ‘the securing of their next appointment 87 89

90 93

Ibid., pp. 10 and 46. 88 Ibid., pp. 10, 28–9, 46 and 50–1. Ibid., pp. 18–29, 34–7. For example, in 1996, Dezalay and Garth categorised Professor Pierre Lalive and Judge Gunner Lagergren as members of the former group and Jan Paulsson and Yves Derains as members of the latter. Ibid., p. 16. 91 Ibid., pp. 8, 16 and 70. 92 Ibid., pp. 16, 29. Ibid., p. 29. 94 Ibid., p. 70.

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to a tribunal on the basis of their display of commercial probity and their loyalty to the values of multinational business’.95 Systemically, there are strong disincentives for arbitrators to give weight to non-commercial considerations or to engage with the wider context of investment activity, such as through the application of principles of sustainable development to the dispute. There is no place in the current system for an arbitrator who acts boldly and incorporates applicable principles from other areas of international law. There are further concerns about the lack of independence of arbitrators. The current system allows for arbitrators to appear as counsel in separate cases.96 This means that counsel in one investment dispute, arguing for a particular interpretation of a provision, can also act as arbitrator on other investment disputes involving similar issues, leading to the unsettling possibility that decisions made in the capacity of arbitrator may later be used to influence the interpretation of the law applicable to the counsel’s own clients.97 An undesirable practice of repeat appointments has also developed where ‘counsel selecting an arbitrator who, next time around when the arbitrator is counsel, selects the previous counsel as arbitrator’.98 As Cosbey et al. point out, the issue is not so much directed at the personal integrity of individual arbitrators, but at a system that allows those lines to be blurred.99 It is hugely problematic that a system so heavily weighted towards the preservation of commercial interests is determining questions that affect significant matters of public policy, the interests of multiple stakeholders, and the ability of states to regulate on the environment and health and safety of their citizens. The current investment dispute settlement framework is clearly unsatisfactory. The establishment of a central, permanent appellate body for investment arbitration, together with appropriate rules on transparency and receipt of amicus briefs, would address many of the concerns set out above and would bring international investment law into line with principles of the emerging global public law framework.100 It would allow for more effective consideration of public interest issues and more 95 96

97

98 100

Sornarajah, supra, note 1, p. 17. Dezalay and Garth, supra , note 86, pp. 49–51; Cosbey et al., supra , note 5, p. 6; Van Harten, supra, note 4, pp. 172–3. Cosbey et al., supra, note 5, p. 6; Van Harten, supra, note 4, pp. 172–3; T. Buergenthal, ‘The Proliferation of Disputes, Dispute Settlement Procedures and Respect for the Rule of Law’, Arbitration International, 22(4) (2006) 495, p. 498. 99 Buergenthal, supra, note 97, p. 498. Cosbey et al., supra, note 5, p. 6. See, for example, Garcia, supra, note 8; Krisch and Kingsbury, supra, note 8.

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appropriate treatment of national regulatory autonomy. Furthermore, it is likely that an appeals facility would also bring a more progressive approach to the development of international investment law. An analogous precedent for this can be found in decisions of the WTO Appellate Body, such as US – Import Prohibition of Certain Shrimp and Shrimp Products,101 which integrated the consideration of principles of international environmental law into the interpretation of trade rules.102 It is likely that opening up the analysis of international investment norms to the influence of principles from other areas of international law would provide a more receptive hearing for the social and environmental issues involved in investor-state arbitration. As such, the next section examines options for creating an appeals facility that may assist in driving the reconceptualisation of international investment law.

Appellate body within ICSID An appellate body could help restore legitimacy to investor-state arbitration.103 As the dominant dispute resolution mechanism in investorstate arbitration,104 it is not surprising that ICSID has turned its attention to the need for an appeals facility. In particular, ICSID has acknowledged the potential for inconsistent awards in investment arbitration and has identified this potential as a systemic problem.105 In exploring the need for an appeals facility, ICSID noted the increasing number of investment cases, the interest expressed by member states in such a mechanism, and the beneficial effects it would have in enhancing the perception of investor-state arbitration outside the arbitration community.106 The initial fervour has slowed somewhat as several states took a negative view 101 102

103

104 105

106

See the Appellate Body Report, US – Shrimp, supra, note 12. See the discussion in T. Stephens, ‘Multiple International Courts and the “Fragmentation” of International Environmental Law’, Australian Yearbook of International Law, 25 (2006) 227, pp. 263 and 265. See, for example, Van Harten, supra, note 4, pp. 153–75, 180; see also S. D. Franck, ‘The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law Th rough Inconsistent Decisions’, Fordham Law Review, 73 (2004–5) 1521; N. Gal-Or, ‘The Concept of Appeal in International Dispute Settlement’, European Journal of International Law, 19(1) (2008) 43; D. A. Gantz, ‘An Appellate Mechanism for Review of Arbitral Decisions in Investor-State Disputes: Prospects and Challenges’, Vanderbilt Journal of Transnational Law, 39 (2006) 39. Van Harten, supra, note 4, p. 27. ICSID, ‘Possible Improvements of the Framework for ICSID Arbitration’ (Discussion Paper, 22 October 2004). Ibid.

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of the proposal.107 These views were expressed despite the conclusion of a number of free trade agreements and bilateral investment treaties that anticipate the future creation of an appeals facility for investor-state disputes.108 There are conflicting views on the desirability of an appellate body established within ICSID, for a variety of reasons. Opponents at one end of the spectrum argue that an appeals facility goes against the raison d’être of international arbitration as a relatively quick and less expensive alternative to litigation.109 The argument runs that allowing appeals would remove the finality of the award, drag out the dispute, extend the period of uncertainty and increase costs.110 On the other hand, Sammartano suggests that these objections could be met fairly easily through a range of tight procedural regulations and prescribed timeframes for the hearing of appeals.111 He also characterises the notion that parties prefer a final, unreviewable award as a myth, and, as such, this should not be used as an argument against an appeals facility.112 Others oppose the establishing of an appellate body within ICSID for entirely different reasons.113 The concerns here are that the private nature of the system remains intact, along with the preservation of a value system that places private commercial interests above public policy measures.114 Creating an appellate body within the ICSID framework would assist in alleviating the problem of inconsistent arbitral awards. However, it would not address the other, equally important, public law issues of transparency, accountability and investor bias. This has led to proposals for the establishment of an international investment court.115 107

108

109

110

111 113 115

Tams, supra, note 20, p. 6; Investment Treaty News, ‘ICSID Member-Governments OK watered-down changes to arbitration process’ (29 March 2006), available at www.iisd. org/pdf/2006/itn_mar29_2006.pdf (accessed 4 May 2009). Tams, supra , note 20, p. 5; see the discussion in Gantz, supra , note 103. Examples include the US–Uruguay Bilateral Investment Treaty (2005), the US–Rwanda Bilateral Investment Treaty (2008), the US–Chile FTA (2003), the US–Singapore FTA (2003), the US–Morocco FTA (2004), and the US-Central American and Dominican Republic FTA (2004). See Tams, supra, note 20, p. 34; see also the discussion on the origins of commercial arbitration as an alternative to litigation in Van Harten, supra, note 4, pp. 59–61. Tams, supra, note 20, p. 34; see also M. R. Sammartano, ‘The Fall of a Taboo: Review of the Merits of an Award by an Appellate Arbitration Panel and a Proposal for an International Appellate Court’, Journal of International Arbitration, 20(4) (2003) 387, pp. 388–91. Sammartano, supra, note 110, pp. 388–9. 112 Ibid., p. 387. See, for example, Van Harten, supra, note 4, p. 167. 114 Ibid. Ibid., pp. 180–4; Sammartano, supra, note 110, pp. 391–2.

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An international investment court Proponents of the creation of an international investment court argue that this institutional option would address many of the concerns surrounding the current ad hoc system of investor-state arbitration, but would also build on the existing framework of bilateral investment treaties, rather than discarding it altogether.116 Van Harten, for example, puts forward a proposal for an international court that has jurisdiction to hear investorstate disputes both at first instance and as an appeals facility.117 This would be a mechanism that sat above the current investment treaty network, adjudicating on disputes arising under bilateral or regional investment treaties. He argues that judges should be tenured appointments to the court and should be selected by states so as to ensure their independence and accountability.118 Van Harten argues that this institutional response to problems with investor-state arbitration is the most realistic reform option, precisely because it is a procedural response and does not address substantive concerns.119 He argues that, with so many bilateral investment treaties in existence and a multitude of failed attempts to garner a multilateral investment treaty, radical reform of the system is unlikely to secure the necessary level of state support.120 Van Harten’s proposal would certainly restore public law principles to investor-state dispute resolution. It would make a fundamental difference to a range of problems derived

116

117 118

119

See, for example, Van Harten, supra , note 4. See also the proposals by Sammartano, supra , note 110, pp. 391–2; S. M. Schwebel, ‘The Creation and Operation of an International Court of Arbitral Awards’ in M. Hunter, A. Marriott and V. V. Veeder (eds.), Internationalisation of International Arbitration (London/Dordrecht/Boston, Graham & Trotman/Martinus Nijhoff, 1995), p. 115; H. H. Holtzman, ‘A Task for the 21st Century: Creating a New International Court for Resolving Disputes on the Enforceability of Arbitral Awards’ in Hunter et al., Internationalisation of International Arbitration, p. 109. Van Harten, supra, note 4, p. 180. Ibid., pp. 180–3. Van Harten argues that state-based appointments to an appellate facility are necessary to ensure accountability. He counters the argument that such a system would produce a bias towards host states by arguing that appointments would come from both capital-exporting and capital-importing states. Van Harten suggests that we will have to trust that states would appoint appropriate experts. He argues that, as states represent the interests of a wide range of stakeholders, are accountable to their citizens, and could hold judges accountable for their decisions, democratic principles demand that states, rather than the investment community, appoint the judges to any future international investment court. Ibid., p. 180. 120 Ibid.

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from the decentralised, ad hoc system of investor-state arbitration and the method of selection of arbitrators. However, while such institutional change is necessary, it is not sufficient to achieve reform. What is also needed is a transformation of substantive norms of international investment law to a more socially and environmentally acceptable set of rules and principles. Only with this type of reform will balance be achieved between the need for regulatory autonomy of the host state and adequate protection for investors. Therefore, a dispute settlement body, incorporating an appeals facility, within a new multilateral agreement addressing sustainable finance, investment and corporate social and environmental responsibility, would be the most effective procedural option to achieve recognition of public interest factors.

Appellate body within a new responsible investment convention A fundamental part of any new socially and environmentally responsible multilateral agreement on investment will be reform of the current international investment dispute resolution system. A new centralised approach needs to be adopted. One decision-making body needs to be created, which has jurisdiction to hear investor-state disputes at both first instance and at appeals level. As Van Harten suggests, the adjudicators need to be appointed for a fi xed term of some years, preferably in the region of seven to ten, and should be selected by a committee of capitalexporting and capital-importing states to ensure judicial independence and accountability.121 There needs to be public access to the documents filed by the parties, to the oral proceedings and to the final awards. There should also be a mechanism by which amicus curiae briefs are accepted. In this way, the transparency, consistency and accuracy problems in investor-state arbitration could be addressed, the inappropriate emphasis on preservation of commercial interests could be removed, and more room could be made in the system for host state regulatory autonomy. The IISD Agreement recognises the need to marry procedural reform with substantive progress. It provides for a two-level dispute settlement body embedded within a convention containing investor responsibilities as well as rights.122 The IISD approach is the most appropriate model to bring about a transformation of foreign investment practices and international investment law. Combining procedural reform with more balanced substantive principles better reflects the needs of all states and their 121

Ibid., p. 182.

122

Mann et al., supra, note 5.

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citizens in the twenty-first century. The most effective way to advance this goal would be to pursue the conclusion of a multilateral treaty, following the model of the IISD Agreement, but with further expansion on sustainable finance, ecological investment and corporate social and environmental responsibility. This is unlikely to occur, however, without a cultural transformation in the foreign investment sector. As such, the next section examines the development of less formal channels to reform, and applies theories of transnational networks to the investment community.

VI

International investment networks

Multinational corporations, institutional investors, transnational financiers and international arbitrators – these are groups around which informal networks are already in place and through which it may be possible to initiate a cultural change in the foreign investment sector. Increasingly, influential ideas, international policies, modes of governance and pre-normative behaviour are emerging from the interaction of ‘sub-state’ officials and non-state actors.123 Constructivist theorists have long recognised the role of activities of this kind in the development of the international legal and political order.124 They have drawn attention to the transformative role of a variety of actors on the emergence of international norms, on state behaviour and cooperation, and on shaping state beliefs, identities and understandings.125 For example, Brunnée and Toope point to the invaluable nature of non-state activity in norm-creation: Pre-legal normativity is valuable in itself, and is not purely a set of instruments on the road to law. But looking back from the perspective of a legal norm or system, one can see that the actors involved in prelegal norm creation and elaboration serve also as builders of the legal system … NGOs, corporations, informal intergovernmental expert networks, and a variety of other groups are actively engaged in the creation of shared understandings and the promotion of learning amongst states.126

123

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125 126

Slaughter, supra, note 8; K. W. Danish, ‘International Relations Theory’ in Bodansky et al., supra, note 21, p. 214. See, for example, Danish, supra , note 123, pp. 216–18; J. Brunnée and S. J. Toope, ‘International Law and Constructivism: Elements of an Interactional Theory of International Law’, Columbia Journal of Transnational Law, 39 (2000–1) 19. Danish, supra, note 123; Brunnée and Toope, supra, note 124. Brunnée and Toope, supra, note 124, p. 70.

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Epistemic communities, NGOs and transgovernmental networks operate so as to develop ideas, establish discourses, reiterate shared beliefs, frame issues, lobby governments and inject viewpoints into new contexts. They have the capacity to function in a quasi-administrative role through coordinated procedures, collaborative programmes, information exchange and analysis, socialisation and peer pressure.127 These entities and channels are crucial for the spread of new ideas and the creation of new perspectives.128 Informal networks have been successful in infusing a more socially and environmentally aware outlook into the discourse on the role of multinational corporations in the international community. The concept of sustainable development, the emergence of the corporate social responsibility and sustainable finance movements,129 the development of initiatives such as the United Nations Global Compact,130 and the growing practice of ‘responsible’ institutional investment via pension plans and mutual funds,131 are all impacting on the international investment field. Taking a constructivist angle, these developments are simultaneously products and purveyors of change in the discourse on the appropriate role and function of business in the global community. What has not yet caught up with this changing emphasis in business practice is the law on international investment. Teubner has developed theories on the causes of inter-systemic conflicts of law between global sectors.132 These theories point to the futility of trying to resolve the clash of international environmental and human rights and investment norms without addressing the underlying vision of the actors. Fischer-Lescano and Teubner argue that the fragmentation

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132

Slaughter, supra , note 8; Haas, supra , note 21; Sands, supra , note 40, pp. 112–17; Raustiala, supra, note 37, p. 538; B. Kingsbury, ‘Global Environmental Governance as Administration: Implications for International Law’ in Bodansky et al., supra, note 21, pp. 79–80; P. J. Spiro, ‘Non-Governmental Organizations and Civil Society’ in Bodansky et al., supra, note 21, p. 770. See the discussion in Haas, supra, note 21; J. S. Dryzek, ‘Paradigms and Discourses’ in Bodansky et al., supra, note 21, p. 44. See, for example, Zerk, supra , note 57; see also M. Jeucken, Sustainability in Finance: Banking on the Planet (Delft, Eburon Academic Publishers, 2004). United Nations Global Compact, (2000), available at www.unglobalcompact.org/ (accessed 4 December 2007). See the discussion in B. J. Richardson, ‘Sustainable Finance: Environmental Law and Financial Institutions’ in B. J. Richardson and S. Wood (eds.) Environmental Law for Sustainability (Oxford, Hart Publishing, 2006), p. 309. See, for example, Fischer-Lescano and Teubner, supra, note 22.

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of global law, and the resultant collision of international norms between separate regimes, represents ‘deep contradictions between colliding sectors of a global society’.133 As the root cause is not so much the colliding norms as the colliding social sectors, the law alone cannot reconcile conflicting systems in international law.134 The most that can be hoped for is ‘a weak normative compatibility of the fragments’.135 If, however, the divisions within the social sectors can be lessened, the commonalities emphasised and alignments created, shared understandings and normative integration can more easily occur. For example, international human rights norms and economic globalisation are now not necessarily diametrically opposed.136 As perspectives within business culture shifted and discourses altered, so new convergences emerged, namely, principles of corporate social responsibility, sustainable development, and the proliferation of the public-private partnership.137 The same process needs to occur within international arbitration circles and amongst those responsible for investment treaty negotiation. The challenge is to induce further change, and at an accelerated pace, within the foreign investment sector and to reach legal decision-makers in the field of international investment law. More active utilisation of informal networks could generate the desired shift in the international investment sector. One possibility is to start with the arbitrators and counsel involved in investor-state disputes. If the shared understandings and values of those operating within the legal community of international investment can be shifted to a more socially and environmentally responsible position, then shifts in the legal principles may start to follow suit. Arbitrators and counsel have been characterised as an ‘epistemic community or issue network’, the members of which share a belief in the primacy of an international system of private dispute resolution and possess shared understandings of the importance of international business values.138 Clearly, further work needs to be done in raising the awareness of arbitrators and lawyers in this community as to the importance of the public law issues and public interest implications of investor-state disputes, and to convince these individuals of the validity of an integrated approach to the application of principles of international law. The taboo 133 136

137

Ibid., pp. 1004 and 1045. 134 Ibid. 135 Ibid., p. 1004. D. Kinley, ‘Human Rights, Globalization and the Rule of Law: Friends, Foes or Family?’, UCLA Journal of International Law and Foreign Affairs, 7 (2002–3) 239, pp. 257–8. Ibid. 138 Dezalay and Garth, supra, note 86, p. 16.

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on allowing principles of sustainable development to assist with interpretation of international investment treaty obligations should be lifted. Engagement with professional organisations, writings in international publications, and dispersion of these ideas at conferences would be a start. However, it may require yet another generational shift in this community before the prevailing viewpoint becomes one where it is natural to consider the environmental, social and sustainability objectives of the host state on a par with the rights of the investor.

VII

Conclusion

There are a number of parallel paths to the realisation of a reconceptualised international investment law. This chapter has argued that a multilayered approach combining these various strategies would be the most effective way to transform foreign investment law, policy and practices. From a constructivist perspective, the current activity surrounding the issue of developing a more balanced, socially and environmentally responsible international investment legal framework suggests that we are already at a pre-normative stage and will ultimately see a new type of investment law materialise. There are, however, several concrete steps that can be taken in the immediate future to accelerate that process. The insertion of provisions in new bilateral investment treaties to reflect more responsible investment will be an important incremental development. Such reform should also be pursued with a view to negotiating a multilateral treaty in the image of the IISD Agreement. An agreement of this kind would also need to go further, however, and include emerging principles of corporate social responsibility and sustainable finance, a stronger emphasis on ecological sustainability, express references to core ethical principles, and the direct application of principles of international environmental and human rights law to investors. It is crucial that multinational corporations are brought within an international regulatory framework. Voluntary initiatives and market mechanisms are important in transforming the landscape in which business operates, but it is now also time to bring an element of global obligation to the way in which corporations and investors conduct themselves. A multilateral agreement directed at corporate social and environmental responsibility and sustainable investment is essential to achieving that global reach. A key factor in bringing about a transformation in international investment law will be reform of the dispute settlement system. It is imperative that the current decentralised structure, comprising non-accountable,

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temporary tribunals, is replaced with a permanent two-tier forum with an appeals facility. Ideally, this would occur within the framework of a new responsible investment convention rather than as a stand-alone procedural reform. Cultural transformation will also be effected through the less formal channels of transnational networks. Although the process of reorienting perspectives is by no means complete, the groundwork has been done on shifting the culture in business circles through raising the awareness of corporations and the public as to the necessity of socially and environmentally responsible corporate conduct. This same process needs to occur for those involved in the development of international investment law, the drafting of investment treaties, and the determination of investor-state disputes. It is unlikely that fundamental change will occur in international investment law until the perspectives of those in these select communities are altered and they perceive it as entirely natural that foreign investment should promote ecologically sustainable development. Concerted effort is therefore required to utilise informal channels to shift perspectives in international investment legal circles. There are obstacles to reform. Clearly, these include the current dispute settlement system and the prevailing approach of arbitrators to public interest issues and to the application of general principles of international law in investor-state disputes. A further problem is the political will of capital-exporting states to negotiate balanced bilateral investment treaties or to engage in multilateral negotiations for a balanced global agreement on investment.139 However, as developed states begin to receive investor-state complaints, their attention is turning to the need for host state regulatory autonomy within investment regimes.140 This is encouraging. It should eventually lead to a re-evaluation of the system of investor-state arbitration and to a reorientation of substantive international investment norms so as to equip the twenty-first century with international investment law that reflects its values and needs. 139 140

Cosbey et al., supra, note 5, p. 27; Van Harten, supra, note 4, p. 179. Sands, supra, note 24, pp. 121–2, 139–41.

INDEX

Page numbers with ‘n’ are notes. Abu Dhabi, investment in the United States 249 Abu Dhabi Investment Authority (ADIA) 248 ACP-EU Joint Parliamentary Assembly 174–5 ACTA (Anti-counterfeiting Trade Agreement) 100–1, 113 adjudication, World Trade Organization (WTO) 62–7 affected status 160–1 Africa, and China’s investment in 249 Africa-Caribbean-Pacific (ACP) group of states 174–5 Agenda 21 301–2 Agreement on the Application of Sanitary and Phytosanitary Measures, see SPS Agreement Agreement on Preshipment Inspection 88 Agreement on Safeguards (WTO) 130–3 Agreement on Technical Barriers to Trade (Standards Code) 89 Agreement on Trade-Related Aspects of Intellectual Property (TRIPS) 26n.19, 27n.26, 99–115 and cross-retaliation 150–5 and minimum standards 101–12 agriculture and private food safety standards 75, 82–3, see also NAMA Aid for Trade 181, 188 Allgeier, Peter 280 Alston, Philip 54

Annex on Movement of Natural Persons (GATS) 199, 275, 278 Anti-counterfeiting Trade Agreement (ACTA) 100–1, 113 anti-globalisation movement 7 globalisation debate 7, 10–15 Antigua and Barbuda 182n.58 US–Gambling dispute 141–2, 148–50, 155–8, 159–62 arbitrators in investment disputes 308–10, 317–18 Arcelor 247 Argentina 255–6 Maffezini v. Spain 264–7 Article III (GATT) 83–4 Article V (GATS) 116 Article XX (GATS) 278–9 Article XXI (GATS) 156–65, 279 Article XXIV (GATT) 116, 117, 118, 124–5, 135 and enforceability of WTO rules on RTAs 136–9 and the EU food safety regulation 225–6 and external trade requirements 218–23 and regional exceptions 129–31 Understanding on the Interpretation of 136–7, 216–17, 221–2, 223, 233 Article XXVIII (GATT) 164–5 ASEAN 253 Asia-Pacific Economic Cooperation (APEC) 252–3 Australia 79n.44 and kava 177–8

320

Index and Pacific Agreement on Closer Economic Relations (PACER) 292 tea tree oil 169n.3 and US FTA 112 Austria and GM food 235 and kava 177–8 autopoeisis 50 bananas 93 barriers to trade 89–90 non-tariff 203–4, see also other regulations of commerce; other restrictive regulations of commerce Bartels, L. 226 Belgium, and kava 177–8 Berne Convention 101–2, 103–4, 110–12, 114 bilateral investment treaties (BITs) 250, 253–6, 268, 304 Canada 305 Chile-Spain 265 and dispute settlement 254–6 Maffezini v. Spain 264–7 Black, J. 61, 82 Blackstone (US private equity firm) 249 Blue Card (EU) 214 Bolivia and the Doha Round 211–12 and nationalism 251, 256 Boston (Massachussetts) 263–4 Boston Redevelopment Authority (BRA) 263–4 Brazil 21, 39, 204, 207 Brazil–Measures Affecting Imports of Retreaded Tyres 138–9 and copyright 113–14 Hong Kong Ministerial 281 and kava 177–8 Britain, see United Kingdom (UK) British Retail Consortium (BRC) 79 California 259–60 Canada bilateral investment agreements 305

321

Canada–Certain Measures Affecting the Automotive Industry 83 Canada–Measures Concerning Periodicals 83 Canada/United States–Hormones Suspension 182 Canada US Free Trade Agreement (CUSFTA) 277–8, 282 and food safety 186 and imports to the US 132–3 and kava 177–8 Loewen Group, Inc. v. United States 261–3 Methanex Corp. v. United States 259–60 Mondev International Ltd. v. United States 263–4 Reference Re Secession of Quebec case 65 United States/Canada–Continued Suspension 180 carbon footprints 77 CARIFORUM states 282–4 Cassis de Dijon case 228 CBD (Convention on Biological Diversity) 100–1, 112 centre-left 9, 10–11 certification of food safety 80, 93–4 Chanda, R. 275–6, 279–80 Charnovitz, Steve 33 Charter of Economic Rights and Duties of States 27, 123 Chavez, Hugo 251 Cheyne, Pace I. 59 Chile 265 China 21 China Investment Corporation (CIC) 248 China National Overseas Oil Company (CNOOC) 249 commercial services 270–1 and the Doha Round 211 and economic crisis 18 and foreign investment 249, 256 Lenovo 247 Opium Wars 243–4 and US copyright dispute 109

322

Index

China Investment Corporation (CIC) 248 China National Overseas Oil Company (CNOOC) 249 CitiGroup 249 climate change, and globalisation 12–13 Clinton, Hillary 268 closure normative 50–1 operational 47–52 CNOOC (China National Overseas Oil Company) 249 Codex Alimentarius Commission (Codex) 74, 81, 183–5, 190 coding 47–8, 49–50 cognitive openness 50–1 coherence, and the WTO 44–5, 58–60, 67–9 collective international schemes 79 commercial services 270–1 Committee on Regional Trade Agreements (CRTA) 137, 221, 225 commodity fetishism 272 common rules 227–8 computer programs 103 constitutionalism 44, 60–2, 68–9 consumer demand 91, 95 contested governance 236 Convention on Biological Diversity (CBD) 100–1, 112 copyright 103–4, 109, 110–12, 113–14 Corporate Social Responsibility 251–2 Correa, Rafael 251 Cosbey, A. 310 cosmopolitan democracy 33 Council for Trade in Services 201 counsel, in investment disputes 317–18 courts, international investment 313–14 Crawford, J. 300 credibility crises 236 cross-retaliation 150–5, 182n.58 CRTA (Committee on Regional Trade Agreements) 137, 221, 225 Cuba, and the Doha Round 211–12 culture, and food safety 188–91

CUSFTA (Canada US Free Trade Agreement) 277–8, 282 customary law 297 and RTAs 120–39 customary norms 54 customs duties 218–19, 223 customs unions 137, 218, 218n.6, 231, see also European Union databases 104n.23 Davis, Bob 19 Davis, Gray 259–60 decrees 85 deliberative democracy 33 democratic deficit of GEIs 22–3, 28, 35 denial of justice, and foreign investment 260–4 Denmark and GM food 235 and kava 177–8 North Sea Continental Shelf case 127 developing countries and economic crisis 18 and EC–Tariff Preferences 30 and equal opportunity in disputes 147–8 and food safety standards EU 237–8 private 92–5, 97–8 and foreign investment 251–2 fuel production 16 and GEIs 24–31 and indigenous products 180–1 and Mode 4 GATS 200, 208–9, 270, 278, 284–8 and retaliation 149–50 and RTAs 216 small island 171–2 and SPS agreement 191–2 and trade in services 204–5, 271 and TRIPS 99 Dezalay, V. 308–9 disaggregated states 31–2 discontinuity between international and domestic legal orders 35–8 dispute settlement 141–8 and indigenous products 181–3

Index and international investment law 315–7, 318–19, see also Dispute Settlement Body (DSB); Dispute Settlement Understanding (DSU) Dispute Settlement Body (DSB) 143 implementation of rulings 145, 160 Dispute Settlement Understanding (DSU) 143 and implementation of rulings 145–6, 163–4 and international obligations 146–8 diuturnitas 126 Doha Round 211–12, 280 and European Union 207–11 Drake, W. 274, 286 Dubai 249 Dubai Ports World 249 Earth Democracy 15–16 East Timor, and the World Bank 42 EC–Biotech Products 84 EC–Hormones dispute 179, 180, 191 economic crisis 17–19 economic liberalism 9–10 economic needs tests 210, 212–13, 233–4 Economic Partnership Agreement (EPA) 282–4 Ecuador and copyright 113–14 and nationalism 251, 256 Eeckhout, P. 224 EEC–Tariff Treatment of Citrus Products from Certain Mediterranean Countries 135 embedded liberalism 35 emerging norms in international law 301 emissaries between regimes in international law 56 Enabling Clause 116, 117, see also GATT Article XXIV Energy Charter 253 entertainment industry 205 environment and food safety standards 75, 77, 79

323

and foreign investment disputes 257–60 and IISD Agreement 305, see also sustainable development equality of harm approach 146n.21 equitable treatment 244 and BITs 254 equivalence in trade 91 escape clauses in WTO disputes 143–4, 159 Esty, Daniel 33 EurepGAP 79 European Communities (EC), see European Union (EU) European Communities–Conditions for the Granting of Tariff Preferences to Developing Countries 30 European Communities–Measures Affecting the Approval and Marketing of Biotech Products 84 European Communities–Measures Affecting Meat and Meat Products 179, 180 European Communities–Trade Description of Sardines 184 European Union (EU) 224 and the ACP-EU Joint Parliamentary Assembly 174–5 as affected Member 160 EC–Biotech Products 84 EC–Hormones 179, 180 economic crisis 17 and Economic Partnership Agreement 282–4 EC–Sardines dispute 184 EC–Tariff Preferences dispute 30 and food safety standards 75, 183, 186, 187, 188–9, 223–38 and intellectual property rights 112–13 and kava 175 and ORCs 222–3 and services trade 207–11, 279, 281 and temporary migration 193–4, 212–14, 215

324

Index

European Union (EU) (cont.) Turkey–Textiles 137–8, 220, 222–3, 226, 229–30, 232, 233–4 and withdrawal of WTO commitments 155n.64 exceptions (TRIPS) 112 exclusive standards 79 Exogenous Shocks Facility (ESF) 29–30 expertise 48–9, 56–8 expropriation 251, 254, 261 external trade requirements, and Article XXIV (GATT) 218–23 Extractive Industry Transparency Initiative 251–2 Federal Institute for Drugs and Medical Devices (BfArM) (Germany) 173 Fiji 172–3, 181–2 and Mode 4 GATS 288–93 financial crises 17–19, 247n.13 and globalisation 250–1, 255 Finland, and kava 177–8 Finnemore, Martha 32 Fischer-Lescano, A. 61, 316–17 flexibilities (TRIPS) 112 Flynn, A. 82 Food and Agriculture Organization (FAO) 74n.6 Food and Drug Administration (FDA) (US) 185–6 food miles 77 Food Safety Act (UK) 77, 79 food safety standards and culture 188–91 and European Union (EU) 75, 183, 186, 187, 188–9, 223–38 private 73–98 and risk assessment 190–1, 192 Food Standards Agency (FSA), and kava 174 foreign direct investments (FDIs) 245–50, 267–8 application of standards 257–67 developing standards of rights and obligations 250–3 disputes 253–4 and dispute settlement 254–6

foreign workers 273–88 Fiji 289–92 women 287 formation, of customs unions or free trade agreements 231 fragmentation of international law rules 33–8, 44, 48–9, 52, 68 and regionalism 123–4 and specialisation 45–6 France and Cassis de Dijon case 228 and GM food 235 and kava 177–8 free trade agreements (FTAs) 218, 218n.6, 231 CUSFTA 277–8, 282 and intellectual property 100–1, 110, 114 NAFTA 132–3, 282 Frieden, J. 9–10 Friedman, Thomas 245 Friendship, Navigation and Commerce treaties 260–1 fuel production 16 Fukuyama, Francis 9 Fulponi, L. 77, 94 functional differentiation 45–6 G8 Leaders Communiqué 112–13 Garcia, F. 302 Garth, B.G. 308–9 Gary, Willie E. 261–3 Gascoigne, D. 86, 89 gateway principle 64, 66 General Agreement on Tariffs and Trade (GATT) 24, 27–6 Article III 83–4 Article XXIV 116, 117, 118, 124–5, 129–31, 135, 136–9 Article XXVIII 164–5 and indigenous products 177 General Agreement on Trade in Services (GATS) 26n.19, 193–8, 269, 273 and Annex on Movement of Natural Persons 199, 275, 278 Article V 116, 117, see also GATT Article XXIV

Index Article XX 278–9 Article XXI 156–65, 279 and liberalisation 202–6 Mode 4 198–201, 273–88 and non-governmental bodies 87–8, 195 system for withdrawing from commitments 155n.64, 156–8 and trade in services 274–5 General International Law 56–7 genetically modified food 235 geographical indications 105, 187 Germany and Cassis de Dijon dispute 228n.41 and kava 173, 174n.25, 177–8 North Sea Continental Shelf case 127 Ghana 43 GIC (Singapore) 248 Giddens, Anthony 7–8 global economic institutions (GEIs) 22–43 and developing states 24–31 economic bias of, 23, 28, 35 and global legal order 31–8 Global Food Safety Initiative (GFSI) 79n.44 GlobalGAP 79 globalisation 8–11 anti-globalisation movement 7, 10–15 debate on 7–21, 244–5, 250–1, 255 of international law 301 of law 8 global legal order 31–8 global public law 302–3 global values 14 good agricultural practice (GAP) 75 good manufacturing practice (GMP) 75 Government Pension Fund of Norway (GPF) 248 GRAS products 185–6 Greece and GM food 235 and kava 177–8 Gressner, Edward 19 Guzman, Andrew 34–5

325

Habermas, Jurgen 8 Hardt, M. 271 harmonisation and RTAs 221 and SPS Agreement 183–5 Hart, H.L.A. 65–6 Havinga, T. 77 Henderson, S. 94 hermeneutics 59 Hilf, M. 92 Hobbs, J.E. 91 Hong Kong China SAR 270–1 Hong Kong Ministerial Declaration 211–12, 280–1 Hong Kong, United Filipinos in 286 Howse, R. 34, 85 Hudec, R. 225 human capital 94 human rights 14, 305 IBM 247 ILO Declaration on Fundamental Principles and Rights at Work 14 immaterial labour 271, 272–3 immigration laws 277–8 importers 75 indeterminacy 56–8 India 21, 204, 207 and the Doha Round 211 and the EC–Tariff Preferences dispute 30 and the Hong Kong Ministerial 280–1 and migrants to US 200–1 and Mode 4 GATS 211, 212 Narmada Valley project 39, 41 and pharmaceuticals 106n.34, 107–8 and services economy 279–80 indigenous products 169–92 kava 169–70, 171–6 and SPS Agreement 170–1, 177–80 Indonesia 42 industry, and foreign investment 246 Inspection Panel of the World Bank 29 intellectual property (IP) 16–17, 27n.26, 100–1, 151–5 enforcement of 108–10

326

Index

intellectual property (IP) (cont.) and investment 246 protection outside of TRIPS 112–14, see also cross-retaliation; TRIPS interdependence, global 18 internal market of the European Union (EU) 227–9, 232 International Centre for the Settlement of Investment Disputes (ICSID) 253–6 appellate body within 311–12 and Metalclad dispute 257–9 international and domestic legal orders, see global legal order international exhaustion of IP rights 153–4 International Institute for Sustainable Development (IISD) 303–6 International Institute for Sustainable Development (IISD) Agreement 314–15, 318 international investment court 313–14 international investment law 319 and dispute settlement 307–15 International Institute for Sustainable Development (IISD) 303–6 investment networks 315–18, 319 and sustainability principles 306–7 International Kava Executive Council (IKEC) 175 International Law Commission 123–4 International Monetary Fund (IMF) , 22, 24n.4 policy on developing states 28n.30, 29–30, 35 and sovereignty 20–1 and SWFs 249 international obligations, and Dispute Settlement Understanding (DSU) 146–8 International Telecommunications Union, and GATS 87–8 international trade, and private food safety standards 90–2 inventive steps 106–8, 111n.57

investment, and IISD Agreement 304–5 investment networks in international investment law 315–18 investors 246–7 bias 308 investor-state arbitration 295–6 IP, see intellectual property Iraq, Fijians working in 290–2 Italy, and kava 177–8 Jackson, John 143–4, 159 Jaffee, S. 94 Japan 112–13 judicial activism 143–4 kava 169–70, 171–6, 180, 192 kava lactones 172 Kerruish, Valerie 273 Kerr, W.A. 91 Kingsbury, Benedict 33 knowledge economy 269 Koh, Harold Hongju 31 Koskenniemi, M. 45–6, 59–60, 61, 68 Krisch, Nico 33 Kuwait 248 Kuwait Reserve Fund for Future 248 Kyoto Protocol to the United Nations Framework Convention on Climate Change 14 labour standards 75 Lamy, Pascal 201, 207 Lang, Andrew 35, 54–5 Lauterpacht, Hersch 45 law, globalisation of 8 lawyers, trade 55 least developed countries (LDCs) 171–2, see also developing countries Lee, G.C. 79 liberalisation and GATS 202–6 Lin Tse-Hsu 243–4 Lithuania, Parkerings-Compagniet AS v. Republic of Lithuania 305 liver disease and kava 173–4 localism 15–17 localisation of economies 15

Index Loewen Group, Inc. v. United States 261–3 Loewen, Raymond 261–3 Luhmann, Niklas 45–6, 50, 67 Luxembourg, and GM food 235 MacIntyre, A. 46–7 MacNair, Arnold 45 Maffezini, Emilio Agustin 264–7 Maffezini v. Spain 264–7 Mahler, S.J. 287–8 market liberalism 9–10 Marsden, T.K. 82 MERCOSUR 138–9, 253 Metalclad Corp. v. United Mexican States 257–9 Methanex Corp. v. United States 259–60 Mexico 250 Metalclad Corp. v. United Mexican States 257–9 North American Free Trade Agreement 132–3, 282 and United States 207 migration policy, temporary 193–215 Millennium Development Goals 29–30 minimum standards and intellectual property 99–100, 101–12 Mississippi 261–3 Mittal Steel 247 Mode 1 GATS 213, 274 Mode 2 GATS 274 Mode 3 GATS 274 Mode 4 GATS 198–201, 212, 270, 274 and the Economic Partnership Agreement (EPA) 282–4 and Fiji 288–93 temporary migration 273–88 modifying commitments to WTO 155n.64, 156–8 Mondev International Ltd. v. United States 263–4 Morales, Evo 251 most-favoured nation (MFN) 100n.5, 197 and BITs 254 Maffezini dispute 265–7 and China 244

327

and customary law 123, 124, 126 movie industry 205 MTBE (methyl tertiary-butyl ether) 259–60 Multilateral Agreement on Investments (MAI) 252–3 mutual recognition 91 NAFTA 253, 255, 268 and Loewen dispute 261–3 and Metalclad dispute 257–9 and Methanex dispute 259–60 and Mondev dispute 263–4 Narmada Valley project (India) 39, 41 Nath, Kamal 212 National Agri-Marketing Association (NAMA) 207 national immigration laws 277–8 nationalisations 251 nationalism, and globalisation 19–21 National Research Council (US) 190 national treatment principle 100n.5, 196–7, 198–9 and BITs 254 and customary law 123 natural persons, 282–4 natural resources, 27n.22 investment 246 necessity requirements 233–4 and Turkey–Textiles 217 Negri, A. 271 neoliberalism 269 New Zealand and copyright 113–14 and PACER 292–3 NGOs 33, 38–9 and investment networks 315–16 and investor-state arbitration 305 and the World Bank 39–40 Nicaragua and the Doha Round 211–12 and nationalism 251 Nicolaidis, K. 274, 286 Non-Binding Investment Principles 252–3 non-discrimination principles 100n.5 and customary law 123, 124

328

Index

non-governmental bodies 195 and SPS Agreement 86–90 non-obviousness 106n.39 non-semantic indeterminacy 58 non-state actors 302–3 and the global legal order 37–8 and investment networks 315–16 non-tariff barriers 203–4, 235 normative closure 50–1 North American Free Trade Agreement (NAFTA) 132–3, 282 North Sea Continental Shelf case 127 Norway 248 novel foods 186 Obama, Barack 268 O’Keefe, Jeremiah 261–3 operational closure 47–52 Operational Manual of the World Bank 29n.35 opinio juris 127 Opium Wars 243–4 Organisation for Economic Co-Operation and Development (OECD) 75, 194, 252–3 Ortega, Daniel 251 other regulations of commerce (ORCs) 218–19, 220–3 other restrictive regulations of commerce (ORRCs) 219, 220–1 overreach 143–4 Pacific Agreement on Closer Economic Relations (PACER) 292–3 Pacific Island (PI) countries 171–2, 174–5, 292–3, see also Fiji Paraguay, and copyright 113–14 parallelism 131–2 Paris Convention 101–2 Parkerings-Compagniet AS v. Republic of Lithuania 305 patents 105–8, 110–12 Pauwelyn, Joost 34, 56, 59, 60, 61, 118–19 Peninsular & Oriental Steam Navigation Company 249

Perdikis,n.91 Peru, and nationalism 256 Pessar, P.R. 287–8 Petersmann, Ernst-Ulrich 32, 54 pharmaceuticals 106n.34, 107–8 and TRIPS 106, 107–8, 153, see also kava Philippine Overseas Employment Administration (POEA) 288 Philippines, foreign domestic workers 288 Pinochet case 65 Piper methysticum, see kava pluralist approach and the global legal order 37–43 Polonoroeste project (Brazil) 39 Portugal, and kava 177–8 Posner, Richard 53 Poverty Reduction and Growth Facility (PRGF) 29–30 precautionary principle 64–5 preferential treatment and RTAs 136 private food safety standards 73–98 and developing states 92–5, 97–8 proportionality 132 protectionism 18–19, 91, 93 public interest and IISD Agreement 305 and investor-state arbitration 295–6, 297 Public International Law (PIL) 300–3 technicalisation of 45 public sector investors 248–50 public services 196–7 Pulkowski, D. 56 Reference Re Secession of Quebec case 65 regional exception 125–6, 127, 128–33 regionalism 216, 240 Regional Trade Agreements (RTAs) 216–19 and the WTO 116–40, see also European Union; MERCOSUR regulation 82–3 Regulation on Novel Foods (EC) 186 religious fundamentalism 20

Index requirements, definition of 83 residence criteria 213 retailers 73, 76–80, 91, 95 retaliation after WTO rulings 144–5, 147, 162–4 cross-retaliation 150–5 and developing states 149–50 Rio Convention on Biological Diversity Rio Declaration 301–2 risk assessment, and food safety standards 190–1, 192 Rokoduru, Avelina 293 Rome, Treaty of 225 Rose, Gillian 59 Russia 248 safeguards 130–3, 198 Safe Quality Food (SQF) 79n.44 Samoa 172–3, 181n.56 Sands, Philippe 66, 302–3 sardines 184 Sassen, S. 11–12, 20, 286 Saudi Arabia 248 Seattle WTO Ministerial Conference 206 self-reference 49–50 sentimentality 59 services economy 269 services industry 246–7 services trade 204–5, 270–3 Shiva, Vandana 15–17 signalling conference on GATS 281–2 Simma, B. 56 Singapore and kava 177–8 sovereign wealth funds (SWFs) 248, 249 Single European Act (SEA) 227 Slaughter, Anne-Marie 31–2, 302 small island developing states 171–2 social issues, and food standards 79 socio-regulatory adjustment 274, 286–7 soft law 300–2 solipsism 46–7, 60 Sornarajah, M. 309–10 South Africa, and Mode 4 GATS 211 sovereignty, and globalisation 20–1

329

sovereign wealth funds (SWFs) 248–50 Spain bilateral investment treaties (BITs) 265 and kava 177–8 Maffezini v. Spain 264–7 special and differential treatment (S&D) 27n.26, 27–6 specialisation 48–9 and fragmentation of international law rules 45–6 SPS Agreement (Agreement on the Application of Sanitary and Phytosanitary Measures) 173, 234 and developing states 94–5 and food safety standards 80–90 and harmonization 183–5 and indigenous products 170–1, 177–80 measures (defined) 81–6 and risk assessment 190 and traditional knowledge (TK) 191–2 Stabilization Fund of the Russian Federation (SFRF) 248 standards exclusive 79 minimum national 99–100, see also food safety standards Standards Code 89 Standards to be Employed by Customs for Uniform Rights Enforcement (SECURE) 112–13 state, and globalisation 11–12, 13, 16, 19–21 Stewart, Richard 33 Stiglitz, Joseph 17 Study Group on the Fragmentation of International Law 123–4 subprime mortgage defaults 250 supermarkets 76n.18, 78, 79 sustainability principles, and international investment law 306–7 sustainable development 306–7 and the IISD Agreement 303–6 and investment networks 316

330

Index

SWFs (sovereign wealth funds) 248–50 Swiss claims 107n.43 Switzerland 76n.18 and GATS 201 and intellectual property rights 112–13 and kava 173, 177–8 systemic interpretation 59 Teaiwa, Teresia 290–1 tea tree oil 169n.3, 185 Technical Barriers to Trade (TBT) Agreement 74n.5, 88 and indigenous products 177 technicalisation of Public International Law (PIL) 45 technology computer programs 103 and globalisation 16 Teitel, Ruti 19–20 Temasek 248 temporary migration 193–215 and GATS Mode 4 273–88 as trade 275–6 Teubner, G. 61, 316–17 Thailand 247n.13, 250 three-level sequence, RTAs and the WTO 133–6 three-step test 110–12, 114 Tokyo Round 89 Trachtman, Joel 184, 219, 231 trade barriers 89–90 national immigration laws as 277–8 equivalence in 91 and private food safety standards 90–2 in services 270–3 trade law lawyers 55 ‘trade and …’ or ‘linkage’ debate 52–5 trade marks 104–5, 109, 110–12 traditional knowledge (TK) 16–17, 99, 171, 192

and traditional use 187–8 traditional uses of indigenous products 185–6, 192 and traditional knowledge (TK) 187–8 transnational legal process 31 treaties systemic interpretation of 59 Vienna Convention on the Law of Treaties (VCLT) 56–7, 81–2, 85–6, see also individual treaties Treaty of Rome 225 Trebilcock, M.J. 85 TRIPS (Agreement on Trade-Related Aspects of Intellectual Property) 26n.19, 27n.26, 99–115 and cross-retaliation 150–5 and minimum standards 101–12 Turkey–Restrictions on Imports of Textile and Clothing Products (Turkey–Textiles) 137–8 , 220, 222–3, 226, 229–30, 232 , 233–4 and necessity requirements 217 UNCTAD (UN Conference on Trade and Development) 245n.6 Understanding on the Interpretation of Article XXIV (GATT) 136–7, 216–17, 221–2, 223, 233 Unequal Treaties 260–1 United Arab Emirates (UAE) 248 United Filipinos in Hong Kong 286 United Kingdom (UK) and food safety standards 77 and kava 173, 174 and the Opium Wars 243–4 and the Pinochet case 65 United Nations General Assembly 27n.22 United States and Australia FTA 112 bilateral investment agreements 305 Canada/United States–Hormones Suspension 182

Index Canada US Free Trade Agreement (CUSFTA) 277–8, 282 and China bid for US companies 249 copyright dispute 109 and Citrus dispute 135 commercial services 270–1 and the Doha Round 207, 211 and Dubai Ports World 249 and economic crisis 18, 250 and food safety 188–9 and free trade agreements (FTAs) 110, 112 GRAS products 185–6 and intellectual property rights 112–13 and investment from Abu Dhabi 249 and kava 177–8 Loewen Group, Inc. v. United States 261–3 Methanex Corp. v. United States 259–60 and Mexico 207 Metalclad Corp. v. United Mexican States 257–9 and Mode 4 GATS 200–1, 211 Mondev International Ltd. v. United States 263–4 National Agri-Marketing Association (NAMA) 207 and national treatment 197 North American Free Trade Agreement 132–3, 282 and trade in services 279–80, 281 United States/Canada–Continued Suspension 180 US–Gambling dispute 141–2, 148–50, 155–8, 159–62 US–Line Pipe dispute 231 US–Shrimp dispute 311 and the World Bank 24, 39–40 United States/Canada–Continued Suspension 180 United States–Definitive Safeguard Measures on Imports of Circular Welded Carbon Quality Line Pipe from Korea 231

331

United States–Import Prohibition of Certain Shrimp and Shrimp Products 311 United States–Measures Affecting the Cross-Border Supply of Gambling and Betting Services–Recourse by Antigua and Barbuda to Article 22.2 of the DSU dispute 141–2, 148–50, 155–8, 159–62 Universal Declaration on Human Rights 14 UNOCAL 249 UN Working Group on the Use of Mercenaries 292 Uruguay Round 18, 26n.19, 89, 143 Van Harten, G. 313, 314 Vanuatu 181n.56 Venezuela and the Doha Round 211–12 and nationalism 251, 256 Vienna Convention on the Law of Treaties (VCLT) 56–7, 81–2, 85–6 and regionalism 117, 119 Wallach, Lori 195–6 Washington Consensus 25–6, 250, 251 Weber, M. 45–6 Williams, Mariama 286 women foreign workers 287 Woodall, Patrick 195–6 World Bank 22 and developing countries 24, 25–6, 39–40, 238n.80 and East Timor 42 Operational Manual 29n.35 and policy on developing states 28n.30, 29, 35, 41–3 and sovereignty 20–1 and the United States 39–40 World Health Organization (WHO) 74n.6 and kava 175 World Intellectual Property Organization (WIPO) 100–2, 102n.16, 107, 112, 113–14

332

Index

World Trade Organization (WTO) 22, 26–7, 50, 53 adjudication 62–7 and coherence 58–60 and EC–Tariff Preferences dispute 30 and EU food safety standards 237 and fragmentation of international law rules 34–5, 68 and the gateway principle 64, 66 and protectionism 18–19 and Regional Trade Agreements (RTAs) 116–40

Seattle Ministerial Conference 206 and sovereignty 20–1, see also dispute settlement (WTO); GATS; SPS Agreement; Turkey–Textiles dispute Yerxa, R. 144–5 Young, A.R. 227, 235 Young, M. 57 zeroing 160n.92 Zoellick, Robert 213