Positive Integration - EU And WTO Approaches Towards The "Trade And" Debate 3030256618, 9783030256616, 9783030256623

Table of contents :
Contents......Page 6
Contributors......Page 7
1 Introduction......Page 10
2 The `Trade and´ Interlinkage......Page 12
3 The Analytical Framework: Positive, Negative and Non-integration......Page 13
4 The Analyzed Fields and the Guiding Questions......Page 18
5 The Contributions......Page 19
References......Page 23
Bilateral Positive Integration: Different Strategies for Regulatory Cooperation in the TTIP......Page 25
1 Introduction......Page 26
2.1 Levels of Regulatory Cooperation......Page 29
2.2 The Fundamental Role of the SPS Agreement......Page 31
3 Focus on EU: Regulatory Food Safety Traditions in the EU......Page 32
4 Focus on EU-US Differences in Food Safety Regulation......Page 34
4.1.1 Regulatory Differences......Page 35
4.1.2 Differences That Led to WTO Disputes......Page 36
4.2 Strategies for Regulatory Cooperation on Food Safety Matters......Page 37
4.2.1 Similar Risk Assessment-Different Regulatory Approaches: Equivalence of Procedural Rules May Be the Solution......Page 38
4.2.2 Different Risk Assessment-Different Regulatory Approaches: No Common Ground Possible, Compromises Necessary......Page 39
5 Conclusion......Page 40
References......Page 41
The Role of Non-tariff Measures in the Agri-Food Sector: Positive or Negative Instruments for Trade?......Page 43
1 Introduction......Page 44
2 Trade of Agri-Food Products: A Global Perspective......Page 45
3 Policy Instruments in Agri-Food Trade......Page 48
4.1 A Theoretical Framework......Page 60
4.2 Evidence from Empirical Literature......Page 62
5 Conclusions......Page 63
References......Page 64
EU and WTO Regulatory Approaches to Renewable Energy Subsidies: Negative and Positive Integration......Page 68
1 Introduction......Page 69
2 A Common but Different Approach to Negative Integration......Page 71
3 EU Approach to Positive Integration: Balancing the Trade-Distortive and Climate-Friendly Effects of Green Energy Subsidies......Page 77
4 The Absence of a Balancing Mechanism in WTO Subsidy Law: Is It a Problem?......Page 84
5 What, If Anything, May the WTO Learn from the EU?......Page 88
6 Conclusions......Page 91
References......Page 92
Trade and Environment in the EU and WTO: Legitimacy, Proportionality and Institutional Power Play......Page 94
1 Introduction......Page 95
2.1 Unpacking the Layers of Legitimacy Tension......Page 97
2.2 Conceptualisations of Legitimacy......Page 98
2.3 The Significance of Administrative Power, Process and Function in Determining Legitimacy......Page 99
3 The Significance of Contemporary Political Events......Page 101
4.1 The Court of Justice......Page 102
4.2 The WTO Dispute Settlement Body (DSB)......Page 103
4.3 The Scope of Adjudicative Authority of the Court of Justice and Appellate Body (AB)......Page 104
5 Judicial Balancing of Trade and Environment: Mitigating the Legitimacy Questions?......Page 105
5.1.2 Establishment and Early Application of the Rule of Reason......Page 106
5.1.3 The Proportionality Test......Page 107
5.1.4 Environmental Protection and the EU Internal Market......Page 108
Essent II......Page 115
5.1.5 The Significance of the EU Environmental Protection Objective and Proportionality......Page 116
5.2.1 The Key Legal Provisions......Page 118
5.2.3 Weighing and Balancing: An Objective Evaluation......Page 119
6 Conclusions......Page 122
References......Page 124
Adjudication and Positive Integration: The Role of the European Court of Justice and the Dispute Settlement Body in the ``Trad.........Page 127
1 Introduction......Page 128
2 Standing and Jurisdiction: The ECJ and the DSB......Page 129
2.1 EU......Page 130
2.2 DSB Proceedings......Page 132
2.3 Assumptions for the General Role of the ECJ and the DSB......Page 133
3 The Different Possible Roles of Courts......Page 134
4.1.1 The ECJ......Page 138
4.2.1 ECJ......Page 139
4.3 The Role as Facilitator of Positive Integration......Page 141
4.3.1 The ECJ......Page 142
4.3.2 The DSB......Page 143
5 Conclusion......Page 146
References......Page 147
Myths and Virtues of Positive and Negative Integration: Some Concluding Remarks......Page 151

Citation preview

European Yearbook of International Economic Law Rike Krämer-Hoppe Editor

Special Issue:

Positive Integration - EU and WTO Approaches Towards the “Trade and” Debate

123

European Yearbook of International Economic Law Series Editors Marc Bungenberg, Saarbrücken, Germany Markus Krajewski, Erlangen, Germany Christian J. Tams, Glasgow, United Kingdom Jörg Philipp Terhechte, Lüneburg, Germany Andreas R. Ziegler, Lausanne, Switzerland Assistant Editor Judith Crämer, Lüneburg, Germany Advisory Editors Armin von Bogdandy, Heidelberg, Germany Thomas Cottier, Bern, Switzerland Stefan Griller, Salzburg, Austria Armin Hatje, Hamburg, Germany Christoph Herrmann, Passau, Germany Meinhard Hilf, Hamburg, Germany John H. Jackson{ William E. Kovacic, Washington, USA Gabrielle Marceau, Geneva, Switzerland Ernst-Ulrich Petersmann, Florence, Italy Hélène Ruiz Fabri, Luxembourg, Luxembourg Bruno Simma, München, Germany Rudolf Streinz, München, Germany

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

Rike Krämer-Hoppe Editor

Positive Integration - EU and WTO Approaches Towards the “Trade and” Debate

Editor Rike Krämer-Hoppe Ruhr-University Bochum Bochum, Germany

ISSN 2364-8392 ISSN 2364-8406 (electronic) European Yearbook of International Economic Law ISSN 2510-6880 ISSN 2510-6899 (electronic) Special Issue ISBN 978-3-030-25661-6 ISBN 978-3-030-25662-3 (eBook) https://doi.org/10.1007/978-3-030-25662-3 © Springer Nature Switzerland AG 2020 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Contents

Introduction—Positive Integration: EU and WTO Approaches Towards the ‘Trade and’ Debate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rike Krämer-Hoppe

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Bilateral Positive Integration: Different Strategies for Regulatory Cooperation in the TTIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Christine Wieck and Bettina Rudloff

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The Role of Non-tariff Measures in the Agri-Food Sector: Positive or Negative Instruments for Trade? . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fabio G. Santeramo and Emilia Lamonaca

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EU and WTO Regulatory Approaches to Renewable Energy Subsidies: Negative and Positive Integration . . . . . . . . . . . . . . . . . . . . . . Ilaria Espa and Gracia Marín Durán

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Trade and Environment in the EU and WTO: Legitimacy, Proportionality and Institutional Power Play . . . . . . . . . . . . . . . . . . . . . Emily Reid

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Adjudication and Positive Integration: The Role of the European Court of Justice and the Dispute Settlement Body in the “Trade and Environment” Debate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 Rike Krämer-Hoppe Myths and Virtues of Positive and Negative Integration: Some Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 Piet Eeckhout

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Contributors

Piet Eeckhout is Professor of EU Law, Dean of the UCL Faculty of Laws, and Academic Director of the European Institute. He joined UCL in 2012, before which he was Director of the Centre of European Law at King’s College London (1998– 2012). He studied law (lic.iur.) and European law (lic.Eur.iur—equivalent to LLM) at the University of Ghent, Belgium, where he also obtained his PhD degree. Before coming to London in 1998, he taught at the University of Ghent and at the University of Brussels (VUB). Between 1994 and 1998, he worked in the chambers of Advocate General Jacobs at the European Court of Justice. Piet’s research covers many areas of EU law and of international economic law. He is particularly interested in the relationship between different legal systems, national, European, and international. His research examines the legal effect of WTO law in EU law, the application of EU human-rights standards in national law, and the means to connecting and integrating legal systems so as to combat legal fragmentation. Piet is a leading authority in EU law and international economic law. He is the author of EU External Relations Law and coeditor of the Yearbook of European Law and of the Oxford EU Law Library (all Oxford University Press). Ilaria Espa is Assistant Professor of International Economic Law at USI, Senior Research Fellow at the World Trade Institute (WTI), and Adjunct Professor at the University of Milan. Formerly awarded a Marie Curie fellowship from the European Commission for her postdoctoral studies (2013–2015), Ilaria holds a PhD in International Law and Economics from the Department of Legal Studies of Bocconi University (summa cum laude, 2013) and was a visiting scholar at Columbia Law School in 2012. Ilaria has published extensively in leading international journals on issues at the intersection of trade and sustainability, mainly in the areas of climate change, energy, and commodities, as well as on the law governing the sustainable management of natural resources. She is the author of a monograph on Export Restrictions on Critical Minerals and Metals: Testing the Adequacy of WTO Disciplines (Cambridge University Press, 2015) and the coeditor of the volume on

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Contributors

International Trade in Sustainable Electricity: Regulatory Challenges in International Economic Law (Cambridge University Press, 2017). Rike Krämer-Hoppe is a senior research fellow at the Ruhr-University Bochum. Before joining the Ruhr-University, she was a lecturer for the German academic exchange service at the University College London, a Jean Monnet Fellow at the New York University, and a researcher at the collaborative research center “transformations of the state” in Bremen. She holds a PhD in law from the University of Bremen. Her main fields of research are international and European economic law (especially state aid and government procurement law) as well as international and European environmental law (especially air quality law) as well as the relationship between trade and environmental concerns. She is also interested in comparative law, in particular administrative comparative law. Some of her work is interdisciplinary in nature. Her research has been published in leading international journals such as Common Market Law Review, Journal of European Integration, and West European Politics. Emilia Lamonaca (PhD in Innovation and Management of Healthy Food at UniFg) is a research fellow at the University of Foggia (Italy). Her main research interests include price analysis, determinants of international trade, as well as the role of trade policy and economic geography on trade. She has a special interest in applied econometrics and has recently focused on the methodological issues of the gravity model of trade. Her research has been published in field journals such as Agricultural Economics Czech, Journal of Cleaner Production, Journal of Agricultural Economics, and Agrekon. Gracia Marín Durán is an Associate Professor in International Economic Law at the UCL Faculty of Laws in London. Before joining UCL in 2017, she was a Senior Lecturer in International Economic Law at the University of Edinburgh School of Law (2011–2017). Gracia’s research interests lie generally in EU external relations law and WTO law, and she has published widely on the use and promotion of environmental protection standards in the EU’s external economic policies, as well as on the balance between trade liberalization and environmental protection objectives under WTO law. She has extensive experience in providing legal consultancy and pro bono advice on trade and trade-related matters to international organizations, governmental institutions, and non-governmental organizations. Emily Reid is Professor of International Economic Law and Sustainable Development at Southampton Law School, University of Southampton. Emily undertook her LLB at the University of Edinburgh before completing an LLM in International and European Legal Studies at the University of Durham. Following a period as Research Assistant in the Durham European Law Institute, Emily undertook her doctoral research at the University of Southampton, supervised by Takis Tridimas. Emily’s primary research interest lies in international economic law and sustainable development. Her monograph, Balancing Human Rights, Environmental Protection

Contributors

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and International Trade: Lessons from the European Union, was originally published by Hart in January 2015 and in paperback in January 2017. Having published significantly in EU and international economic law, with a growing focus on the trade/environment/climate change interface, Emily’s current work is centered upon a long-term project, Trade Governance and Regulation in a Globalised Context. Emily has taught predominantly EU law, WTO law, and globalization and law at the Universities of Southampton and, previously, Sussex. Bettina Rudloff holds a PhD in agricultural economics and was assistant professor at Bonn University, where she analyzed consumer protection in the area of food, development, and trade. As consultant at the European Institute of Public Administration (EIPA) in Maastricht, the Netherlands, she consulted officials on trade and food policy and led mid-term training programs on behalf of the European Commission to support trade negotiators from developing countries. Recently, she is senior associate at the German Institute for International and Security (SWP) in Berlin, the research institute of the German Chancellery, providing advice to German and European political actors on food, trade, and agriculture. Fabio Santeramo (PhD in Economics at NCSU) is Assistant Professor at the University of Foggia (Itay) and member of the IATRC since 2017. Dr. Santeramo has been visiting scholar at Iowa State University where he collaborated with Giancarlo Moschini and Sergio Lence. Recently, he has been visiting at the Georg August Universitat Gottingen and at the Duke University. Dr. Santeramo has taught in Italy and in the USA (University of Bari, University of Naples “Federico II,” Iowa State University, North Carolina State University) and has served as consultant for international institutions such as the EU Commission, the FAO, the IFPRI, the ICCT, the CIHEAM, and several Italian National Institutions. His research focuses on international trade issues in agriculture and on agricultural policy issues via quantitative and econometrics methods. He is author of more than fifty peerreviewed papers (currently listed as top 25% economist in Italy, according to IDEAS ranking): his research has been published in top field journals such as Applied Economic Perspectives and Policy, European Review of Agricultural Economics, Journal of Agricultural Economics, and Agricultural Economics. Christine Wieck is Professor for agricultural and food policy at the University of Hohenheim. Germany. Her research, teaching, and outreach centers on the quantitative and qualitative analysis of agricultural and food policies in a globalized world. She worked in the years 2015–2018 for the German Development Agency (GIZ) as an agricultural trade policy advisor. She received her habilitation from the University of Bonn focusing on regulatory impacts on agricultural and food market. Prior to that, she worked in the USA at the Washington State University and in Spain at the Technical University of Valencia.

Introduction—Positive Integration: EU and WTO Approaches Towards the ‘Trade and’ Debate Rike Krämer-Hoppe

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 The ‘Trade and’ Interlinkage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3 The Analytical Framework: Positive, Negative and Non-integration . . . . . . . . . . . . . . . . . . . . . . . 4 4 The Analyzed Fields and the Guiding Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5 The Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Abstract The ‘trade and’ debate is concerned with the relationship between trade liberalisation and other non-economic values or concerns like the protection of the environment or human health. Both the EU as well as the WTO struggle in finding the right balance between different values. In the twenty-first century, especially in times like these, when free trade and economic integration are more and more called into question, finding convincing normative answers or ways to address this very complex relationship between trade and other policies is even more pressing. This special issue uses the framework of positive, negative and non-integration to describe and assess solutions and problem-solving capacities for the ‘trade and’ interlinkage. Comparing the WTO and the EU through this framework not only allows for a comprehensive assessment of all the solutions or mechanisms already in place, it also enables new visions and answers for the ‘trade and’ debate.

1 Introduction Achieving a modus vivendi between liberalisation of the economy and the achievement of other non-economic values has proven one of the most difficult issues of this decade in many

R. Krämer-Hoppe (*) Ruhr-University Bochum, Bochum, Germany e-mail: [email protected] © Springer Nature Switzerland AG 2020 R. Krämer-Hoppe (ed.), Positive Integration - EU and WTO Approaches Towards the “Trade and” Debate, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-25662-3_1

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R. Krämer-Hoppe industrialised countries. Whether it is the tensions between economic efficiency and environmental protection, or labor-market flexibility and fair labor standards, or deregulation and distributive justice, a resolution of this problem seems some way away.1

This special issue will not offer one modus vivendi to all ‘trade and’ concerns, the attempt is more modest: to deepen our understanding of the relationship between ‘trade and’ issues in the EU and the WTO. It will highlight already in place or possible legal choices and responses to the ‘trade and’ conflict. Economic developments as well as the institutional and political context will be elaborated upon. Solutions or attempts of integrating different values in the different legal systems will be analysed and compared to envision new approaches for the twenty-first century. Academic scholarship has engaged in the ‘trade and’ debate for some time,2 however, one final set of solutions seems still far away. Globalisation and a change in policy instruments—from command-and-control regulation to market-based instruments—have increased the likelihood of conflicts between trade and non-economic policy concerns,3 also called diagonal conflicts.4 This change has also changed the nature of some of these conflicts.5 In the twenty-first century, especially in times were free trade and economic integration are more and more called into question, finding convincing normative answers or ways to address this very complex relationship between trade and other policies is even more pressing. For the WTO, it has indeed be claimed that the future of the organisation will be in part determined by the WTO approach towards such subjects as labour rights and the environment.6 New and convincing normative answers to the question, how to deal with the interlinkage, might be envisioned through a comparison of those two regimes and their approaches in different areas. Why comparing the EU and the WTO now? Comparing the two systems is hardly a new idea.7 This also holds true but only to a lesser extent for a comparison of these two regimes regarding ‘trade and’ concerns.8 The ‘trade and’ debate is concerned with the relationship between trade liberalisation and other non-economic values like the protection of the environment or human health. The trend towards even more trade liberalisation gathered speed in the late 1980s with the signing of the ‘Single European Act’ in 1986 as well as the conclusion of the ‘Uruguay Round’ in 1994. The first comparisons of the two regimes had a more descriptive as well as speculative character. The new legal rules were assessed and the developments of the

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McCrudden (1999), p. 3. This debate started with Esty (1994), see for example also Vranes (2009). 3 Williams III (2010). 4 Krämer (2014). 5 Wu and Salzmann (2014). 6 VanGrassteck (2013), p. 557. 7 See for example Gaines et al. (2012). 8 Notaro (2003), Wiers (2002) and Reid (2015). 2

Introduction—Positive Integration: EU and WTO Approaches Towards. . .

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regimes were envisioned.9 Nearly three decades later, both regimes have matured, stabilised and consolidated themselves. In several cases, the relationship between trade liberalisation and other non-economic values has been assessed. Panel and Appellate Body reports as well as ECJ judgements have been issued. The law and the institutions have developed. At this point in time, a comparison hands out the opportunity for a more retrospective and reflective analysis about the developments as well as the current solutions for the relationship between trade liberalisation and other non-economic concerns. In addition, just recently the project of trade liberalisation seems to be on trial. The statements of the new president of the United States Donald Trump are just one incident. As the TTIP and CETA negotiations show, social anger and discontent with free trade is growing. The legitimacy of the EU and the WTO is questioned. Therefore, a new reflection about the developments, the achievements as well as the problematic issues of the status quo seems particularly necessary and valuable.

2 The ‘Trade and’ Interlinkage The relationship between trade policies and other non-economic policies is complex. For sure, different policy goals like trade and human health or trade and environmental concerns most certainly interact with each other. However, it has been and still is controversially discussed in the literature, in which way they interact and what the relationship between different effects is.10 For the trade and environment interlinkage, three possible linkage effects are described: Open trade could increase the scale of economic activity. It could alter the composition of economic activity. And thirdly, it could change the techniques of production, for example the invention and trade of new, more resource efficient products, which could decrease environmental harm.11 For the general question, whether such a change might be positive or negative for the environment two hypothesis exist12: The first is the environmental Kuznet curve (EKC). It suggests that the relationship between income and the quality of the environment is an inverted U-shape relationship. In low income countries pollution level rises until a certain income level has been reached, afterwards the degradation of the environment is reversed. The link between trade and environment could therefore be positive; an increase in trade can lead to higher living standards and, simultaneously, increase the level of environmental protection. The second hypothesis is the pollution haven hypothesis. It suggests that pollution intensive industries

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Notaro (2003) and Wiers (2002). For an overview of the literature and the current debate with regard to trade and environment issues see Shahbaz et al. (2017), p. 222 f. 11 Grossmann and Krueger (1991). 12 Copeland and Taylor (2003). 10

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will relocate their industrial plants into countries with low environmental standards.13 Here the link between trade and environmental concerns would be negative; a shift of production of goods from countries with high levels of environmental protection into countries with low environmental standards can harm the overall environmental performance of our planet. The empirical evidence for the two hypothesis is mixed.14 From empirical studies15 but also from the two hypothesis themselves, it is clear, trade itself does only have an indirect effect on pollution levels. Trade itself does not generate high environmental standards. For high levels of environmental protection, accompanying environmental regulations and standards enacted as well as enforced are necessary. As the study of Emerson et al. suggests, good governance is important to allow “nations to capture the benefits of trade while mitigating environmental degradation and greenhouse gas emissions.”16 One example for good governance are efficient environmental regulations and whether this are in place and implemented. However, these environmental norms and regulations can potentially be trade barriers and clash with trade rules currently in place, being it WTO or EU rules. These regulations can through adjudication be declared incompatible with WTO or EU law.

3 The Analytical Framework: Positive, Negative and Nonintegration What is the analytical framework of this comparison? First of all, let us answer the question, why such a framework is necessary. The short answer to this question is to allow for a common language while comparing. A comparison of two different systems like the WTO and the EU can highlight a range of similarities and differences, respectively. Using an analytical framework allows for a more focused assessment of the differences and similarities. It also enables interdisciplinary work as different disciplines can look at similar issues through the same prism. The framework establishes categories to describe and evaluate the extent of similarities or differences as well as certain relationships or context requirements. It is the benchmark for the comparison and therefore deepens the comparison and the discussion about the differences and similarities. It focuses the view of the comparator towards certain issues and aspects. There are different frameworks one could use for a comparison. For the ‘trade and’ debate in the WTO, Elizabeth Trujillo17 has proposed a dialogical approach. This approach emphasises the relationship between different courts or different 13

For the relationship between EKC and the pollution haven hypothesis see Cole (2003). Shahbaz et al. (2017), p. 222. 15 Emerson et al. (2011), p. 3. 16 Emerson et al. (2011), p. 3. 17 Trujillo (2013). 14

Introduction—Positive Integration: EU and WTO Approaches Towards. . .

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branches of government. It also includes responsive relationships between Member State officials and NGOs. It looks into feedback loops and describes the relationship between different actors or levels of governance in a certain form: not hierarchical but dialogical. This means the different actors or levels are in contact with each other and respond to other ideas.18 This approach has been used to explain policy convergence. Another possible frame or paradigm has been suggested by Steve Charnowitz. He proposes a change in the perception of the WTO. The WTO should finally perceive itself as an environmental agency.19 The first approach only engages with the relationship between different levels or actors. It is relational in nature. Its goal is to try to explain convergence. It therefore tries to answer the question: Why can we find convergence and how do norms travel. The second approach is a more normative one which proposes as a solution to the ‘trade and’ interlinkage: a change in perspective. Both of these approaches have some shortcomings. The first one assumes that convergence happens through dialogue. Convergence, however, could also happen due to the fact that one solution is the best to a certain problem. The second approach lacks the perspective of what has already been achieved and only proposes a normative solution not embedded in today’s political context. The framework of positive and negative integration can fill some of these gaps. Even so the WTO as well as the EU are different, regarding trade liberalisation both rest on the same theoretical assumption: the economic theory of comparative advantages.20 In simplified terms, trade between different countries will be mutual beneficial to all countries involved. Trade liberalisation can increase these mutual benefits. In economic theory, a distinction is drawn between two different mechanisms to integrate formerly separated markets and to foster trade liberalisation: positive and negative integration. Both terms have been introduced by Tinbergen in 1954.21 Negative integration “being the abolition of instruments harmful to the common well-being of the integrated area”22 in other words, the removal of trade barriers such as quantitative restrictions and import duties. Positive integration instead “requires, as a minimum, co-ordinating the use of some instruments in order to avoid a falsification of the price formation and the ensuing division of labour,”23 in short, the establishment of common rules or common institutions. This distinction between positive and negative integration is used as a framework for the comparison of the EU and the WTO as these are the classical two options to integrate markets. A third option will be added: non-integration. This means different product and process standards are kept in place and market integration might not take place either. In most legal scholarship, the traditional comparative approach has been a comparison mainly focusing on negative integration, the removal of trade barriers

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See for the term dialogue Krämer and Märten (2015). Charnowitz (2007). 20 Gaines et al. (2012). 21 Tinbergen (1965), p.XVf. 22 Tinbergen (1965), p. XV. 23 Tinbergen (1965). p. XVI. 19

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between countries by striking down Member State measures via adjudication.24 The focus only on negative integration has led to a narrow comparison of judicial reasoning neglecting the other side of the same coin, positive integration, in the sense of the establishment of common rules and non-integration, the justification of different rules. All the following papers will use this frame of positive and negative integration to fill the gap in the literature and to offer a new perspective on the ‘trade and’ debate: a comprehensive comparative one. To create a comprehensive framework for the comparison, the concepts of positive integration and negative integration must be further illuminated. Both aim at enlarging the economic space beyond national boundaries. Negative integration here refers to the removal of barriers to trade like tariffs and quotas but also includes the striking down of national legislation. It is generally seen as an instrument for deregulation. ECJ judgements and panel or Appellate Body reports are sometimes equated with negative integration, as if they always strike down national regulatory measures.25 Striking down national measures via adjudication is just one option for courts and court-like institutions. If they do so they use the mechanism of negative integration. This judicial option might, however, led in the long run to the establishment of common rules and therefore to positive integration in the end.26 Negative integration can also be a political choice. One example for this is the EU air transport liberalisation. Here, in 1987 the EU started a process of slowly dismantling 200 bilateral agreements between Member States dealing with aviation.27 Courts can not only strike down national legislation but also declare that a measure is justified and thereby choose non-integration as an option. For example, the Appellate Body declared the import ban for seal products in the EU generally for justified under the public morals exception, only the application of the regulation violated the Chapeau of Art. XX GATT.28 The ECJ, for example, declared the import ban of other bees to a Danish Island justified because it preserved an indigenous animal population with distinct characteristics and so contributed to the maintenance of biodiversity by ensuring the survival of the population concerned.29 Diversity and non-integration is sometimes necessary. In some areas, subnational or national regulators might be more equipped to regulate. In other areas, international or European regulation might not be possible or feasible. The choice for diversity should be kept in mind, not integrating certain parts or aspects of a market is a possible solution. However, even choosing judicial non-integration can in the end create positive integration for example through the emergence of common rules and the convergence of legal systems.

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Notaro (2003), Wiers (2002) and Reid (2015). Scharpf (2010). 26 With regard to the Cassis judgement, Alter and Meunier-Aitsahalia (1994). 27 Scharpenseel (2001). 28 Appellate Body Report, European Communities — Measures Prohibiting the Importation and Marketing of Seal Products, WT/DS400/AB/R adopted 18 June 2014, DSR 2014:I, II. 29 ECJ judgement, Bluhme, ECR 1998, I – 8053. 25

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Positive integration on the other hand tries to overcome national separated markets by enacting common rules for more than one market or establishing common institutions. Frequently, the term positive integration is reduced to harmonization or common rules and it is claimed that the legislative deadlock at the WTO but also the legislative hurdles in the EU hinder the creation of such common rules and positive integration in general.30 However, there are more subtle forms of positive integration. Common rules can be created through administrative cooperation, international cooperation, through learning, through soft law or other forms of governance like private regulation. For the WTO Shaffer highlights that “the most routine part of WTO governance is not dispute settlement, but reporting and peer review systems”.31 These subtle integrative mechanisms must be included into our understanding of positive integration in order to describe the developments comprehensively. Positive integration is not an all or nothing concept, it can have different forms, extents and depth ranging from harmonisation and centralised control to cooperation and coordination. Also courts or court-like institutions can foster and engage in positive integration. For example, in the US-Shrimp case, the Appellate Body requested serious across-border negotiations with the objective of concluding bilateral or multilateral agreements before enacting an unilateral import prohibition.32 In the literature, it has even been argued that because of the strong adjudicative process in the WTO more positive integration took place at the WTO level. As the fora gained more credibility, political actors brought more and more issues under the jurisdiction of the WTO like intellectual property regulation.33 Due to this increase of positive integration at the WTO, some have requested the integration of human rights into the WTO legal system to balance this new power.34 Figure 1 shows a summary of the understanding of the key terms negative, positive and non-integration and the framework applied in this special issue. The two terms negative and positive integration stem from economic theory but have been applied in political science35 and in legal scholarship.36 This framework, therefore, lends itself for an interdisciplinary analysis. Sometimes the two mechanisms have been described as an either-or concept. However, economic integration needs both; all systems or regimes of economic integration have introduced some elements of positive integration.37 Currently, the room for further negative integration is limited. Even so, positive integration concerns the abolition of non-tariff barriers to trade and requires a higher level of political commitment which is often

30

For the EU Scharpf (1999), p. 43 ff. Shaffer (2015), p. 17. 32 Appellate Body Report, United States – Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R adopted 6 November 1998, DSR 1998, VII, 2753, para 166 ff. 33 DeBievre (2004). 34 Petersmann (2000). 35 The most prominent example being Scharpf (1999), pp. 43 ff. 36 For example De Sousa (2012). 37 El-Agraa (1997), p. 3. 31

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Term

Meaning and forms

Positive integration

Enactment of common rules (public and private). More subtle forms of coordination and cooperation.

Negative integration

Removal of barriers to trade like tariffs and quotas. Striking down national product or process legislation.

Non integration

The choice not to integrate markets but to keep them separated with divers rules. The justified application of domestic product and process standards for imported goods.

Fig. 1 Positive, negative and non-integration

hard to achieve,38 it should be included into the comparative analysis of both regimes. Through such a comparative perspective, both regimes might be able to learn from the experience of the other. The WTO could gain insights into the development of common rules from the EU. For positive integration at the WTO Petersmann for example demanded a broader participation in the rule-making as well as the integration of human rights and the recognition of citizens as legal subjects like in the EU.39 Vice versa the EU could gain insights about certain hurdles for positive integration via common rules. In addition, other paths for positive integration besides legislatively setting common rules could be illustrated. These insides are especially valuable in times were the European integration project is in peril. They allow for new and different visions for the EU or the WTO respectively. As Majone already pointed out in 2005, “in an increasingly diverse EU it might be necessary to revert to a negative-integration regime”.40 Both regimes the EU as well as the WTO struggle to find the right balance between trade liberalisation and other non-economic concerns. Therefore, both are not only founded on similar theoretical assumptions but also face similar problems and issues. The scope and depth of integration, however, differ. These differences make it worth to compare the two systems over time and examine how the two systems struck the balance between trade and other non-economic concerns and whether they did so by turning towards negative, positive or non-integration. The comparison will not be a comparison only about the law in the books but also about the application of the law and the development of the institutions. The comparative methodology applied in this special issue is functionalism. Functionalism means that comparable are only the laws that serve the same function.41 Therefore the starting point has to be a certain problem, the law addresses. In our case, the starting point of the comparison is the socio-economic problem about where and how to strike a 38

El-Agraa (1997), p. 385. Petersmann (2000). 40 Majone (2005), p. 143. 41 Kötz and Zweigert (1996), pp. 33 ff.; Siems (2014); Kischel (2015), pp. 93 ff. 39

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balance between different policy concerns in multilevel-governance settings. The different answers to this problem in the WTO and the EU will be compared.

4 The Analyzed Fields and the Guiding Questions Besides this new frame, the special issue focuses on areas in the ‘trade and’ debate, which are generally not widely discussed and uses an interdisciplinary approach. Starting with food safety and aiming at positive integration via bilateral cooperation (Wieck/Rudloff), the special issue turns to non-tariff measures in the agri-food sector (Santeramo/Lamonaca). All this is followed by an analysis of a WTO field, which only recently came into the focus of the ‘trade and’ debate: renewable energy subsidies (Espa/Marin-Duran). The contribution on subsidies highlights the relationship between enforcement mechanisms not only for positive but also for negative integration as well as the possibilities and necessities for legal shelter for Renewable Energy subsidies at the WTO level. The last two contributions focus on the courts or court-like institutions as actors (Reid; Krämer-Hoppe). The special issue ends with a conclusion and some remarks for further research (Eeckhout). The guiding questions for the contributions are: • Where does the EU or the WTO struck the balance between liberalisation of trade and other non-economic concerns in the analysed area? • How did the system get to the status quo? Are there different stages in the development process? • To what extent is the mechanism of achieving integration in that area mainly positive, negative or non-integration? • What is the relationship between positive, negative and non-integration in the studied field? • What role do the different actors involved play? Do they push for positive or negative integration? • What are the differences and the similarities between the WTO and the EU in the analysed sector? • What are the strength and weaknesses of the different systems? • Where might one system learn from the other? To sum up, this special issue enables us to draw more general lessons on the relationship between trade and non-economic concerns and the balance of the different dimensions of positive, negative and non-integration. It will highlight, under which condition positive, negative and non-integration takes place and where regulatory measures and space might need to be left at the national or subnational level. In addition, the special issue allows us to recognise different stages of integration and envision certain developments for the future. It aims at enhancing our understanding about the interdependence between trade and other non-economic policy concerns and at enabling us to find new responses or solutions for this interdependence in multi-level-governance settings in the decades to come.

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To conclude, in times of crisis the special issue deepens our understanding of the difficult assessment of striking a balance between trade and other non-economic concerns and empowers us to envision normative solutions on how to strike this balance by avoiding certain pitfalls.

5 The Contributions From an economic perspective, the first two contributions set the scene for positive and negative integration. They both give a background for the different options for positive integration as well as non-tariff measures while concentrating on trade in food products. Both contributions clearly indicate the different take of economists towards these questions—a more general and abstract approach. Bringing together these different views enhances the overall debate and leads to rethinking some of the questions presented in the legal literature. The first contribution opens up the debate by showing the various possibilities for positive integration besides harmonization. The second contribution presents an overview of the various forms non-tariff measures can take. The stated increase of policy intervention between 2008 and 2015 in the agri-food sector also begs the question of the regulatory chill hypotheses sometimes presented in the legal and political science literature.42 The first contribution “Bilateral positive Integration – Different strategies for regulatory cooperation in the TTIP” by Christine Wieck and Bettina Rudloff approaches the topic from an economic perspective, the aim of the paper is to discuss regulatory cooperation in trade agreements with regard to food safety using the TTIP negotiations as an example. The paper firstly describes the different possible forms of positive integration in the area of food safety and food quality measures. Positive integration here comes in different shapes, ranging from harmonisation, mutual recognition, and equivalence to solely coordination. Each of this different regulatory rapprochements comes with different costs and benefits. It than describes the fundamental role of the SPS agreement for bi- as well as multilateral regulatory cooperation in the field of food safety. It also shows that internationally complete harmonisation of food safety systems is achieved only in a very few cases. In a second step, the EU experience in regulating food safety in the European Common Market is described. Despite international harmonisation being only slowly and so far only achieved in few cases, the EU has come a long way. Externally, the EU uses different approaches ranging from gradual harmonisation especially for accession countries as well as flexible equivalence. Here, the EU sometimes requires the compliance with EU standards but offers aid for implementation of these standards in return. For organic products special rules are in place and recent trade agreements include the requirement to set up regulatory coordination councils.

42

Cf. Young (2005), p. 47; Lydgate (2012).

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In a third step, the relationship between the EU and the US is analysed. With regard to food safety, one of the goals of the TTIP is a cooperation in areas where unnecessary duplications or trade barriers may exist. The paper shows that in certain areas both countries have some regulatory difference in dealing when assessing food risks (precautionary vs after-care principle). The WTO disputes in these areas show that even in such areas there might be strategies for solutions like barter deals. Due to the range of options a “race to the bottom” as often feared is not necessary and does not necessarily take place. The second contribution “The role of non-tariff measures in the agri-food sector: positive or negative instruments for trade?” by Fabio G. Santeramo and Emilia Lamonaca also approaches the topic from an economic perspective, this paper asks a slightly different question as has been asked before by lawyers. Lawyers tend to ask about the legality and compatibility of non-tariff measures within the WTO agreements, this paper asks about the relationship between trade and non-tariff measures and how non-tariff measures and trade influence each other. It highlights that the pervasiveness of non-tariff measures is likely to be strictly related to a change in trade patterns and differs across countries involved. In addition, it clearly indicates that not all non-tariff measures hinder trade but instead some measures can even foster trade. In the first section, the paper lays out the development of trade in the agri-food sector. The trade intensity between North-North countries as well as the South-South countries have increased dramatically while the trade between South-North countries seems to be stable. In the second section, the paper describes different forms of non-tariff measures and shows a tremendous increase of these measures in the agrifood sector, in particular during the period 2005–2015. In the third section, the trade effects of these non-tariff measures are analysed. In contrast to tariffs, non-tariff barriers may act as catalyst for international trade or as a barrier. The empirical literature about the effects of non-tariff measures is mixed and the paper suggests that whether non-tariff measures foster or hamper trade is country-, product- and measure-specific. To conclude, non-tariff measures at the national-level, labelled “non-integration” in this introduction can have integrative effects on markets. The third contribution focuses from a legal perspective on a different and also important aspect of the ‘trade and’ debate, namely the trade in renewable energy. Besides the broader approaches in the first two papers this paper really focuses on the different institutions EU and WTO and their negative as well as positive integration approach towards renewable energy subsidies. It clearly shows that institutional setup matters not only for positive but as well for negative integration and that both aspects interact. The contribution “EU and WTO regulatory approaches to renewable energy subsidies: Negative integration and positive integration” by Ilaria Espa and Gracia Marín Durán aims to compare how the EU and the WTO have grappled with balancing the negative (trade-distortive) as well as positive (climate change-mitigation) effects of green energy subsidies. In a first step, the paper describes how EU State aid law and WTO subsidy law are similar in their approaches towards negative integration. While both share some common ground—their understanding that subsidies can have trade distortive effects,

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differences in the application and the institutional setup are evident. The EU substantive disciplines and control mechanisms are comparatively stronger in constraining governments room to manoeuvre. The WTO lacks an institution like the European Commission with its broad control functions. These differences in monitoring and policing the compliance of the subsidy regimes also explain the different approaches with regard to positive integration in the two systems. The paper poses the hypotheses that when implementation is strictly controlled a necessity exists for harmonising “good” acceptable renewable energy subsidies, therefore for positive integration through hard- and soft-law instruments like the General Block Exemption Regulation. In the second section, the paper poses the question whether the lack of such positive integration at the WTO-level puts national renewable energy subsidies at risk of being WTO incompatible and whether there is a need for legal shelter. Especially regarding the legal shelter for renewable energy subsidies, the last part of the paper explores which lessons, if any, may be drawn for the WTO from the EU regulatory experience. For a variety of legal, political and institutional reasons the paper argues that a transposition of the EU positive integration approach towards the WTO is not desirable. In the different approach towards the implementation and the different institutional setup, both end up with a different mixture of negative as well as positive integration elements. And to a certain extends both these mixtures allow for renewable energy subsidies. One could argue that we see functional equivalents in the specific mixture of positive and negative integration. The last two contributions engage with the adjudication from an internal (Reid) as well as a more external perspective (Krämer-Hoppe). The first contribution analyses some of the recent renewable energy judgements of the European Court of Justice and the balance which has been struck between trade and environmental considerations in these cases. It therefore relates to the prior paper (Espa/Marin-Duran) on renewable energy and gives a deeper insight to the adjudicative approach of the ECJ, as well as that of the DSB. The last paper gives an overview of the possible impact of case law for positive as well as negative integration and the different roles the ECJ as well as the DSB can engage in when dealing with the ‘trade and’ relationship. The sixth contribution “Trade and Environment in the EU and WTO: legitimacy, proportionality and institutional power play” by Emily Reid analyses the relationship between trade liberalisation and environmental protection. This relationship is prima facie one of tension, requiring a decision to be made as to the balance to be struck between these objectives. Both the EU and WTO are familiar with this tension. Adjudicative decision-making in both institutions, and particularly in this area, raises legitimacy questions at a number of levels. In exploring these, the language used by the ECJ and the Appellate Body; the tests which they apply in order to reach a decision; and indeed whether these (the language and the tests are absolutely aligned) will be examined. In the first part, the paper gives a short overview of the legitimacy debate in international law and distinguishes between normative and descriptive legitimacy, which distinction is key to understanding some of the questions which arise with regard to these institutions ruling upon ‘trade and’, and their consequent vulnerability. The second part of the paper

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examines the balancing approaches of the ECJ and the Appellate Body, focusing in particular upon how they have developed over time, and whether the approach articulated by each institution fully reflects its reasoning in its judgements or reports. The paper comes to the conclusion that despite the different legal context of these judicial or quasi-judicial bodies both adopt rather similar approaches to balance the two interests of trade and environment. Both “courts” tend to avoid subjective reasoning and seek to reach their decisions based upon objective criteria. This clearly reflects their sensitivity towards questions of legitimacy. The seventh contribution “Adjudication and positive integration - the role of the European Court of Justice and the Dispute Settlement Body in the ‘trade and environment’ debate” by Rike Krämer-Hoppe discusses the different roles of courts with regard to the topic of the special issue. Courts are generally attributed with negative integration. This paper seeks to explore the possibilities of the ECJ and the Dispute Settlement Body (DSB) of the WTO to engage in positive integration. Therefore, first the different standing rights and the jurisdictions of both institutions are described as a background. In a second step, possible roles of courts in general and in environmental law are described eluding to possible roles for the ECJ and the DSB in engaging in positive integration. Three possible roles are identified and described: rule enforcement, the clarification of the room to manoeuvre or acting as a facilitator of positive integration. Rule enforcement thereby generally describes the situation in which a court states what the law is. The clarification of the room to manoeuvre more specifically includes case in which the court interprets and clarifies certain exemptions. In addition, the court act as a facilitator of positive integration when it provides certain solution for the balancing of the two goals or requires cooperation. In a fourth step, the paper illustrates these different roles for the courts or courtlike institution to engage in positive integration by using different case law, e.g. the rule enforcement of secondary environmental law in the EU has fostered deeper integration as it enabled implementation. The clarification of the room to manoeuvre has created examples with a WTO or EU approved stamp which were later adopted by other countries as well. In the area of EU public procurement law, the case law of the ECJ solved the legislative deadlock and opened the path for the inclusion of environmental-friendly criteria. These examples show that both institutions already engage in positive integration in different ways. Further comparative research should therefore take this other side of the same coin—positive integration—into account. The last contribution “Myths and virtues of positive and negative integration some concluding remarks” by Piet Eeckhout outlines the common themes which run through the special issue. He comes to the conclusion that the difficulties which positive and negative integration face are context-or sector-dependent. Positive and negative integration also come in different forms and shapes. One lesson we can take from the trade and environment debate is that policy and regulatory differences between jurisdictions are not necessarily harmful. For further research he suggests to study ideas or possibilities for a metric for environmental protection not being reduced to “externalities” in an economics vocabulary.

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Acknowledgements Many thanks to all the participants of the Workshop “Trade and Environment—Positive Integration in the EU and the WTO” at the Ruhr-University Bochum partly funded also by the Ruhr University. With a special thanks to Piet Eeckhout, Stefan Magen, Joanne Scott, Fiona Smith, Maria Lee and Markus Krajewski for their comments on earlier versions of this introductory and conceptual chapter.

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Scharpenseel MF (2001) Consequences of EU Airline deregulation in the context of the global aviation market. Northwest J Int Law Bus 22:91–116 Scharpf F (1999) Governing in Europe: effective and democratic. Oxford University Press, New York Scharpf F (2010) The asymmetry of European integration, or why the EU cannot be a ‘social market economy’. Socio-Econ Rev 8:211–250 Shaffer G (2015) How the WTO shapes regulatory Governance. University of California Legal Studies Research Paper Series, No 2014–53 Shahbaz M, Nasreen M, Ahmed K (2017) Trade openness-carbon emission nexus: the importance of turning points of trade openness for country panels. Energy Econ 61:221–231 Siems M (2014) Comparative law. Cambridge University Press, Cambridge Tinbergen J (1965) International economic integration, 2nd edn. Elsevier, Amsterdam Trujillo E (2013) A dialogical approach to trade and environment. J Int Econ Law 16(3):535–585 VanGrassteck C (2013) The history of the World Trade Organisation. WTO, Geneva Vranes E (2009) Trade and the environment – fundamental issues in international law, WTO law and legal theory. Oxford University Press, New York Wiers J (2002) Trade and environment in the EC and the WTO: a legal analysis. Europa Law Publishing, Groningen Williams III RC (2010) Growing state-federal conflicts in environmental policy: the role of marketbased regulation. NBER Working Paper No. 16184: 1–25 Wu M, Salzmann J (2014) The next generation of trade and environment conflicts: the rise of green industrial policy. Northwest Univ Law Rev 108:401–474 Young AR (2005) Picking the wrong fight: why attacks on the World Trade Organization pose the real threat to national environmental and public health protection. Global Environ Polit 5 (4):47–72

Bilateral Positive Integration: Different Strategies for Regulatory Cooperation in the TTIP Christine Wieck and Bettina Rudloff

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Food Safety in Trade Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Levels of Regulatory Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 The Fundamental Role of the SPS Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Focus on EU: Regulatory Food Safety Traditions in the EU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Focus on EU-US Differences in Food Safety Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Bilateral Differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Strategies for Regulatory Cooperation on Food Safety Matters . . . . . . . . . . . . . . . . . . . . . . . 5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18 21 21 23 24 26 27 29 32 33

Abstract This article discusses regulatory cooperation in the area of food safety in trade agreements with a special attention to the EU-US negotiations about the Transatlantic Trade and Investment Partnership. We show how food safety is regulated in trade agreements and what regulatory cooperation approaches between countries and internationally regarding food safety exist. There were several highprofile disputes at the WTO dealing with food safety issues. These cases show how solutions for heterogeneous food safety regulation can be found and constitute viable alternatives to regulatory cooperation and harmonization of standards. A “race to the bottom” of food safety standards is not necessarily the case when countries cooperate on food safety matters.

C. Wieck (*) University of Hohenheim, Stuttgart, Germany e-mail: [email protected] B. Rudloff The German Institute for International and Security Affairs (SWP), Berlin, Germany e-mail: [email protected] © Springer Nature Switzerland AG 2020 R. Krämer-Hoppe (ed.), Positive Integration - EU and WTO Approaches Towards the “Trade and” Debate, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-25662-3_2

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1 Introduction The prospect of a free trade agreement between the United States (US) and the European Union (EU) generated a large body of literature discussing feasibility and (institutional) consequences of such an agreement. One of the main topics of the negotiations related to regulatory issues, often described by the terms of regulatory “convergence”, “coherence” or “cooperation”. However, TTIP negotiation progress has stalled on many of the difficult issues since 2015, the public interest in regulatory cooperation across the US and EU has declined, and since a US-EU joint report on TTIP progress at the beginning of the year 2017,1 no new negotiation rounds took place. However, in particular the regulatory cooperation on food remains relevant every day, as trade in food products is continuously increasing and divergent national food safety regulations remain a challenging issue. The idea behind negotiations on regulatory issues is that an “elimination, reduction and prevention of unnecessary regulatory barriers” should be achieved.2 Where an elimination or reduction may be deemed difficult, cooperation on regulatory matters, as an example of positive integration, is one option. The area of food safety is one of the topics in this debate. Regulatory cooperation on food standards has a long tradition as agricultural production, food processing and food marketing is governed by a complex system of national and international food safety and quality regulations. The General Food Law of the EU enacted in 2002 considers agricultural and food production as a “continuum” where all aspects of the food production chain from “primary production and the production of animal feed up to and including sale or supply of food to the consumer” are relevant.3 If this approach is taken seriously, this leads to an impressive number of regulatory measures that apply to the agricultural and food sector. These standards are put in place to address societal interests when the market forces are perceived to provide insufficient incentives for public health. In other cases, the introduction of regulatory measures may also be motivated by protectionist arguments and rent seeking. International trade rules for food safety and food quality are designed to facilitate the flow of goods and to insure the use of necessary regulatory measures are applied on non-discriminatory basis. In economic terms, food safety measures are considered to be non-tariff measures (NTMs). In the context of agri-food trade regulations, the use of the term non-tariff “measures” is predominant, as it acknowledges that regulations may address legitimate issues of market failure. Therefore, by definition, they should not be called a “barrier”. A commonly accepted definition of a non-tariff measure is that they are “policy measures, other than ordinary customs tariffs, that can potentially have an

1

EU (2017). EU (2013), p. 1. 3 European Communities (2002), §12. 2

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economic effect on international trade in goods, changing quantities traded, or prices, or both”.4 Food safety and food quality is regulated by both technical and non-technical measures as well as by public regulation and private standards. “Food safety” refers “to all those hazards, whether chronic or acute, that may make food injurious to the health of the consumer”.5 “Food quality” “includes all other attributes that influence a product’s value to the consumer”.6 The regulation of food safety “encompasses actions aimed at ensuring that all food is as safe as possible”.7 Minimum quality requirements ensure that the produced food is “unadulterated and not subjected to any fraudulent practices intended to deceive the consumer”.8 The relevant technical measures for food safety and food quality are: (1) sanitary and phytosanitary measures; (2) technical barriers to trade; and (3) non-technical measures related to the intellectual property embedded in geographical indications regarding production and/or processing. Both technical and non-technical measures are largely enforced through public standards. But, in globalized food supply chains private measures related to product attributes such as quality grading, residue levels, testing, traceability, and branding, as well as process attributes such as organic production and animal welfare friendly are widely used. In addition, in the context of agri-food production and marketing the term “standard” is also used. A standard is defined as a method “to ensure uniform specifications or attributes of a product”.9 In the WTO framework, there exists a distinction between a regulation and a standard. A regulation indicates mandatory public rules instituted by governments whereas standards may also be developed by private entities such as supermarket chains or certification service providers. This means that compliance to standards is (quasi-) voluntary and only relevant for the group of producers involved in the production of that specific good. This distinction results from the World Trade Organisation (WTO) Technical Barriers to Trade (TBT) Agreement where the word standard is reserved for private standards whereas any regulation instated by public law is considered to be a technical regulation with mandatory compliance. For standards, compliance is voluntary and products not in compliance may still be marketable as no government regulation is violated. However, with the sharpening of the analytical debate about design, measurement, compliance costs and welfare benefits of regulations and standards, the distinction becomes less relevant as the economic impacts of regulations and standards are often the same. In addition, public regulations are sometimes based on technical specifications developed by private standard-setting organizations which make the distinction even more complex. An example is the “Hazard Analysis and Critical Control Point” (HACCP) protocol which is designed and

4

UNCTAD (2012), p. 1. FAO/WHO (2003), p. 3. 6 FAO/WHO (2003), p. 3. 7 WHO (2016). 8 FAO (2016). 9 WTO (2003), p. 326. 5

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certified by private entities but mandatory according to the European General Food Law.10 Trade agreements deal with public regulation. There was some debate in the context of the WTO Sanitary and Phytosanitary (SPS) agreement, if private standards are also captured by trade agreements, but up to now, this matter remains unclear and the SPS agreement only applies to standards defined by public authorities.11 Thus, this research focuses on public food regulation. Positive integration via regulatory cooperation on food may take different forms: mutual recognition of standards, harmonization of standards or different types of cooperation in the regulatory process. There exists a long-standing tradition in regulatory cooperation between the EU and the US,12 but also in the international arena, most notably noted in the WTO agreements on SPS and TBT issues. However, also differences exist that, in some cases, became so severe13 that long-lasting WTO disputes were necessary to come up with solutions. Each trade agreement and unilateral decision about seeking deeper economic integration with other countries led to debates about forms, impacts and consequences of regulatory cooperation. This debate is reflected in the economic literature on standard setting.14 In the public there prevails the view that trade agreements that unite countries with different food safety measures or food safety protection levels will lead to a “race to the bottom” where only the lowest food safety level with the lowest compliance costs will be maintained. There are several examples in particular from WTO dispute cases on food issues that show that this is not necessarily the case. With this background, the objective of this article is to discuss regulatory cooperation on food safety in trade agreements as an example how positive regional integration may work. Special attention is given to the EU-US negotiations about the Transatlantic Trade and Investment Partnership (TTIP). We show how food safety is regulated and how the topic is approached in trade agreements. Focusing on EU-US food safety issues we highlight fundamental differences in food safety regulation and derive solution strategies that may solve food safety differences. Section 2 provides an overview on how food safety is regulated in trade agreements, Sect. 3 provides details on how EU addresses food safety matters in regional integration, and in Sect. 4, EU-US differences in food safety traditions are analysed and solutions to overcome these regulatory differences discussed. Section 5 concludes the article.

10

European Commission (2015). WTO (2007) and Wouters and Geraets (2012). 12 For example Veterinary Equivalence Agreement (1998) or Wine agreement (2006). 13 For example in the EU-US Beef hormone case. 14 For example OECD (1994), Thilmany and Barrett (1997), Hooker (1999), Josling et al. (2004), Hobbs and Kerr (2006), Brouwer et al. (2012) and Humphrey (2012). 11

Bilateral Positive Integration: Different Strategies for Regulatory. . .

21

2 Food Safety in Trade Agreements Regulatory measures on food must adhere to the international legal architecture. The General Agreement on Tariffs and Trade (GATT) is based on the notion of free market access which equally applies to all states. These regulations must be implemented in a uniform and non-discriminatory way (“most-favoured nation treatment” and “national treatment”) and be least-trade distortive in their design. Quota-based trade restrictions are explicitly banned (Article XI). However, there are exceptions from these rules, for instance for measures protecting human, animal or plant health (Article XX [b]). The SPS measures and on TBT measures provide the internationally agreed upon framework for the evaluation of many of the regulatory measures used on agricultural and food markets. The SPS agreement aims at defining a balance between the right of WTO members to set their own regulations to protect human, animal and plant life and the free flow of goods, and at the same time avoiding unnecessary and arbitrary trade barriers (Preamble of SPS agreement). A similar balance is embedded in the TBT agreement where it allows for measures to ensure the quality of exports, the protection of the environment, and, the prevention of deceptive practices without unjustifiable discrimination between countries (Preamble TBT agreement). With respect to the labelling of food quality, the TBT agreement and the agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) play a major role. In this respect the TBT agreement requires that the measures are appropriate to their objective and be least trade distorting. Food quality that is based on geographical origin is regulated by the TRIPS agreement. Also in this agreement, the objective is to strike the balance between “effective and adequate protection of intellectual property rights” and to ensure that these rules do not “become barriers to legitimate trade” (Preamble TRIPS Agreement).

2.1

Levels of Regulatory Cooperation

Apart from the multilateral framework governing the agri-food system, regional and bilateral agreements also deal with food safety and, sometimes, with food quality. This rapprochement15 or regulatory cooperation between countries support positive regional integration and may take different forms: mutual recognition of standards, harmonization of standards or different types of cooperation in the regulatory process. With each of these regulatory rapprochements levels, different costs and benefits regarding deepness of economic integration and national sovereignty in standard setting are involved.16 The starting point for any regulatory cooperation 15

I.e., the reduction of regulatory differences between countries (Hooker 1999). Hooker (1999), Sparling and Caswell (2006), Badulescu and Baylis (2006) and Meilke et al. (2008). 16

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between countries is the national food safety framework. As most countries are member of the WTO, their food safety and food quality regulation should be aligned with the WTO rules. When countries agree to increase their cooperation or even aim for regulatory convergence, a first step is to agree on regulatory cooperation with the aim to gradually narrow any significant differences between their domestic level food safety regulations. As a next step in the regulatory cooperation, a more outcome-oriented approach could be targeted by agreeing on equivalence of single measures or groups of requirements. Alternatively, mutual recognition of certain areas or the whole food safety system is an option. Accepting equivalence for certain measures means that even though the measures of two countries may be different, they are accepted as equivalent in achieving the same level of food safety. Equivalence is usually defined on a measure-by-measure basis and often leads to agreements with long “positive lists”. Mutual recognition in contrast, usually has a broader scope where not only measures but complete food safety systems or at least larger parts of the system are accepted as achieving the same food safety level. Mutual recognition is usually based on an arrangement where both countries agree to recognize each other’s conformity assessments. This means cost savings despite remaining different standards and commercial advantages, because expensive quality assessments and border controls can be forgone. The measure-by-measure approach that is possible under equivalence approaches allows for greater flexibility in acceptance of equivalence and is thus more prevalent in food safety cooperation efforts between countries than mutual recognition agreements.17 Finally, departing from diverging national measures that are mutually recognized or accepted as equivalent, a single uniform system across countries could be adopted. This implies a full harmonization of food safety systems. The NAFTA specified an extensive number of trilateral committees and working groups to deal with regulatory coordination in the agricultural and food sectors (Green et al. 2006). At the same time, the NAFTA partners pursued regulatory coordination in other venues, sometimes as a substitute for activities that could have taken place in the NAFTA committees and working groups. Different types of cooperation are observed: “workaday cooperation” where national bureaucracies interact on “an almost daily basis” (Green et al. 2006, p. 12), “strategic bilateralism” to address regulatory issues on a bilateral basis (e.g. in the US-Canada Record of Understanding or several bilateral Consultative Committees on Agriculture (CCAs) created by the agricultural and trade ministries of the NAFTA countries) or in some instances even “strategic trilateralism” when an SPS issue affected all three countries (e.g. BSE). Green et al. concluded that it was mostly the “nature of a particular regulatory challenge” (Green et al. 2006, p. 18) that has defined the solution approach and the regulatory architecture. Ongoing longer-term issues are well suited for committee and working group analysis whereas emergency issues that require immediate attention are more likely to be discussed bilaterally in some “workaday” or “strategic” solution-focused type of approach. 17

Rudloff (2014).

Bilateral Positive Integration: Different Strategies for Regulatory. . .

2.2

23

The Fundamental Role of the SPS Agreement

Across the trade agreements around the globe, we find all stages of regulatory cooperation to support positive regional integration. Already early on, agreements like NAFTA, within the APEC, or within the early predecessors of the EU, regulatory cooperation was agreed on.18 Also the Trans-Atlantic Consumer Dialogue (TACD), launched in 1998 between the EU and the US aimed at that objective. In a recent OECD study19 on the provisions in regional trade agreements, it is highlighted that most regional trade agreements include a separate chapter on food safety, plant and animal health, or SPS. Of the 55 agreements examined, only five do not contain a separate SPS chapter: Canada-Chile, Mexico-Peru, China-Hong Kong, Japan Thailand and United States-Singapore.20 However, the analysis also shows that only a few agreements go beyond the specific commitments laid down in the SPS agreement of the WTO. The analysis also found that 40% of the agreements examined limit the SPS chapter to one or two paragraphs where they agree to observe the commitments of the SPS agreement. According to the report, the language of the agreements signals a “preferred behavior” instead of a legal commitment.21 However, deeper commitments may be achieved later in additional memorandums of understanding or ad-hoc agreements. With respect to TBT matters, a similar observation is made in the OECD report. Most of the agreements reviewed do not provide for specific food or agriculture related TBT provisions, but rather relate to the general rules of the agreement. For GIs, a similar observation holds. Reference to the WTO TRIPS agreement is often made, but further regulatory cooperation seems rather challenging as negotiations in recent bilateral trade agreements show.22 A complete harmonization of food systems is achieved in only a few cases. This harmonization of food safety and food quality rules for example takes place within the deeply integrated free market of the EU countries, as national regulations have been completely aligned with EU food law. A similar unification is expected to take place in the deep and comprehensive free trade agreements that the EU negotiated or is considering with the Ukraine and Mediterranean countries. Also the WTO SPS agreement with its approach to base food safety measures on commonly agreed on standards as defined by the three standard-setting organizations shows a tendency for the harmonization of standards based on consensus. However, this is a difficult road: progress has been slow and many food safety areas that are not yet covered by the

18

Hooker (1999). OECD (2015). 20 OECD (2015). 21 OECD (2015), p. 18. 22 Viju et al. (2012), Matthews (2015) and Watson (2016). 19

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Codex alimentarius,23 and the long fierce disputes about food safety regulation24 show that the WTO members are still far away from achieving this harmonization of food safety rules. However, it is also striking, that even though on a bilateral or regional basis, easier steps towards regulatory convergence could be made, not much ambition in terms of real commitments can be found. Yet, this would be a relevant step to achieve the stated objectives of all agreements to facilitate trade and reduce transaction costs. On the other side, this highlights again the fundamental role of the WTO and its agreements in governing global food trade. Bilateral agreements mostly deepen multilateral trade preferences but in terms of trade rules, the majority of the agreements reference to the respective WTO agreements and the role of the international standard-setting bodies. Thus, if further harmonization or equivalence of public international food safety rules is achieved, the leadership of the respective WTO committees, such as the SPS committee, TBT committee and the TRIPS committee, and of the standard-setting international bodies must be recognized and fostered.

3 Focus on EU: Regulatory Food Safety Traditions in the EU In sum, the EU has concluded more than 770 international agreements concerning trade in agriculture. These agreements range from very encompassing agreements to very specific ones only concerning one product. The EU hast a longstanding experience with harmonization and mutual equivalence which also lies at the heart of the European Common Market. The approaches differ by partner country and product: (1) Gradual Harmonization. For EU accession candidates, full harmonization is required. Countries aspiring to become EU member states need to adopt all EU standards and regulatory systems (“acquis communautaire”). In the case of free trade agreements and customs unions with third countries, the EU often aims to include harmonization of standards to the EU-model, despite negotiation of lower tariffs: For example, the European Free Trade Agreement (EFTA) states Norway, Liechtenstein and Iceland decided to adopt the according part of the “EU acquis”. The national regulatory agencies of Norway and Iceland should cooperate closely with EU agency in which they also enjoy observer status. The Ankara treaty with Turkey only lowers tariffs for a few processed agricultural

23

Orden and Roberts (2007) and Winchester et al. (2012). Even though the existence of a scientifically based public health risks allows for stricter food safety levels, a higher required standard has never been accepted in resolved WTO disputes.

24

Bilateral Positive Integration: Different Strategies for Regulatory. . .

25

products. Food standards are not included. Hence, EU standards apply for exported Turkish goods to the EU. (2) Flexible Equivalence. The mutual recognition of equivalence is the most common form of cooperation and can again take various forms and shapes: The bilateral agricultural treaty with Switzerland envisages individual mutual recognition of veterinary standards and relies on positive lists. With the Deep and Comprehensive Trade Agreements (DCFTAs), the EU aims to specifically tackle NTMs in neighboring countries, which entails difficulties in the agricultural sector. Yet, adjustment of the association agreements according to the DCFTA model could only be started with few partners. Negotiations with Morocco are ongoing since spring 2013, negotiations with Tunisia have started. Preparatory dialogues are currently held with Jordan and Egypt. The EU approach to standards in agreements with countries which are further away is much differentiated: Only few product specific agreements define what is considered equivalent in positive lists. The degree of equivalence ranges from full recognition to conditional recognition until complete refusal and hence, exclusion of equivalence. The veterinary agreements between the EU and the USA, Canada and New Zealand define different degrees of equivalence for a different number of standards and only for animal products. When they are completed, comprehensive trade agreements usually replace previous equivalence treaties. With the negotiation of the Comprehensive Economic Trade Agreement (CETA) between the EU and Canada, cooperation in veterinary services has been deepened and more measures are defined as equivalent. Currently, the EU negotiates the Economic Partnership Agreements (EPAs) with African Caribbean and Pacific states (ACP states). Here again, standards play a decisive role in terms of market access to the EU—full tariff elimination is useless if market access is denied because standards are not met. Only few agreements (EU-CARIFORM, EU-Pacific) have full mutual recognition as a goal. Most often it is about compliance with EU standards for which the EU offers aid for implementation. (3) Special Rules for Organic Products. The rules for import of organic products comprise the whole range of forms of cooperation: The EU recognizes competent regulatory control bodies in third countries to verify equivalence of products with EU countries, which is in turn cross-checked by the EU. Simpler rules apply to all organic products of a country if the whole production is considered equivalent. Hence, a product-specific verification is not required anymore. In 2012, eleven countries fell under this category, among them the USA, Canada, Australia, Israel, Tunisia and India. The EU concluded special organic equivalence agreements with some of those—for instance with the USA (2012), with Canada (2011), with Switzerland (2008), and with Japan (2010). These agreements further facilitate the EU import of organic products because additional EU-controls cease to apply. (4) Institutionalized Cooperation. Recent trade agreements contain procedural provisions about common decisions of equivalence between the contracting states: The EU agreements with Korea, Chile, and with Peru/Colombia integrate a joint

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SPS regulatory coordination council. The EU-Korea agreement and the Comprehensive Economic and Trade Agreement with Canada (CETA) include the intention to cooperate in matters of animal protection, a novelty in trade agreements. Moreover, CETA also contains a higher-ranking regulatory cooperation council, covering all industry sectors. In this context, it will be interesting to see what the TTIP might bring about.

4 Focus on EU-US Differences in Food Safety Regulation In the TTIP currently under negotiation between the US and the EU, a closer cooperation in regulatory matters is envisaged. According to the EU, the idea behind these negotiations on regulatory issues is that bilaterally regulatory cooperation shall be established and reinforced in areas where “the Parties identify common interests and where this cooperation benefit citizens, entities subject to regulation, in particular small and medium sized enterprises, as well as the public interest” (EU 2016a: Article x1.1a). A similar objective is stated by the US highlighting that “while maintaining the level of health, safety and environmental protection our people have come to expect, we seek greater compatibility of U.S. and EU regulations and related standards development processes, with the objective of reducing costs associated with unnecessary regulatory differences and facilitating trade, inter alia by promoting transparency in the development and implementation of regulations and good regulatory practices, establishing mechanisms for future progress, and pursuing regulatory cooperation initiatives where appropriate”.25 This indicates that in these negotiations a complete harmonization of food systems is not envisaged but rather cooperation in areas where unnecessary duplications or barriers to trade may exist.26 However the reference to “future progress” or “proposed legislative proposals”27 indicates that this agreement may go beyond the more “traditional” type of cooperation through ex-ante regulatory developments and not just on ex-post regulatory problem-solving as in most other trade agreements. Food standards in the EU and the US differ in many respects (Table 1). On the one hand there are differences in terms of process requirements, for instance for detect contamination with animal epidemics (procedural rules). On the other hand, there are differences in terms of the principles on the levels of risk (risk tolerance).

25

USTR (2016). Josling and Tangermann (2015). 27 EU (2016b). 26

Bilateral Positive Integration: Different Strategies for Regulatory. . .

27

Table 1 Transatlantic regulatory differences: procedural rules and risk tolerance (⃠ banned, √ permitted)

Procedural rules For genetically modified food _public license registry For animal and plant epidemics _regionalization approach _Escherichia coli test for crustacean animals Principles on risk tolerance For genetically modified food _Licensing _labeling requirements For meat _Decontamination . . . with chlorine . . . with lactic acid _Use of performance enhancers (hormones/beta-blocker) _Use of antibiotics . . . as performance enhancers . . . veterinary use in organic farming For cloning _marketing of food products _labeling requirement For milk _raw milk product marketing _use of performance enhancers (bovines, somatotropin)

EU

USA

√

Non-existent

Region often differentiated

Region often the state In the water

In animal meat

√ EU-wide ⃠ by member state √ if content > 0.9%

√

⃠

√

√ ⃠

√ √

⃠ √

√ ⃠

√ new proposal for ban in legislate process –

√ –

√ ⃠

⃠ √

WTO case

EU convicted

–

Still no decision EU convicted

Source: Rudloff (2014)

4.1

Bilateral Differences

4.1.1

Regulatory Differences

The guiding principle of the EU is the precautionary principle. Accordingly, there is a duty to “preventative decision-taking in the case of risk” (EUR-Lex 2015). In practice that means that if companies cannot prove that used substances or procedures are harmless they will be banned from the use. The guiding principle of the

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USA is the after-care principle. Here, the public administration first has or prove a harmful effect of a product before it can enact a ban. This risk-based approach which comes close to the approach of the WTO is further augmented by the damage liability tradition in the USA. New substances and products are much more often banned in the EU compared to the USA. These bans lead to levels that are stricter than international thresholds which usually allow for limited levels of residues. Therefore, EU standards are more likely to be attacked and need to be justified by risk assessments. In the cases when the USA put a ban on a product (e.g. raw milk product marketing), there are usually no international reference standards which could serve as the basis for a complaint at the WTO. The regulatory focus of the EU is generally on the whole production process (“the food chain”) than on the final product. This approach means high requirements for every single production step. Germ load of meat should be prevented by continuous hygiene, starting at the farm and ending on the plate of the consumer (“from farm to fork”). This also entails measures which enable backtracking such as identification chips for animals, but also detailed documentation across all production stages. The USA focuses more on the final product, for example, by using chlorine to eliminate all germs at the end of the production. Transatlantic regulatory differences are also caused by differences in domestic decision procedures. Since the BSE (“mad cow”) crisis, risk management and risk assessment are institutionally separated within the EU. The European Food Safety Authority (EFSA) reviews the risk assessments brought forward by national agencies and enterprises. For the subsequent political decision approval, the European Commission, the Council and the European Parliament are involved. Often, the representatives in these organs do not follow the risk assessment of EFSA—for instance in the cases of genetically modified organisms (GMOs) or chlorine decontamination of carcasses. Decisions concerning rather technical aspects come in form of so-called ‘delegated acts’, for which European Parliament and member states have much less of a say. Among these technical aspects are the use of GMOs and additives. The old EU veterinary agreements with Canada and the USA were even passed via Council decisions, which completely excluded the European Parliament and the national parliaments, contrary to the recent trade agreements CETA and TTIP. In the USA, there is no institutional separation of risk assessment and risk management, but different jurisdictions according to product types. This more integrated approach explains the higher level of coherence between risk assessment and management—political decisions about approval of products usually follow the risk assessment.

4.1.2

Differences That Led to WTO Disputes

Given this differences in regulatory approaches for food safety, the WTO dispute settlement had to be used in several cases to find a solution to food disputes. In total,

Bilateral Positive Integration: Different Strategies for Regulatory. . .

29

only 10 percent of all WTO cases refer to food safety. The EU participated in a third of these. Often, the US is the opposing party.28 At the end of the 1980s, the US and Canada accused the EU in the beef hormone dispute because the EU had banned the import of American and Canadian beef.29 The application of growth hormones for performance enhancement during feeding is banned in the EU because it is considered cancer-causing. However, because the EU could not proof this causality by a WTO accepted risk assessment, the EU was convicted by the WTO dispute panel in 1998.30 When the EU still upheld her import ban, the WTO granted the US and Canada import tariffs on European products up to a value of 120 million dollars. It was not until 2009 when the dispute could finally be resolved. The EU granted tariff free import quotas for hormone-free premium beef from Canada and the US. The US and Canada lifted their punitive tariffs in return. In a dispute on genetically modified organisms (GMOs) the US, Canada and Argentina sued the EU in 2003 for a moratorium she had imposed five years ago, and which was equal to a ban of market access for these states.31 The EU was convicted in 2006 and lifted the ban. However, till today, only one type of genetically modified maize has been produced in only five European countries (Spain, Portugal, Czech Republic, Slovenia, and Romania). Yet the EFSA repeatedly ascertained that genetically modified food poses no risk to consumer health. In 2009, the US registered a dispute about poultry carcasses treaded with certain chemical treatments; the dispute is on hold right now.32 The complaint refers to a 1997 EU ban on American poultry that had been decontaminated with chlorine; the EU permits only poultry that is treated with water or being in cold-storage. The EFSA again could not find any risk to consumer health.

4.2

Strategies for Regulatory Cooperation on Food Safety Matters

As shown in the previous section, regulatory cooperation on food safety issues takes place in different forms. However, there were instances when no cooperative solution could be found. This usually leads to the denial of market access for the respective products of certain countries. Then, recourse to the WTO dispute settlement is one way to go forward. Obviously, this is only possible if both countries are member of the WTO and if the regulation in question potentially violates WTO law.

28

Kerr (2018). WTO DS 26. 30 Appellate Body Report, EC - Measures Concerning Meat and Meat Products, WT/DS/26/AB/R, adopted 16 January 1998. 31 WTO DS 291 and DS 292. 32 WTO DS 389. 29

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Over the course of the last twenty years, there were several high-profile disputes at the WTO dealing with food safety issues.33 The EU and the US were involved several times. In particular these cases show ways, how solution to food safety issues can be found when different evaluations regarding the risk of products prevail. We distinguish two different types of solution strategies. The first one deals with procedural issues when at least a similar risk assessment and a similar level of food safety protection is aimed for. The second set of solution strategies can be used when fundamental differences regarding the assessment of risk prevail. In the following we show what approaches were used in recent trade agreements to cooperate on food safety. These approaches constitute viable alternatives to the harmonization of standards.

4.2.1

Similar Risk Assessment—Different Regulatory Approaches: Equivalence of Procedural Rules May Be the Solution

A harmonization of procedural measures may be a solution, if the regulatory measures are based on similar risk assessments and hence, aim for a similar level of food safety protection. This is often the case when contagious disease or epidemics are a threat or bacterial hygiene of the products is at the center of the problem. (1) Flexible equivalence. Since 26 September 2014, the consolidated version of CETA is publicly available which means one can trace how the veterinary agreement has been included in CETA: although the number of regulations that were kept in place on behalf of the EU decreased from 108 to 75, the number of fully equivalent regulations increased from 3 to 7. Canada still only accepts 3 regulations as equivalent. Both sides exclude a number of regulations from equivalence (EU: 12, Canada: 10). Most of the regulations require additional conditions. One can envision a similar flexibility for TTIP, which will replace the existing veterinary agreement. (2) Common decision procedures. TTIP envisages a regulatory cooperation council and a SPS forum, similar to CETA. While the SPS forum is supposed to be responsible for the implementation of the existing SPS rules, the regulatory cooperation council shall enable an ongoing dialogue about measures which are not part of the agreement yet. This would affect plant regulations which are not covered under the existing veterinary agreements. A balanced appointment of the regulatory council is crucial: Besides those of the industry, negotiations should also include representatives of civil society. CETA at least recommends this. This would not only allow assessing effects on human, plant and animal health and on trade flows but also include consumer interests and wider interest

33

Orden and Roberts (2007).

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31

of the society. CETA also stresses the involvement of third states, which should also be emphasized in TTIP. 4.2.2

Different Risk Assessment—Different Regulatory Approaches: No Common Ground Possible, Compromises Necessary

If there are fundamental conflicts about how to assess risks, a mutually agreeable equivalence of measures is not feasible as no common level of protection could be identified. However, this does not mean that the interests of only one actor will necessarily prevail. In particular with respect to issues such as the use of performance enhancers, GMOs in feed stuff or the decontamination of animal carcasses, in the past, we saw several approaches that dealt with these problems. The interesting point here is that even if it looks from a legal point of view like non-integration, this could lead to smoother forms of positive integration as “barter deals” or private labelling are solutions from which both sides can gain. (1) Counter trade/barter deal. After the decade long depute about hormone beef, the found solution constituted a win-win situation: The EU could stick to its convicted standards but had to grant tariff concessions to the US and Canada. Since then, Canada and the US enjoy tariff-free market entry for a certain amount of (high-quality, hormone free) beef, which would otherwise face high import tariffs.34 Because of the prevailing chlorine ban in the EU, only about 200 tons of US poultry could be exported to the EU in 2013. There is a poultry quota at a lower tariff rate, however, it is far from being filled. Further tariff decreases to better cover production costs up to tariff-free market entry could be an incentive for the US to produce more chlorine-free poultry. Similar tariff incentives could also be a possible solution for other performance enhancers used in production (e.g. somatotropin in milk production, beta blocker in pig fattening), which are banned in the EU. (2) Private labeling as a solution. There are already several disputes which could be solved by implementing a private labeling scheme: The US was convicted by the WTO because of an import stop of Mexican tuna which had been fished using dolphin-damaging catching techniques.35 The consequence of the private “dolphin-friendly tuna”-label was that the US catching techniques prevailed on the US market without any legal obligations because consumers refused the other tuna. However, labels can also have trade-distorting effects and then become the reason for disputes: The American label for the origin of beef had been convicted because it was considered to constitute a disadvantage for Canadian importers.36 An EU-wide obligation to label products treated with GMOs or chlorine could

34

See WT/DS26/29. See WT/DS381/AB/R from 16 May 2012. 36 See WT/DS384/AB/R and WT/DS386/AB/R from 29 June 2012. 35

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also be vulnerable if it had discriminatory effects. Purely private labels could be a solution because only states can be sued in front of the WTO appellate body and not private companies. 4.2.3

No Common Ground, No Compromise: Still a Transparent and Open Debate About Different Food Safety Perceptions Necessary

Keeping own standards is also an option. Such retention of own standards implies to eschew the possible welfare-increasing effects of increased trade flows under the TTIP. However, the retention of own standards would also serve a purpose. First, it would reduce external costs which are usually not covered by risk assessments—for instance, health or environmental effects, which are usually not tested for. This approach would also reflect the fact that the methods for risk assessment and expert opinions on risks and about what to test for are under constant change anyway. In the future, other risks will be assessed than today. Hence, the external costs and potential welfare effects will change constantly. Second, retaining own standards may imply a political benefit via consumer confidence. This confidence is based on subjective perceptions, regardless of any scientific risk assessment. The WTO does not consider consumer perceptions to be a crucial factor in political decision-making. However, since risk assessment is always also a subjective and socio-cultural process, there are always going to be conflicts between states regarding the safety of food. This stresses the importance of openness and transparency of such conflicts. The opening-up of the regulatory council for societal groups should be also be envisaged for the TTIP so that this debate about risk perceptions may take place.

5 Conclusion Food safety standards are here to stay. We observe a wide range and increasingly complex framework of regulatory measures applied by countries. Even though in most trade agreements, language is included that deal with food safety standards, a complete harmonization, the ultimate objective of regulatory cooperation and positive regional integration, of food systems is achieved in only a few cases. However, there are many interim stages of regulatory cooperation on food safety issues that may help to reduce trade costs and regulatory burden without jeopardizing food safety standards and perceptions. The EU has a longstanding experience with harmonization and mutual equivalence which also lies at the heart of the European Common Market. The EU approach differs by partner country and product. In particular with the US, different solutions have been found for different food safety issues. These solutions such as accepting equivalence of measures in the case when the risk assessment was similar or barter deals when the risk assessment diverged show solution strategies that can

Bilateral Positive Integration: Different Strategies for Regulatory. . .

33

be used when food safety regulation cannot be harmonized. Thus, a “race to the bottom” as often feared is not necessary and does not necessarily take place. Countries can maintain their food safety protection levels and find solutions to food safety conflicts. Apart from the EU-US debate, in many trade agreements, the SPS and TBT rules are set as standards. Thus, if further harmonization or equivalence of public international food safety rules is to be achieved, the leadership of the standard-setting international bodies and the SPS committee should be fostered.

References Badulescu D, Baylis K (2006) Pesticide regulation under NAFTA harmonization in process?. Canadian Agricultural Trade Policy Research Network (CATPRN Commissioned Paper 2006-0, Guelph, Ontario Brouwer, Fox, Jongeneel (2012) The economics of regulation in agriculture - compliance with public and private standards. CABI International EUR-Lex (2015) The precautionary principle. EUR-Lex - l32042 – EN. Available at: http://eur-lex. europa.eu/legal-content/EN/TXT/?uri¼URISERV:l32042. Accessed 22 May 2019 European Commission (2015) Food hygiene – basic legislation. Available at: https://ec.europa.eu/ food/safety/biosafety/food_hygiene/legislation_en. Accessed 22 May 2019 European Communities (2002) EC Regulation EC/178/2002. Official Journal of the European Communities L31/1. Brussels European Union (2013) Trade cross-cutting disciplines and institutional provisions. Initial EU position paper. European Commission, Brussels (Belgium) European Union (2016a) TTIP-EU proposal for Chapter: Regulatory Cooperation. Textual proposal. Available at: http://trade.ec.europa.eu/doclib/docs/2016/march/tradoc_154377.pdf (22.05.2019) European Union (2016b) Regulatory cooperation in TTIP. An introduction to the EU’s revised proposal. 21 March 2016. Available at: http://trade.ec.europa.eu/doclib/docs/2016/march/ tradoc_154378.pdf (22.05.2019) European Union (2017) U.S. - EU Joint Report on TTIP Progress to Date. Available at: http://trade. ec.europa.eu/doclib/docs/2017/january/tradoc_155242.pdf. Accessed 22 May 2019 FAO (2016) Definition of food quality. Internet page. Available at: http://www.fao.org/food/foodsafety-quality/capacity-development/food-regulations/en/ (22.05.2019) FAO/WHO (2003) Assuring food safety and quality. Guidelines for strengthening national food control systems. FAO Food and Nutrition paper 76. Rome Green T, Hanson L, Lee L, Fanghanel H, Zahniser S (2006) North American approaches to regulatory coordination. In: Huff KM, Meilke KD, Knutson RD, Ochoa RF, Rude J (eds) Agrifood regulatory and policy integration under stress. Guelph Hobbs JE, Kerr WA (2006) Consumer information, labelling and international trade in agri-food products. Food Policy 31:78–89 Hooker NH (1999) Food safety regulation and trade in food products. Food Policy 24:653–668 Humphrey J (2012) Convergence of US and EU production practices under the new FDA Food Safety Modernization Act. World Econ 35(8):994–1005 Josling T, Tangermann S (2015) Agriculture, food and the TTIP: possibilities and pitfalls. In: Hamilton DS, Pelkmans J (eds) Rule-makers or rule-takers? Exploring the Transatlantic Trade and Investment Partnership. Rowman and Littlefield International London and Centre for European Policy Studies (CEPS), Brussels Josling T, Roberts D, Orden D (2004) Food regulation and trade: toward a safe and open global system. Institute for International Economics, Washington DC

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Kerr WM (2018) Dealing with disputes over agricultural trade. In: Josling T, Meilke KD (eds) Handbook on agricultural and food policies, volume III: international trade rules for food and agricultural products. World Scientific Publisher Matthews A (2015) What outcome to expect on geographical indications in the TTIP free trade agreement negotiations with the United States? Paper presented at the 145th EAAE Seminar “Intellectual Property Rights for Geographical Indications: What is at Stake in the TTIP?”. Parma Meilke K, Rude J, Zahniser S (2008) Is ‘NAFTA Plus’ an option in the North American Agrifood Sector? World Econ 28(8):925–946 OECD (1994) Regulatory co-operation for an interdependent world. Paris (France) OECD (2015) Regional trade agreements and agriculture, OECD Food, Agriculture and Fisheries Papers, No. 79. Paris (France) Orden D, Roberts D (2007) Food regulation and trade under the WTO: ten years in perspective. Agric Econ 37(31):103–118 Rudloff B (2014) Food standards in trade agreements. SWP Comments 2014/C49. Berlin (Germany) Sparling DH, Caswell AJ (2006) Risking market integration without regulatory integration: the case of NAFTA and BSE. Rev Agric Econ 28(2):212–228 Thilmany DD, Barrett CB (1997) Regulatory barriers in an integrating world food market. Rev Agric Econ 19:91–107 UNCTAD (2012) Classification of non-tariff measures. UNCTAD/DITC/TAB/2012/2. UNCTAD. Geneva United States Trade Representative (2016) Non-tariff barriers and regulatory issues. Internet page. Available at: https://ustr.gov/trade-agreements/free-trade-agreements/transatlantic-trade-andinvestment-partnership-t-tip/t-tip-2 (22.05.2019) Viju C, Yeung MT, Kerr WA (2012) Geographical indications, barriers to market access and preferential trade agreements. Canadian Agricultural Trade Policy Research Network (CATPRN Commissioned Paper 2012-01, Guelph, Ontario Watson W (2016) Reign of terroir. How to resist Europe’s effort to control common food names as a geographical indications. Policy Analysis Number 787. Cato Institute, Washington, DC WHO (2016) Definition of food safety. Internet page. Available at: http://www.who.int/topics/ food_safety/en/ (22.05.2019) Winchester N, Rau ML, Goetz C, Larue B, Otsuki T, Shutes K, Wieck C, Burnquist HL, Pinto de Souza MJ, de Faria RN (2012) The impact of regulatory heterogeneity on agri-food trade. World Econ 35(8):973–993 Wouters J, Geraets D (2012) Private food standards and the World Trade Organization: some legal considerations, Working Paper (82), Leuven (Belgium) WTO (2003) Dictionary of trade policy terms, 4th edn. Cambridge University Press, 437 pp WTO (2007) Private standards and the SPS agreement. Note by the secretariat. G/SPS/GEN/746. Geneva (Switzerland)

The Role of Non-tariff Measures in the Agri-Food Sector: Positive or Negative Instruments for Trade? Fabio G. Santeramo and Emilia Lamonaca

Contents 1 2 3 4

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade of Agri-Food Products: A Global Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Policy Instruments in Agri-Food Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Trade Effect of Non-tariff Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 A Theoretical Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Evidence from Empirical Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

36 37 40 52 52 54 55 56

Abstract The contribution shows the state of the art of “trade and non-tariff measures” debate in the agri-food sector. It provides an overview on trends in trade and in the level of policy interventions over the last decades, in order to shed lights on potential cause-effect relations. Comparing the evolution of trade and of non-tariff measures (NTMs) in agri-food sector, it appears that the pervasiveness of NTMs is likely to be strictly related to changes in trade patterns. Although the main scope of NTMs is to correct market inefficiencies, they may have a twofold role: trade catalysts or trade barriers. The potential relationships between trade and NTMs, however, differ across involved countries, products under regulation, and types of measure. Indeed, evidence from the empirical literature support either the “standards as catalysts” and the “standards as barriers” points of view. Our contribution aims at outlining how NTMs and trade influence each other.

F. G. Santeramo (*) · E. Lamonaca University of Foggia, Foggia, Italy e-mail: [email protected]; [email protected] © Springer Nature Switzerland AG 2020 R. Krämer-Hoppe (ed.), Positive Integration - EU and WTO Approaches Towards the “Trade and” Debate, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-25662-3_3

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1 Introduction International agri-food trade is a priority area due to a set of important policy questions that need to be deepened. Although most of the driving forces of agrifood markets are not new, the implications of trade policy issues are frequently substantial, redistributive and pervasive.1 Therefore, understanding the dynamics of agri-food trade, and of related trade policies, has become a topic of utmost importance for policymakers and for applied economists. Despite its small and declining importance in the global economy, agri-food market is politically sensitive and highly contentious in international trade negotiations.2 The political sensitiveness of agri-food trade is related to the complex dynamics that occur among involved stakeholders: trade allows specialisation, and thus comparative advantages, of producers, and provides a wider and diversified range of products to consumers.3 The frequent disputes arising in international negotiations for agri-food trade are due to the high levels of protection: as a consequence, trade distortions in agri-food sector are exceptional and highly controversial relative to those in other sectors.4 The trade policy agenda is greatly different from that over the past 25 years. The main reason is the emergence of trade policy issues to be addressed at national and regional levels. The recent period of relative openness to trade of agri-food markets has contributed to a substantial redistribution of market shares and levels of protection from developed to developing countries. The main challenge of policymakers is to obtain an optimum for all countries, given the trade gains reached from international negotiations.5 In this regard, the risk is to incur in high protection and strong political support at domestic level, which may be suboptimal at global level.6 In recent years, much of the attention of the international political agenda is on the trade disputes that gravitate towards agri-food support, protection, and market access. Indeed, the long-lasting protection of domestic agri-food markets has determined severely distortions at national and international levels. The consequent delay in development of agri-food sector has contributed to a growing pressure for reforming agri-food policies. The crucial and complex set of negotiations of the World Trade Organisation (WTO), in the mid-1990s, has attempted to liberalise trade and to create a trade policy environment, characterised by a more sustainable growth and a less government intervention. The negotiations of the WTO has increased opportunities of market access, by lowering traditional barriers to trade (i.e., tariffs). However, growing concerns have been raised on the proliferation of non-tariff measures (NTMs) and on their potential 1

Martin (2018). Anderson and Martin (2005). 3 Martin (2018). 4 Trebilcock and Pue (2015). 5 Bagwell and Staiger (2011). 6 Anderson and Nelgen (2012) and Ivanic and Martin (2014). 2

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37

impacts on trade performances.7 Although the main scope of NTMs is to correct market inefficiencies, they may have a twofold role: trade catalysts or trade barriers.8 For instance, if Panel and Appellate Body reports or the ECJ judgements are in favour of non-integration, the national regulation may hamper trade and vice-versa. The potential of having both negative and positive effects on trade may explain the move from non-tariff barriers (a more restrictive definition) to non-tariff measures. Thus, non-tariff trade policies may have both potential winners and losers: while many countries benefit from trade liberalisation, others may suffer considerable loss. Understanding what are the policy implications of such changes is essential in order to identify positive and negative perspectives. The contribution provides analytically based insights into the potential correlations between trade and the level of policy interventions in agri-food sector. It offers perspectives and evidence on the evolution of trade and NTMs over recent decades. It aims to extend the understanding of the “trade and NTMs” debate to stimulate more research into this important topic.

2 Trade of Agri-Food Products: A Global Perspective During the last two decades, global agri-food trade has been interested by rapid and dynamic changes with a significant re-shaping of trade patterns. The traded value of agri-food products has progressively increased at global level over the longer term. Since the negotiations of the World Trade Organisation (WTO) in the mid-1990s, exports grew by 23% from 1995 to 2005, and by 53% from 2005 to 2015; similarly, imports expanded by 30% from 1995 to 2005, and by 44% from 2005 to 2015 (Fig. 1). The results is a global trade balance in agri-food sector significantly higher in 2015 compared to 1995.9 A remarkable increase has interested, in particular, developing countries: since 1995 until 2015, their trade flows have grown more rapidly than those of developed economies.10 Considering a selection of developed (North) and developing countries (South),11 we find that South-North and South-South trade have grown

7

Fernandes et al. (2017). Xiong and Beghin (2014). 9 UN Comtrade (2017). See comtrade.un.org/data/ (last accessed 29 September 2017). 10 Martin (2018). 11 According to the United Nations’ country classification (2017), we consider Australia, Canada, the European Union (EU), New Zealand, and the United States (US) as Northern (developed) countries, and emerging economies of the group of BRIICS (Brazil, Russian Federation, China, Indonesia, India, South Africa), as well as other countries of Latin America (Argentina, Bolivia, Peru) and of the Northern and Central Africa (Congo, Egypt, Libya, Morocco, Tunisia) as Southern (developing) countries. They cover 77% of the global gross domestic product (GDP): in 2015, developed economies, BRIICS countries, Egypt, and Peru are listed as top 25% economies for level of GDP. All these economies have benefited from a general growth in global welfare from 1995 to 8

38

F. G. Santeramo and E. Lamonaca

900 800

billion U$$

700 600 Imports Exports

500 400 300 200 100 0

1995

2005

2015

Fig. 1 Global trade balance in agri-food sector in 1995, 2005, 2015 [Source: elaboration on UN Comtrade (2017)] Table 1 Trade (in billion US$) of selected agri-food product categoriesa in 1995 and 2015: detail by trade patternsb

Origin country North South Total

Destination country North 1995 2015 556 3200 10 1660 566 4860

South 1995 279 11 290

2015 2850 2570 5420

Total 1995 835 21 856

2015 6050 4230 10,280

Source: elaboration on UN Comtrade (2017) Product categories, coded according to the Harmonised System (HS) 2-Digit Chapter Headings, are as follows: (02) Meat; (03) Fish; (04) Dairy produce; (07) Edible vegetables; (08) Edible fruit and nuts; (10) Cereals; (12) Oil seeds and oleaginous fruits; (16) Preparation of meat, fish b Origin and destination countries, labelled according to the officially assigned ISO 3166-1 alpha-3 codes (UN Statistics Divisions 2018), are classified into North (Developed Economies) and South (Developing Economies and Economies in transition), according to the United Nations’ country classification (2017). They are as follows: Australia (AUS), Canada (CAN), European Union (EUN), New Zealand (NZL), United States (USA) for North; Argentina (ARG), Bolivia (BOL), Brazil (BRA), China (CHN), Congo (COG), Egypt (EGY), Indonesia (IDN), India (IND), Libya (LBY), Morocco (MAR), Peru (PER), Russian Federation (RUS), Tunisia (TUN), South Africa (ZAF) for South a

exponentially (from 21 to 4230 billion US$), North-North trade has become six times greater, and North-South trade has decoupled12 (Table 1). 2015: in particular, Bolivia and Congo have more than quadrupled their GDPs, while Libya, Morocco, and Tunisia have tripled their GDPs (CEPII, 2017). See www.cepii.fr/CEPII/en/bdd_ modele/bdd.asp (last accessed in 9 June 2017). 12 UN Comtrade (2017). See comtrade.un.org/data/ (last accessed 29 September 2017).

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39

It seems that national policies are pushing consumers’ preferences toward nationally produced goods (in the North), to the detriment of imported goods (from the South). However, the expansion of trade flows originating from South balances out the closure of developed countries. The rapid growth in trade intensity of developing economies may be a direct consequence of two determinants: economic globalisation and structural changes in the composition of agri-food trade.13 The globalisation has stimulated the development of global commodity chains and has created a deep economic integration.14 In this regard, since 2000, the importance of developing economies has driven the development of global agri-food markets. In addition, developing countries have became export-oriented economies, with substantial variations within the composition of exports. In fact, trade has moved from traditional commodities (e.g., coffee, tea, sugar, cocoa) to non-traditional, high value commodities (e.g., fruit and vegetables, poultry, fish).15 The general increase in trade intensity may be also due to the progressive process of trade liberalisation, as well as to the provision of restrictive standards to fulfil bilateral agreements.16 The vast majority of countries have sought to improve their market access though preferential, bilateral, and regional trade agreements. In fact, while multilateral negotiations have stalled, a number of collective trade agreements has entered into force (Fig. 2). Since 2000, there has been an increasing number of new agreements notified to the WTO and a consistent growth in the stock of agreements in place: in 2017, the trade agreements are 314 (compared to 96 in 2000), of which 90% are regional (RTAs) and 10% are preferential (PTAs).17 Successful trade agreements facilitate market access, by including tariff cuts and other market access concessions,18 and contribute to a larger trade response.19 In particular, trade agreements have a dual effect on trade response: they push toward the creation of intra-bloc trade, and lead to trade diversion toward developing countries.20

13

Henson et al. (2000). Disdier et al. (2015). 15 Henson and Loader (2001). 16 Disdier et al. (2015) and Santeramo et al. (2019a). 17 See rtais.wto.org/UI/Charts.aspx# and ptadb.wto.org/ptaList.aspx (last accessed 12 January 2018). 18 OECD (2015). 19 Grant and Lambert (2008). 20 Koo et al. (2006), Lambert and McKoy (2009), and Sun and Reed (2010). 14

F. G. Santeramo and E. Lamonaca 21

300

18

250

15 200 12 150 9 100 6 3

50

0

0

PTAs

RTAs

Agreements in force (cumulative)

Notifications per year

40

RTAs (cumulative)

PTAs (cumulative)

Fig. 2 Global trade agreements by year of entry into force, 1990–2017. Notes: Acronyms are as follows: Preferential Trade Agreements (PTAs) and Regional Trade Agreements (RTAs) [Source: elaboration on Regional Trade Agreements Information System (RTA-IS 2018) and Database on Preferential Trade Arrangements (WTO 2018)]

Number of new intervention

1,800 1,500 1,200 900 600 300 0 2008

2009

2010

2011

2012

Harmful

2013

2014

2015

2016

2017

2018

Liberalising

Fig. 3 Number of policy interventions per year in agri-food sector: 2008–2018 [Source: elaboration on Global Trade Alert (2018)]

3 Policy Instruments in Agri-Food Trade Changes in global agri-food trade have stimulated a reorganisation in the system of policy interventions. Since the negotiations of the World Trade Organisation (WTO), which have substantially reduced tariffs and fostered trade across the globe, a number of border measures for several agri-food categories remains high.

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41

Figure 3 shows the number of new policy interventions occurred in agri-food sector in a decade, distinguishing between harmful and liberalising instruments. Harmful interventions are in great number with respect to liberalising ones. In 2018, the policy interventions in force in agri-food sector are 11,236 (46% import tariffs, 54% non-tariff instruments). In particular, import tariffs account for 47% and 53% for harmful and liberalising interventions, vice-versa non-tariff instruments account respectively for 75% and 25%. It is worth noting that 85% of the total number of policy interventions is implemented by countries of the European Union (EU) and by emerging economies of BRIIC (Brazil, Russian Federation, India, Indonesia, China).21 Despite a reduction in the level of tariffs (in particular of harmful tariffs), the level of non-tariff instruments has remained high and, indeed, has increased over time: non-tariff instruments are policy measures, alternative to tariffs, capable of shaping trade flows22; their growing (ab)use has led to a less transparent trade policy environment.23 The rationale of non-tariff policies has changed overtime. A dated view depicts non-tariff instruments as “non-tariff barriers” (NTBs), so to emphasise their protectionist scopes (e.g. quotas, export restraints). More recently, economists and policymakers prefer the term “non-tariff measures” (NTMs), in order to include a wider, and more diversified, set of measures which may hamper or facilitate trade.24 The United Nations Conference on Trade and Development defines NTMs as “policy measures other than ordinary customs tariffs that can potentially have an economic effect on international trade in goods, changing quantities traded, or prices or both”.25 NTMs may also have a corrective role, by reducing asymmetric information in the marketplace (Technical Barriers to Trade, TBTs), mitigating risks in consumption, improving the sustainability of eco-systems (Sanitary and Phytosanitary Standards, SPSs), and influencing the competition and the decision to import or export (non-technical NTMs). Table 2 lists and describes NTMs set on the occasion of WTO consultations. The total number of NTMs that governs trade of agri-food products has increased tremendously over the past decades, in particular during the period 2005–2015 (from 1.09 million to 3.41 million).26 In fact, the food price crisis in 2007/2008 has led to changes in agri-food trade policies. In the short term, a number of governments imposed export restrictions and varied import duties in an attempt to insulate domestic consumption from volatility of international price.27 However, the effect of protectionist trade policy on domestic and international markets is asymmetric. In

21

See www.globaltradealert.org/ (last accessed 15 March 2018). Arita et al. (2017). 23 Fernandes et al. (2017). 24 Grant and Arita (2017). 25 UNCTAD (2012), p. 1. 26 See trains.unctad.org/Forms/Analysis.aspx (last accessed 15 September 2017). 27 Greenville (2015). 22

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Table 2 Classification and description of Non-Tariff Measures (NTMs) Type Technical measure

Non technical measure

Chapter A

Classification Sanitary and Phytosanitary Standards (SPSs)

B

Technical Barriers to Trade (TBTs)

C

Pre-Shipment inspections

D

Contingent tradeprotective measures

E

Quantity-control measure

F

Price-control measures

G

Finance measures

Description Measures that are applied to protect human or animal life from risks arising from additives, contaminants, toxins or disease-causing organisms in their food; to protect human life from plant- or animal-carried diseases; to protect animal or plant life from pests, diseases, or disease-causing organisms; to prevent or limit other damage to a country from the entry, establishment or spread of pests; and to protect biodiversity Measures referring to technical regulations, and procedures for assessment of conformity with technical regulations and standards, excluding measures covered by the SPS Agreement Compulsory quality, quantity and price control of goods prior to shipment from the exporting country, conducted by an independent inspecting agency mandated by the authorities of the importing country Measures implemented to counteract particular adverse effects of imports in the market of the importing country, including measures aimed at unfair foreign trade practices, contingent upon the fulfillment of certain procedural and substantive requirements Control measures generally aimed at restraining the quantity of goods that can be imported, regardless of whether they come from different sources or one specific supplier Measures implemented to control or affect the prices of imported goods in order to, inter alia, support the domestic price of certain products when the import prices of these goods are lower; establish the domestic price of certain products because of price fluctuation in domestic markets, or price instability in a foreign market; or to increase or preserve tax revenue. This category also includes measures other than tariffs measures that increase the cost of imports in a similar manner, i.e. by fixed percentage or by a fixed amount. They are also known as para-tariff measures Finance measures are intended to regulate the access to and cost of foreign exchange for imports and define the terms of payment. They may increase import costs in the same manner as tariff measures (continued)

The Role of Non-tariff Measures in the Agri-Food Sector: Positive or. . .

43

Table 2 (continued) Type

Chapter H

Classification Measures affecting competition

I

Trade-related investment measures

J

Distribution restrictions

K

Restrictions on postsales services

L

Subsidies

M

Government Procurement

N

Intellectual property

O

Rules of origin

P

Export-related measures

Description Measures to grant exclusive or special preferences or privileges to one or more limited group of economic operators Requirements to purchase or use certain minimum levels or types of domestically produced or sourced products, or restrictions on the purchase or use of imported products based on the volume or value of exports of local products Restrictions on the importation of products used in or related to local production, including in relation to the amount of local products exported; or limitations on access to foreign exchange used for such importation based on the foreign exchange inflows attributable to the enterprise in question Distribution of goods inside the importing country may be restricted. It may be controlled through additional license or certification requirements Measures restricting producers of exported goods to provide post-sales service in the importing country Financial contribution by a government or public body, or via government entrustment or direction of a private body (direct or potential direct transfer of funds) Measures controlling the purchase of goods by government agencies, generally by preferring national providers Measures related to intellectual property rights in trade: Intellectual property legislation covers patents, trademarks, industrial designs, layout designs of integrated circuits, copyright, geographical indications and trade secrets Rules of origin cover laws, regulations and administrative determinations of general application applied by government of importing countries to determine the country of origin of goods. Rules of origin are important in implementing trade policy instruments such as antidumping and countervailing duties, origin marking and safeguard measures Export-related measures are measures applied by the government of the exporting country on exported goods

Source: International Classification of Non-Tariff measures, February 2012 version (UNCTAD/ DITC/TAB/2012/2)

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F. G. Santeramo and E. Lamonaca 4.0 3.5

Number of NTMs (mln)

3.0 2.5 2.0 1.5 1.0 0.5 0.0 1995

2005 NTM categoty A

B

C

D

E

F

G

2015

H

P

Fig. 4 Global number of NTMs imposed on agri-food products: detail by type of NTMs in 1995, 2005, 2015. Notes: Categories of non-tariff measures (NTMs) are coded according to the UNCTAD classification (UNCTAD 2012): Sanitary and Phytosanitary Standard (SPS) (A), Technical Barrier to Trade (TBT) (B), Pre-Shipment inspection (C), Contingent trade-protective measure (D), Quantity-control measure (E), Price-control measure (F), Finance measure (G), Measure affecting competition (H), Export-related measure (P) [Source: elaboration on UNCTAD (2017), TRAINS NTMs: The Global Database on Non-Tariff Measures]

that, the gain in terms of reduced volatility of domestic market comes at expenses of an increase in volatility of international market: the larger the trading country interested by the intervention, the larger the impact.28 In the medium-long term, many countries have maintained more defensive trade policies towards international markets, exacerbating standards requirements for imports: emblematic is the case of SPSs which have dramatically increased by 178% from 2005 to 2015 (Fig. 4).29 SPSs are the most widespread measures that affect agri-food trade, due to their economic significance and negotiating options for reform.30 The pervasiveness of SPSs in agri-food trade is essentially due to the sensitive nature of covered issues (e.g. protection of human or animal life from risks arising from additives, contaminants, toxins or disease-causing organisms in their food; protection of human life from plant- or animal-carried diseases; protection of animal or plant life from pests, diseases, or disease-causing organisms; prevention of damage to a country from the entry, establishment or spread of pests; protection of biodiversity).31 28 Anderson and Nelgen (2012), Ivanic and Martin (2014), Santeramo et al. (2018), and Santeramo and Lamonaca (2019a). 29 See trains.unctad.org/Forms/Analysis.aspx (last accessed 15 September 2017). 30 Dal Bianco et al. (2016) and Grant and Arita (2017). 31 UNCTAD (2012), p. 7.

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Figure 5 shows the number of SPSs implemented in agri-food sector, in force in 2017. The most affected product categories are fish (27%), meat (14%), vegetables (9%), dairy produce (8%), preparation of meat and fish (8%), fruits and nuts (7%), oil seeds and oleaginous fruits (5%), and cereals (3%).32 In general, SPSs concern trade of fresh products.33 In that, the risk that the abovementioned product categories are subject to dissemination of disease or pests is higher, due to a greater perishability. In particular, the most implemented SPSs, in force in 2017 for agri-food products, are certification requirement (A830, 18%), special authorisation requirement for SPS reasons (A140, 17%), tolerance limits for residues of or contamination by certain (non-microbiological) substances (A210, 10%), testing requirement (A820, 8%), geographic restrictions on eligibility (A120, 7%), packaging requirements (A330, 6%), labelling requirements (A310, 4%) (Fig. 6).34 Table 3 describes in detail the most implemented SPSs, according to the UNCTAD’s international classification of NTMs.35 Considering the most regulated agri-food products and a set of developed (North) and developing (South) countries,36 we find that the total number of implemented SPSs has more than tripled during the period 1995–2015 (from 33 to 126 thousand)37 (Table 4). In particular, SPSs implemented by developed countries have doubled, while the growth in the number of SPSs set by developing countries has been impressive: from 0.8 to 65.8 thousand.38 Albeit traditional trade barriers (tariffs) continue to decline, protectionist interests of countries persist through an increasing and frequently non-transparent use of food safety regulations.39 Differences related to the intensity of regulations emerges at country level (Fig. 7): from 1995 to 2015, the number of countries implementing SPSs has more than doubled, and the number of SPSs is about seven times greater (from 33 to 126 thousand). In 1995, the United States (US) were responsible for 96% of the total of implemented SPSs; China (2%), New Zealand (2%), Brazil, and Argentina (1%) had a lower contribution. In 2015, the set of imposing countries includes also

32

See trains.unctad.org/Forms/Analysis.aspx (last accessed 15 September 2017). Grant and Arita (2017). 34 See trains.unctad.org/Forms/Analysis.aspx (last accessed 15 September 2017). 35 UNCTAD (2012). 36 We analyse product categories, coded according to the Harmonised System (HS) 2-Digit Chapter Headings: meat (02), fish (03), dairy produce (04), edible vegetables (07), edible fruits and nuts (08), cereals (10), oil seeds and oleaginous fruits (12), preparation of meat and fish (16). According to the United Nations’ country classification (2017), we consider Australia, Canada, the European Union (EU), New Zealand, and the United States (US) as Northern (developed) countries, and emerging economies of the group of BRIICS (Brazil, Russian Federation, China, Indonesia, India, South Africa), as well as other countries of Latin America (Argentina, Plurinational State of Bolivia, Peru) and of the Northern and Central Africa (Congo, Egypt, Libya, Morocco, Tunisia) as Southern (developing) countries. 37 See trains.unctad.org/Forms/Analysis.aspx (last accessed 15 September 2017). 38 See trains.unctad.org/Forms/Analysis.aspx (last accessed 15 September 2017). 39 Jongwanich (2009). 33

0.05

0.10

0.20

Number of SPS (mln)

0.15

0.25

0.30

0.35

Fig. 5 Number of Sanitary and Phytosanitary Standards (SPSs) imposed in agri-food sector: detail by product category in 2017 [Source: elaboration on UNCTAD (2017), TRAINS NTMs: The Global Database on Non-Tariff Measures]

0.00

Tobacco Residues Beverages Miscellaneous (preparation) Vegetable/fruit (preparation) Cereal (preparation) Cocoa Sugar Meat/fish (preparation) Fats, oils Vegetable-based products Lac Oilseeds Milling-based products Cereal Coffee, spices Fruit Vegetables Live trees Animal-based products Dairy Fish Meat Live animals

46 F. G. Santeramo and E. Lamonaca

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47

A8 A7 SPS category

A6 A5 A4 A3 A2 A1 0.00

0.10

0.20 0.30 Number of SPS (mln)

0.40

0.50

Fig. 6 Number of Sanitary and Phytosanitary Standards (SPSs) imposed in agri-food sector: detail by SPS category in 2017. Notes: SPS categories are coded according to the UNCTAD classification: (A1) Prohibitions/restriction of imports for SPS reasons; (A2) Tolerance limits for residues and restricted use of substances; (A3) Labelling, Marking and Packaging requirements; (A4) Hygienic Requirements; (A5) Treatments for elimination of plant and animal pests and disease-causing organisms in the final product (e.g. Post-harvest treatment); (A6) Other Requirements on Production or Post-Production Processes; (A8) Conformity Assessment related to SPS; (A9) SPS Measures, not elsewhere specified (n.e.s.) [Source: elaboration on UNCTAD (2017), TRAINS NTMs: The Global Database on Non-Tariff Measures]

economies of Latin America (i.e. Bolivia and Peru) and some of the BRIICS countries (i.e. Russian Federation and Indonesia). In particular, the US preserves the leadership of implementing country (35%), followed by Indonesia (32%), New Zealand (10%), Brazil (8%), and Russian Federation (7%). From 1995 to 2015, the number of imposed SPSs has approximately doubled in China (from 684 to 1247) and in the US (from 32,096 to 43,982), and it has grown exponentially in Argentina (from 4 to 915), Brazil (from 112 to 10,207), and New Zealand (from 551 to 12,947).40 A distinctive trait: none of the African countries (Congo, Egypt, Libya, Morocco, Tunisia) has implemented SPSs neither in 1995 nor in 2015; the same consideration is for the EU, Australia, and India. A plausible explanation of the lack of imposition in African countries or in India is that the effective implementation of SPSs requires binding commitments to provide adequate financial and technical assistance to developing countries. As a consequence, developing countries do not consider the implementation of SPSs a way to establish a dynamic trade environment in domestic economy.41 In addition to this general belief, developing countries have frequently incurred in SPSs’ crises.

40 41

See trains.unctad.org/Forms/Analysis.aspx (last accessed 15 September 2017). Athukorala and Jayasuriya (2003).

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Table 3 Details on types of Sanitary and Phytosanitary Standards (SPSs) Code A120

Name Geographic restrictions on eligibility

A140

Special authorisation requirement for SPS reasons

A210

Tolerance limits for residues of/or contamination by certain (non-microbiological) substances

A310

Labelling requirements

Description Prohibition of imports of specified products from specific countries or regions due to lack of evidence of sufficient safety conditions to avoid sanitary and phytosanitary hazards. The restriction is imposed automatically until the country proves employment of satisfactory sanitary and phytosanitary measures to provide a certain level of protection against hazards that is considered acceptable. Eligible countries are put on a “positive list”. Imports from other countries are prohibited. The list may include authorized production establishments within the eligible country A requirement that importers should receive authorisation, permits or approval from a relevant government agency of the destination country for SPS reasons: In order to obtain the authorisation, importers may need to comply with other related regulations and conformity assessments A measure that establishes a maximum residue limit (MRL) or tolerance limit of substances such as fertilisers, pesticides, and certain chemicals and metals in food and feed, which are used during their production process but are not their intended ingredients. It includes a permissible maximum level for non-microbiological contaminants Measures defining the information directly related to food safety, which should

Example Imports of dairy products from countries that have not proven satisfactory sanitary conditions are prohibited

An import authorisation from the Ministry of Health is required

(a) Maximum residue level is established for insecticides, pesticides, heavy metals and veterinary drug residues; (b) chemicals generated during processing; (c) residues of dithianon in apples and hop

(a) Labels that must specify the storage conditions such as “5 degree C maximum”; (continued)

The Role of Non-tariff Measures in the Agri-Food Sector: Positive or. . .

49

Table 3 (continued) Code

Name

A330

Packaging requirements

A820

Testing requirement

A830

Certification requirement

Description

Example

be provided to the consumer: Labelling is any written, electronic or graphic communication on the consumer packaging or on a separate but associated label Measures regulating the mode in which goods must be or cannot be packed, or defining the packaging materials to be used, which are directly related to food safety A requirement for products to be tested against a given regulation, such as maximum residue level: This measure includes the cases where there is sampling requirement Certification of conformity with a given regulation that is required by the importing country but may be issued in the exporting or the importing country

(b) potentially dangerous ingredients such as allergens, e.g. “contains honey not suitable for children under one year of age”

Use of PVC films for food packaging is restricted

A test on a sample of orange imports is required to check against the maximum residue level of pesticides

Certificate of conformity for materials in contact with food (containers, papers, plastics, etc.) is required

Source: International Classification of Non-Tariff measures, February 2012 version (UNCTAD/ DITC/TAB/2012/2)

For instance, in 1998 the EU banned fishery product imports from Kenya, Mozambique, Tanzania, and Uganda to safeguard the EU consumers from the risk of cholera.42 In 2000, the EU also removed India from the list of approved countries for imports of egg powder, seafood products, and mango pulp due to high pesticide residues.43 The inability of developing countries to meet foreign standards may contribute to reduce the probability to set domestic standards in WTO consultations. As regard the EU, member states frequently use requirements on Maximum Residue Levels (MRLs) to ensure safe imports as an alternative to SPSs. For all food and animal feed, the European Commission fixes MRLs that considers legally tolerable. Requirements on MRLs are not set on the occasion of WTO consultations, but they may be assimilated to the SPS A200 on the tolerance limits for residues and

42 43

Henson et al. (2000). Mehta and George (2003).

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Table 4 Number of Sanitary and Phytosanitary Standards (SPSs) imposed on selected agri-food product categoriesa in 1995 and 2015: detail by trade patternsb

Implementing country North South Total

Affected country North 1995 2015 14,025 24,044 151 29,067 14,176 53,111

South 1995 18,622 649 19,271

2015 36,455 36,696 73,151

Total 1995 32,647 800 33,447

2015 60,499 65,763 126,262

Source: TRAINS NTMs: The Global Database on Non-Tariff Measures (UNCTAD 2017) Product categories, coded according to the Harmonized System (HS) 2-Digit Chapter Headings, are as follows: (02) Meat; (03) Fish; (04) Dairy produce; (07) Edible vegetables; (08) Edible fruit and nuts; (10) Cereals; (12) Oil seeds and oleaginous fruits; (16) Preparation of meat, fish b Origin and destination countries, labelled according to the officially assigned ISO 3166-1 alpha-3 codes (UN Statistics Divisions 2018), are classified into North (Developed Economies) and South (Developing Economies and Economies in transition), according to the United Nations’ country classification (2017). They are as follows: Australia (AUS), Canada (CAN), European Union (EUN), New Zealand (NZL), United States (USA) for North; Argentina (ARG), Bolivia (BOL), Brazil (BRA), China (CHN), Congo (COG), Egypt (EGY), Indonesia (IDN), India (IND), Libya (LBY), Morocco (MAR), Peru (PER), Russian Federation (RUS), Tunisia (TUN), South Africa (ZAF) for South a

the restricted use of certain substances in food and feed.44 It seems that Australia follows a similar approach in adopting MRLs instead of SPSs. The imposition of MRLs in the EU and/or in Australia is well documented in a number of eminent studies.45 Countries that have increased or introduced SPSs have also amplified their trade openness ratio46 from 1995 to 2015: in particular, we observe the greatest growth in trade openness ratio (from 1995 to 2015) for Bolivia (+20%), China (+13%), Argentina (+6%), and Peru (+4%); Canada and New Zealand are economies with the highest agricultural propensity (Fig. 7). Changes in the intensity of trade and the increase of SPSs is unlikely to be a coincidence. From 1995 to 2015, the number of undergone SPSs is almost unchanged, exception made for the US, whose intensity of undergone SPSs (almost non-existent in 1995) was 4% in 2015, and Indonesia, for which the intensity of undergone SPSs decreases from 4% to 2% in two decades. The number of implemented SPSs has been reduced for meat-based products (
41%) and vegetables (
36%), and it has tremendously increased for fishery products (+2773%). 44

UNCTAD (2012). E.g. Otsuki et al. (2001a, b), Wilson et al. (2003), Wilson and Otsuki (2004), Chen et al. (2008), Disdier and Marette (2010), Xiong and Beghin (2011), Drogué and DeMaria (2012), and Melo et al. (2014). 46 In line with Wacziarg (2001), countries’ trade openness ratio is computed as the sum of domestic agri-food imports and exports compared to the annual GDP. Domestic agri-food imports and exports refer to product categories meat (02), fish (03), dairy produce (04), edible vegetables (07), edible fruit and nuts (08), cereals (10), oil seeds and oleaginous fruits (12), preparation of meat and fish (16). 45

Fig. 7 Trade intensity, imposed and undergone Sanitary and Phytosanitary Standards (SPSs): a comparison between 1995 and 2015. Notes: aCountries, labelled according to the officially assigned ISO 3166-1 alpha-3 codes (UN Statistics Divisions 2018), are as follows: Argentina (ARG), Australia (AUS), Plurinational State of Bolivia (BOL), Brazil (BRA), Canada (CAN), China (CHN), Congo (COG), Egypt (EGY), European Union (EUN), Indonesia (IDN), India (IND), Libya (LBY), Morocco (MAR), New Zealand (NZL), Peru (PER), Russian Federation (RUS), Tunisia (TUN), United States (USA), South Africa (ZAF). b Product categories, coded according to the Harmonized System (HS) 2-Digit Chapter Headings, are as follows: (02) Meat; (03) Fish; (04) Dairy produce; (07) Edible vegetables; (08) Edible fruit and nuts; (10) Cereals; (12) Oil seeds and oleaginous fruits; (16) Preparation of meat, fish. cCountries’ trade openness ratio is computed as the sum of domestic agri-food imports and exports compared to the annual GDP. Data on GDP are not available for LBY and ZAF in 1995 and for LBY in 2015: thus, the trade openness ratio refers to 1998 and 2013 for LBY and to 2000 for ZAF. dCountries’ intensity of undergone SPSs is computed as the ratio between the number of SPSs undergone in a country and the total of undergone SPSs in the analysed sample [Source: elaboration on UN Comtrade (2017), TRAINS NTMs: The Global Database on Non-Tariff Measures (UNCTAD 2017), and Centre d’Études Prospectives et d’Informations Internationales (CEPII 2017)]

The Role of Non-tariff Measures in the Agri-Food Sector: Positive or. . . 51

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While in 1995 only Indonesia and Russian Federation have been interested by SPSs on fishery products, in 2015 SPSs have been raised against all countries: the relevant growth in the intensity of SPSs on fishery products may be due to a general increase in trade openness ratio for this category. The intensity of SPSs for other products (i.e. dairy products, fruits, cereals, oil seeds, preparations of meat and fish) has remained stable.47

4 The Trade Effect of Non-tariff Measures 4.1

A Theoretical Framework

The implicit comparison that frequently occurs between tariffs and non-tariff measures (NTMs) is not completely valid. Tariffs are protectionist by definition, and undermine the social welfare by crowding out trade.48 NTMs may be protectionist or competitive for trade, and imply welfare redistributions by addressing market imperfections (asymmetric information, externalities).49 From a social perspective, while the optimal level of tariffs is zero, determining the optimal level of NTMs is a huge challenge for policymakers50: such a difficulty depends on the complex relationship existing between trade and social effects of NTMs.51 In order to discriminate between catalyst and barrier effects of NTMs on trade, we suppose that a small open economy sets a NTM on a product category, produced in domestic market and also imported from country’s trading partners. The aim of the policymaker is to maximise domestic welfare in terms of increase of consumers’ surplus and producers’ profits. In domestic market, the optimal level of a NTM results from the trade-off between the marginal utility gain for consumers and the marginal cost for producers. However, in a small open economy, the effects of a NTM on domestic welfare is influenced by the behaviour of trading partners: thus, a NTM determines potential trade effects. NTMs affect trade in all but one case, that is when the effects on domestic production exactly offset the effects on domestic consumption.52 Given the existence of asymmetric information and/or externalities, attributing a catalyst or a barrier function to a NTM is a complex challenge. In general, by addressing market imperfections, NTMs are likely to influence incentive mechanisms and behaviours of consumers, producers, and trading partners. From the perspective of consumers, a non-tariff policy is socially desirable and provides higher social well-being. By reducing asymmetric information and/or

47

See trains.unctad.org/Forms/Analysis.aspx (last accessed 15 September 2017). Swinnen (2016). 49 Xiong and Beghin (2014). 50 Swinnen (2017). 51 Sheldon (2012). 52 Swinnen (2016). 48

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53

externalities, NTMs boost consumers’ confidence in products under regulation, and reduces transaction costs.53 The general effect is an increase in consumers’ utility and a consequent demand-enhancing effect (with a rightward shift of demand, from D to D0 ). The growing demand and the higher costs of implementing the measure determine an equilibrium price higher than the pre-NTM price (from p to p0 ): the consequence is an increase in consumption expenditures. The net effect of NTMs on consumers’ surplus depends on the magnitude of utility gain compared to the size of (negative) effect on consumption expenditures: the higher the consumers’ utility, the higher the willingness to pay a higher price for products under regulation.54 From the perspective of producers, a non-tariff policy implies higher costs of compliance, in terms of fixed costs (e.g. upgrade of practice codes and facilities, acquisition of certificates, conformity in marketing requirements) and variable costs (e.g. prolonged delivery time due to inspection and testing procedures at custom points, rejection of certain shipments, denial of entry of certain shipments).55 By increasing the costs of implementing more stringent standards, NTMs reduce producers’ profits. The consequence is a supply-contraction effect (with a leftward shift of supply, from S to S0 ). The reduced supply determines an equilibrium price higher than the pre-NTM price (from p to p0 ), and thus an increase in producers’ revenue. The net effect of a NTM on producers’ profits depends on the magnitude of gain in revenue compared to the size of (negative) implementation costs: the lower the implementation costs, the higher the gain in revenue for products under regulation.56 For exporters, a non-tariff policy imposed in the destination country implies higher costs of compliance in order to meet the requirements, with a consequent increase in import price (from p(imp) to p(imp)0 ). Given the increased consumers demand for products under regulation, if the difference between import price preand post-NTM ( pimp
p0imp) is greater (lower) than the difference between domestic price pre- and post-NTM ( p
p0), domestic producers face lower (greater) implementation costs and obtain higher (lower) profits than foreign producers. The NTM has a barrier (catalyst) effect on trade if determines a reduction (increase) in domestic imports (Fig. 8).57   pimp
p0imp < ð p
p0 Þ ) standard as catalyst and   pimp
p0imp > ð p
p0 Þ ) standard as barrier

53

Xiong and Beghin (2014). Crivelli and Gröschl (2016) and Swinnen (2016). 55 Xiong and Beghin (2014) and Crivelli and Gröschl (2016). 56 Swinnen (2016). 57 Swinnen (2017). 54

ð1Þ

54

F. G. Santeramo and E. Lamonaca

Fig. 8 “Standards as catalyst” vs. “Standards as barrier”: a theoretical framework. Notes: D and D0 are domestic market demand pre- and post-standard; S and S0 are domestic market supply pre-and post-standard; p and p0 are equilibrium price in domestic market pre- and post-standard; p(imp) e p(imp)0 are equilibrium import price pre- and post-standard; q(D) e q(S) are domestic demanded and supplied quantities pre-standard; q(D)0 e q(S)0 are domestic demanded and supplied quantities poststandard; q(D)-q(S) and q(D)0 -q(S)0 are imports pre- and post-standard

4.2

Evidence from Empirical Literature

The extensive empirical literature on the nexus between non-tariff measures (NTMs) and trade provides contrasting evidence. A majority of researches suggests that NTMs hamper trade.58 Other studies conclude that NTMs may have no impact59 or tend to foster trade.60 Several researches find both positive and negative effects of NTMs on trade.61 The mixed evidence may be partly explained by the large heterogeneity in empirical studies: some analyses are global, others are regional; few researches focus on aggregate NTMs, while many studies focus on productspecific NTMs.62 Heterogeneity is also due to a variety of methodological and empirical approaches: differences emerge in proxies used to measure NTMs, types of data, and estimators. In addition, the magnitude and the direction of NTM’s trade effects tend to be sector- and/or product- specific.63 To sum up, a direct comparison of results is not feasible. Only few studies provide a general overview on the trade effects of NTMs, and a remarkable case is Hoekman and Nicita (2008) who suggest that NTMs are major frictions to trade of agri-food products.

58 E.g. Cioffi et al. (2011), Santeramo and Cioffi (2012), Peterson et al. (2013), and Dal Bianco et al. (2016). 59 E.g. Sun et al. (2014) and Shepotylo (2016). 60 E.g. de Frahan and Vancauteren (2006) and Cardamone (2011). 61 E.g. Xiong and Beghin (2011) and Beckman and Arita (2016). 62 Santeramo (2019) and Santeramo and Lamonaca (2019b, c). 63 Santeramo et al. (2019b).

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As for the trade effects of NTMs on different geographic and economic areas, it seems that NTMs are barriers to trade.64 Studies on trade between developed countries provide different conclusions: negative effects65 and positive effects66 of NTMs on trade are found. Trade among developing countries tends to be frictioned by NTMs.67 If we focus on the trade effects of specific NTMs, Technical Barriers to Trade (TBTs) attend to be catalysts for trade,68 while Sanitary and Phytosanitary Standards (SPSs), may either hamper or facilitate trade. In fact, some studies support the “standards as barrier” view,69 while others provide mixed results. A plausible explanation of the heterogeneity in findings for SPSs may be the effect of regulations: “there are specific measures that have a substantial positive impact and others with a significant negative impact. These effects can offset each other within a class”.70 As for product-specific measures, the Maximum Residue Levels (MRLs) tend to act as barrier to trade.71 Considering the influence of proxies used for NTMs, the relationship between standards and trade tends to be negative if standards are proxied by ad valorem equivalent (AVE),72 or by frequency index and/or coverage ratio.73 Differently, if standards are proxied by dummy or count variables, the results may be positive74 or negative.75

5 Conclusions The contribution investigates the evolution of trade in agri-food sector and the potential correlations between trade and levels of policy intervention.

64 E.g. Essaji (2008), Anders and Caswell (2009), and Disdier and Marette (2010). Few exceptions are Wilson et al. (2003), Chevassus-Lozza et al. (2008), and Shepherd and Wilson (2013), who provide mixed evidence on the trade effects of NTMs. 65 E.g. Harrigan (1993), Fontagné et al. (2005), Yue and Beghin (2009), and Beckman and Arita (2016). 66 de Frahan and Vancauteren (2006). 67 E.g. Schuster and Maertens (2013), Melo et al. (2014), and Santeramo and Lamonaca (2019b, c). 68 E.g. de Frahan and Vancauteren (2006). 69 E.g. Jongwanich (2009), Jayasinghe et al. (2010), Peterson et al. (2013), and Crivelli and Gröschl (2016). 70 Schlueter et al. (2009), p. 1489. 71 E.g. Otsuki et al. (2001a, b), Wilson et al. (2003), Scheepers et al. (2007), Chen et al. (2008), Wei et al. (2012), and Ferro et al. (2015). 72 E.g. Olper and Raimondi (2008) and Arita et al. (2017). 73 E.g. Jongwanich (2009) and Fernandes et al. (2017). 74 E.g. Cardamone (2011) and Shepherd and Wilson (2013). 75 E.g. Peterson et al. (2013) and Dal Bianco et al. (2016).

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Agri-food trade has assumed a great relevance over time, in terms of traded volumes and values, involved countries, and interested commodities. More importantly, there has been a trend reversal in trade patterns, with a remarkable growth in trade from developing countries. Changes in agri-food trade are related to a plethora of determinants: economic globalisation, changes in the composition of trade, progressive trade liberalisation, growing trade agreements, reorganisation of policy interventions.76 The joint influence of these factors has contributed to the development of new dynamics in agrifood trade. In particular, it is likely that the proliferation of non-tariff measures (NTMs) and changes in trade patterns are strictly related. NTMs are policy instruments capable to shape trade in the same way as traditional tariffs. Since the negotiation of the World Trade Organisation (WTO), the number of NTMs has tripled. In particular, Sanitary and Phytosanitary Standards (SPSs) have grown exponentially, in terms of products coverage and number of implementing countries. SPSs are suitable to regulate trade of perishable agri-food products, such as meat-based and seafood products, fruits and vegetables, cereals, fats and oils.77 In addition, immediately after the trade liberalisation (1995), implementing SPSs was a prerogative of developed countries. Nowadays, developing countries have become important players in the WTO consultations,78 although the United States remain the leader country. Comparing the evolution of trade and of NTMs in agri-food sector, we observe that potential relationships “cause-effect” exist: growing trade flows may have stimulated the increase of trade policy measures; but, in their turn, NTMs may have shaped trade. The combination of greater trade openness and levels of protection has stimulated an interesting academic debate. The empirical evidence show that NTMs may be trade catalysts or trade barriers: in particular, the effects are country-, product-, and measure-specific.79 By providing an overview of the dynamics in trade and NTMs, our contribution would be instrumental to the vivid debate on the role of NTMs in the agri-food sector.

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76 Henson and Loader (2001), Grant and Lambert (2008), Sun and Reed (2010), and Arita et al. (2017). 77 Dal Bianco et al. (2016) and Grant and Arita (2017). 78 Martin (2018). 79 Santeramo (2019).

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Hoekman B, Nicita A (2008) Trade policy, trade costs, and developing country trade. World Dev 39 (12):2069–2079 Ivanic M, Martin W (2014) Implications of domestic price insulation for global food price behavior. J Int Money Financ 42:272–288 Jayasinghe S, Beghin JC, Moschini GC (2010) Determinants of world demand for U.S. corn seeds: the role of trade costs. Am J Agric Econ 92(4):999–1010 Jongwanich J (2009) The impact of food safety standards on processed food exports from developing countries. Food Policy 34(5):447–457 Koo WW, Kennedy PL, Skripnitchenko A (2006) Regional preferential trade agreements: trade creation and diversion effects. Appl Econ Perspect Policy 28(3):408–415 Lambert D, McKoy S (2009) Trade creation and diversion effects of preferential trade associations on agricultural and food trade. J Agric Econ 60(1):17–39 Martin W (2018) A research agenda for international agricultural trade. Appl Econ Perspect Policy 40(1):155–173 Mehta R, George J (2003) Processed food products exports from India: an exploration with SPS regime. Country report prepared under the ACIAR Project, International Food Safety Regulation and Processed Food Export from Developing Countries. Research Information Systems and the Australian National University, Delhi Melo O, Engler A, Nahuehual L, Cofre G, Barrena J (2014) Do sanitary, phytosanitary, and qualityrelated standards affect international trade? Evidence from Chilean fruit exports. World Dev 54:350–359 OECD (2015) Regional trade agreements and agriculture. OECD Food, Agriculture and Fisheries Papers, No. 79. OECD, Paris Olper A, Raimondi V (2008) Explaining national border effects in the QUAD food trade. J Agric Econ 59(3):436–462 Otsuki T, Wilson JS, Sewadeh M (2001a) What price precaution? European harmonization of aflatoxin regulations and African groundnut exports. Eur Rev Agric Econ 28(2):263–283 Otsuki T, Wilson JS, Sewadeh M (2001b) Saving two in a billion: quantifying the trade effect of European food safety standards on African exports. Food Policy 26(5):495–514 Peterson E, Grant JH, Roberts D, Karov V (2013) Evaluating the trade restrictiveness of phytosanitary measures on US fresh fruit and vegetable imports. Am J Agric Econ 95 (4):842–858 RTA-IS (2018) Available at: https://www.wto.org/english/tratop_e/region_e/region_e.htm Santeramo FG (2019) On non-tariff measures and changes in trade routes: from north-north to south-south trade? IATRC Commissioned Paper, No. 938-2019-1580 Santeramo FG, Cioffi A (2012) The entry price threshold in EU agriculture: deterrent or barrier? J Policy Model 34(5):691–704 Santeramo FG, Lamonaca E (2019a) On the drivers of global grain price volatility: an empirical investigation. Agric Econ (AGRIECON) 65(1):31–42 Santeramo FG, Lamonaca E (2019b) The effects of non-tariff measures on agri-food trade: a review and meta-analysis of empirical evidence. J Agric Econ 71(1) (in press) Santeramo FG, Lamonaca E (2019c) On the impact of non-tariff measures on export performances of African agri-food sector. Agrekon:1–18 Santeramo FG, Lamonaca E, Contò F, Nardone G, Stasi A (2018) Drivers of grain price volatility: a cursory critical review. Agric Econ (AGRIECON) 64:347–356 Santeramo FG, Guerrieri V, Lamonaca E (2019a) On the evolution of trade and sanitary and phytosanitary standards: the role of trade agreements. Agriculture 9(1):2 Santeramo FG, Lamonaca E, Nardone G, Seccia A (2019b) The benefits of country-specific nontariff measures in world wine trade. Wine Econ Policy 8(1):28–37 Scheepers S, Jooste A, Alemu ZG (2007) Quantifying the impact of phytosanitary standards with specific reference to MRLs on the trade flow of South African avocados to the EU. Agrekon 46 (2):260–273

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Schlueter SW, Wieck C, Heckelei T (2009) Regulatory policies in meat trade: is there evidence for least trade-distorting sanitary regulations? Am J Agric Econ 91(5):1484–1490 Schuster M, Maertens M (2013) Do private standards create exclusive supply chains? New evidence from the Peruvian asparagus export sector. Food Policy 43:291–305 Sheldon I (2012) North–South trade and standards: what can general equilibrium analysis tell us? World Trade Rev 11(3):376–389 Shepherd B, Wilson NL (2013) Product standards and developing country agricultural exports: the case of the European Union. Food Policy 42:1–10 Shepotylo O (2016) Effect of non-tariff measures on extensive and intensive margins of exports in seafood trade. Mar Policy 68:47–54 Sun L, Reed MR (2010) Impacts of free trade agreements on agricultural trade creation and trade diversion. Am J Agric Econ 92(5):1351–1363 Sun D, Huang J, Yang J (2014) Do China’s food safety standards affect agricultural trade? The case of dairy products. China Agric Econ Rev 6(1):21–37 Swinnen J (2016) Economics and politics of food standards, trade, and development. Agric Econ 47 (1):7–19 Swinnen J (2017) Some dynamic aspects of food standards. Am J Agric Econ 99(2):321–338 Trebilcock M, Pue K (2015) The puzzle of agricultural exceptionalism in international trade policy. J Int Econ Law 18:233–260 UN Comtrade (2017) Available at: https://comtrade.un.org/ UN Statistics Division (2018) Available at: https://unstats.un.org/unsd/databases.htm UNCTAD (2012) International classification of non-tariff measures, February 2012 version (UNCTAD/DITC/TAB/2012/2). United Nations, New York UNCTAD (2017) Available at: https://unctad.org/en/Pages/Home.aspx Wacziarg R (2001) Measuring the dynamic gains from trade. World Bank Econ Rev 15(3):393–429 Wei G, Huang J, Yang J (2012) The impacts of food safety standards on China’s tea exports. China Econ Rev 23(2):253–264 Wilson JS, Otsuki T (2004) To spray or not to spray: pesticides, banana exports, and food safety. Food Policy 29(2):131–146 Wilson JS, Otsuki T, Majumdsar B (2003) Balancing food safety and risk: do drug residue limits affect international trade in beef? J Int Trade Econ Dev 12(4):377–402 WTO (2018) Available at: http://ptadb.wto.org/ Xiong B, Beghin JC (2011) Does European aflatoxin regulation hurt groundnut exporters from Africa? Eur Rev Agric Econ 39(4):589–609 Xiong B, Beghin JC (2014) Disentangling demand-enhancing and trade-cost effects of maximum residue regulations. Econ Inq 52(3):1190–1203 Yue C, Beghin JC (2009) Tariff equivalent and forgone trade effects of prohibitive technical barriers to trade. Am J Agric Econ 91(4):930–941

EU and WTO Regulatory Approaches to Renewable Energy Subsidies: Negative and Positive Integration Ilaria Espa and Gracia Marín Durán

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 A Common but Different Approach to Negative Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 EU Approach to Positive Integration: Balancing the Trade-Distortive and Climate-Friendly Effects of Green Energy Subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 The Absence of a Balancing Mechanism in WTO Subsidy Law: Is It a Problem? . . . . . . . . . 5 What, If Anything, May the WTO Learn from the EU? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

62 64 70 77 81 84 85

Abstract This paper compares how the EU and the WTO have grappled with balancing the negative (trade-distortive) and positive (climate change-mitigation) effects of renewable energy (RE) subsidies. It first shows that, although both subsidy control regimes share some basic tenets of negative integration (i.e. prohibiting trade-distortive RE subsidies), EU State aid law is comparatively more constraining on governments’ space to support green energy in both substantive and procedural/ institutional terms. It then argues that the more negative integration is strictly framed and implemented, the greater the need for positive integration (i.e., sheltering tradedistortive but climate-friendly RE subsidies under certain conditions). This, in turn, goes a long way in explaining why the EU’s regulatory model is also distinct for having progressively established a set of common rules on permissible “good” RE subsidies. With this in mind, the paper assesses the extent to which the absence of a comparable positive integration dimension in the WTO legal framework exposes RE subsidies to the risk of WTO-illegality. It finally argues that while comparing the two I. Espa (*) Università della Svizzera Italiana, Lugano, Switzerland World Trade Institute, Bern, Switzerland e-mail: [email protected] G. Marín Durán University College London, London, UK e-mail: [email protected] © Springer Nature Switzerland AG 2020 R. Krämer-Hoppe (ed.), Positive Integration - EU and WTO Approaches Towards the “Trade and” Debate, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-25662-3_4

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regimes may be useful from a theoretical standpoint, a transposition of the EU’s positive integration approach to the WTO is not desirable for a variety of legal, political and institutional reasons.

1 Introduction It goes largely undisputed that climate change is possibly the greatest sustainable development challenge presently facing the international community, and the 1992 United Nations Framework Convention on Climate Change (UNFCCC) and more recent 2015 Paris Agreement represent the global response to this challenge with the ultimate objective of reducing greenhouse gas (GHG) emissions concentrations in the atmosphere and “holding the increase in the global average temperature to well below 2 C above pre-industrial levels”.1 Similarly, there is broad consensus that replacing conventional “brown” or “dirty” energy (i.e. generated from fossil fuels such as coal, natural gas and oil) with renewable “green” or “clean” energy (i.e. generated from naturally replenished resources such as solar or wind) can play an important role in mitigating climate change and achieving the internationally agreed 2  C target.2 But while the need for government intervention to boost renewable energy (RE) is generally accepted,3 which specific forms of public support are most appropriate or effective towards combating climate change remains a contentious issue. In other words, what “policy space” should governments have in supporting the transition to a low-carbon green economy? And indeed, how to strike

1

United Nations Framework Convention on Climate Change (UNFCCC), signed on 9 May 1992, 771 U.N.T.S. 107, Article 2; Paris Agreement, signed on 12 December 2015, Article 2(1)(a), further providing “[. . .] and pursuing efforts to limit the temperature increase to 1.5  C above pre-industrial levels”. 2 Paris Agreement, ibid., Articles 3 and 4(2); International Renewable Energy Agency (IRENA) Rethinking Energy 2017: Accelerating the Global Energy Transformation (2017), https://www. irena.org/documentdownloads/publications/irena_rethinking_energy_2017.pdf (last accessed 2 June 2019), pp. 23–24. This is because the energy sector is still contributing to more than two thirds of global GHG emissions: see International Energy Agency (IEA) Energy, Climate Change and the Environment: 2016 Insights (2016), https://www.iea.org/publications/freepublications/pub lication/ECCE2016.pdf (last accessed 2 June 2019), p. 17. 3 The case for government intervention is made on the basis of both the climate-related benefits (or positive externalities) of green energy and the climate-related costs (or negative externalities) of conventional energy: see, inter alia, Marín Durán (2018), pp. 133–134. According to latest estimates, renewable energy subsidies rose to USD 140 billion in 2016, although this is still lower than fossil-fuel subsidies which amounted to USD 260 billion in that same year. IEA Commentary: Fossil-fuel Consumption Subsidies Are Down, But Not Out (20 December 2017), https://www.iea.org/newsroom/news/2017/december/commentary-fossil-fuel-consumption-subsi dies-are-down-but-not-out.html (last accessed 2 June 2019).

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a proper balance between the negative (trade-distortive) and positive (climate change-mitigating) effects of green energy subsidies? The aim of this article is to compare how the EU and the WTO have grappled with these complex and highly contested questions, through the lens of negative and positive integration. In doing so, it will focus on the power sector since it has been the largest single source of GHG emissions, on the one hand, and the primary target of public incentives to renewable energy, on the other hand.4 Based on latest statistics, in 2015, 110 countries implemented some form of government support in the electricity sector compared to 66 and 21 countries in the transport sector and in the heating and cooling sector, respectively.5 The single most common form of public support to green electricity generation have been feed-in tariff (FIT) schemes offering long-term guaranteed prices for renewably generated electricity (particularly using solar photovoltaic (PV) and wind technologies) fed into the grid.6 FITs have not only been a popular choice, but also widely recognized as the “most efficient and effective” policy instrument for promoting green electricity by the Intergovernmental Panel on Climate Change and other international expert bodies.7 Another common form of government support in the electricity sector are fiscal measures (e.g. tax exemptions/reductions) and public finance (e.g. grants and preferential loans) to encourage investment in and deployment of renewable energy technologies,8 and these have been projected to increase substantially in the International Energy Agency’s “Bridge Scenario” from $270 billion in 2014 to $400 billion in 2030.9

4 In 2015, the electricity sector still accounted for approximately 40% of global energy-related GHG emissions due to the heavy reliance on fossil fuels: IEA (2017), CO2 Emissions from Fuel Combustion: Highlights, https://www.epa.gov/ghgemissions/global-greenhouse-gas-emissionsdata (last accessed 2 June 2019), p. 13. 5 Renewable Energy Policy Network for the 21st Century (REN21), Renewable 2016 Global Status Report (2016), https://www.ren21.net/wp-content/uploads/2019/05/REN21_GSR2016_ FullReport_en_11.pdf (last accessed 2 June 2019), p. 112. 6 A detailed examination of countries’ policy practice is beyond the scope of this article, see inter alia: Espa and Marín Durán (2018), pp. 623–628 and references therein. 7 Intergovernmental Panel on Climate Change (IPCC) Renewable Energy Sources and Climate Change Mitigation – Summary for Policy Makers and Technical Summary (2012), https://www. ipcc.ch/site/assets/uploads/2018/03/SRREN_Full_Report-1.pdf (last accessed 2 June 2019), p. 152, outlining the main elements of “well-designed” FIT programmes; see also Charnovitz and Fischer (2015), p. 184, referring to estimates that FITs are responsible for about 75% of global solar PV and 45% of global wind capacity. 8 For an overview, REN21 (2013), Renewables 2013 – Global Status Report, http://www.ren21.net/ Portals/0/documents/Resources/GSR/2013/GSR2013_lowres.pdf (last accessed 2 June 2019), pp. 68–70; and REN21 (2016), Renewables 2016 – Global Status Report, https://www.ren21.net/ wp-content/uploads/2019/05/REN21_GSR2016_FullReport_en_11.pdf (last accessed 2 June 2019), p. 8. 9 IEA (2015), Energy and Climate Change – World Energy Outlook Special Report, https://www. iea.org/publications/freepublications/publication/ WEO2015SpecialReportonEnergyandClimateChange.pdf (last accessed 2 June 2019), pp. 13 and 85.

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The comparative analysis begins by exposing how EU State aid law and WTO subsidy law are similar in their approach to negative integration, understood as the set of substantive disciplines and institutional mechanisms aimed at prohibiting or limiting the use of government support measures that are trade-distortive and hence deemed harmful from an EU/international trade perspective. It will be shown that, whilst both regulatory systems follow this logic of negative integration, they are fundamentally different in important respects. Overall, EU substantive disciplines and control mechanisms are comparatively stronger in constraining government support, which is a direct reflection of the more ambitious objectives of EU State aid law (Sect. 2). This, in turn, goes a long way in explaining why the EU’s regulatory model is also distinct for its positive integration dimension: that is, the progressive establishment of common substantive and procedural rules for permitting, under certain conditions, State aid to renewable energy, using a combination of both hard-law and soft-law instruments (Sect. 3). It will be then assessed whether the absence of a comparable system for justifying green energy subsidies under WTO law is actually problematic: in other words, are these measures genuinely at risk under current WTO subsidy rules, and thus in need of a legal shelter? (Sect. 4). The final section of the article explores which lessons, if any, may be drawn for the WTO from the EU regulatory experience in terms of positive integration. In this regard, it will be argued that it is hardly conceivable, or even desirable, that the EU’s approach to sheltering RE government support be transposed to the WTO for a variety of legal, political and institutional reasons (Sect. 5).

2 A Common but Different Approach to Negative Integration In a basic sense, both EU State aid law and WTO subsidy law follow the logic of negative integration in that they seek to constrain trade-distortive governmental support. In the former regulatory system, the key provision to this effect is Article 107(1) of the Treaty on the Functioning of the European Union (TFEU), which lays down a general prohibition on “any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods . . . in so far as it affects trade between Member States”.10 According to the case law of the EU Court of Justice (CJEU), four cumulative conditions have to be met for a government measure to fall under this prohibition: (1) it must confer an economic advantage on the recipient that it would not have received under normal market conditions; (2) it must entail an actual or potential use of State resources; (3) it must be selective, by

10

The present contribution focuses exclusively on the treatment of RE subsidies under EU State aid law. For a discussion in relation to EU internal market law (particularly Articles 34 and 36 TFEU), including recent case law, see E. Reid’s contribution to this special issue.

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favouring certain undertakings or the production of certain goods; (4) it must be liable to distort competition and affect intra-EU trade.11 In principle, this general prohibition equally applies to renewable energy support schemes, since the purpose of State aid is irrelevant under Article 107(1) TFEU. At first glance, some degree of similarity may be readily noticed between Article 107(1) TFEU and the three cumulative conditions for a given measure to constitute a “subsidy” under the WTO Agreement on Subsidies and Countervailing Measures (ASCM): (1) it must be a financial contribution (or income/price support) by a government or public body12 (or by a private body “entrusted” or “directed” by a government)13; (2) it must confer a benefit (i.e., analogous to “economic advantage” under EU State aid law)14; (3) it must be specific (i.e., analogous to the “selectivity” condition under EU State aid law).15 But as will be shown next, the scope and depth of negative integration in these two regulatory regimes fundamentally differs in both substantive and procedural terms, with the overall result that WTO subsidy disciplines are less constraining on green policy space.16 The first significant difference relates to the threshold requirement of “benefit” for a government support measure to be subject to ASCM disciplines, and the parallel “economic advantage” condition under EU State aid law. In both systems, the existence of a benefit or economic advantage needs to be determined in relation to prevailing conditions in the marketplace, which raises the question as to what constitutes the “relevant market”.17 In the context of EU State aid law, market definition focuses on demand-side substitutability: that is, whether the products at issue are regarded as substitutes or reasonably interchangeable to meet the same

11

See further Bacon (2013), pp. 20–87. Articles 1.1(a)(1)(i)-(iii) and 1.1(a)(2) ASCM. 13 Article 1.1(a)(1)(iv) ASCM. 14 Article 1.1(b) ASCM. 15 Articles 1.2 and 2 ASCM. As this does not differ fundamentally from the notion of “selectivity” under EU State aid law, it will not be further discussed here: for a comparison, see Ehlermann and Goyette (2006), pp. 701–704. 16 Admittedly, there is one exception to this general proposition in that the notion of “subsidy” under WTO law may in some respects be broader than that of “State aid” under EU law. This is because only measures that are both imputable to a Member State and financed directly or indirectly through “State resources” may be regarded as State aid under EU law. On this “cost to government” (or “charge on the public account”) requirement, see in particular: Case C-379/98 PreussenElektra [2001] ECR I-2099, paras. 58–62 and discussion in Ramirez Carmona (2016), pp. 222–224. By contrast, no similar “cost to government” requirement exists under WTO subsidy law: WTO Appellate Body Report, Canada — Measures Affecting the Export of Civilian Aircraft, WT/DS70/AB/R, adopted 19 November 1999, para. 154, rejecting Canada’s argument that “cost to government” is one way of conceiving the existence of a “benefit” under Article 1.1(b) ASCM. On this point, see further Marín Durán (2018), p. 141. 17 WTO Appellate Body Report, Canada — Measures Affecting the Export of Civilian Aircraft, WT/DS70/AB/R, adopted 19 November 1999, para. 157 and Articles 14(b)-(d) ASCM; Ehlermann and Goyette (2006), pp. 700–701. 12

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consumer need.18 Applying this approach to FIT programmes, for instance, would lead to defining the relevant market in broad terms, as encompassing all electricity irrespective of its green or less green origin,19 and thereby pave the way for the conclusion that (administratively-set) feed-in tariffs grant an “economic advantage” to renewable electricity generators.20 Conversely, the definition of relevant market for the benefit comparison under the ASCM has become a more complex matter following the Appellate Body’s report in Canada – Renewable Energy (2013). The approach followed here gave prominence, albeit controversially,21 to supply-side substitutability: otherwise said, the Appellate Body considered that the source of electricity, either conventional or renewable (in the case at issue, wind and solar), is determinative for the definition of the relevant market insofar as “windpower and solar PV producers of electricity cannot compete with other electricity producers because of differences in cost structures and operating costs and characteristics”.22 Thus, the market for green electricity had to be distinguished from the wholesale electricity market, even though renewably-produced and conventional electricity were found to be highly substitutable on the demand-side.23 In addition, the Appellate Body found, again controversially, that markets for renewably-produced electricity can still provide appropriate benefit benchmarks even when they are created by means of government intervention.24 By narrowing the definition of the relevant market to the “competitive markets for wind- and solar PV-generated electricity”,25 rather than the wholesale electricity market as a whole, the Appellate Body has arguably made it harder to demonstrate the existence of a benefit and thereby created a partial carve-out for FIT programmes from ASCM disciplines. Even so, and

18 European Commission Notice on the Definition of Relevant Market for the Purposes of Community Competition Law’ (97/C372 /03), OJ [1997] C372/5, para. 1, footnote 1, noting that “[t]he focus of assessment in State aid cases is the aid recipient and the industry/sector concerned rather than identification of the competitive constraints faced by the aid recipient.” This distinguishes State aid cases from competition cases in EU law, as in the latter both demand-side and supply-side substitutability may be considered: see further, Rubini (2015), pp. 219–220. 19 Factors suggesting a high demand-side substitutability between renewable and conventional electricity include that all electricity is physically identical and performs the same end-use regardless of how it is generated: on this point see, WTO Appellate Body Report, Canada — Certain Measures affecting the Renewable Energy Generation Sector/Measures relating to the Feed-in Tariff Program, WT/DS412/DS426/AB/R, adopted 24 May 2013 [hereinafter Appellate Body Report, Canada – Renewable Energy (2013)], para. 5.170; and further discussion in Charnovitz and Fischer (2015), pp. 201–202. 20 See e.g., in relation to feed-in tariffs under the German EEG Act, European Commission State aid SA.38632 (2014/N) – Germany. EEG 2014 – Reform of the Renewable Energy Law (C(2014) 5081 final), 23 July 2014, paras. 121 and 149. 21 A reference to the main academic critiques is given in Espa and Marín Durán (2018), pp. 634–635. 22 Appellate Body Report, Canada – Renewable Energy/FIT Program (2013), para. 5.174. 23 Appellate Body Report, Canada – Renewable Energy/FIT Program (2013), para. 5.178. 24 Appellate Body Report, Canada – Renewable Energy/FIT Program (2013), paras. 5.175-85. 25 Appellate Body Report, Canada – Renewable Energy/FIT Program (2013), para. 5.190.

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importantly, the Appellate Body did not provide a full “safe heaven” to FIT schemes inasmuch as it pointed to ways in which complainants may establish the existence of a benefit in future cases (i.e., by looking at in-country price benchmarks, or adjusted out-of-country price benchmarks; or proxy construction).26 Nonetheless, when compared to EU State aid law, this jurisprudential approach grants greater flexibility to WTO members when supporting green electricity through FIT schemes.27 A second, and arguably more important, distinction between the two regulatory regimes concerns the adverse effects that government support must have in order to be sanctioned as incompatible with either EU State aid rules or WTO subsidy law. Here, the threshold under EU law is seemingly low: to be prohibited, selective State aid needs only to “be liable” to affect competition and intra-EU trade, and there is no requirement that this potential effect be significant or substantial.28 In other words, any State measure that provides selective aid through public resources is, in principle, deemed incompatible with the EU internal market, with no need to prove an actual distortive effect on competition or intra-EU trade.29 Conversely, under WTO law, trade-distortive effects are not generally presumed but only in two specific cases: namely, export subsidies (i.e., those contingent upon export performance) and import-substitution subsidies (i.e., those contingent upon the use of domestic over imported goods). These are both expressly aimed at distorting trade and investment flows, and thus prohibited outright.30 All other specific subsidies are just actionable under the ASCM, which means that they are only WTO-incompatible to the extent it is demonstrated that they cause actual adverse effects to the import-competing (in the form of “material injury”)31 or export-competing interests (in the form of “serious prejudice”)32 of another WTO member.

26 Appellate Body Report, Canada – Renewable Energy/FIT Program (2013), paras. 5.228 and 5.233. See further, Rubini (2015), pp. 218–220. 27 Note that the Appellate Body’s approach to the benefit analysis in Canada – Renewable Energy (2013) concerned the legal standard in Article 14(d) ASCM and hence it is applicable to FIT programmes as a “purchase of goods” by the government, but not to other forms of public support listed in Article 1.1(a) ASCM (e.g., tax exemptions, grants or preferential loans). For further discussion, see Espa and Marín Durán (2018), pp. 633 and 639. 28 On this point see Flett et al. (2008), pp. 447–449. 29 See further, Bacon (2013), pp. 12–13 and 82–87. 30 Article 3 ASCM. For a more detailed examination, see van den Bossche and Zdouc (2017), pp. 802–810. 31 Articles 5(a) and 15 ASCM, referring to “material injury”, or threat thereof, to the domestic industry of another member producing the like product. For a more detailed examination, see van den Bossche and Zdouc (2017), pp. 811–817. 32 Articles 5(c) and 6.3 ASCM, referring to “serious prejudice”, or threat thereof, to the interests of another member, including by “displacing or impeding” imports of a like product into the market of the subsidising member, or by “displacing or impeding” exports of a like product into the market of a third country, or by resulting in “significant” price undercutting, price suppression, price depression or loss of sales. For a more detailed examination, see van den Bossche and Zdouc (2017), pp. 818–837.

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Because of this trade-injury focus of the ASCM, RE subsidies are thus not prohibited as such unless they incorporate a discriminatory component in the form of local content requirements (LCRs), but the latter are primarily tools of industrial policy with no clear environmental benefits.33 Among those non-discriminatory RE support schemes that are instead actionable under the ASCM, FIT schemes targeting green electricity face a lower risk of WTO-incompatibility than other public incentives given to manufacturers of technology equipment and components (e.g., solar panels or wind turbines) used to produce that electricity. In the former case, trade distortions are in fact harder to find due to the geographical and infrastructural limitations on cross-border electricity trade, which mainly confine it at the local or at best regional level.34 By contrast, the global nature of the RE generation equipment market means a higher probability of public support causing trade distortions and being WTO-inconsistent.35 A last but not least important aspect on which EU State aid law and WTO subsidy law differ is in terms of monitoring and enforcement mechanisms. In the EU context, the general prohibition under Article 107(1) TFEU is backed up by sophisticated procedures for ex ante and ex post centralised control by a supranational independent agent–the European Commission.36 As a general rule, EU Member States are required to notify their planned State aid measures (including material alterations to existing aid) to the Commission, which has exclusive competence for assessing their compatibility with the internal market. Critically, any such aid can only be granted after obtaining the Commission’s approval.37 The implementation of unauthorised State aid is therefore unlawful and the Commission is empowered to suspend the relevant aid measure and order the full repayment of any aid already 33

On the discriminatory effects of LCRs see, among others, Hestermeyer and Nielsen (2014), pp. 553–591. On the limited evidence regarding their added environmental benefits, see Kuntze and Moerenhout (2013), Local Content Requirements and the Renewable Energy Industry – A Good Match?, https://pdfs.semanticscholar.org/6872/7a8d62a9722b28a250bef0470aeb847108f9.pdf (last accessed 2 June 2019), pp. 1–2, 31–35 and 43–44. 34 According to the International Energy Agency, while steadily increasing, global imports of electricity in 2015 (726 TWh) only amounted to about 3.5% of the world’s total electricity consumption (20200 TWh): IEA Electricity Information: Overview (2017), pp. 5 and 7–8, https:// www.iea.org/publications/freepublications/publication/ElectricityInformation2017Overview.pdf (last accessed 2 June 2019). 35 On how the distinction among RE subsidies based on the product being subsidized (namely, electricity vs. green technology products) has a bearing on the trade-distortive effects analysis under the ASCM, see Sect. 4 below. 36 Article 108 TFEU; and Council Regulation (EU) No 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 TFEU, OJ [2015] L248/9. 37 Article 108(3) TFEU. One exception to this general rule is provided in: Commission Regulation (EU) No 1407/2013 on the application of Articles 107 and 108 TFEU to de minimis aid, OJ [2013] L352/1. For all covered sectors (Article 1), State aid may be granted up to a ceiling of €200,000 per single undertaking over any period of three fiscal years, or €100,000 in the road transport sector (Article 3). Any such de minimis aid is deemed not to distort competition nor affect intra-EU trade, and thus it does neither meet the criteria of Article 107(1) TFEU nor does it need to be notified under Article 108(3) TFEU.

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granted.38 Similarly, the Commission may open a formal investigation procedure for any authorised State aid used in contravention of its approval decision (misused aid), and in such cases it has similar powers of suspension and recovery as in the case of unlawful aid. Moreover, any existing aid is subject to regular reporting and continuous review by the Commission.39 The WTO context offers nothing comparable in terms of institutional and procedural mechanisms for ensuring compliance with the ASCM. The Committee on Subsidies and Countervailing Measures is the closest to a surveillance body for matters relating to the operation of the ASCM but lacks any ex ante or ex post control powers similar to those assigned to the European Commission. Composed of government representatives,40 it keeps track of all notified subsidies and simply affords WTO members the opportunity to request additional information in cases of low or nil reporting performances and to exchange views on such measures.41 Notification requirements under the ASCM are, in turn, quite slim inasmuch as WTO members are only requested to notify yearly all specific subsidies once they are in place, that is, after implementation.42 Even so, the rate of compliance with this procedural obligation is very poor,43 the information provided mainly inconsistent,44 and the amount of subsidization largely understated.45 Finally, enforcement of WTO subsidy rules is decentralized and much less systematic compared to the EU context to the extent that it depends on whether WTO members decide to take action against a specific support programme under the so-called multilateral track (that is, by filing a complaint in the WTO dispute settlement system).46 Alternatively, and in contrast to the EU State aid law, WTO members may choose the so-called unilateral track, which allows the imposition of countervailing duties (CVDs) on the part of national

38

By contrast, WTO remedies are prospective, probably reflecting the idea that the system is designed primarily to protect current and future trade flows: Flett et al. (2008), p. 449. 39 For a more detailed examination, see Bacon (2013), chapter 18. 40 Article 24.1 ASCM. 41 Article 25.9 to Article 25.11 ASCM. 42 Articles 25.1 and 25.2 ASCM. 43 According to a recent report prepared by the WTO Secretariat, the status of subsidy notifications has significantly deteriorated over the years 1995–2015. In the words of the Secretariat: “. . .the share of Members that notified subsidies decreased from 50% to 38% since 1995. In addition, the share of Members that made a ‘nil’ notification fell significantly, from 25% to 10%, in the same period. Thus, with the exception of 1995, the share of Members making the required notifications has not exceeded 63%, and generally has hovered around 58%. Conversely, the share of Members not making any notification registered an important increase since 1995, from 25% to 52%. . .”. WTO Committee on Subsidies and Countervailing Measures, Notification Requirements under the Agreement on Subsidies and Countervailing Measures – Background Note by the Secretariat, G/SCM/W/546/Rev.8, 31 March 2017, pp. 3–4. 44 Many authors have stressed the need to correct for the absence of a systematic reporting and suggested new templates for WTO subsidy notifications. See, among others, Steenblik and Simon (2010). 45 See, e.g. Horlick and Clarke (2017), p. 697. 46 See Articles 4 and 7 ASCM.

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investigating authorities with a view to offsetting the trade-distortive effects of certain subsidies.47 Significantly, governments have by far preferred such a unilateral option to remedy the injurious effects of RE subsidies in their domestic markets. This is most likely due to the high evidentiary burden requested on the complainants when raising subsidy claims in the WTO dispute settlement system compared to the inherent protectionist bias of national investigating authorities in charge of imposing CVDs.48 More specifically, RE subsidies have been challenged in only six WTO disputes out of the total 116 ASCM cases as of June 2018,49 whereas WTO members have conducted 45 trade remedy investigations in the sole period 2006–2015.50

3 EU Approach to Positive Integration: Balancing the Trade-Distortive and Climate-Friendly Effects of Green Energy Subsidies As was shown in the previous section, EU State aid law and WTO subsidy law share some basic tenets of negative integration, but the former is much more constraining on government support in both substantive and procedural terms. This is so, in particular, because there is a broader prohibition on State aid under EU law with no need to prove actual trade-distortive effects, which is centrally enforced by the singularly powerful European Commission. In turn, this goes a long way in explaining why the EU’s approach to State aid control is fundamentally distinct for its positive integration dimension. That is, the wide prohibition in Article 107 (1) TFEU is necessarily counterbalanced by a relatively extensive system of justifications,51 which positively defines the terms and conditions under which State aid is considered legitimate and thus permitted. The legal basis for such a positive justification is found in Articles 107(2) and (3) TFEU, which qualify the general prohibition by introducing a number of derogations for certain categories of State aid mainly in light of their purpose. These are deemed compatible with the internal market and hence admissible,52 either automatically (paragraph 2)53 or in most cases at the Commission’s discretion

See Part V ASCM. This unilateral track is only available in the case of subsidies causing “material injury” to the domestic industry within the meaning of Article 5(a) ASCM. 48 Horlick and Clarke (2017), p. 689. 49 For more details, see Espa and Marín Durán (2018), pp. 629–630. 50 Kampel (2017), p. 12. 51 Note that the introductory words of Article 107(1) TFEU (“save as otherwise provided in the Treaties”) make clear that the prohibition is not absolute. 52 In addition, the Council acting on a proposal from the Commission may introduce further derogations if needed: Article 107(3)(d) TFEU. 53 Automatic compatibility includes State aid: having a social character (Article 107(2)(a)); necessary to make good the damage caused by natural disasters or exceptional occurrences (Article 107 47

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(paragraph 3).54 Of most relevance to our purposes is Article 107(3) TFEU, whose key underlying principle is that decisions by the Commission on the compatibility of State aid must weigh its positive impact in reaching a set of legitimate objectives against any negative trade-distortive effects. However, the TFEU defines these objectives in rather vague terms: obvious examples are references to “aid to important projects of common European interest” (Article 107(3)(b)), and to “aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest” (Article 107(3)(c) TFEU). In addition, there is not much guidance on how to balance any such objective of “common interest” against the potentially trade-distortive effects of the State aid in question. This ambiguity in EU treaty law provides the Commission with wide discretion and, as Blauberger aptly notes, enables it to “act as a supranational entrepreneur, not only in enforcing the prohibition of distortive State aid, but also developing its own vision of ‘good’ State aid policy . . . and thus [to create] positive integration from above.”55 In our particular case, there is little doubt that combating climate change and promoting the development of renewable energy are objectives of “common interest” for the EU56 which, in certain circumstances, may justify the granting of State aid in spite of any potential distortion on competition and/or intra-EU trade. That being so, a complex system of justifications for “good” environmental State aid has been developed by the European Commission in a hybrid form, using a combination of both hard-law and soft-law instruments which have been recently reviewed following the State Aid Modernisation process initiated in May 2012.57 More specifically, there is presently a two-track approach for sheltering government support to renewable energy from the general prohibition contained in Article 107 (1) TFEU: either under (i) the general 2014 General Block Exemption (GBE) Regulation,58 which automatically authorizes State aid under certain conditions

(2)(b)); and granted to the economy of certain areas of Germany affected by the cold war division (Article 107(2)(c)). In these cases, the Commission has no discretion as to whether or not to authorize the aid, but merely ascertains that the conditions set out in Article 107(2) TFEU are fulfilled. See further, Bacon (2013), pp. 95–100. 54 Discretionary compatibility includes: cohesion aid (Article 107(3)(a)); aid to important projects of common European interest or to remedy a serious disturbance in the economy of a Member State (Article 107(3)(b)); and aid to promote culture and heritage conservation (Article 107(3)(d)). See further, Bacon (2013), pp. 100–113. 55 Blauberger M (2008), From Negative to Positive Integration? European State Aid Control through Soft and Hard Law, (Max Planck Institute for the Study of Societies Discussion Paper 08/04, http://www.mpifg.de/pu/mpifg_dp/dp08-4.pdf (last accessed 2 June 2019), pp. 3 and 5. 56 See, inter alia, Articles 191 and 194(1)(d) TFEU; see also European Commission Communication on Energy 2020 – A Strategy for Competitive, Sustainable and Secure Energy, COM(2010) 639 final, 10 November 2010; and European Commission Communication on a Policy Framework for Climate and Energy in the period from 2020 to 2030, COM(2014) 15 final, 22 January 2014. 57 For more information: http://ec.europa.eu/competition/state_aid/modernisation/index_en.html (last accessed 2 June 2019). 58 Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in the application of Articles 107 and 108 TFEU, OJ [2014]

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without prior notification and individual scrutiny by the Commission59; or, if not eligible under this Regulation, under (ii) the specific 2014–2020 Guidelines on State Aid for Environmental Protection and Energy,60 which set out the principles and criteria against which the Commission assesses the compatibility of notified State aid and authorizes it on a case-by-case basis. With regards to the first track, the 2014 GBE Regulation significantly extends the margins for EU Member States to grant aid without prior notification, in an attempt to proceed with the ex-ante compatibility assessment by the Commission only on those cases with the biggest potential to distort competition and intra-EU trade.61 However, it is important to highlight that the 2014 GBE Regulation does not apply to State aid “to export-related activities towards third countries or Member States”, nor to State aid “contingent upon the use of domestic over imported goods”62 –in other words, the category of prohibited subsidies under WTO law finds no legal shelter under the Regulation. Otherwise, the scope of the current Regulation has been considerably broadened vis-à-vis its predecessor: it does not only cover “investment aid”63 for the production of energy from renewable energy resources,64 but also “operating aid”65 for the production of electricity from renewable energy resources and of energy from renewable energy resources in small-scale installations.66 These RE support measures must, in turn, meet a number of general67 and category-specific

L187/1 [hereinafter 2014 GBE Regulation]. This replaced: Commission Regulation (EC) No 800/2008 declaring certain categories of aid compatible with the common market in application of Articles 87 and 88 of the Treaty, OJ [2008] L214/3 [hereinafter 2008 GBE Regulation]. 59 2014 GBE Regulation, Preamble, para 6. 60 European Commission Guidelines on State Aid for Environmental Protection and Energy 2014–2020, OJ [2014] C 200/1 [hereinafter 2014–2020 EEA Guidelines]. Formally speaking, these are not legally binding on the Member States, but are so for practical purposes since they guide the Commission’s assessment and decision-making on the compatibility of State aid with the internal market. 61 European Commission Memo – State Aid: Commission adopts new General Block Exemption Regulation’ (14/369), dated 21 May 2014 [hereinafter Commission Memo 2014], p. 2, estimating that “3/4 of today’s aid measures and about 2/3 of total aid amounts granted by Member States could be covered by the new GBE Regulation.” 62 2014 GBE Regulation, Articles 1(2)(c) and (d); similarly, 2008 GBE Regulation, Articles 2(a) and (b). 63 Usually referring to one-off aid measures covering upfront capital costs of investing in the production of energy from renewable energy sources (e.g., grants and preferential loans). 64 Defined as “renewable non-fossil energy sources”, namely wind, solar, aerothermal, geothermal, hydrothermal and ocean energy, hydropower, biomass, landfill gas, sewage treatment plant gas and biogases: 2014 GBE Regulation, Article 2 (110). 65 Usually referring to aid measures covering production-based costs of renewable energy generation (e.g., price-support instruments). 66 2014 GBE Regulation, Articles 41-43. Cf. 2008 GBE Regulation, Article 23, covering only investment aid for the promotion of energy from renewable energy sources. 67 E.g., on “transparent aid”: 2014 GBE Regulation, Article 5.

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conditions in order to be block exempted under the Regulation, which are briefly outlined next. Investment aid for renewable energy needs to be below the specified notification threshold of €15 million per undertaking per investment project,68 which implies a remarkable increase vis-à-vis the 2008 GBE Regulation (i.e., €7.5 million per undertaking per investment project).69 In addition, it can only be granted to new installations and shall be independent from output,70 as well as within the specified maximum aid intensities: 30–45%, 55% and 65% of eligible costs71 respectively for large, medium-sized and small enterprises.72 Operating aid to green electricity production should be granted, as a general rule, through a competitive bidding process open to all green electricity generators on a non-discriminatory basis,73 in which case the notification threshold is set at a total of €150 million per year.74 As will be seen below, this competitive allocation of public support is in line with the Commission’s drive towards the gradual integration of matured RE technologies into the internal electricity market in the 2014–2020 EEA Guidelines. According to the European Commission, the above-indicated thresholds on both the amount and intensity of renewable energy aid were derived from “[its] market experience and decision-making practice, in particular from the application of State aid frameworks and guidelines”.75 The underlying assumption appears to be that any potentially distortive effects of renewable energy aid exempted under the GBE Regulation are limited and outweighed by its benefits in contributing to the common objective of climate change mitigation, insofar as it is contained within the established ceilings and other conditions.76 To ensure this, any green aid granted by EU Member States pursuant to the GBE Regulation is subject to transparency and reporting obligations so that the Commission can exercise ex post control of such measures.77 According to the Commission’s 2016 State Aid Scoreboard, about 95% 68

Ibid., Article 4(1)(s). 2008 GBE Regulation, Article 6(1)(b). 70 2014 GBE Regulation, Article 41(5). 71 2014 GBE Regulation, Article 41(6): these are the extra investment costs to promote the production of energy from renewable sources. 72 2014 GBE Regulation, Articles 41(7) and (8). These maximum aid intensities are roughly the same as those found under the former 2008 GBE Regulation, Article 23(2). However, under the 2014 GBE Regulation, these may go up to 100% of eligible costs, if the aid is granted in a competitive bidding process on the basis of clear, transparent and non-discriminatory criteria (Article 41(10)). 73 2014 GBE Regulation, Article 42(2). Nonetheless, under Articles 42(3) and (4), EU Member States may limit the bidding process to specific RE technologies under certain conditions (e.g., if necessary to achieve diversification or secure grid stability). In addition, under Article 42(8), a special exemption is made for small-scale installations producing electricity from renewables, whereby operation aid may be granted in the absence of a competitive tendering process but may not exceed €15 million per undertaking. 74 2014 GBE Regulation, Article 4(1)(v). 75 Commission Memo 2014, p. 1. 76 2014 GBE Regulation, Preamble, paras. 16 and 61. 77 2014 GBE Regulation, Chapter II. 69

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of State aid measures implemented by Member States have been exempted under the 2014 GBE Regulation, with the general category of “environmental protection and energy savings” taking up the largest combined expenditure (€9.5 billion in 2015).78 Turning to the second track, the 2014–2020 Guidelines on State Aid for Environmental Protection and Energy extend the scope of the previous 2008 Guidelines on State Aid for Environmental Protection79 in the energy field (e.g., to cover aid for energy infrastructure and aid for generation adequacy measures),80 but adopt a more stringent approach on government support to renewable energy. Like its predecessor, the 2014–2020 EEA Guidelines cover both investment and operating aid that does not fall within the scope of the 2014 GBE Regulation so that such aid must be notified ex ante to the Commission.81 However, there is no explicit exclusion of State aid contingent upon export performance or import substitution—meaning that prohibited subsidies under WTO law could, in principle, be sheltered under the EEA Guidelines (unlike under the 2014 GBE Regulation).82 All environmental/energy aid measures authorised under these Guidelines are subject to annual reporting and monitoring by the Commission.83 The 2014–2020 EEA Guidelines provide “Common Assessment Principles”, which lay out an overarching “balancing test”84 as the principal basis for the Commission’s compatibility assessment of all notified environmental/energy aid measures. It comprises seven elements: (1) contribution to an objective of common interest85; (2) need for State intervention86; (3) appropriateness of aid87; (4) incentive

78 European Commission State Aid Scoreboard 2016, http://ec.europa.eu/competition/state_aid/ scoreboard/index_en.html (last accessed 2 June 2019). No specific data on renewable energy aid is available. 79 European Commission Community Guidelines on State Aid for Environmental Protection, OJ [2008] C 82/1 [hereinafter 2008 Guidelines]. 80 2014–2020 EEA Guidelines, section 1.2. 81 Article 108(3) TFEU. 82 2014–2020 EEA Guidelines, section 1.1(15). 83 2014–2020 EEA Guidelines, section 6. 84 This test was first set out in: European Commission State Action Plan – Less and better targeted State aid: a road map for State aid reform 2005–2009, COM(2005) 107 final, 7 June 2005. It has been subsequently developed in the Commission’s guidelines: see e.g., 2008 Guidelines, section 1.3. 85 2014–2020 EEA Guidelines, section 3.2.1, whereby the planned State aid should be aimed at an objective of common interest in accordance with Article 107(3) TFEU (in this context, the shift towards a resource-efficient and low-carbon economy, and achieving a well-functioning, secure, affordable and sustainable European energy market). 86 2014–2020 EEA Guidelines, section 3.2.2, whereby the planned State aid targets a market failure and can bring about a material contribution towards achieving the specified environmental or energy objective that the market alone cannot deliver. 87 2014–2020 EEA Guidelines, section 3.2.3, whereby there are no less-trade distortive policy instruments or types of aid that would make an equivalent contribution to the sought environmental or energy objective.

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effect of aid88; (5) proportionality of aid89; (6) avoidance of undue negative effects on competition and intra-EU trade90; (7) transparency of aid.91 In addition, compatibility criteria are specified for certain categories of aid.92 Of most relevance for present purposes are those applicable to operating aid to green electricity production, which have been considerably strengthened vis-à-vis the 2008 Guidelines. In essence, the current EEA Guidelines promote a progressive convergence of public support for green electricity across the EU through the gradual introduction of market-based aid instruments and allocation mechanisms. As a first step, for all new aid measures adopted after 1 January 2016, generators have to sell their green electricity directly in the market, and aid may only be granted as a premium in addition to the market price.93 In other words, the Guidelines seek to phase out feed-in tariff schemes commonly used by EU Member States, which guarantee the purchase of renewably generated electricity at administratively-fixed minimum prices, and replace these by feed-in premiums that expose green electricity generators to market signals and changing electricity prices.94 In a second step, the Guidelines have gradually introduced competitive bidding as the principal means for granting aid to green electricity producers.95 Roughly speaking, this is a marketbased mechanism for setting the premium price. From 1 January 2017, such a

88 2014–2020 EEA Guidelines, section 3.2.4, whereby the proposed State aid measure induces the beneficiary to change its behaviour to increase the level of environmental protection or to improve the functioning of a secure, affordable and sustainable energy market, and such a change in behaviour would not have occurred but for the aid. 89 2014–2020 EEA Guidelines, section 3.2.5, whereby the planned State aid is limited to the minimum necessary to achieve the environmental or energy objective aimed for. 90 2014–2020 EEA Guidelines, section 3.2.6, whereby the negative effects of the planned State aid measure in terms of distortions on competition and intra-EU trade must be limited and outweighed by the positive effects in terms of contribution to the sought environmental or energy objective, so that the overall balance is positive. 91 2014–2020 EEA Guidelines, sections 3.2.7 and 6. 92 See 2014–2020 EEA Guidelines, Annex I, laying down maximum aid intensities for RE investment aid that are similar to the ones previously seen under the GBE Regulation: 45%, 55% and 65% of eligible costs respectively for large, medium-sized and small enterprises, with the possibility of reaching 100% for aid provided following a competitive bidding process on the basis of clear, transparent and non-discriminatory criteria (section 3.2.5.1 (80)). 93 2014–2020 EEA Guidelines, section 3.3.2.1(124). In addition, beneficiaries are subject to standard balancing obligations and measures must be in place to ensure they have no incentive to generate electricity under negative prices. 94 European Commission Staff Working Document – Guidance for the Design of Renewable Support Schemes, SWD(2013) 439 final [hereinafter Commission WD 2013], pp. 8–9 and 12–13. 95 During a transitional phase covering the years 2015 and 2016, aid for at least 5% of the planned new green electricity capacity had to be provided through a competitive bidding process on the basis of clear, transparent and non-discriminatory criteria: 2014–2020 EEA Guidelines, section 3.2.5.1 (126).

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competitive bidding process became the general rule for allocating all operating aid granted (i.e., 100% of the planned new green electricity capacity).96 In principle, this process should be technology-neutral and open to all generators producing electricity from renewable energy sources on a non-discriminatory basis.97 Support schemes compatible with these conditions are authorised for a maximum period of 10 years and, if maintained after such a period, they should be re-notified and re-evaluated by the Commission.98 This drive towards harmonising the form and means of allocating public support to green electricity generation certainly implies a departure from the more decentralised approach initially adopted under the 2009 Renewable Energy Directive,99 and has been enshrined in the 2016 Commission’s proposal for a revised Directive within the Union’s 2030 climate and energy framework.100 According to the Commission, such a move is now justified and indispensable in order to adjust current support schemes to the growing share of renewables in the European electricity market and the decreasing costs of more established RE technologies.101 In particular, the Commission is concerned that the rigidity of administratively established FIT prices fails to take account of falling production costs, risking thereby to overcompensate green electricity producers. In addition, by fully insulating beneficiaries from market price signals, FIT schemes have led to excessive production of renewably generated electricity irrespective of actual demand.102 The basic premise is, therefore, that renewables should be gradually integrated

96 Ibid., section 3.2.5.1(126). Only under a limited number of circumstances are Member States still allowed to grant aid without such an allocation process (e.g., to avoid strategic bidding or underbidding). 97 Ibid., section 3.3.2.1(126), in which case, the Commission will presume that the aid is proportionate and does distort trade and competition to an extent contrary to the common interest. However, Member States may still carry out RE technology-specific tenders under certain conditions (e.g., if necessary to promote the long-term potential of a new and innovative technology or to achieve diversification or secure grid stability). 98 Ibid., section 3.3.1(121). In addition, the Guidelines promote cross-border cooperation with the Commission giving positive consideration to operating aid schemes for green electricity that are open to other EEA countries and Contracting Parties of the Energy Community: section 3.3.1(122). 99 Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from renewable sources, OJ [2009] L140/16 [hereinafter 2009 Renewable Energy Directive], Article 3(3), leaving the choice of support instruments to the EU Member States in order to achieve their national renewable energy targets for 2020. For a discussion, see Marín Durán (2018), pp. 136–138; Callaerts (2015), pp. 17–18. 100 European Commission Proposal for a Directive of the European Parliament and of the Council, COM(2016) 767 final/2, 23 February 2017 [hereinafter 2016 Proposed RE Directive]. In particular, Article 4 provides that “[s]upport for electricity from renewable sources shall be designed so as to integrate electricity from renewable sources in the electricity market and ensure that renewable energy producers are responding to market price signals and maximise their market revenues” and that “Member States shall ensure that support for renewable electricity is granted in an open, transparent, competitive, non-discriminatory and cost-effective manner”. 101 Commission WD 2013, p. 4. 102 Commission Memo 2014, p. 2.

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into the internal electricity market through more flexible feed-in premiums, and government support phased out as RE technologies mature and become grid-competitive.103 In this sense, the Commission sees genuinely competitive bidding as a self-regulating subsidy phase-out mechanism, which will reward low-cost RE technologies and eventually approach zero as technology costs reach grid parity.104 In sum, positive integration has gone hand in hand with negative integration in the EU’s regulatory approach to RE subsidies, recognising the need to strike a delicate balance between their trade-distortive (negative) and climate-friendly (positive) effects. Both forms of integration have entailed the establishment of common substantive rules and institutional mechanisms, albeit the former purport to generally abolish the use of State aid within the EU internal market while the latter to permit certain categories of “good” State aid (i.e., whose trade-distortive impact is outweighed by their contribution to climate change mitigation among other public policy objectives). And yet, as evidenced by the 2014 GBE Regulation and 2014–2020 EEA Guidelines, drawing a bright line between “good” (and hence, justifiable) and “bad” (and hence, unjustifiable) RE subsidies is a highly complex regulatory endeavour, requiring consensus on a sufficiently detailed and quite technical set of criteria. This helps explaining why the positive integration dimension has been developed more gradually, and mainly driven by the European Commission who enjoys extensive and exclusive powers in the field of EU State aid law that are not easily matched within other centralized systems of subsidy control (including the WTO).

4 The Absence of a Balancing Mechanism in WTO Subsidy Law: Is It a Problem? The ASCM does not contain anything similar to the sophisticated two-track approach developed in the EU context for balancing the negative (trade-distortive) and positive (climate-friendly) effects of renewable energy subsidies. Its trade-injury focus does not allow for any negative externalities other than trade distortions to be taken into account,105 and hence RE subsidies will be ASCM-incompatible whenever they cause trade distortions, be it actual (as in the case of actionable subsidies) or presumed (as in the case of prohibited subsidies), irrespective of any environmental benefits they may bring.106 Originally, this was mitigated to some extent by

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Commission WD 2013, p. 22. Commission WD 2013, p. 7. Nevertheless, the Commission recognises that market integration may not be appropriate for small installations, which benefit from a differentiated regime under the 2014–2020 Guidelines (notably, no competitive bidding process is required and FITs and other equivalent forms of support are still allowed: 2014–2020 Guidelines, sections 3.2.2.2(131) and 3.3.2.1(125). 105 Horlick and Clarke (2017), p. 678. 106 Horlick and Clarke (2017), p. 676. 104

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the existence of a specific exception, Article 8 ASCM, which created a category of non-actionable (that is, permitted) subsidies that included, among others, certain (narrowly defined) environmental subsidies.107 As it is known, however, Article 8 ASCM was negotiated as a provisional 5-year exception and it expired on 1 January 2000 after WTO members failed to renew it.108 The fate of Article 8 ASCM again shows how inherently difficult it is for over 160 States to agree on what should be the conditions for granting the “green light” to certain support schemes based on their purpose, even when the underlying policy objective is itself of undisputed legitimacy and urgency as it is the case with climate change mitigation. Failing anything similar to an environmental exception suited to shelter RE subsidies under the ASCM, the question is whether the absence of a positive integration dimension in the ASCM risks materializing into a clash between the multilateral trade and climate change regimes. Otherwise said, do ASCM disciplines, as they stand now, outlaw climate-desirable RE subsidies, thus running counter to the mutual supportiveness between international trade and climate change regimes?109 Here the answer is mixed and ought to be qualified in light of the specific measures at issue, the product being subsidized and the most proximate objectives pursued.110 At the one end of the spectrum are discriminatory RE subsidies, that is, support schemes that incorporate local content requirements. Such LCRs make the subsidy programme “contingent on local content” and are thus prohibited outright as per Article 3 ASCM without the need to prove their actual trade distortive effects, in addition to violating national treatment rules in other WTO agreements.111 Not surprisingly, discriminatory RE subsidies have been the sole target of WTO renewable energy disputes to date.112 Interestingly, moreover, WTO members have

See Article 8.2 (c) ASCM, which deemed non-actionable those subsidies granting “assistance to promote adaptation of existing facilities to new environmental requirements imposed by law and/or regulations which result in greater constraints and financial burden on firms, provided that the assistance: (i) is a one-time non-recurring measure; and (ii) is limited to 20 per cent of the cost of adaptation; and (iii) does not cover the cost of replacing and operating the assisted investment, which must be fully borne by firms; and (iv) is directly linked to and proportionate to a firm’s planned reduction of nuisances and pollution, and does not cover any manufacturing cost savings which may be achieved; and (v) is available to all firms which can adopt the new equipment and/or production processes”. 108 For a thorough reconstruction of the negotiating history of Article 8 ASCM and the reasons for its expiration, see in particular Bigdeli (2011). 109 For a more in-depth discussion and contextualisation of this issue, see Espa and Marín Durán (2018), pp. 633–643. 110 A thorough explanation of how such distinctions play out for the purpose of assessing how different RE subsidies would fare under the ASCM is given in Espa and Marín Durán (2018), pp. 623–628. 111 See above, Sect. 2. 112 For a detailed explanation of how the so-called likeness of success argument conditions the choice of disputes, see de Bièvre et al. (2017). 107

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gradually privileged national treatment claims based on Article III:4 GATT and Article 2.1 of the WTO Agreement on Trade-related Investment Measures (TRIMs) rather than ASCM claims revolving around Article 3.113 Accordingly, the Appellate Body has consistently condemned the discriminatory component of the challenged RE subsidies under the GATT/TRIMs non-discrimination rule only.114 However, such an outcome does not raise issues from a mutual supportiveness perspective inasmuch as LCRs are essentially industrial policy instruments aimed at encouraging local RE industries albeit less competitive.115 At the other hand of the spectrum are non-discriminatory support programmes targeting green electricity itself, such as FIT schemes. Such programmes, in and of themselves, are on a comparatively safer footing under existing ASCM disciplines. First, as previously explained, it seems harder (albeit not impossible) for FIT schemes to be subject to ASCM disciplines due to the flexibility built-in through the Appellate Body’s interpretative approach to the benefit analysis in Canada – Renewable Energy (2013).116 Second, it is not readily obvious for FIT programmes to be found to cause trade-distortive effects inasmuch as cross-border electricity trade still remains relatively limited for both geographical and infrastructural reasons.117 Yet, assuming there were two or more WTO members trading in electricity, there is a chance that adverse effects be found in the form of “serious prejudice” to the trade interests of another WTO member under Article 5(c) ASCM. FIT-subsidized green electricity tends in fact to be mainly, and at times directly,118

In the India –Solar Cells dispute, the US withdrew the claim that the Indian feed-in tariff scheme at issue was inconsistent with Article 3 ASCM from its second request for consultations (intervened after the Appellate Body’s ruling in Canada – Renewable Energy (2013)), and decided to keep its claims under Article III:4 GATT and Article 2.1 TRIMs only. See WTO Appellate Body Report, India — Certain Measures Relating to Solar Cells and Solar Modules, adopted 14 October 2016, WT/DS456/AB/R [Appellate Body Report, India – Solar Cells (2016)]. For more details, see Asmelash (2015), pp. 277–278. 114 Appellate Body Report, Canada – Renewable Energy (2013); Appellate Body Report, India – Solar Cells (2016). It should however be noted that, in the former case, the Ontario government ended up removing its FIT scheme altogether for lack of political support otherwise. For more details, see Meyer (2017). 115 Especially in the short- to medium-run, the environmental benefits linked to the use of LCRs are highly disputed. See, among others, Casier and Moerenhout (2013), WTO Members, Not the Appellate Body, Need to Clarify the Boundaries in Renewable Energy Support, https://www.iisd. org/pdf/2013/wto_members_renewable_energy_support.pdf (last accessed 2 June 2019), pp. 1–2, 31–35 and 43–44. 116 For a more detailed explanation, see Espa and Marín Durán (2018), pp. 633–634. 117 Although trade in electricity has been expanding in latest years thanks to technological improvements and investment choices (see, e.g., Chatzivasileiadis and Ernst (2017), pp. 21–45), global imports of electricity only account for a negligible 3.5% of the world’s total final electricity consumption. See IEA Electricity Information: Overview (2017), https://www.iea.org/publica tions/freepublications/publication/ElectricityInformation2017Overview.pdf (last accessed 2 June 2019), pp. 5 and 7–8. 118 This happens in those countries where priority access and priority dispatch are also granted to green electricity, such as in the case of EU Members States until the reform of the Renewable Energy Directive will enter into force. For more details, see Espa (2017b), pp. 225–244. 113

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absorbed at the national level, thus having the effect of reducing the consumption of imported electricity (even if cheaper) compared to what would have been the case under normal market situations.119 Could this be proven, FIT schemes would be considered unlawful under Article 6.3(a) ASCM as subsidies whose effect is “to displace or impede the imports of a like product of another Member into the market of the subsidizing Member”.120 Such a possibility, as slim as it may be,121 is non-desirable from a mutual supportiveness perspective to the extent that FIT schemes are classically considered as the archetypal “good” type of RE subsidies122 and the most efficient and effective tool for promoting green electricity generation.123 In between are a wide range of fiscal and financial incentives given by governments to manufacturers of green technology equipment.124 Such measures are likely to be covered by the ASCM,125 and, albeit formally non-discriminatory, they could still de facto discriminate in favour of domestic producers given the usually less significant penetration of foreign companies/installations in the territory of the subsidizing Member.126 In addition, ASCM-inconsistency scenarios either revolving around “serious prejudice” claims or “material injury” claims would have a comparatively higher chance to succeed due to the global reach of the market for green technology products.127 WTO members, however, have overall refrained from

119

See on this point, Advocate General Bot in the Case 573/12, Ålands Vindkraft, judgement of 1 July 2014 [ECLI:EU:C:2014:2037], paras. 75–76. 120 It should be noted, however, that based on existing WTO case law a “genuine and substantial relationship” between the FIT scheme itself and the current (or imminent) trade distortion must be shown as evidence of causation (that is, the effect of the scheme must be clearly disentangled from those of any other instruments supporting green electricity). For an analysis of the difficulties inherent to this exercise in the case of green electricity, see Espa and Marín Durán (2018), p. 638. 121 See Espa and Marín Durán (2018), pp. 637–639, for a detailed examination of all factors that are likely to exclude that a WTO dispute concerning a non-discriminatory FIT scheme actually materializes. 122 See, e.g., Cosbey and Mavroidis (2014), p. 28. 123 See, among others, IPCC Renewable Energy Sources and Climate Change Mitigation – Summary for Policy Makers and Technical Summary (2012), https://www.ipcc.ch/site/assets/uploads/ 2018/03/SRREN_Full_Report-1.pdf (last accessed 2 June 2019) p. 152. It should be noted, however, that countries are gradually phasing out costly out-of-market price-support mechanisms such as FIT programmes in favour of more sustainable, market-based mechanisms for setting premium prices such as competitive tendering. See, for all, IRENA (2017), Rethinking Energy 2017: Accelerating the Global Energy Transformation, http://www.irena.org/ DocumentDownloads/Publications/IRENA_REthinking_Energy_2017.pdf (last accessed 2 June 2019), pp. 23–24. 124 An overview of such measures is given in Espa and Marín Durán (2018), pp. 623–628. 125 Espa and Marín Durán (2018), pp. 639–640. 126 UNEP (2014), Trade and Green Economy: Handbook, http://web.unep.org/sites/unep.org. greeneconomy/files/publications/Trade-GE-Handbook-FINAL-FULL-WEB.pdf (last accessed 2 June 2019), p. 105. 127 See, respectively, Articles 6.3 ASCM and 5(a). For more details, see Espa and Marín Durán (2018), pp. 640–641.

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raising ASCM claims and preferred instead to unilaterally impose offsetting CVDs (and often parallel anti-dumping duties).128 This choice may have to do with the fact that, as more recent practice shows, domestic investigating authorities have generally not been much inclined to engage in a balancing exercise that would allow consideration of any positive (climate change-mitigation) effects produced by public incentives given to manufacturers of green technology products against their negative (trade-distortive) effects when deciding whether to introduce or maintain CVDs and calculating their exact rate.129 To sum up, when compared to EU State aid law, WTO subsidy disciplines are less constraining on governmental support to renewable energy. Unlike in the EU context, RE subsidies are not in principle subject to a general prohibition under WTO law, but exposed to varying degrees of legal risks under the ASCM depending on whether they incorporate LCRs (i.e., always WTO-illegal) and on whether they target electricity itself (i.e., less likely WTO-inconsistent) or rather green technology products (i.e., more likely WTO-inconsistent). This means that the need for positive integration is not as fundamental in the WTO context as it is in the EU one, and instead needs to be calibrated against the spectrum of legal risks. Nonetheless, the case for introducing a balancing mechanism in the ASCM may still hold true in those situations where “good” RE subsidies (i.e., whose trade-distortive effects can be presumed to be limited and outweighed by their benefits in contributing to climate change mitigation) still face high legal risks under current ASCM rules. This being so, the next section explores which lessons (if any) may be drawn for the WTO from the EU regulatory experience in terms of positive integration.

5 What, If Anything, May the WTO Learn from the EU? In the aftermath of the WTO Canada – Renewable Energy (2013) dispute, two main options for reforming the ASCM have been often advocated in the scholarship: (1) resuscitating (or negotiating anew) the category of permissible subsidies along the lines of the now expired Article 8 ASCM; and (2) extending the applicability of Article XX GATT or introducing a similar exception clause in the ASCM as a means to justify otherwise unlawful subsidies.130 Interestingly, the former follows the logic of full exemption under the GBE Regulation, whereas the latter replicates the caseby-case assessment approach under the EEA Guidelines.131

128

For a thorough analysis of the numerous CVD and antidumping investigations concerning green technology products, see Vermulst and Meng (2017), pp. 336–355. 129 See, among others, Espa and Marín Durán (2018), pp. 642–643; Horlick and Clarke (2017), p. 689. 130 Both proposals are examined at length in Espa and Marín Durán (2018), pp. 643–650. 131 See above, Sect. 2. For more details, see Marín Durán (2018), pp. 159–160.

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The re-introduction of the category of non-actionable subsidies would have the merit to shelter qualifying RE subsidies from both multilateral and unilateral trade remedial action but would require the pre-determination of specific conditions granting eligibility for this full exemption. While it is unanimously recognized that the limited scope of the original Article 8.2(c) ASCM would not offer any protection to those RE subsidies still exposed to ASCM-inconsistency,132 the question is whether this may be reverted were a new exemption for RE subsidies be negotiated from scratch. In this respect, some scholars have suggested that the EU experience could serve as an inspiration with a view to broadening the scope of exempted RE subsidies along the lines of the GBE Regulation.133 Yet, one should bear in mind that there are several factors why the EU’s regulatory approach may be difficult to transpose to the WTO. First, the WTO membership is much wider and more heterogeneous than that of the EU, thus making it way more challenging for them to agree on pre-determined (general and category-specific) conditions for the purposes of defining non-actionable RE subsidies.134 This seems confirmed if one considers that WTO members did not even agree to renew the limited Article 8 ASCM itself after having designed the category of permissible subsidies only 5 years earlier.135 Second, as shown by the EU experience, broadening the scope for exempting RE subsidies requires a much stronger institutional setting than it is available in the WTO context in terms of both abuse-prevention rules and surveillance procedures.136 Such inherent limits to replicating the EU example are implicitly acknowledged in existing proposals inasmuch as they either remain very general (namely, by simply stating that RE subsidies aimed at promoting the use of clean energy should be kept distinct from RE subsidies targeting domestic RE manufacturing) or suggest that eligibility criteria should be clearly designed in a way as to shelter minimally-distortive RE subsidies only, with no definitive answer however as to how to treat unavoidable “boundary” cases.137 Finally, and significantly, the need for more stringent transparency and notification requirements, on the one hand, and stricter procedural safeguards to avoid abuses, on the other hand, is also extensively reiterated.138 Some of the difficulties inherent to pre-determining sufficiently calibrated criteria for carving out RE subsidies would be overcome through recourse to a general 132

See above, Sect. 2. For more details, Marín Durán (2018), p. 160. See, e.g. Rubini (2012), p. 577; Rubini L (2015), Rethinking International Subsidies Disciplines: Rationale and Possible Avenues for Reform, http://e15initiative.org/publications/rethinking-interna tional-subsidies-disciplines-rationale-and-possible-avenues-for-reform (last accessed 2 June 2019), pp. 4–5. 134 See further Marín Durán (2018), p. 160. 135 See Bigdeli (2011), p. 20. 136 Bigdeli (2011), pp. 20 and 36. For a discussion on how the European Commission’s powers are uniquely distinct, see Marín Durán (2018), p. 161. 137 Among the more structured proposals, see Shadikhodjaev (2015), pp. 494–496; Horlick and Clarke (2017), p. 680. For a more detailed account, see Espa and Marin Duran (2018), pp. 649–650. 138 Espa and Marin Duran (2018), p. 650. 133

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exception clause à la Article XX GATT, whose conditions would be formulated in general terms and interpreted flexibly on a case-by-case basis by a multilateral but non-political decision-maker –i.e., the WTO adjudicatory bodies.139 A strand of the literature has even argued in favour of making Article XX GATT itself applicable to ASCM-inconsistent subsidies.140 Such a scenario would be attractive in that it would not require a formal amendment of the ASCM, but the matter is far from being settled.141 Yet, assuming on arguendo that Article XX GATT is available, whether it would indeed serve to provide a legal shelter to climate-desirable RE subsidies otherwise at risk under the ASCM is far from clear. In particular, the limits of a GATT Article XX-based approach are evident when compared to the “balancing test” designed in the 2014–2020 EEA Guidelines. Both potentially relevant “environmental” exceptions, that is, Article XX (b) and Article XX (g) GATT,142 could in principle cover RE subsidies but neither of them would really be suited to justify them in case of ASCM-inconsistency. This holds true for Article XX (g) GATT, inasmuch as (1) the “related to” test does not require that the environmental effectiveness of a measure be balanced with its trade-distortive effects and (2) the “even-handed” standard is not easily applicable to RE subsidies, be it FIT schemes or other public incentives.143 Similarly, for Article XX (b) GATT, the necessity test therein focuses on the trade-restrictive impact of a challenged measure rather than the much more comprehensive notion of trade-distortion espoused in the ASCM.144 More fundamentally, even if a newly drafted general exception clause were to solve these limitations along the lines of the EU example, the fact remains that this is an avenue that could only shelter multilaterally challenged RE subsidies, while proving totally ineffective in affording protection to those RE subsidies that are instead 139

See Marín Durán (2018), p. 161. See, e.g. Rubini (2012), pp. 561–566; Howse (2013), Securing Policy Space for Clean Energy under the SCM Agreement: Alternative Approaches, http://e15initiative.org/wp-content/uploads/ 2015/09/E15-CETs-Howse-Final.pdf (last accessed 6 February 2018), p. 2; Shadikhodjaev (2015), pp. 499–505; and, more recently, Condon (2017), pp. 685–690. 141 The direction indicated by the Appellate Body in recent WTO case law, however, seems hardly open to such an interpretation. In particular, the Appellate Body has clarified that GATT Article XX defences can be available to violations of non-GATT provisions only to the extent that such provisions incorporate specific language to that effect (that is, in the form of an “objective” textual link). See WTO Appellate Body Report, China – Measures Related to the Exportation of Various Raw Materials, WT/DS394/DS395/DS398/AB/R, adopted 22 February 2012, paras. 303–306; and WTO Appellate Body Report, China – Measures Related to the Exportation of Rare Earths, Tungsten and Molybdenum, WT/DS431/DS432/DS433/AB/R, adopted 29 August 2014, paras. 5.63–5.65 and 5.74. For more details, see Espa (2015), pp. 194–202. 142 As it is known, Articles XX(b) and (g) GATT respectively justify measures “necessary to protect human, animal and plant life or health” and “related to the conservation of exhaustible natural resources”. Pursuant to the introductory paragraph of Article XX GATT, any such measure cannot be “applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade”. 143 See Marín Durán (2018), pp. 161–162; Espa and Marín Durán (2018), pp. 645–646. 144 See Marín Durán (2018), pp 161–162; Espa and Marín Durán (2018), p. 646. 140

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counteracted via unilaterally imposed CVDs. However, as previously noted, unilateral trade remedy actions are on the rise145 and this is a direct consequence of the specificity of WTO subsidy law compared to EU State aid law, limiting further the scope for transposing the latter regulatory model to the former.

6 Conclusions Our comparative analysis has shown that the EU and WTO regulatory approaches to RE subsidies present some similarities but also important differences in terms of both negative and positive integration. Three conclusions may, in particular, be drawn from this analysis that can be of interest in light of the overarching theme of this special issue. First, positive integration requires the establishment of common rules and institutions as much as negative integration does. This is well illustrated by the EU regime, where both dimensions are present, as well as by the WTO regime which only follows the logic of negative integration. Second, negative and positive integration may be seen as two sides of the same coin: the stronger the former, the greater the need for the latter. In this regard, our analysis has shown that while both the EU and WTO regimes share some basic tenets of negative integration, they are fundamentally different in both substantive and institutional terms. On the one hand, the latter is much less constraining on government support because, unlike under EU State aid law, the ASCM does not lay down a general prohibition on subsidies (i.e. a prohibition which takes effect irrespective of the need to prove actual trade-distortive effects), nor does it count on anything equivalent to the European Commission’s centralized supervisory and enforcement powers. This means that the need for a mechanism aimed at balancing the negative (trade-distortive) and positive (climate-friendly) effects of RE subsidies is not as strong or obvious within the WTO context as it is under EU State aid law. On the other hand, the less centralized control system of the WTO (i.e. permitting also unilateral trade remedy action against trade-distortive RE subsidies) creates distinct challenges on which the EU regulatory model cannot offer much guidance. A third and final point is that the fundamental political and the institutional differences exhibited by the EU and WTO regimes render a comparison of their regulatory approaches to RE subsidies more useful in theory than in practice. Based on our analysis of the actual legal risks that RE subsidies face under current ASCM rules, we have argued that the only meaningful balancing mechanism would consist of introducing a full exemption that would shield certain “good” RE subsidies from ASCM-based challenges on both multilateral and unilateral fronts, along the lines of the EU GBE Regulation. Yet, as shown by the EU’s experience, positively defining sufficiently detailed terms and conditions under which RE subsidies are deemed

145

See above, Sect. 2.

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permissible is a highly complex regulatory endeavour, which in the case of the EU has turned out to be possible mainly thanks to the extensive and exclusive powers of the European Commission. It is thus hard to see how this positive integration dimension can be replicated in the WTO, given the absence of a supranational body with equivalent decision-making and overseeing functions that could bridge current divisions among WTO members on what may and may not be “good” RE subsidies. Acknowledgements We are very grateful to Rike Krämer and all the participants in the workshop on “EU and WTO Approaches towards Trade and Environment” (Ruhr Universität, Bochum on 9-10 May 2016) for the rich exchanges on the topic. All opinions and any errors remain our own. This Article further develops the findings and arguments presented in Espa and Marín Durán (2018), Espa (2017a) and Marín Durán (2018).

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Trade and Environment in the EU and WTO: Legitimacy, Proportionality and Institutional Power Play Emily Reid

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 2 Balancing the Pursuit of Environmental Protection and Trade Liberalisation: Questions of Legitimacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 2.1 Unpacking the Layers of Legitimacy Tension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 2.2 Conceptualisations of Legitimacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 2.3 The Significance of Administrative Power, Process and Function in Determining Legitimacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 3 The Significance of Contemporary Political Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 4 The Decision-Makers and Their Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 4.1 The Court of Justice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 4.2 The WTO Dispute Settlement Body (DSB) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 4.3 The Scope of Adjudicative Authority of the Court of Justice and Appellate Body (AB) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 5 Judicial Balancing of Trade and Environment: Mitigating the Legitimacy Questions? . . . 98 5.1 The Court of Justice and Environmental Protection Based Trade Restrictions . . . . . . 99 5.2 Trade and Environment in the WTO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

Abstract The relationship between trade and environment is complex. Notwithstanding that these interests are fundamentally interdependent, the Court of Justice (Court) and WTO Appellate Body (AB) have both had to balance trade liberalisation and environmental protection, typically in cases involving a challenge to traderestrictive national environmental regulation, where setting aside such regulation would contribute to negative integration. Such judicial balancing raises legitimacy questions relating to three areas of tension: first, substantively, between trade liberalisation and environmental protection; secondly concerning the relationship

E. Reid (*) Southampton Law School, University of Southampton, Southampton, UK e-mail: [email protected] © Springer Nature Switzerland AG 2020 R. Krämer-Hoppe (ed.), Positive Integration - EU and WTO Approaches Towards the “Trade and” Debate, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-25662-3_5

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between supra/international rules and national regulation; and thirdly, relating to a supra/international judicial body (potentially) setting aside a national regulator’s act. The ongoing credibility of the EU and WTO is dependent upon mitigating these questions, an imperative intensified by the emergence of ‘popular globalisation scepticism’ in contemporary politics. Building upon recent scholarship on conceptualisations of legitimacy in international law, this paper first critically scrutinises the legitimacy questions arising from such judicial balancing, contextualising the problem in contemporary political events. Secondly, the respective roles of the Court and AB are examined, and the significance of the scope of their authority evaluated. Thirdly, the reasoning of the Court and AB is analysed. In conclusion, the political importance of the Court and AB’s language on proportionality and ‘weighing and balancing’, indicating sensitivity to national values, is highlighted. It is however recognised that consistent with administrative due process, key to input legitimacy, the objective judicial analysis which underpins the Courts’ tests is crucial, and it is this which will contribute to output legitimacy.

1 Introduction The achievement of balance in the relationship between trade liberalisation and environmental protection is an issue which has long challenged both the European Union (EU) and the World Trade Organisation (WTO). It is therefore unsurprising that it has been the subject of much comment with respect to both of these organisations.1 There has been considerable discussion of whether either organisation lends sufficient weight to, or should do more to promote, environmental protection; to assessing the balance struck between the pursuit of economic liberalism and environmental protection; and to evaluating the influence of the ‘neo-liberal’ agenda upon decisions made concerning the relationship between trade and environment in these contexts, particularly in the WTO. This relationship is one which can be fraught with tension. Although fundamentally mutually dependent, sustainable trade being reliant upon a sustainable approach to the environment and its resources, a commitment to the pursuit of trade liberalisation constrains a state’s capacity to regulate to protect the environment. Similarly, national environmental regulation has the capacity to create obstacles to trade. Inevitably therefore national environmental regulations have been challenged on grounds of the restrictions they pose to trade in both the EU and WTO legal orders. Successful challenge leads to such national measure being set aside, with the outcome, generally, of negative integration. Where such measure is not set aside, despite a trade restrictive or market partitioning effect, the outcome is non-integration. However, where a national measure is permitted to stand, facilitating non-integration, it may, if copied by 1

See inter alia: Scott (2000), Wiers (2002), Notaro (2003) and Reid (2015).

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other states, give rise to indirect positive integration.2 Any such decision, concerning the balance between inter and supra national and domestic regulatory autonomy, is potentially controversial. The concern of the present paper is with the perceived legitimacy of EU and WTO responses to the Trade and Environment interface. This encompasses the questions which might be raised by negative, positive or non-integration, focusing specifically upon questions which arise when the European Court of Justice (Court/Court of Justice) and WTO Appellate Body (AB) make decisions impacting upon the regulatory choices made by their Members’ Governments or other public authorities, relating to pursuit, and levels, of environmental protection. The concept of legitimacy engages an extremely wide range of questions and issues which apply not only to trade and environment, but to the broader social and ‘non-economic’ objectives which are encompassed in what is referred to as ‘trade and . . . ’, and beyond. These questions also concern the wider relationship between inter (and supra) national and domestic governance. Consequently, the conclusions drawn in this context from analysis of trade and environment, will be able to be extrapolated from to inform both the wider ‘trade and . . .’ debate and practice, and broader issues relating to the tension between international and domestic law and governance. The first part of this paper briefly sets out the legitimacy questions at issue, it builds on recent scholarship on conceptualisations of legitimacy in international law to critically analyse the legitimacy questions raised by judicial balancing of trade and environment, locating this in the contemporary political context. The second part examines the respective roles of the Court of Justice and AB, and the significance of the scope of their authority, reflecting the scope of their respective legal orders. The third part critically analyses the reasoning of first the Court of Justice and then the Appellate Body in balancing trade and environment when they come before it in conflict. The final part signposts some preliminary conclusions: the political significance of the Court and Appellate Body’s language of proportionality and ‘weighing and balancing’ respectively is recognised, this demonstrates engagement with the merits of the conflict, and in so doing indicates sensitivity to national priorities and values. It is however highlighted that administrative due process, and the objective analysis which underpins the application of both the Court’s proportionality test and the AB’s ‘weighing and balancing’ process, are key to input legitimacy, which in turn contributes to output legitimacy.

2

See Krämer-Hoppe (2019) in this special issue.

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2 Balancing the Pursuit of Environmental Protection and Trade Liberalisation: Questions of Legitimacy 2.1

Unpacking the Layers of Legitimacy Tension

Legitimacy is an attribute which is frequently acknowledged, or refuted, with remarkable lack of rigour, simply being used in a manner to be indicative of approval/acceptance or disapproval/rejection of a body’s action. Bodansky, however, has observed and examined an increase in a more technical and specific interest in ‘legitimacy’ in both international law and international relations through the 1990s and 2000s,3 and his analysis, which distinguishes between normative and descriptive (social/sociological) legitimacy,4 offers a useful starting point for the present enquiry. In the course of a detailed review of the meaning and use of ‘legitimacy’ in international law and international relations Bodansky observes that this more technical conception of legitimacy is essentially concerned with the ‘right to exercise authority’ or ‘to govern’. This in turn, inevitably, raises further questions—‘what does it mean to “govern” and . . . what does it mean to have a “right” to govern?’5 Such questions of legitimacy are increasingly pressing in a context in which the international legal architecture is changing, reflecting the emergence of a range of new international actors, challenging traditional understandings of international law.6 Among these new actors are, of course, the EU and the WTO: non-state organisations which have the capacity to make decisions which will be binding upon their ‘subjects’ (members).7 Crucially, recognition of legitimacy not only acknowledges power to act, but in creating obligations, the exercise of the right to govern is normative in its effects. Some of the obligations created may be legal, but in other instances they may be moral. The effects created apply primarily to the organisation’s subjects, but can have spill-over effects for others, for example by creating reasons for non-intervention in particular circumstances. The questions for the international legal order, and for international governance, raised by the emergence of actors such as the EU and WTO are compounded by the fact that each of these particular new actors has a system of dispute settlement, the Court of Justice and WTO Dispute Settlement Body respectively. As indicated above, the central focus of the present enquiry is upon the decisions of the Court

3

Bodansky (2012). Discussed below. 5 Bodansky (2012), p. 5. 6 See further Reid (2018) and Levy (2006). 7 The ‘legitimacy’ of the EU and of the WTO has been the subject of both institutional development, in the EU, and academic comment, and is connected to questions of their democratic accountability. In the EU concern relating to lack of democracy and accountability in the EU contributed to the inclusion of ‘subsidiarity’ in the Treaty, as well as to the Laeken Convention, which led to proposals for the EU Consititution. See Bacchus (2004), Howse and Nicolaidis (2003), Krajewski (2001), Bernstein and Hannah (2008) and Howse (2000, 2007). 4

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of Justice and AB in the trade-environment context. The ‘right to govern’, however, is typically associated with states, governments and policy-making institutions, rather than with courts. The questions concerning the ‘legitimacy’ of Court of Justice or AB decisions, therefore, also engage concerns which are familiar from (domestic) judicial review, and cannot be considered in isolation from considerations of the role of the Court of Justice and AB in their respective legal orders. The legitimacy questions engaged in the present enquiry concern three distinct but closely inter-related, frequently but not invariably, overlapping areas of concern: first, the tension between international level and state level regulation and authority; secondly, the tension arising between international or supra-national courts and national government bodies or public authorities; and thirdly, the specific substantive tension between national regulation and economic liberalisation.

2.2

Conceptualisations of Legitimacy

Any analysis of the ‘legitimacy’ of an organisation, its decision-makers or its adjudicators must also grapple with the varying, nuanced, and sometimes imprecise, conceptualisations of ‘legitimacy’. This is a product of the lack of rigour in the attribution of ‘legitimacy’, yet the proliferation of references flowing from the lack of rigour in its use, makes this lack of robust analysis even more surprising. Dependent on context, different writers use the same term for slightly different conceptualisations of legitimacy, and use different terms for the same idea. It is therefore important to be clear as to both what is being tested for legitimacy, and what conceptualisation of legitimacy is being used. For example, Bodansky and Krajewski both refer to ‘normative’ legitimacy, and both additionally refer to a legitimacy based on acceptance, although they use different terms for this. Thus, as indicated above, Bodansky observes a distinction between normative and descriptive (social/sociological) legitimacy, according to which normative legitimacy is engaged where an institution has a clearly established ‘right’ to rule—for instance where states have signed up to its requirements and in so doing expressly accept its authority. Descriptive legitimacy, is premised upon the subjects’ belief in or acceptance of the institution’s right to rule.8 Krajewski similarly refers to ‘empirical legitimacy’ which ‘defines the degree of acceptance of a norm’.9 Like Bodansky, Krajewski distinguishes this acceptance based legitimacy from normative legitimacy. Krajewski however relates this (normative legitimacy) to ‘worthiness to be accepted’, which is in turn premised upon adherence to fundamental principles. This

8 Bodansky (2012) and Howse (2000). This recognition of the significance of ‘acceptance’ in determining the authority of an actor or act is not unique to conceptualisations of legitimacy, but can also be seen, for example in HLA Hart’s rule of recognition, relating to the certainty and validity of rules. Hart (1961), Chapter 5 & 6.1. 9 Krajewski (2001), pp. 168–169.

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is slightly different to Bodansky’s basis of normative legitimacy, a right to rule, for example based upon what states have signed up to, although adherence to fundamental principles would surely be a pre-condition for the establishment of such a right to rule. Bodansky’s articulation of normative legitimacy is well suited to the present focus upon adjudicatory legitimacy, whereas Krajewski’s articulation is focused upon, and appropriate for the question of democratic legitimacy in WTO decision-making. Whether founded upon a right to rule, or fundamental principles, it is significant that there is thus, as Bodansky observed, an objective quality to normative legitimacy. In contrast descriptive legitimacy is essentially subjective; ‘It focuses on the attitudes of the ruled rather than the qualities of the ruler’.10 Frequently, normative and descriptive legitimacy are conflated, or at least viewed as being inter-related: descriptive legitimacy frequently goes hand in hand with normative legitimacy. Yet, when we start to unpack responses to actions and institutions, it can be seen that normative legitimacy does not always guarantee descriptive legitimacy, and, as we will see in the present context, descriptive legitimacy can arise without what Bodansky would characterise as clear normative legitimacy, although it is unlikely that it could arise without Krajewski’s normative legitimacy (premised upon compliance with fundamental principles). Despite the frequent conflation, the distinction between Bodansky’s normative and descriptive legitimacy is significant because it contributes to understanding of the limits, and potential fragility, of an organisation’s (perceived) legitimacy. Applying this to the EU or WTO, it is clear that the EU and WTO each have legitimacy to act in certain regards, but equally there are times at which both are perceived by some to have exceeded their authority. For example, the WTO clearly has legitimacy (both normative and descriptive) with regard to its trade rules, to which the members have signed up, and generally accept, even if there is not universal compliance with these. However, its legitimacy with regard to decisions which impact upon matters beyond trade is normatively less clear cut, and at a certain point, is dependent upon subjective acceptance rather than objective right, taking it into the realms of descriptive (social/sociological) legitimacy, but on this occasion without accompanying provisions to which states have signed up and therefore without clearly established normative legitimacy.

2.3

The Significance of Administrative Power, Process and Function in Determining Legitimacy

When a dispute engaging the tension between trade liberalisation and environment comes before the Court of Justice or Appellate Body it generally concerns a challenge to a national environmental measure on the grounds of its trade restrictive 10

Bodansky (2012), p. 8.

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effect.11 Such disputes arise because states have willingly chosen to reduce their barriers to trade in order to obtain the benefits of liberalised trade. In doing so, they have voluntarily curtailed their regulatory freedom. The full extent of that curtailment, however, was not evident at the time of establishment of the EU and WTO and, in the absence of certainty, the act of the EU or WTO in determining the legality or illegality of a Member State’s national regulation is rife with controversy. When considering the legitimacy of such decisions there are a number of questions which arise: who is making the decision regarding the appropriate balance between trade and environment? What is the basis of their role in doing so? To what extent is there, or should there be, accountability for that decision? To what extent is the process transparent or predictable? These are essentially questions of administrative power, process and function, and the answers underpin the legitimacy, or not, of the decision, and decision-maker. They are issues of what can be termed ‘input – legitimacy’.12 It is worth highlighting that while the answers to such questions may support the legitimacy of the decision or act in question, they do not operationalise the legitimacy of the act, or guarantee its substantive (output) legitimacy. Reinforcing this essential administrative core, Chalmers has argued that ‘any legitimatory project concerned with transnational government must consider the administrative nature of the beast’.13 As noted above, the present focus is upon adjudicative, as opposed to legislative, executive or organisational decision-making relating to trade and environment. The Court of Justice and AB have had several opportunities to address this issue, to refine their approach, and to adapt as the context changes beyond its immediate legal order. As seen above, a number of legitimacy questions arise when the Court of Justice and AB rule on the relationship between trade liberalisation and environmental protection. In exploring this issue, the language of the Court and AB14; the tests which they apply in order to reach a decision; and the alignment between these (language and tests) will be examined. A key factor affecting the legitimacy of both the ECJ and the AB, considered below, is the scope of their respective legal orders, in particular the significance of the existence of EU environmental law, in contrast with the lack of such provisions in the WTO legal order. Regardless of ‘input legitimacy’, if the Court of Justice or AB exceeds its mandate, its ruling may be perceived to lack ‘output’ legitimacy. It is also worth highlighting that while traditionally easier to achieve than positive integration, negative integration, in requiring the setting aside of a trade restricting of a national environmental standard, potentially engages all three areas of legitimacy tension: that between supra-national and national 11

See for example Commission v. Denmark (302/86) ECLI:EU:C:1988:421; US-Shrimp US-Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R, adopted 6 November 1998, DSR 1998. 12 See further Krajewski (2001), p. 169. 13 Chalmers (2006) has noted that this is essentially has characterised these questions as being concerned with the administrative function, rules and procedures. 14 For reasons of length, and significance, the present analysis focuses primarily upon the rulings of the Appellate Body.

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regulation, between a supra-national court and national regulatory authority, and of course, the substantive tension between trade liberalisation and environmental protection.

3 The Significance of Contemporary Political Events Contemporary political events add some urgency to this issue. The upsurge in what can be characterised as ‘popular globalisation scepticism’, as manifested in the UK Brexit vote, Donald Trump’s election as US President, Le Pen’s relative success in the French Presidential elections, and the electoral success of far right wing parties in Austria, Hungary and Italy intensify the questions facing global institutions, including economic, and clearly including the WTO and EU. Underpinning each of these developments is a popular unhappiness with the political status quo, and particularly with globalisation.15 The narrative for Brexit was framed by calls to ‘take back control’. ‘Leave’ campaigners exploited feelings among some voters that they had been excluded from the benefits of globalisation. Although exploited by right wing politicians and groups, this feeling was consistent with a long standing left wing critique of the EU that it was created by elites, for elites. The post 2009 ‘austerity’ response of the EU institutions to Greece, and to a lesser extent Italy, Spain and Portugal could only lend support to this critique. Donald Trump’s election campaign was characterised by open nationalism, and his approach to government has been consistent with this: his protectionist trade narrative and actions to ‘make America great again’ do nothing to undermine that nationalist narrative upon which he was elected. Le Pen’s Presidential election campaign, although ultimately unsuccessful, had been built upon consistently growing support since 2012 and called explicitly for repatriation of French sovereignty, reassertion of French identity and a rejection of globalization. Although Le Pen lost in the second round, it cannot be insignificant that the candidate who succeeded in defeating her, Macron, also proposed a break with the political status quo, albeit in a different direction. The 2017 and 2018 election outcomes in Austria, Hungary, and Italy indicate that the popular nationalism displayed in the UK, US and France is not confined to these states, but is more widespread and pervasive. In all of these contexts the challenges for both the institutions of globalisation and their respective legal orders are significant, and underpinning these are questions relating to their legitimacy. In this contemporary context, the need to address the legitimacy questions which have long simmered, and have contributed to recent political developments, has become more urgent. The balance between global and national regulatory authority and autonomy has rarely been more delicately poised.

15 See, inter alia, Goodwin and Heath (2016), Menon and Salter (2016) and Inglehart and Norris (2016).

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4 The Decision-Makers and Their Authority In the context of EU and WTO dispute settlement the key actors are the Court of Justice and the Dispute Settlement Panel/Appellate Body respectively. The extent of their authority is inextricably linked to their roles, and it is therefore essential first to unpack these, in order to understand both the limits of their legitimacy and perceptions of their decisions.

4.1

The Court of Justice

Article 19 TEU provides that the Court of Justice ‘shall ensure that in the interpretation and application of the Treaties the law is observed’. The Court’s role is thus explicitly interpretative and it has adopted a purposive approach to this function. The controversial nature of this approach has led to criticism,16 including from Rasmussen, that it found ‘inspiration in guidelines which are essentially political of nature and hence not judicially applicable. This is the root of judicial activism which may be a usurpation of power.’17 This is a critique of the legitimacy of the Court’s approach, and indeed Rasmussen was concerned not with all instances of judicial activism, but with those in which he perceived that the Court acted in ways which undermined its popular legitimacy. It is easy to see how active pursuit of environmental protection, or any other ‘agenda’ might draw criticism if not squarely based in law. Yet, equally, the Court’s function, being explicitly interpretative, requires it to fill in the detail of the framework of law provided by the Treaty and its secondary legislation. This exposes the tension between normative legitimacy and descriptive: the Court has clear normative, and descriptive, legitimacy for ensuring the application of Treaty provisions. It also has normative and descriptive legitimacy for decisions relating to the interpretation of the treaties: despite criticism such as Rasmussen’s there has been much support for the Court and its approach. In particular, Advocate General Jacobs has highlighted the constitutional function of the Court, and the function inherent within that, of ensuring balance between the EU and its Member States.18 Thus Jacobs has highlighted the Court’s role in addressing the first area of tension giving rise to legitimacy questions (that is the tension between supra-national and national regulation and authority). However, the basis of the Court’s interpretation and objectives is something which can be expected to be examined: any exercise or fulfilment of such function (constitutional and interpretative) must be subject to scrutiny, the more so given the lack of accountability of judicial decisionmakers. In the absence of adequate base, it will be found wanting. This is particularly 16

Cappelletti (1987); Weiler (1987); Toth (1987), pp. 411–413. Rasmussen (1986), p. 62. 18 Jacobs (1992). 17

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the case given that exercise by the court of its interpretative function in such contexts, which might contribute to negative integration, nontheless potentially engages that second area of tension, the legitimacy of a supra national court ruling on the validity of national regulation. Being founded in Article 19 TEU, however, exercise of the Court’s interpretative function is not inherently lacking in legitimacy. Meeting the administrative imperatives, such as transparency, predictability and fairness, and to the extent that it is necessary to compensate for the lack of accountability, is helpful in understanding, and securing both descriptive/sociological and normative legitimacy. In giving effect to the rules of the Treaty relating to trade liberalisation, the Court has facilitated, and ensured, negative integration: the removal of barriers to trade. It is also arguable that, through the exercise of its interpretative function, the Court has in fact gone further and indirectly facilitated positive integration, through the recognition (and indirect creation) of rights. When the Court engages in such creative judicial decision making, the basis of that creativity should be clearly and transparently established to ensure its acceptance (or, put another way, to secure its descriptive legitimacy), in order to mitigate the almost inevitable questions which otherwise may be raised. It may not always be possible to point to a basis of clear normative legitimacy in such circumstances. Similarly, there is a need for transparency and predictability in the Court’s approach to resolving tension between competing EU objectives and interests. Thus it is imperative in such contexts that the administrative due process requirements are met, that is that input legitimacy is secured, as highlighted above. We will see below whether this has been achieved with regard to the Court’s approach to the balance between environmental protection and trade liberalisation, but first, attention turns briefly to the role and function of the WTO Dispute Settlement Body.

4.2

The WTO Dispute Settlement Body (DSB)

In terms of general international law, it is significant that the WTO has a system of binding dispute settlement. The Dispute Settlement Understanding (DSU) and process are intended to secure application of, and compliance with, WTO rules. The capacity of WTO rules’ to encroach upon national sovereignty with regard to ‘non-trade’ matters including environmental protection and human rights has meant that exercise of this function has, on occasion proved controversial.19 Crucially, in contrast to the broad interpretative and even constitutional function conferred by Article 19 TEU upon the Court of Justice, Article 3.2 DSU provides that: the Dispute Settlement system . . . serves to clarify the existing provisions of [the covered agreements] in accordance with customary rules of interpretation of public international law.

19

Jackson (1989).

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Recommendations and rulings of the DSB cannot add to or diminish the rights and obligations provided in the covered agreements.20

It is therefore evident that the role assigned to the WTO DSB (Panels and Appellate Body) is significantly more restricted than that conferred upon the Court of Justice. It does not share the Court of Justice’s interpretative, normative function. Notwithstanding its relative limitations, fulfilment of its role by the WTO DBS, does however, like the Court of Justice, potentially engage all three areas of legitimacy tension. It is, however, not only in the nature of its role that the authority of the DSB is more limited than that of the Court of Justice.

4.3

The Scope of Adjudicative Authority of the Court of Justice and Appellate Body (AB)

Both the Court of Justice and DSB must have regard to the provisions of their respective treaties and legal orders and in this respect there is a further significant difference. Not only does the Court of Justice possess an interpretative power not held by the DSB, but the rules and law to which it must have reference are much wider than those of the WTO. The WTO and its covered agreements are essentially concerned with trade liberalisation, and its rules are consequently confined to various aspects and sectors of trade liberalisation. It is particularly significant in the present context that the EU has moved well beyond its original economic integration objectives and foundations. For example, among other areas of policy, it has developed an extensive cross-cutting environmental policy, exemplified in the duty of environmental integration.21 When having regard to the relevant law and the relationship between trade and environment, the Court of Justice must therefore balance two competing objectives of the same legal order, each supported by legal rules. In contrast, the WTO has a set of exceptions to the trade liberalisation rules, which have been interpreted to include the possibility of derogation for environmental reasons,22 but it has no environmental policy or rules of its own upon which the Panels or Appellate Body may draw. This gives rise to questions concerning the appropriateness, or legitimacy, of a Panel, or the AB ruling on the balance to be struck between trade liberalisation and environmental protection. While it clearly has normative legitimacy as regards the application and enforcement of the WTO trade rules, the nature and extent of the Panel or Appellate Body’s legitimacy to rule on the legality or not of a Member’s environmental regulation, or its relation with trade liberalisation is less clear. The

20

Emphasis added. Article 11 TFEU ‘Environmental protection requirements must be integrated into the definition and implementation of the Union’s policies and activities, in particular with a view to promoting sustainable development’. 22 GATT Article XX (b) and (g), see further below. 21

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originally unanticipated potential of the WTO rules to encroach upon national sovereignty with regard to environmental matters means that any ruling that a Member’s environmental regulatory choices are in breach of the rules, and must be brought into compliance, is extremely sensitive. Clearly, therefore this is a context in which the Panel/AB must proceed with caution, or risk raising questions regarding its legitimacy, and undermining its own credibility. Thus the Panel and AB, potentially even more than the Court of Justice, must be scrupulously careful when ruling on the balance to be drawn between trade and environment. The DSB and Court of Justice must each ensure that both the basis of its decision-making, and the process applied to reach decisions, are clear and transparent, meeting administrative standards of due process in order to mitigate the legitimacy questions which inevitably arise, by demonstrating input legitimacy.23 In so doing they can engender descriptive legitimacy, even in the absence of clear normative legitimacy.

5 Judicial Balancing of Trade and Environment: Mitigating the Legitimacy Questions? The distinctions and differences between the EU and WTO are plentiful, including the nature and role of their institutions charged with dispute settlement. There are, however, certain key similarities, including, at a very basic level, that both organisations pursue trade liberalisation and both permit certain exceptions to the rules relating to trade liberalisation, subject to satisfaction of certain conditions. Moreover, in both organisations the permitted exceptions have been interpreted, directly or indirectly, to include environmental protection24 despite the fact that in neither organisation was environmental protection explicitly included as a justification for exception in the original treaty rules. This interpretation of the exceptions, which are traditionally narrowly construed, was itself controversial. However, to have failed to construe the exceptions to include environmental protection, given its emergence as a popular concern and the development of international environmental law, would potentially have been more problematic. Two sets of questions arise in this regard concerning first the requisite conditions for justification of an environmental measure; and secondly the determination, in turn, of whether such conditions are met. Fundamentally, however, as noted above, any national environmental regulation carries the capacity to form a restriction to trade and such regulation has been the subject of dispute before both the Court of Justice and WTO Appellate Body.

23

See further text accompanying notes 12 and 13. See inter alia US-Shrimp US-Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R, adopted 6 November 1998, DSR 1998; Criminal Proceedings against Ditlev Bluhme (C-67/97) ECLI: EU:C:1998:584.

24

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The Court of Justice and Environmental Protection Based Trade Restrictions

The engagement of the Court of Justice with the relationship between trade liberalisation and environmental protection measures dates back to the 1980s, and has sometimes proved controversial, engaging as it does the three levels of legitimacy concern identified above. In order to understand both the relationship and the controversy it is necessary to initially locate the issue within the legal framework for free movement of goods.

5.1.1

Key Provisions of the Treaty on the Functioning of the European Union

Trade liberalisation is one of the core EU objectives.25 The key provision of the Treaty in delivering this, in terms of trade in goods, is Article 34 TFEU, which prohibits ‘quantitative restrictions on imports and all measures having equivalent effect between Member States’. In Dassonville, the Court held that measures having equivalent effect to a quantitative restriction include ‘all trading rules . . . capable of hindering, directly or indirectly, actually or potentially, intra-Community trade’26 and are thus included within Article 34 TFEU. An exhaustive list of grounds for derogation from Article 34 is provided in Article 36 TFEU. To be justified by Article 36 a measure must both pursue one of the listed objectives and be ‘proportionate’.27 The Article 36 exceptions are deliberately narrow, which reflects the fact that they permit derogations from pursuit of one of the core EU objectives; crucially they do not include ‘environmental protection’, although Article 36 does include an exception for measures pursuing ‘the protection of health and life of humans, animals or plants’. Alongside the Article 36 TFEU exceptions, however, the Court of Justice has developed the ‘rule of reason’.28

5.1.2

Establishment and Early Application of the Rule of Reason

Despite the familiarity of the rule of reason to most of those familiar with EU law, it is worth revisiting its basic tenets in this context in the light of its relevance to

25

Trade liberalisation is pursued in the EU through the four freedoms which underpin the Internal Market: free movement of goods, persons, services and capital. Given the present focus upon trade and environment, this paper focuses upon the provisions relating to trade in goods, which supports comparison with the operation of the GATT. 26 Dassonville (8/74) ECLI:EU:C:1974:82, at para 5. 27 Discussed below. 28 Rewe-Zentral AG v Bundesmonopolverwaltung für Branntwein (Cassis de Dijon) (120/78) ECLI: EU:C:1979:42.

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environmental regulation, and its somewhat inconsistent application in this field: understanding the root of that inconsistency is key to the present paper. Originally established in Cassis de Dijon, the rule of reason applies in areas in which there is no regulatory harmonisation. In such circumstances Member States may introduce national regulation, and this can inevitably give rise to a restriction of trade. The Court recognised in Cassis de Dijon that such regulation, and restriction, may be justified by mandatory or imperative requirements (overriding public interest.)29 Like the Article 36 derogations, measures to be justified by imperative requirements are also subject to the proportionality test. Crucially, the rule of reason is traditionally only available to measures which apply equally to domestically produced and imported goods, that is, so-called ‘indistinctly applicable’ measures.30

5.1.3

The Proportionality Test

Proportionality, like legitimacy, carries different meanings in different contexts, and has in some contexts been perceived as problematic, not least where there is the possibility that it will require a regulating authority’s decision to be set aside. For present purposes the focus is upon the application of the proportionality test in the context of the EU internal market, specifically with regard to Article 36 TFEU and the rule of reason. In this context, proportionality has been held to require that the measure at issue be both an appropriate means by which to pursue the legitimate objective, and the least trade restrictive means by which to do so.31 Significantly, therefore, application of the ‘proportionality’ test with regard to Article 36 TFEU and the rule of reason, does not in fact, here, entail any subjective weighing or balancing of the interests: it requires instead what should be an objective evaluation of the appropriateness of the measure and the degree of its trade restrictiveness. This 29

Rewe-Zentral AG v Bundesmonopolverwaltung für Branntwein (Cassis de Dijon) (120/78) ECLI: EU:C:1979:42 para. 8. 30 Commission v Ireland (113/80) ECLI:EU:C:1981:95, para. 11. It is worth noting the Court’s jurisprudence in respect of ‘selling arrangements’ originating in Keck v. Mithouard (C-267 & 268/91) ECLI:EU:C:1993:905. In this case the Court excluded ‘selling arrangements’ from the scope of Dassonville (8/74) ECLI:EU:C:1974:82, subject to the requirement that the measure have an equal burden in law and in fact, upon domestically produced and imported goods. Subsequently, the case of Åklagaren v Percy Mickelsson and Joakim Roos, (C-142/05) ECLI:EU:C:2009:336 considered the question of whether the Keck exception for ‘selling arrangements’ should be extended to restrictions on use, the facts in question concerned a restriction on use in pursuit of environmental protection. The Court had recently held, however, in Commission v. Italy (Case C-110/05) ECLI:EU:C:2009:66, that a restriction of use could have a significant impact on consumer behaviour and therefore impact upon access to the market, bringing it within the scope of Article 34 TFEU, and in Åklagaren relied on this to rule that the restriction on use was a measure equivalent to a quantitative restriction, which was therefore within the scope of Dassonville and Rewe-Zentral AG v Bundesmonopolverwaltung für Branntwein (Cassis de Dijon) (120/78) ECLI: EU:C:1979:42. It would therefore require justification by reference to either Article 36 TFEU or the rule of reason to stand. 31 See further Tridimas (2006) and Jans (2000).

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is important because founding the test upon an objective basis permits the Court to avoid some of the legitimacy questions which would arise if it were seen to be imposing its subjective view of an appropriate balance between trade and a competing interest (in the present paper environment) over that of the national decisionmaker. The objectivity of the proportionality test contributes to securing input legitimacy, which is particularly important in circumstances engaging all three areas of legitimacy tension.

5.1.4

Environmental Protection and the EU Internal Market

There is a long history of Court of Justice jurisprudence relating to trade and environment. Generally, this has developed in the context of requests for preliminary rulings concerning whether a particular national environmental measure is a ‘measure equivalent to a quantitative restriction’, presumptively prohibited under Article 34 TFEU, and if so whether it can be justified, either by Article 36 TFEU or as an imperative requirement under the rule of reason.32 In 1985, despite there being at that time no clear Treaty basis for doing so, the Court recognised that environmental protection constituted ‘one of the Community’s essential objectives’,33 and followed this in 1988 by ruling that environmental protection could constitute an imperative requirement, pursuant to the rule of reason.34 The Court’s case law in this area, including the Belgian Waste case35 and Preussen Elektra,36 has been the subject of considerable criticism, however, both in the academic literature,37 and from its own Advocates-General.38 This case law raises a number of issues pertinent to present purposes. On the occasions on which a national measure is set aside due to it falling within the scope

32

Rewe-Zentral AG v Bundesmonopolverwaltung für Branntwein (Cassis de Dijon) (120/78) ECLI: EU:C:1979:42. 33 Procureur de la République v. Association de Défence des Bruleurs de l’Huiles Usagées (240/83) ECLI:EU:C:1985:59, paragraph 13. On the development of EU Environmental Law see inter alia Chalmers (1998–1999), McGillivray and Holder (2001) and Jans and Vedder (2012). 34 Commission v. Denmark (302/86) EU:C:1988:421. 35 Commission v Belgium (2/90) EU:C:1992:310. 36 PreussenElektra AG v Schleswag AG, (C-379/98) Judgment of the Court EU:C:2001:160. Opinion of the Advocate General ECLI:EU:C:2000:585. 37 See, inter alia, Poli (2002), p. 228. 38 See opinions of AG Jacobs in Preussen Elektra PreussenElektra AG v Schleswag AG, (C-379/98) Judgment of the Court ECLI:EU:C:2001:160. Opinion of the Advocate General ECLI:EU: C:2000:585, and Bot in Essent Belgium NV v Vlaamse Reguleringsinstantie voor de Elektriciteisen Gasmarkt (C-204 to C-208/12) Judgment ECLI:EU:C:2014:2192, Opinion of the Advocate General ECLI:EU:C:2013:294, and Ålands Vindkraft (C-573/12) ECLI:EU: C:2014:2037 (Judgment of the Court) ECLI:EU:C:2014:37 (Opinion); and Essent Belgium NV v Vlams Gewest Inter Energa and Others, Vlaamse Regulator van de Elektriciteits-en Gasmarkt (VREG) (Essent II) (C-492/14) ECLI:EU:C:2016:732 (Judgment) and ECLI:EU:C:2016:257 (Opinion), discussed below.

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of Dassonville and Article 34 TFEU, but not being justifiable by either Article 36 or the rule of reason, the outcome is negative integration, through the removal of barriers to trade. Yet, as will be seen below,39 the Court has on occasion allowed a measure to stand, notwithstanding that this has permitted the segregation of the market along national lines, with the outcome of non-integration.40 Where a similar scheme is adopted by other states, however, Krämer-Hoppe argues that this could go beyond non-integration, amounting to the creation of common rules, therefore giving rise to indirect harmonisation, and positive integration.41 The Court’s challenge with regard to environmental protection and trade liberalisation has emerged as a consequence of the coincidence of a number of factors noted above: first, ‘environmental protection’ is not explicitly included as an exception under Article 36 TFEU; secondly, the rule of reason, which permits measures to protect imperative requirements, has traditionally only been available to indistinctly applicable measures.42 Thirdly, the EU has developed a substantial environmental policy, some of which reflects Member States’ international commitments and, even before the development of EU environmental policy, the Court had recognised environmental protection as a key EU objective. To a degree, the Court’s difficulties in this area have arisen due to a sensitivity to the environmental concerns of Member States, both as manifested within and outwith the EU legal order, and the fact that the provisions of the Treaty relating to free movement of goods, have not kept pace with this. That the development of extensive EU environmental policy has not prompted an amendment to Article 36 TFEU, to explicitly include environmental protection, has not helped the Court in this context. It should be recognised that this ‘omission’ reflects the will of the Member States: there have been numerous opportunities to amend Article 36 as part of the same Treaty revision through which EU environmental law and policy has been established and developed.43 This in turn reinforces the legitimacy challenge facing the Court when ruling in this area: it is required to balance two competing areas of EU policy, pursuing two distinct EU objectives, without the Treaty having been updated to explicitly include the one as a justification for derogation from the other. In addition, it is faced with negotiating the balance between fulfilling its role within the EU legal order, while not being perceived to exceed its role at the expense of Member States’ regulatory autonomy. The development of national and EU policies promoting renewable energy, which form part of its environmental policy, 39 See discussion below, at text accompanying notes 49-55, of PreussenElektra AG v Schleswag AG, (C-379/98) Judgment of the Court EU:C:2001:160. 40 See discussion of PreussenElektra AG v Schleswag AG, (C-379/98) Judgment of the Court ECLI: EU:C:2001:160, below. 41 See Krämer-Hoppe (2019) in this special issue. 42 On the face of it, therefore, pursuit of environmental protection should only be capable of justifying indistinctly applicable trade restrictive measures, that is, those that apply to all products without distinguishing between them on grounds of origin. Commission v. Ireland (113/80) ECLI: EU:C:1981:95. 43 In the negotiations of the Maastricht, Amsterdam, Nice or Lisbon treaties.

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and contribute to realisation of the EU’s sustainable development objectives has posed further challenges, and it is in this context that a series of cases, Ålands Vindkraft,44 Essent45 and Essent II,46 has recently arisen.47 The fact that the application of the rule of reason has traditionally been limited to indistinctly applicable cases has caused the Court significant difficulty in this field. In Commission v. Belgium,48 faced with a measure which was, on its face, discriminatory, the Court considered the special nature of waste as being such as to require local disposal, meaning that the measure in question, which distinguished between waste on grounds of origin, could be classed as non-discriminatory. As a ‘nondiscriminatory’ measure it could be justified pursuant to the rule of reason, by the imperative requirement of environmental protection. The legitimacy of this decision is questionable, the Court arguably found a characterisation of the facts which permitted it to avoid engaging with the prima facie discriminatory nature of the measure, to arrive at the result it sought. Given the limitations of Article 36 TFEU, this appeared to be the only way the Court could have given effect to the environmental objective at issue. Yet, had the Court simply ruled the measure in breach of Article 34 TFEU, it could have been criticised for the obstructive impact of this upon a state seeking to realise its environmental objectives. The gap in EU law, which had arisen as EU environmental law had been developed without ensuring that this could be fully accommodated within the provisions on free movement of goods, left the Court struggling with regard to the lack of bridge between two areas in which it has normative legitimacy. This ruling was sharply criticised by Advocate General Jacobs in PreussenElektra. The facts of this case concerned a scheme to promote the use of renewable energy which Jacobs identified as distinctly applicable, and therefore only justifiable by Article 36 TFEU. In the light of the Belgian Waste decision he called upon the Court to clarify whether mandatory requirements could be used to justify distinctly applicable measures.49 He further considered whether environmental protection should be an overriding justification, available to all measures, subject to application of the proportionality test. On the particular facts at issue, Jacobs was

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Ålands Vindkraft (C-573/12) EU: C:2014:2037 (Judgment of the Court) ECLI:EU:C:2014:37 (Opinion). 45 Essent Belgium NV v Vlaamse Reguleringsinstantie voor de Elektriciteis- en Gasmarkt (C-204 to C-208/12) Judgment EU: C: 2014:2192, Opinion of the Advocate General ECLI:EU:C:2013:294. 46 Essent Belgium NV v Vlams Gewest Inter Energa and Others, Vlaamse Regulator van de Elektriciteits-en Gasmarkt (VREG) (Essent II) (C-492/14) ECLI:EU:C:2016:732 (Judgment) and ECLI:EU:C:2016:257 (Opinion),. 47 The earlier case of PreussenElektra AG v Schleswag AG, (C-379/98) Judgment of the Court EU: C:2001:160. Opinion of the Advocate General ECLI:EU:C:2000:585, which was subject to significant criticism, was also concerned with the promotion of renewable energy. 48 Commission v Belgium (2/90) ECLI:EU:C:1992:310. 49 Opinion of the Advocate General Jacobs in PreussenElektra AG v Schleswag AG, (C-379/98) Judgment of the Court ECLI:EU:C:2001:160. Opinion of the Advocate General ECLI:EU: C:2000:585, para. 229.

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of the view that the measure in question would, in any event, fail the proportionality test, as it was not the least trade restrictive means by which to pursue the objective. In its judgment, however, the Court avoided making a determination relating to the distinct or indistinct applicability of the measure in question, and ruled baldly that as the measure promoted the use of renewable energy, and pursued the protection of the health and life of humans, animals and plants50 (included as an exception in Article 36 TFEU) it was not incompatible with Article 34 TFEU.51 Significantly the Court, in addition to avoiding addressing the question of the distinct or indistinct applicability of the measure, also failed to mention, or to apply, the proportionality test. It is therefore unsurprising that this ruling was subject to substantial criticism.52 In reaching its conclusion the Court referred to the link between the use of renewable energy and environmental protection,53 the EU’s climate change obligations54 and the duty of environmental integration.55 The outcome was that the Court, rather than setting the measure aside, to facilitate negative integration, allowed Germany to continue a scheme which partitioned the market, amounting to non-integration. The questions which the Court omitted to address in this judgment gave rise to considerable uncertainty, however, which endured for over 10 years, and still persisted when the question of the impact upon the internal market of a national renewable energy scheme returned to the Court in Ålands Vindkraft56 and Essent.57 Advocate General Bot delivered both Opinions, first that in Essent and then, several months later, that in Ålands Vindkraft, which was heard by the Grand Chamber. It is worth noting that the judgment in Essent was delivered after that in Ålands Vindkraft. Ålands Vindkraft arose from a challenge to a Swedish Government scheme, pursuant to Directive 2009/28, under which certificates were awarded to ‘approved’ producers of renewable energy for each megawatt of green energy produced. Significantly, it was only Swedish producers of renewable energy which could be ‘approved’ (although this was not in fact specified in the legislation). The green certificates were tradable and demand for these was secured by requiring electricity

50

Judgment of the Court, PreussenElektra AG v Schleswag AG, (C-379/98) Judgment of the Court ECLI:EU:C:2001:160. Opinion of the Advocate General EU:C:2000:585 para. 75. 51 PreussenElektra AG v Schleswag AG, (C-379/98) Judgment of the Court EU:C:2001:160. Opinion of the Advocate General ECLI:EU:C:2000:585 para. 81. 52 See inter alia Poli (2002). 53 PreussenElektra AG v Schleswag AG, (C-379/98) Judgment of the Court EU:C:2001:160. Opinion of the Advocate General ECLI:EU:C:2000:585, para 73. 54 PreussenElektra AG v Schleswag AG, (C-379/98) Judgment of the Court EU:C:2001:160. Opinion of the Advocate General ECLI:EU:C:2000:585para 74. 55 PreussenElektra AG v Schleswag AG, (C-379/98) Judgment of the Court EU:C:2001:160. Opinion of the Advocate General ECLI:EU:C:2000:585 para 76. 56 Ålands Vindkraft (C-573/12) EU: C:2014:2037 (Judgment of the Court) EU:C:2014:37 (Opinion). 57 Essent Belgium NV v Vlaamse Reguleringsinstantie voor de Elektriciteis- en Gasmarkt (C-204 to C-208/12) Judgment ECLI:EU: C: 2014:2192, Opinion of the Advocate General ECLI:EU: C:2013:294.

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suppliers to hold a certain number of certificates annually. This clearly stimulated production of renewable energy, as a consequence of demand for the certificates. The fact, however, that only Swedish producers could be approved was problematic because suppliers were required to purchase green certificates, and there was nothing which prevented the producers from tying sale of certificates to the purchase of electricity. The key questions which arose in Ålands Vindkraft were therefore whether this scheme constituted a quantitative restriction or a measure equivalent to a quantitative restriction, and if so, whether it could be justified. Advocate Bot referred back to his recent Opinion in Essent, stating that: ‘Although the Swedish green certificate scheme does not prohibit the importation of electricity, it indisputably confers an economic advantage which may favour producers of green electricity located in Sweden as compared with producers located in other Member States, since, whereas the former benefit from additional income from the sale of green certificates, which is in effect a production premium, the income of the latter is derived solely from the sale of green electricity.’ Continuing: ‘The fact that it is impossible for electricity producers located in other Member States to have access to the green certificate scheme when they export green electricity therefore constitutes a discriminatory restriction on the free movement of goods, which, as such, is prohibited by Article 34 TFEU.’58 Bot went on to state his view that a national measure constituting an MEQR ‘may be justified by the objective of environmental protection even if it is discriminatory, provided that it undergoes a particularly rigorous proportionality test.’59 On this point Bot again referred to his Opinion in Essent,60 in which he had argued that although the Court had previously held that only a non-discriminatory measure may be justified by an imperative public interest, the judgments in the Belgian Waste case, together with that in Aher Waggon and PreussenElektra, indicated a ‘change of course, which has led to the extension of the possibility of relying on objectives that do not appear in Article [36 TFEU]’.61 He urged the Court to state this expressly in order to clarify the position,62 invoking three grounds for this: first legal certainty; secondly, that a failure to do so undermined the potential for variation in the application of the proportionality test—he was of the view that discriminatory measures should be subject to a ‘strict

58

Opinion of AG Bot Ålands Vindkraft (C-573/12) EU:C:2014:2037 (Judgment of the Court) EU: C:2014:37 (Opinion)., at paras 76-77. 59 Ålands Vindkraft (C-573/12) ECLI:EU: C:2014:2037 (Judgment of the Court) ECLI:EU: C:2014:37 (Opinion)at para 79. 60 Essent Belgium NV v Vlaamse Reguleringsinstantie voor de Elektriciteis- en Gasmarkt (C-204 to C-208/12) Judgment ECLI:EU: C: 2014:2192, Opinion of the Advocate General ECLI:EU: C:2013:294. 61 Ålands Vindkraft (C-573/12) ECLI:EU: C:2014:2037 (Judgment of the Court) ECLI:EU: C:2014:37 (Opinion) at para 88. 62 Ålands Vindkraft (C-573/12) ECLI:EU: C:2014:2037 (Judgment of the Court) ECLI:EU: C:2014:37 (Opinion)at para 92.

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requirement of proportionality’; and thirdly, to recognise the place of environmental protection within the EU legal order.63 In reasoning which echoed that in PreussenElektra64 the Court once again referred to the contribution of use of renewable energy sources to both the protection of the environment, and to combatting climate change65; the EU’s international commitments to combatting climate change66; and the Article 36 derogation on grounds of protection of the health and life of humans, animals and plants.67 The Court further referred to the significance of the objective of developing renewable as an element of EU energy policy and therefore recognised that ‘the objective of promoting the use of renewable energy sources for the production of electricity . . . is in principle capable of justifying barriers to the free movement of goods.’68 While the Court declined to accede to Bot’s (and earlier AG Jacob’s) wishes and clarify the position relating to the availability of the rule of reason to justify a discriminatory environmental measure, it did however, invoke the proportionality test69 in contrast with its approach in PreussenElektra.70 In that context, application of the proportionality test, the Court did recognise the discriminatory nature of the measure when it considered whether the territorial nature of the scheme went beyond what was necessary.71 The Court ultimately concluded, however, that the measure was justified.72 Ankersmit has observed that it is ‘disappointing the Court did not actually explain why the territorial limitation of the support scheme was in line with the proportionality principle . . .but only implicitly connected the dots without making any explicit normative statements’.73 Had the Court acceded to AG Bot’s wishes with regard to the availability of the rule of reason, it would have provided some clarity. It would also, however, have 63 Ålands Vindkraft (C-573/12) ECLI:EU: C:2014:2037 (Judgment of the Court) ECLI:EU: C:2014:37 (Opinion) at paras 93-96. 64 PreussenElektra AG v Schleswag AG, (C-379/98) Judgment of the Court ECLI:EU:C:2001:160. Opinion of the Advocate General ECLI:EU:C:2000:585. 65 Ålands Vindkraft (C-573/12) ECLI:EU: C:2014:2037 (Judgment of the Court) ECLI:EU: C:2014:37 (Opinion), para. 78. 66 Ålands Vindkraft (C-573/12) ECLI:EU: C:2014:2037 (Judgment of the Court) ECLI:EU: C:2014:37 (Opinion)para. 79. 67 Ålands Vindkraft (C-573/12) ECLI:EU: C:2014:2037 (Judgment of the Court) ECLI:EU: C:2014:37 (Opinion)para 80. 68 Ålands Vindkraft (C-573/12) ECLI:EU: C:2014:2037 (Judgment of the Court) ECLI:EU: C:2014:37 (Opinion)at 82. 69 Ålands Vindkraft (C-573/12) ECLI:EU: C:2014:2037 (Judgment of the Court) ECLI:EU: C:2014:37 (Opinion) para. 83. 70 PreussenElektra AG v Schleswag AG, (C-379/98) Judgment of the Court ECLI:EU:C:2001:160. Opinion of the Advocate General ECLI:EU:C:2000:585. 71 Ålands Vindkraft (C-573/12) ECLI:EU: C:2014:2037 (Judgment of the Court) ECLI:EU: C:2014:37 (Opinion), paras 91-104. 72 Ålands Vindkraft (C-573/12) ECLI:EU: C:2014:2037 (Judgment of the Court) ECLI:EU: C:2014:37 (Opinion) para. 119. 73 Ankersmit (2014).

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been highly problematic: to have expressly stated that the availability of the rule of reason has been extended in this way would have been at odds with the Treaty, specifically contradicting the exhaustive nature of Article 36 TFEU. The Court’s interpretative function under Article 19 TFEU cannot be invoked to interpret the Treaty in a manner which contradicts its terms. There is clearly no normative legitimacy for such a development, and it is unlikely that such blatant judicial law making would be readily accepted, or carry descriptive (social/sociological) legitimacy. An alternative approach would be to explicitly interpret the Article 36 derogation for the protection of life and health of humans, animals and plants to include measures for the protection of the environment, including relating to renewable energy. This appears to be what the Court has moved towards doing with reference to Article 36 in PreussenElektra, Ålands Vindkraft and Essent. Such an approach was moreover earlier signalled in the Danish Bees case, in which the Court had held that a territorial restriction on keeping a specific species of bees constituted a measure equivalent to a quantitative restriction, but could be justified by Article 36 on the basis that it pursued the protection of the health and life of animals, particularly in view of the importance of bio-diversity.74 While traditionally the Article 36 derogations have necessarily been narrowly construed, such an interpretation requires a far smaller leap than extending the availability of the rule of reason, and can be seen to be consistent with the text of the Treaty, both in terms of the Court’s interpretative role (Article 19) and Article 36 TFEU, and with the development of EU environmental law, policy and objectives. As indicated above, the judgment in Ålands Vindkraft75 was swiftly followed by that in Essent,76 in which the Fourth Chamber followed the reasoning of the Grand Chamber in Ålands Vindkraft, and once again declined to follow AG Bot’s invitation to expressly permit the rule of reason to be available to justify discriminatory environmental measures. In terms of securing the legitimacy of the Court’s rulings in this context, one of the strengths of the proportionality test, as applied by the Court in the context of the internal market, is its objectivity: either the measure is appropriate (makes a contribution to its objective) or it is not, and either it is necessary (the least trade restrictive means by which to do so) or it is not. By restricting itself to such questions of ‘fact’, the Court avoids the suggestion that it is imposing its preferences over the wishes of the national regulator. What is at issue here is the third area of legitimacy tension identified above, specifically that concerning unease relating to a supra-national court imposing its view or values over those of a regulating national authority. 74

Criminal Proceedings against Ditlev Bluhme (C-67/97) ECLI: EU:C:1998:584. The Court took a similar approach with regard to the environmental objectives pursued in Åklagaren v Percy Mickelsson and Joakim Roos, (C-142/05) ECLI:EU:C:2009:336. 75 Ålands Vindkraft (C-573/12) ECLI:EU: C:2014:2037. 76 Essent Belgium NV v Vlaamse Reguleringsinstantie voor de Elektriciteis- en Gasmarkt (C-204 to C-208/12) Judgment ECLI:EU: C: 2014:2192, Opinion of the Advocate General ECLI:EU: C:2013:294.

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The objectivity of the test allows the Court to avoid the charge that its decision is value driven, but instead to garner legitimacy through application of an agreed process, taking into account clearly defined considerations (the two arms of the proportionality test). This provides a degree of input legitimacy. In this light it is worth unpacking Bot’s proposition that the fact that a national measure is discriminatory should be of relevance in the application of the proportionality test, rather than being material for the availability of the rule of reason. Bot is correct that the discriminatory nature of a measure would be relevant in the application of the proportionality test, however, if the proportionality test is restricted to the questions of appropriateness (whether the measure contributes to the achievement of the objective pursued) and necessity (whether it is the least trade restrictive means by which to pursue the objective) it is hard to see that such objective tests can be applied with varying degrees of robustness. It would seem likely that it would be rarer to conclude that a discriminatory measure is the least trade restrictive means available, than to conclude this with regard to a non-discriminatory measure, but ultimately the test is, and should remain, objective, and therefore it is not capable of being applied with greater or lesser degrees of robustness. As Bot indicates, however, the test should be rigorously applied in each case in which a state seeks to justify a quantitative restriction or measure equivalent to a quantitative restriction.

Essent II Bot’s ongoing frustration with the Court’s reasoning was apparent in his 2016 Opinion in Essent II.77 As he observed, he had previously made clear his view of the limitations of the Court’s reasoning in this area. Not being inclined to ‘mount a rearguard action’ however, he saw his task in Essent II as being limited to establishing the applicability or not of the Court’s earlier reasoning (whatever his view of its limitations) to the case before him.78 The measure at issue in this case was a scheme which provided free distribution of electricity from renewable sources which was sourced from producers connected directly to the distribution network. This clearly incentivised distribution of local green energy and, as such, constituted a discriminatory measure equivalent to a quantitative restriction.79

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Essent Belgium NV v Vlams Gewest Inter Energa and Others, Vlaamse Regulator van de Elektriciteits-en Gasmarkt (VREG) (Essent II) (C-492/14) ECLI:EU:C:2016:732 (Judgment) and ECLI:EU:C:2016:257 (Opinion). 78 Opinion of the Advocate General Bot, Essent Belgium NV v Vlams Gewest Inter Energa and Others, Vlaamse Regulator van de Elektriciteits-en Gasmarkt (VREG) (Essent II) (C-492/14) ECLI: EU:C:2016:732 (Judgment) and ECLI:EU:C:2016:257 (Opinion). This conclusion reflects Bot’s view of the extent and legitimacy of his role and function. 79 Essent Belgium NV v Vlams Gewest Inter Energa and Others, Vlaamse Regulator van de Elektriciteits-en Gasmarkt (VREG) (Essent II) (C-492/14) ECLI:EU:C:2016:732 (Judgment) and ECLI:EU:C:2016:257 (Opinion) para 89. The Court, in paragraph 98 of its judgment also reached this conclusion.

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While the Court also reached this conclusion, the question which this led onto was whether the measure could be justified, and whether it satisfied the proportionality test. Again, AG Bot and the Court agreed that in principle a measure promoting the production of renewable energy could be justified,80 however, they differed in their respective applications of the proportionality test. The Advocate General recognised that the direct benefit of the scheme was enjoyed by suppliers, as it was they who would benefit from free distribution of the renewably sourced electricity, however in his view, this would incentivise increased distribution of green energy and thus benefit producers.81 In contrast, the Court concluded that ‘in view of what is thus the indirect, uncertain and risky nature of any support that might flow for the green electricity producer himself. . . it must be concluded that the genuine ability of that scheme to achieve the legitimate objective pursued in the present case, which is to create an effective incentive for operators to produce more green electricity . . . has not been established’.82 The measure thus failed the ‘appropriateness’ arm of the proportionality test. The Court also held that there were alternative means by which to achieve the objective, ‘without undermining third party access to the distribution system on terms that are non-discriminatory’ thus holding that the measure failed the necessity arm even on its own terms.83 As noted above, Bot had previously argued strongly for a robust application of the proportionality test in cases such as this, and in this instance the Court has applied it.

5.1.5

The Significance of the EU Environmental Protection Objective and Proportionality

The significance of EU environmental policy has already been noted in respect of the Court’s decision-making in Belgian Waste and PreussenElektra. Similarly, the significance of the status of environmental protection in EU law, that it is itself an EU objective, was emphasised by the Court in Ålands Vindkraft, Essent and Essent II. Thus, in the EU, environmental protection is not simply a distinct interest to be balanced against trade liberalisation, but constitutes an objective to be pursued. The

80

Essent Belgium NV v Vlams Gewest Inter Energa and Others, Vlaamse Regulator van de Elektriciteits-en Gasmarkt (VREG) (Essent II) (C-492/14) ECLI:EU:C:2016:732 (Judgment) and ECLI:EU:C:2016:257 (Opinion) Opinion of the Advocate General para 91; Judgment of the Court, para 101. 81 Essent Belgium NV v Vlams Gewest Inter Energa and Others, Vlaamse Regulator van de Elektriciteits-en Gasmarkt (VREG) (Essent II) (C-492/14) ECLI:EU:C:2016:732 (Judgment) and ECLI:EU:C:2016:257 (Opinion), paras 94-95. 82 Essent Belgium NV v Vlams Gewest Inter Energa and Others, Vlaamse Regulator van de Elektriciteits-en Gasmarkt (VREG) (Essent II) (C-492/14) ECLI:EU:C:2016:732 (Judgment) and ECLI:EU:C:2016:257 (Opinion) Judgment of the Court at para 115. 83 Essent Belgium NV v Vlams Gewest Inter Energa and Others, Vlaamse Regulator van de Elektriciteits-en Gasmarkt (VREG) (Essent II) (C-492/14) ECLI:EU:C:2016:732 at para 116.

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tension between EU trade liberalisation requirements and national environmental regulation clearly engages the first area of legitimacy concern, between supranational law and national regulation. However, the existence of EU environmental law and policy also potentially engages this tension: national environmental regulation must comply with EU environmental law and objectives rather than being autonomous. Given that there was no environmental law in the original treaty of Rome, and the EU started to pursue and adopt environmental law and policy before there was a competency in the Treaty to do so, Member States might have had some legitimacy concerns at this development.84 Yet, when EU Environmental policy arises in cases such as those discussed above, it does so as a ‘competing’ EU objective, relating to which the Court therefore has a degree of normative legitimacy. The second area of legitimacy tension is therefore in play, that is the substantive tension between pursuit of trade liberalisation and the protection of the environment. The very existence of EU environmental law and policy could be, for some, a source of legitimacy questions vis-à-vis the relationship between EU and national regulation. It might therefore be viewed as somewhat paradoxical that in fact the existence of supra-national EU environmental law creates, in this field, the policy space in which national regulation can be pursued and accommodated. In so doing it alleviates the questions which would otherwise arise relating to all three areas of legitimacy tension (between EU Trade rules and domestic environmental regulation; concerning the possibility of a supra-national court setting aside national environmental regulation; and between trade liberalisation and environmental protection itself). The existence of elements of positive integration, EU environmental law, has here created the policy space for Member States to regulate, and not have those national measures set aside through negative integration as would be the presumptive outcome for national regulation which has a trade restrictive effect. This is the more striking when it is considered that the outcome is that far from securing negative integration, this has facilitated non-integration, although it may give rise to indirect positive integration.85 Notwithstanding the conflict which can arise in specific cases, the EU’s development of environmental law and policy is now premised upon recognition of its interdependence with economic development objectives: that sustainable development requires the pursuit of both environmental and economic development. The tension which can arise between the EU’s trade and environment objectives is evident, and achieving a balance between them is clearly challenging, as is simultaneously addressing the different areas of legitimacy concern. While PreussenElektra might be viewed as a particularly weak point in the handling of the trade-environment interface by the Court of Justice, it is arguable that by emphasising the role of

84 It should be recognised however that the EU started to develop Environmental Law and Policy following a meeting of Members’ Heads of State, so it can be seen that it was at least initiated by the states. See Reid (2015), McGillivray and Holder (2001), Jans and Vedder (2012) and Chalmers (1998–1999). 85 See Krämer-Hoppe (2019) in this special issue.

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proportionality in its more recent judgments, contributing to input legitimacy, the Court has addressed some of the earlier criticism. Establishing the balance between trade and environment is clearly difficult to satisfactorily achieve in the EU context, however, the WTO potentially faces a greater challenge: there is no WTO environmental policy, and the DSB therefore has a far less clear mandate to rule on the relationship between trade and environment.

5.2

Trade and Environment in the WTO

The WTO comprises a much narrower legal order than the EU and the mandate of its Dispute Settlement Panels and AB is consequently, as seen above, much more limited. This notwithstanding, the commitment of WTO Members to environmental protection, both individually and as signatories to international environmental law, means that trade and environment disputes arise in the WTO just as they do in the EU. The limited mandate of the DSB, however, makes rulings on this issue potentially all the more controversial, and the legitimacy questions potentially even more acute.

5.2.1

The Key Legal Provisions

The original agreement of the WTO, the General Agreement on Tariffs and Trade (GATT), governs trade in goods and it is this agreement, and the Agreement on Technical Barriers to Trade (TBT) which are at the heart of WTO trade environmental disputes. For present purposes the key provisions of the GATT are: Article I, which pursues the reduction of tariffs on a non-discriminatory basis, through the application of the principle of ‘most-favoured nation’; Article III, which provides that imported products should be treated no less favourably than domestically produced ‘like products’; and Article XI which prohibits quantitative restrictions on imports. Article XX GATT provides an exhaustive list of ‘general exceptions’ to the rules. Although Article XX does not explicitly refer to environmental measures, Article XX(b) permits measures necessary to protect human, animal or plant life or health and Art. XX(g) permits measures relating to the conservation of natural resources—both of these have been interpreted to permit environmental measures.86 It should be added that invocation of the Article XX exceptions is also subject to the requirements of the ‘chapeau’ to Article XX, which provides that Article XX must not be used to permit arbitrary or unjustifiable discrimination. The GATT rules thus provide a framework of negative integration, through the prohibition of

86 US-Shrimp US-Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R, adopted 6 November 1998, DSR 1998. Brazil-Retreaded Tyres WT/DS/332/AB/R.

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discrimination between imported and domestically produced like products, and the removal of barriers to trade. Significantly, while it precludes discriminatory measures this focus upon non-discrimination does not generally seek to regulate nondirectly discriminatory measures which hinder market access, such as those falling within the EU’s rule of reason. The ‘non-discrimination’ paradigm thus leaves greater regulatory autonomy to Members than would be the case if the GATT extended into regulation of non-discriminatory barriers to trade.87 In the application of Article XX, the definition of ‘necessary’ and ‘relating to’ are clearly fundamental to the balance struck between trade liberalisation and environmental protection.

5.2.2

Applying Article XX: Unpacking the Tests

While it has been held that the requirement that a measure ‘relate to’ conservation of natural resources means that the measure must be ‘primarily aimed at’ conservation, and that this is less than the requirement of ‘necessity’, in analysing whether a particular measure is ‘primarily aimed at’ conservation the Panel considered whether it was the ‘least restrictive means’ available to pursue the objective.88 In the subsequent Thai Cigarettes dispute the Panel applied the least restrictive means test in evaluating the ‘necessity’ of the disputed measure under XX(b).89 The Thai Cigarettes ruling was controversial because the Panel did not consider the practicalities of application of the potential less restrictive measure by the regulating state—raising a question as to the appropriateness of its judgment that there was an alternative measure available. This issue arose again in the Korea-Beef dispute, and the Panel and AB both recognised that an available alternative could well involve higher enforcement costs.90

5.2.3

Weighing and Balancing: An Objective Evaluation

In Korea-Beef the AB also refined its approach to the ‘necessity test’ stating that it requires ‘in every case a process of weighing and balancing a series of factors which predominantly include the contribution made by the compliance measure to the enforcement of the law or regulation at issue, the importance of the common interests or values protected by that law or regulation, and the accompanying impact

87

Note Article 2.2 TBT, which requires that a measure be both non-discriminatory and necessary, going beyond the non-discrimination paradigm, discussed below. 88 Canada-Measures Affecting Exports of Unprocessed Herring and Salmon BISD 35 S (1988) 98. 89 Thailand-Restrictions of Importation of and Internal Taxes on Cigarettes, Report of the Panel, Adopted 7 November 1990 (DS10/R – 37S) (BISD 37S/200). 90 Korea-Measures Affecting Imports of Fresh, Chilled and Frozen Beef, (Korea-various measures on beef), WT/DS/161/R, adopted 10 January 2001, para 673 and WT/DS161/AB/R, adopted 10 January 2001, para 181.

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of the law or regulation on imports or exports.’91 This indicates a subjective evaluation of the issues. The ‘importance’ of the issue is a judgment, which may be relative. The AB went on to indicate, however, that ‘the weighing and balancing process . . . is comprehended in the determination of whether a WTO-consistent alternative measure which the Member concerned could ‘reasonably be expected to employ’ is available, or whether a less WTO-inconsistent measure is ‘reasonably available’.92 The AB has continued to refer to the requirement of ‘weighing and balancing’ both the analysis of necessity and the availability of reasonable alternatives, while recognising that the Member State is free to determine and give effect to their chosen level of protection.93 As the desired level of protection is entirely at the discretion of the regulating Member, there is no real weighing and balancing of the objective itself against the objective of removal of barriers to trade. Instead, like the Court of Justice proportionality test, the ‘necessity’ review requires evaluation of the trade restrictive effects of the measure; the desired level of protection is not subject to question. This language and approach can be seen again in Brazil-Retreaded Tyres.94 In its Appeal, the EC had submitted that the Panel had not properly weighed and balanced the relevant factors, and in its ruling the AB therefore unpacked the application of the necessity test and the process of ‘weighing and balancing’.95 The AB ruled that the ‘panel must consider the relevant factors, particularly the importance of the interests or values at stake, the extent of the contribution to the achievement of the measure’s objective, and its trade restrictiveness.’96 The AB went on to reference US-Gambling97 in holding that if that consideration of the relevant factors led to a ‘preliminary conclusion that the measure is necessary’ the measure must be compared with alternative means by which to provide an equivalent contribution to the objective pursued, which should be done ‘in the light of the importance of the interests or values at stake.’ It continued, emphasising that the ‘weighing and balancing is a holistic operation that involves putting all the variables of the equation together and evaluating them in relation to each other after having examined them individually.’98 The process described by the AB, however, does not involve a subjective evaluation, but focuses upon objective assessment, despite the potential 91 Korea-Measures Affecting Imports of Fresh, Chilled and Frozen Beef, (Korea-various measures on beef), WT/DS/161/R, adopted 10 January 2001, and WT/DS161/AB/R, adopted 10 January 2001, para 164. 92 Korea-Measures Affecting Imports of Fresh, Chilled and Frozen Beef, (Korea-various measures on beef), WT/DS/161/R, adopted 10 January 2001, and WT/DS161/AB/R, adopted 10 January 2001, at para166, emphasis added. 93 European Communities –measures Affecting Asbestos and Asbestos Containing Products (EC-Asbestos) WT/DS/135/AB/R. 94 Brazil-Retreaded Tyres WT/DS/332/AB/R. 95 Brazil-Retreaded Tyres WT/DS/332/AB/R at paras 176-183. 96 Brazil-Retreaded Tyres WT/DS/332/AB/R, at para 178. 97 US – Gambling, WT/DS285/26/AB/R at para. 307. 98 Brazil-Retreaded Tyres, above n. 86 at para 182.

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implicit subjectivity of ‘weighing and balancing’. As with the EU’s proportionality test, the AB is focussed upon questions and considerations which can provide objective responses and conclusions. Thus, despite the language employed by the AB, in the context of the GATT the AB has consistently and, one has to assume, determinedly, avoided substituting its subjective evaluation of the measure for that of the national decision-maker. Similarly, in the context of the Agreement on Technical Barriers to Trade, the AB has focussed upon the requirement in Article 2.2 that a measure pursue a legitimate objective and also be no more trade restrictive than ‘necessary’. In US-Tuna II (Mexico) the AB returned to the question of the ‘necessity’ requirement under Article 2.2 TBT and referred once again to the test requiring that it ‘weigh and balance’ ‘(i)the degree of contribution made by the measure to the legitimate objective; (ii) the trade-restrictiveness of the measure; and (iii) the nature of the risks at issue and the gravity of the consequences that would arise from non-fulfilment of the objectives.’99 Yet once again, the focus of analysis was upon whether the identified proposed alternative would meet US objectives. It is worth noting that Article 2.2 TBT extends beyond requiring non-discrimination, to requiring also necessity. The result is that in this context even a non-discriminatory national regulation must satisfy the ‘necessity’ test in order to be compliant with WTO rules.100 What becomes clear when the application of the tests is examined is that despite the Appellate Body’s repeated reference to the need to ‘weigh and balance’ the competing interests engaged by Article GATT XX(b) and (g), and Article 2.2. TBT, in fact it has consistently avoided engaging in a subjective evaluation of the relative weight to be accorded these interests. It has instead focussed upon an objective analysis of the existence of contribution to the realisation of the objective, and the availability of alternatives which are less trade restrictive and will meet the desired objectives.101 In so doing the AB has avoided second guessing the judgment of the national decision maker with regard to the weight to be accorded the respective interests. This clearly side steps some of the legitimacy questions which would face it if it did indeed engage in a more subjective evaluation. The outcome in the WTO is therefore that while once again the three areas of legitimacy tension are engaged, the focus upon discriminatory measures in the WTO

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US-Tuna II (Mexico) WT/DS381/AB/R, para 321–322. See further Reid (2018). 101 On the various aspects of ‘weighing and balancing’ see also Indonesia - Measures Concerning the Importation of Chicken Meat and Chicken Products WT/DS484/R; 22 November 2017; BrazilCertain Measures Concerning Taxation and Charges (Brazil Taxation) WT/DS472/R; China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products (China-Publications and Audoovisual Products) WT/DS/363/AB/R, 21 December 2009. which confirm the approach of the AB in Korea-Measures Affecting Imports of Fresh, Chilled and Frozen Beef, (Korea-various measures on beef), WT/DS/161/R, adopted 10 January 2001, and WT/DS161/AB/R, adopted 10 January 2001, and Brazil-Retreaded Tyres WT/DS/332/AB/R. 100

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context encroaches less upon national regulatory autonomy than the EU’s broader focus also upon non-discriminatory barriers to trade. The lack of WTO environmental provisions, while on the one hand leaving the relationship between Trade liberalisation and environmental protection as a direct potential conflict, also means that there is no positive integration in this context, but only the possibility for non and negative integration. As such, the WTO legal order should give rise to potentially fewer legitimacy questions. The focus of GATT rules upon the objective of progressive trade liberalisation, however, perhaps left it open to greater scrutiny and criticism, and legitimacy questions, in the face of the emergence of popular concern with environmental protection and the development of international environmental law. In fact, the AB’s interpretative approach to GATT Article XX, combined with a focus upon objective criteria for its application, has meant that although it has consistently referred to what looks like a subjective test, in fact it has been objectively applied, thereby mitigating some of the legitimacy questions which would arise had it indeed engaged in a subjective ‘weighing and balancing’ exercise.

6 Conclusions The long recognised challenge of reconciling progressive trade liberalisation with environmental protection is only one element of the contemporary challenge facing the EU and WTO. This substantive challenge has been heightened in recent times by the emergence of popular globalisation scepticism, which has sharpened the focus on the controversy which has dogged the WTO, in particular, regarding its handling of the relationship between trade and environment. Court of Justice and WTO AB rulings concerning the balance between trade and environment impact upon the regulatory choices made by Members’ governments, and public authorities, raising a number of questions, particularly around legitimacy. It has been seen that these questions concern three distinct, although frequently overlapping areas of tension: that between supra or international regulation and domestic regulation; tension concerning an adjudicatory body ruling on the validity (or not) of domestic regulation; and the substantive tension between trade and environment. All three areas of tension are engaged by Court of Justice and WTO AB trade-environment rulings. This tension is heightened when it is considered that the fundamental mandate of the WTO is progressive trade liberalisation, and this is also at the heart of EU activity. In understanding the legitimacy questions facing the EU and WTO, and in particular the perceptions of the legitimacy of these organisations’ acts, Bodansky’s articulation of normative and descriptive (sociological) legitimacy is particularly helpful. Both the EU and WTO have clear normative and sociological legitimacy with regard to the rules to which members have signed up, in each case concerning trade liberalisation. The EU has, additionally, normative and descriptive (sociological) legitimacy in respect of its policies beyond trade, including environmental. It is when each is perceived to exceed its mandate that their acts become controversial. Although normative and sociological legitimacy are frequently conflated, separating

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them out assists us in understanding the potential fragility of the EU’s and WTO’s legitimacy. Bodansky’s emphasis upon acceptance based (descriptive/sociological) legitimacy, as opposed to a ‘right to rule’ (normative legitimacy) is helpful to us in grasping both the scope of normatively legitimate actions, and fragility of legitimacy where it is dependent upon recognition of the acceptance of EU/WTO acts. Such acceptance is easier to achieve where input legitimacy requirements are met, in particular, administrative due process requirements, and where the outcome is based on objective factors. While this does not guarantee output legitimacy, it does contribute to it. The WTO legal order provides a legal framework of progressive trade liberalisation, through negative integration. The EU legal order also pursues negative integration but in addition provides for harmonisation (positive integration) and has developed to include, among other competences, environmental law and policy. Negative integration is generally perceived as being easier to achieve than positive integration. The development of EU environmental regulation, a manifestation of positive integration, is a clear example of competence shifting from Member States to the EU. On its face, this gives rise to a potential tension between EU and national environmental regulation, to add to the tension between EU trade rules and national environmental regulation. It is somewhat paradoxical therefore that in this context it has been seen that EU environmental law and policy has created a space for national environmental regulation, even where this gives rise to partitioning of the market on national grounds, and therefore non-integration, undermining the EU’s trade liberalisation objectives. Despite very different legal contexts to the issue, the AB and Court of Justice have ultimately adopted rather similar approaches to the ‘balancing’ of trade and environment. The emphasis of the Court of Justice upon both the significance of EU environmental policy and the status of environmental protection within the EU legal order, might suggest that absent that special status the Court would not have been willing, or able perhaps, to avoid ruling against the measures at issue in PreussenElektra,102 Ålands Vindkraft103 and Essent.104 This might be the case with regard to PreussenElektra, and that might be deemed to have been a good thing, given the problematic nature of the Court’s reasoning in that case. Yet, the approach of the AB, without such background policy and law from which to draw, has been rather similar, despite its avoidance of engagement with ‘proportionality’. In fact, the AB necessity test, and one core element of the Court of Justice proportionality test, focus upon the same core issue: the question of the availability of a less trade restrictive alternative. While until relatively recently it might have been asked

102

PreussenElektra AG v Schleswag AG, (C-379/98) Judgment of the Court ECLI:EU:C:2001:160. Opinion of the Advocate General ECLI:EU:C:2000:585. 103 Åklagaren v Percy Mickelsson and Joakim Roos, (C-142/05) ECLI:EU:C:2009:336. 104 Essent Belgium NV v Vlaamse Reguleringsinstantie voor de Elektriciteis- en Gasmarkt (C-204 to C-208/12) Judgment ECLI:EU: C: 2014:2192, Opinion of the Advocate General ECLI:EU: C:2013:294.

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whether the Court of Justice’s ‘proportionality’ test is accurately represented: would it in fact be better described as a ‘necessity’ test, the outcome in Essent II indicates not.105 Fundamentally, however, the ‘proportionality’ or ‘necessity’ tests are used as the basis of an adjudicative mechanism rather than requiring particular substantive outcomes. In that sense both therefore contribute to securing input legitimacy. The Court’s characterisation of the test as being one of ‘proportionality’, however, like the AB’s description of its obligation to ‘weigh and balance’ suggests an engagement with the substantive merits of the interests at stake. This clearly reflects a sensitivity to the legitimacy questions which would be engaged by it appearing to simply override national priorities. As such, it also perhaps reflects a recognition that engagement of those legitimacy questions run the risk of undermining their ongoing status and credibility. Thus the gesture towards openness to non-trade interests conveyed by the idea of ‘weighing and balancing’, can be seen as contributing to the ongoing interests of the ‘courts’ and their respective legal orders. Yet the very language of proportionality also points to a subjective, or value driven judgment, which might pose challenges in securing acceptance. As has been seen, however, underpinning the language of ‘proportionality’ and ‘weighing and balancing’ it is an objective analysis which is indeed carried out. Both the Court of Justice and Appellate Body can thus be seen to be treading a fine line in ensuring their own integrity while defending their legitimacy and ultimately their credibility. The reliance upon objective rather than subjective criteria of review should contribute to predictability and deliver a degree of transparency to the decision-making process, providing input legitimacy and therefore a defence against the legitimacy questions which inevitably arise as the EU and WTO move beyond their original focus on trade liberalisation. Acknowledgements I would like to thank James Davey, Haris Psarris, Rike Krämer-Hoppe, Piet Eeckhout, and other participants in the workshop ‘Trade and Environment—Positive Integration in the EU and the WTO’, Ruhr-University Bochum, 9–10 May, 2016, for their comments on earlier versions of this paper.

References Ankersmit L (2014) ‘Facilitating’ infringements of article 34 TFEU and the territorial nature of green electricity support schemes: Case C-573/12 Ålands Vindkraft AB v Energimyndigheten’ http://europeanlawblog.eu/?p¼2407 (last assessed 21 May 2019) Bacchus J (2004) A few thoughts on legitimacy, democracy, and the WTO. J Int Econ Law 7:667 Bernstein S, Hannah E (2008) Non-state global standard setting and the WTO: legitimacy and the need for regulatory space. J Int Econ Law 11:575

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Bodansky D (2012) ‘Legitimacy in international law and international relations’ available at SSRNid1900289 Cappelletti M (1987) Is the European Court of Justice “Running Wild”? Eur Law Rev 12:4–17 Chalmers D (2006) Administrative globalisation and curbing the excesses of the State. In: Joerges C, Petersmann EU (eds) Constitutionalism, multilevel trade Governance and social regulation. Hart Pubishing, Oxford Chalmers D (1998–1999) Inhabitants in the field of European community environmental law. Columbia J Eur Law 5:39 Goodwin MJ, Heath O (2016) The 2016 Referendum, Brexit and the left behind: an An aggregatelevel analysis of the result. Polit Q 87:323–332. https://doi.org/10.1111/1467-923X.12285 Hart HLA (1961) The concept of law. Oxford University Press, Oxford Howse R (2000) Adjudicative legitimacy and treaty interpretation in international trade law: the Early Years of WTO Jurisprudence. In: Weiler J (ed) The EU, the WTO and the NAFTA: towards a common law of International Trade. Oxford University Press, Oxford Howse R (2007) The WTO system: law, politics & legitimacy. Cameron and May, London Howse R, Nicolaidis K (2003) Enhancing WTO legitimacy: constitutionalization or global subsidiarity? Governance 16:74–94 Inglehart R, Norris P (2016) “Trump, Brexit, and the rise of populism: economic have-nots and cultural backlash,”, HKS Faculty Research Working Paper Series RWP16–026 Jackson JH (1989) The World Trade Organisation: law and policy of International economic relations. Massachusetts Institute of Technology Press, Cambridges Jacobs F (1992) Is the Court of Justice of the European Communities a Constitutional Court? In: Curtin D, O’Keefe D (eds) Constitutional adjudication in European community and National Law. Butterworths, Ireland Jans JH (2000) Proportionality revisited. Legal Iss Econ Integr 27:239 Jans JH, Vedder HHB (2012) European environmental law: after Lisbon, 4th edn. Europa, Groningen Krajewski M (2001) Democratic legitimacy and constitutional perspectives of WTO law. J World Trade 35(1):167–186 Krämer-Hoppe R (2019) ‘Adjudication and positive integration – the role of the European Court of Justice and the Dispute Settlement Body in the ‘trade and environment’ debate’ in this special issue Levy JD (2006) The state also rises: the roots of contemporary state activism. In: Levy J (ed) The State after Statism: new activities in the Age of liberalization. Harvard University Press, Cambridge McGillivray D, Holder J (2001) Locating EC environmental law. Yearb Eur Law 20:139–171 Menon A, Salter JP (2016) Brexit: initial reflections. Int Aff 92(6):1297–1318 Notaro N (2003) Judicial approaches to trade and environment: the EC and the WTO. Cameron May, London Poli S (2002) National schemes supporting the use of electricity produced from renewable energy sources and the community legal framework. J Environ Law 14:209 Rasmussen H (1986) On law and policy in the European Court of Justice. Martinus Nijhoff, Dordrecht Reid E (2015) Balancing human rights, environmental protection and international trade: lessons from the EU experience. Hart Publishing, Oxford Reid E (2018) The WTO’s purpose, regulatory autonomy and the future of the embedded liberalism compromise. In: Moon G, Toohey L (eds) The future of international economic integration: the embedded liberalism compromise revisited. Cambridge University Press, Cambridge Scott J (2000) On Kith and Kine (and Crustaceans): trade and environment in the EU and WTO. In: Weiler J (ed) The EU, the WTO and the NAFTA: towards a common law of international trade. Oxford University Press, Oxford Toth AG (1987) Review of Rasmussen H ‘On Law and Policy in the European Court of Justice’. Yearb Eur Law 7:411–413

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Adjudication and Positive Integration: The Role of the European Court of Justice and the Dispute Settlement Body in the “Trade and Environment” Debate Rike Krämer-Hoppe

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Standing and Jurisdiction: The ECJ and the DSB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 EU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 DSB Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Assumptions for the General Role of the ECJ and the DSB . . . . . . . . . . . . . . . . . . . . . . . . . 3 The Different Possible Roles of Courts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 The Different Roles in DSB and ECJ Adjudication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Positive Integration Through Rule Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Positive Integration Through Clarification of the Room to Manoeuvre of Member States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 The Role as Facilitator of Positive Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract The relationship between the two goals trade and environment is complex and has been analysed by the so called “trade and environment” debate. This debate has mainly focused on the WTO with the inclusion of some comparison with the EU. Especially with regard to the quasi-judicial organs of the WTO, the Dispute Settlement Body (DSB) and the European Court of Justice (ECJ), the comparison has concentrated on negative integration, the removal of trade barriers between countries by striking down Member State measures via adjudication. This has led to a narrow comparison of judicial reasoning to the trade and environment interdependence, leaving aside the other side of the same coin, positive integration, in the sense of the establishment of common rules. Even so courts can not enact common rules, the paper argues, the ECJ and to some extent also the DSB can play pivotal roles by changing the status quo and providing an opportunity structure for environmental change and foster positive integration in this way. In order to allow for a broader comparison, the paper will first analyse the different standing rights R. Krämer-Hoppe (*) Ruhr-University Bochum, Bochum, Germany e-mail: [email protected] © Springer Nature Switzerland AG 2020 R. Krämer-Hoppe (ed.), Positive Integration - EU and WTO Approaches Towards the “Trade and” Debate, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-25662-3_6

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before the ECJ and the DSB. In a second step, the different possible roles the ECJ or the panels and the Appellate Body can play in promoting positive integration will be outlined: rule enforcement, clarification of the room to manoeuvre and facilitator of positive integration. In a third step, these possible roles are exemplified by different settings and cases from the EU and the WTO. These cases show that positive integration can also be fostered through adjudication. For comprehensive comparisons this perspective has to be included in our “trade and environment” debate.

1 Introduction As outlined in the introduction to the special issue,1 the relationship between trade policies and environmental policies is complex and2 the empirical evidence for different assumptions about the relationship is mixed.3 However, what can be said with some certainty is that trade itself does not generate high environmental standards. For high levels of environmental protection, accompanying environmental regulations and standards enacted as well as enforced are necessary. These environmental regulations, however, can potentially be trade barriers and clash with trade rules currently in place, being it WTO or EU rules. These regulations can through adjudication be declared incompatible with WTO or EU law. The legal interlinkage between trade rules and environmental standards is analysed by the so called “trade and environment” debate. For the WTO, this debate started 1994 with Daniel Esty’s book “Greening the GATT”4 and was followed by a vast amount of literature.5 This literature also includes some comparative analysis with the EU and the role of the European Court of Justice (ECJ).6 However, these analysis mostly compare within the framework of negative integration, the removal of trade barriers between countries by striking down Member State measures via adjudication, missing out on the role of the judiciary with regard to positive integration, the enactment of common rules. Neither the ECJ nor the Dispute Settlement Body (DSB) of the WTO have been solely striking down Member States environmental regulations in the last decades. Instead, they also allowed for some kinds of regulations or they interpreted certain norms in a broad way allowing the Member States more leeway to foster environmental protection and creating new opportunity structures. The impact of the ECJ and the DSB within the “trade and environment” debate therefore reaches far beyond negative integration into the realm 1

Krämer-Hoppe (2019). For an overview of the literature and the current debate see Shahbaz et al. (2017), p. 222 f. 3 Shahbaz et al. (2017), p. 222. 4 Esty (1994). 5 To name just one with further references Pauwelyn (2004), p. 575 ff. 6 Reid (2015), Notora (2003) and Wiers (2003). 2

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of non-integration as well as into the realm of positive integration, the creation of common rules. The ECJ has been described as an “engine of European integration”7 eluding towards the huge impact of the ECJ case law on the European integration process.8 With regard to environmental policy and the “trade and” debate the ECJ has been identified as an “environmental tribunal” hinting towards environmental activism by the ECJ.9 This paper, however, is not concerned with a general assessment of the ECJ or the DSB case law in environmental matters. Instead, the paper focuses on the possible roles and functions, ECJ jurisprudence and DSB reports can play in the “trade and” debate, especially with regard to positive integration. Therefore the paper will not focus and compare judicial approaches for example different balancing approaches,10 but it is more concerned with what happens after the ECJ issues a judgement or the DSB issues a report. The question asked is: What is or could be the overall impact of the ECJ and the DSB jurisprudence on the “trade and environment” debate besides deciding the case at hand? To categorize and analyse the impact, the paper proposes three different ways in which the ECJ and the DSB can foster positive integration and shows that they are already doing so. Before going into depth of the possible roles the ECJ and the DSB can play, the next section will first set the scene and describe the different standing possibilities as well as the jurisdiction of the ECJ and the DSB. This gives an overall picture of the possible impacts of these two judicial institutions. In a second step, the possible roles for courts in general and in environmental law in particular will be described. Three possible categories for courts in multi-level settings to engage in positive integration will be proposed: rule enforcement, clarification of the room to manoeuvre for the Member States as well as facilitator of positive integration. In a third step, these three possible roles will be exemplified by case law and reports from the ECJ, the panels and the Appellate Body. This shows that courts or court-like institution in multi-level settings already engage in positive integration. For a comprehensive comparison this perspective should be included in our analysis.

2 Standing and Jurisdiction: The ECJ and the DSB In adjudication, different roles and possibilities to become a relevant actor depend on the extent in which an actor is involved in the policy field. For adjudication, the extent of involvement depends besides other factors on the standing rights of different actors. As Stone Sweet rightly points out: A “judge must have a case load. If actors, private and public, conspire not to activate review, judges will accrete

7

Höpner (2011). For an overview of this research see Stone Sweet (2010). 9 Sands (1990), p. 695; This early assessment has been lately confirmed by Brouers (2012), p. 91. 10 Reid (2019) in this special issue. 8

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no influence over the polity.”11 For a courts influence over either positive or negative integration having a case load is essential. The case load of a court depends to some extent on standing rules and the jurisdiction of the court. Therefore, the standing as well as the jurisdiction of the ECJ and the DSB will be shortly described and compared.

2.1

EU

According to Article 19 I TEU, the ECJ shall ensure that in the interpretation and application of the treaties the law is observed. The ECJ has supreme authority on all issues of Union law.12 Before the ECJ different actors have standing rights (locus standi) and can bring claims concerning the trade and environment relationship. One often used procedure in the area of environmental law is the infringement procedure (Article 258 TFEU). In this procedure, the European Commission can sue a Member State for the failure to fulfil an obligation under the treaties. The European Commission acts as the guardian of EU law. Before taking a Member State to court, the European Commission shall deliver a reasoned opinion on the matter and give the Member State the opportunity to submit its remarks. If the State concerned does not comply with the opinion within a certain period, the Commission may bring the matter before the court. Article 258 TFEU does not require the Commission to bring any matter before the court. Instead, it leaves absolute discretion to the Commission.13 Up till 2010 the infringement procedure has only been used in environmental law contexts.14 But even in infringement procedures, private parties are indirectly involved. The European Commission, especially in the area of environmental law, relies heavily on NGOs and other private parties as a source of information. As Ludwig Krämer rightly points out, “environmental complaints constitute the main source of information to the Commission concerning the practical application of EU environmental law.”15 The Commission itself lacks the capacity to monitor all the applications of EU law and also itself acknowledges the “the vital role played by [complainants] in helping [it] to detect infringements of Union law”.16 Another possibility for an infringement procedure is Article 259 TFEU. Here, Member States can sue other Member States for non-compliance with EU law. In this case, the Member States themselves are in charge of monitoring compliance with EU law. To bring a claim under Article 259 TFEU no special legal interest of

11

Stone Sweet (2010), p. 8. Steiner et al. (2012), p. 43. 13 Craig and De Búrca (2011), p. 415. 14 Vedder (2010), p. 296. 15 Krämer (2014), p. 6. 16 European Commission (2012), p. 2. 12

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the Member State in the case at hand is required.17 In this procedure Member States act as guardians of the treaty in the public interest. However, this procedure has rarely been used. Member States prefer political means to solve their disputes.18 Besides infringement procedures, the trade and environment linkage can be a concern in preliminary reference procedures (Article 267 TFEU). The purpose of these procedures is to ensure a uniform interpretation of EU law. In this process, the ECJ has to rely on national courts to bring claims. National courts can request a preliminary reference procedure, when questions of the interpretation of the EU treaties or the validity and interpretation of acts of the institutions, bodies, offices or agencies of the Union are raised before them and if they consider that a decision on the question is necessary to enable it to give a judgement. Individuals have no direct standing to bring a preliminary reference procedure, however, the preliminary reference procedure has been valuable to individuals. Via national courts, they can indirectly bring claims to the ECJ.19 One last possibility to bring claims concerned with the trade and environment relationship is Article 263 TFEU. In this process, the ECJ reviews the legality of legislative acts, of acts of the Council, of the Commission, and of the European Central Bank, other than recommendations and opinions, and of acts of the European Parliament and of the European Council intended to produce legal effects vis-à-vis third parties. It shall also review the legality of acts of bodies, offices or agencies of the Union, intended to produce legal effects vis-à-vis third parties. With regard to environmental concerns, the ECJ can for example review the legality of EU environmental secondary law. Privileged and quasi-privileged applicants as laid down in Article 263 (2) and (3), like Member States or the European Central Bank, always have standing rights in this procedure. Instead natural or legal persons either have to be the addressee of a decision or the act has to be of direct and individual concern to the legal or natural person.20 Generally, environmental NGOs as legal persons could have a direct access to review EU acts. However, the requirement of a direct and individual concern has been very narrowly interpreted by the ECJ, making it next to impossible to gain access as a NGO.21 Recent case law confirmed this strict interpretation.22

17

Karpenstein (2015), para 3. Craig and De Búrca (2011), p. 433. 19 Steiner et al. (2012), p. 216. 20 Craig and De Búrca (2011), p. 491. 21 Schoukens (2015). 22 ECJ joined cases C-401/12 P to C-403/12 P Council and Others v Vereniging Milieudefensie and Stichting Stop Luchtverontreiniging Utrecht, ECLI:EU:C:2015:4. 18

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DSB Proceedings

The DSB, since 1995 a binding third party dispute settlement body, is authorized to provide security and predictability and to clarify the existing provisions in the WTO agreements (3.2 DSU).23 The DSB has compulsory jurisdiction over all WTO agreements. When a Member State raises a claim before the DSB, the respondent Member State has no choice but to accept the DSU jurisdiction.24 In order to fulfil this task, the DSB establishes ad hoc panels to consider the case. These panels issue reports and either side has the possibility to appeal the decision. Each appeal is heard by 3 members of the Appellate Body. The Appellate Body consists of 7 Members holding four year terms which are renewable.25 In its report, the Appellate Body can uphold, modify or reverse the legal findings of the panel. The Dispute Settlement Body has to accept or reject the Appellate Body report. However, since 1995 a rejection is only possible by consensus, turning the process from a diplomatic process into a quasi-judicial process. Standing rights within DSB proceedings are limited. Only Member State governments can be parties of a dispute either as complainants, defendants or as third parties. NGOs, private parties or other international organisations are not entitled to actively initiate a DSB proceeding and the WTO secretariat does not act as the guardian of the WTO agreements. Even so private parties and NGOs do not have legal standing before the DSB, they can influence DSB proceedings in two ways. First, they can influence a WTO Member, their home government, to initiate a dispute or request a panel before the DSB. In practice, almost all WTO proceedings are backed up by a request of a national industry.26 Second, they can submit amicus curiae briefs. Whether these amicus curiae briefs will be considered by the panels or the Appellate Body falls in their discretion. They are not obliged to consider them.27 Opposition against this practices comes mostly from developing country Members of the WTO. Up till now, only panels have cautiously referred to amicus briefs. The Appellate Body has never made use of its discretion to do so.28 WTO Member States need to a have a legal interest for acting as a complainant before the DSB and for requesting a panel to be set up. They cannot act as guardians of the agreements. They have to claim that a benefit accruing to it directly or indirectly under the covered agreements are being impaired. In addition, adjudication shall always be the last resort. Mutually agreed political solutions are clearly preferred (Article 3.7 DSU). Furthermore, Member States have discretion whether they want to bring a case. The success rate of 90 percent of the cases shows that Member States think very

23

Van den Bossche and Prévost (2016), p. 263 ff. Van den Bossche and Prévost (2016), p. 265. 25 For an overview of the selection process see Shaffer et al. (2016), p. 6 ff. 26 Van den Bossche and Prévost (2016), p. 266. 27 For an overview of this questions in the field of trade and environment see Khoury (2012). 28 Van den Bossche and Prévost (2016), p. 267. 24

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thoroughly about bringing a case to the DSB.29 Only when they are sure about their case they initiate proceedings.

2.3

Assumptions for the General Role of the ECJ and the DSB

Generally, before the DSB, its Panels and the Appellate Body, as well as before the ECJ standing rights are to some extent restricted. In the EU, direct access to the ECJ is according to Article 263 (4) a legal option for individuals and legal persons. To make use of this possibility the claimant has to argue that either the act addressed to him or her or the regulatory act is of direct and individual concern to them. Fulfilling the laid down requirements of an individual and direct concern in environmental law matters seems due to the very restrictive reading of the ECJ next to impossible. However, trade and environment issues can be raised either through the preliminary reference procedure or through infringement proceedings, in which the European Commission as a guardian of the treaty is an active player. At the WTO-level only Member States, claiming a benefit of the covered agreements has been impaired, have standing rights. To conclude, standing rights are more restricted before the DSB, the panels and the Appellate Body, than before the ECJ. The different standing possibilities do not necessary have to result in a much narrower impact. Regarding cases, the DSB obvious is a less frequent player compared to the ECJ. In 2014, 15 Panel reports have been adopted.30 In the EU in 2014, the ECJ completed 719 cases.31 For the “trade and environment” debate one could assume the DSB being a less frequent player leads to lesser impact in shaping the “trade and environment” debate. However, in the international realm the DSB is one of the few bodies with a binding third party dispute resolution. Panel or Appellate Body reports therefore are very influential in the debate and due to the restrictive standing rights cannot so easily be overruled or changed in subsequent cases. In DSB proceedings as well as in infringement procedures, we can see that private parties play a crucial role for the initiating of such procedures, albeit from different angles. In the European Union NGOs engage in infringement procedures with the aim of enforcing environmental law, in the WTO private parties mainly aim at reducing trade barriers affecting their industry. In conclusion, both courts or courtlike institution can engage in the “trade and” debate to some extent.

29

Van den Bossche and Prévost (2016), p. 269. See https://www.wto.org/english/tratop_e/dispu_e/stats_e.htm (last accessed 21 May 2019). 31 Court of Justice of the European Union (2015), p. 93. 30

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Fig. 1 The different roles of courts

3 The Different Possible Roles of Courts Traditionally, the role of courts has been dispute resolution, in other words: resolving the dispute at hand between private parties.32 Particularly for public law adjudication, this description is much too narrow and the role of courts has been expanded to rule elaboration and rule enforcement.33 More recently, courts have been described as multifunctional actors with three more functions besides dispute settlement, namely the stabilization of normative expectations, law-making, and the control as well as legitimation of authority.34 In addition, and described more in terms of roles, Alter distinguishes between the traditional dispute settlement role, the enforcement role, described as assessing the compliance with the legal obligations, the administrative review role, described as reviewing the decisions of an administrative actor and the constitutional role described as assessing the legal validity of legislative and government actions.35 Figure 1 provides an overview of the different possible roles of courts. This paper is concerned with the different roles the ECJ and the DSB can play in a certain debate, trade and environment, and a certain policy field: environmental policy. All the roles described above can be relevant, but they are as categories much too broad to capture the possibilities of the ECJ and the DSB as an actor in the “trade and environment” debate. Furthermore, the categories mainly focus on the role of the court and the case at hand. They lack the perspective of the overall impact of court decisions. In the area of climate change litigation, other categories have been developed. In these debate, climate change litigation is perceived as a regulatory tool. A tool which can be used to mandate and foster climate change actions. Within this perspective two categories are distinguished: direct effects on regulatory governance, like constitutional interpretation, statutory interpretation and common law, and indirect effects, like increasing costs and risks and changing social norms and values.36 Besides the case at hand, these categories take into account the broader impact of the decision. The paper, however, does not argue that either the DSB or the 32

Chayes (1976), p. 1281. Scott and Sturm (2006), p. 568. 34 Von Bogdandy and Venzke (2013). 35 Alter (2012), p. 6 ff. 36 Peel and Osofsky (2015), p. 28 ff. 33

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ECJ capture certain roles intentionally. One single case, however, can have an impact that goes far beyond settling the case between the two parties to the dispute. The focus in the climate change litigation literature is more on the broader outcome of a case. Certain case law or reports can have certain impacts; this can happen intentionally or unintentionally. Instead of using one of the above described sets of categories, the paper will develop the already existing categories further. In environmental debates, courts have already been envisioned as important players in the 1970s. In 1971, Sax highlighted: “The judiciary has several virtues which have thus far been largely lacking in those who attempt to deal with environmental quality.37 He describes two virtues: Firstly, the judge is an outsider to the administrative decision and process. The judge is therefore less prone to political capture. Secondly, the judge has to decide a case. In judicial proceedings, a claim will not end up in a drawer but will be decided.38 At the international level, this positive picture of courts for the enforcement of environmental policies has been voiced pointedly in 2002 in Johannesburg. Here, 120 judges declared: “an independent Judiciary and judicial process is vital for the implementation, development and enforcement of environmental law, and that members of the Judiciary, as well as those contributing to the judicial process at the national, regional and global levels, are crucial partners for promoting compliance with, and the implementation and enforcement of, international and national environmental law”.39 In the climate change debate also high hopes are set on courts.40 Generally albeit for different reasons, courts are perceived as enforcing environmental legislation and pushing for environmental protection. In the “trade and environment” debate, the picture drawn for the quasi-judicial body at the WTO is much gloomier and not so bright. Critics of the WTO have raised lots of concerns about environmental questions being addressed in the WTO. “Nameless, unaccountable international bureaucrats will strike down duly enacted domestic laws in the name of free trade, ruling them to be protectionist nontariff barriers to trade.”41 This critic focuses on negative integration. Negative integration is generally regarded as the process of integration via the internal market.42 Negative integration therefore refers to deregulation, the opening and liberalisation of markets and the removal of trade barriers. It also sometimes has a negative connotation like social dumping or the sole protection of economic interests. Also, in general terms the role of courts has been described as being a “negative legislator”,43 reducing the possible role of courts to one that can only declare legislative measures invalid.

37

Sax (1971), p. 108. Sax (1971), p. 108 ff. 39 See https://www.eufje.org/images/DocDivers/Johannesburg%20Principles.pdf (last accessed 21 May 2019). 40 Peel and Osofsky (2015). 41 Keleman (2001), p. 622. 42 Scharpf (1999), p. 45. 43 Kelsen (1929), p. 56. 38

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For the ECJ, negative integration would mean striking down Member States national environmental regulations in favour of the European internal market. In legal terms, this possibility can for example be found in Articles 28 and 29 TFEU. Of course, the ECJ has done so in several cases.44 In most of the cases concerned with questions regarding the “trade and environment” debate the ECJ, however, has not followed this path and instead has given an EU approved stamp for several national environmental regulations.45 Therefore, the critic of an imbalance between negative and positive integration has not risen in the EU in the field of environmental policy. Instead, the debate mostly focuses on welfare policies which have come under pressure from the ECJ jurisprudence.46 In panel reports or Appellate Body reports one can also see these two options, declaring a measure incompatible with WTO law or compatible. Therefore, panel reports or Appellate Body reports have not always declared national measures incompatible with the WTO agreements but have also uphold national measures as being compatible.47 In other cases the panel or Appellate Body reports only declared the manner of the application of the measure invalid but not the general purpose, substance or aim of the measure.48 Here, the courts might have voted for non-integration. Another option for the integration of markets is positive integration: generally referred to the enactment of common rules, harmonization and regulation. It is also positively valued as leading to social protection and the correction of market failures. The ECJ itself or the panel or Appellate Body cannot enact positive environmental law. In contrast, Scharpf has argued that the institutional capacity for negative integration is stronger in the EU than the capacity for positive integration via the legislator.49 For him the broad possibility to engage in ECJ proceedings compared to the high consensus necessities in the EU legislative process was the reason for this fundamental asymmetry in European integration. In the WTO, the enactment of new agreements even requires consensus by all Member States. So, how can the ECJ as well as the panels and Appellate Body being part of the overrepresentation of negative integration also engage in positive integration? The paper will argue that besides settling the dispute at hand, there are three more functions courts can fulfil and which can impact positive integration: rule enforcement, clarification of the

44

To name just a few ECJ cases: ECJ C-28/09 Commission vs Austria, ECR 2011, I-13567; ECJ C-217/99 Commission vs Belgium, ECR 2000, I-10251; ECJ C-203/96 Dusseldorp, ECR 1998, I-04075; ECJ C-209/98 Sydhavnens Sten & Grus, ECR 2000, I-03743. 45 For the ECJs tendency to be environmental friendly see for example Jacobs (2006), pp. 185–205. 46 Scharpf (1999); Höpner and Schäfer (2010), pp. 344–368. 47 Appellate Body Report, EC - Measures Concerning Meat and Meat Products, WT/DS/135/AB/ R, adopted 12 March 2001. 48 Appellate Body Report, United States - Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS/58/AB/R, adopted 12 October 1998; Appellate Body Report, European Communities — Measures Prohibiting the Importation and Marketing of Seal Products, WT/DS/400/ AB/R, adopted 18 June 2014. 49 Scharpf (1999), p. 49.

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Fig. 2 The different roles of courts in fostering positive integration

room to manoeuvre and more directly courts can themselves facilitate positive integration. Rule enforcement via courts or court-like institutions does not mean policing behaviour. It merely describes the situation in which a court declares a measure consistent or inconsistent with the law. A situation in which the court states what the law is. From the three different functions this is the broadest one and the most basal. Court or court-like institutions decide cases and in doing so, they apply the law and therefore enforce the rules. Rule enforcement deepens positive integration as it pushes legal obligation into the real world. Via rule enforcement courts or courtlike institutions try to make sure that the law in the books matches with real world behaviour. The clarification of the room to manoeuvre includes cases in which the courts declare a measure consistent with the law due to certain exemptions provided in the law itself. This, at first glance, does not foster positive integration but leads to non-integration as explained in the introduction to this special issue.50 Each Member or signatory state can enact certain unilateral measures in certain areas. Market distortion happens rather than market integration. However, in certain areas different outcomes are possible. When courts declare a certain law compatible with the legal obligations in the respective legal system, this unilateral law can become a model and other Member or signatory states can follow this unilateral example, leading indirectly to a certain degree of harmonisation. Courts or court-like institutions can further act as facilitators of positive integration.51 They can make the process of positive integration easier. They can assist and help in achieving positive integration. In their judgements, they can provide solutions or models for balancing between the two goals: trade and environment. These models can be harmonised through legislation. They can change the status quo and the bargaining behaviour of the Member or signatory States. The provided solution by the court can itself state certain requirements that would necessary lead to more cooperation and positive integration. Figure 2 provides a summary of the different roles of courts with regard to positive integration.

50

Krämer-Hoppe (2019). Joanne Scott and Susan Sturm label the role of the courts for a similar situation, Scott and Sturm (2006), pp. 565–594. 51

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4 The Different Roles in DSB and ECJ Adjudication In the following section, the different possible roles with regard to positive integration for the ECJ and the DSB will be elaborated. Different examples from the “trade and environment” field will be used to illustrate the different roles. Some of the mechanisms to foster positive integration work along similar lines in both regimes while other differ.

4.1

Positive Integration Through Rule Enforcement

When enforcing a rule, a court merely declares what the law is. It can declare a measure to be consistent or inconsistent with the law. Court or court-like institutions decide cases and in doing so, they apply the law and therefore enforce rules. They can enforce primary or secondary law and can clarify what the law is. Having courts or court-like institutions might give these enforceable rules some extra push to be followed and implemented.

4.1.1

The ECJ

Harmonisation does not only require the enactment of common rules but also the application, implementation and compliance with these EU directives and regulations. With regard to positive integration within the “trade and environment” debate, this would concern the enforcement of EU environmental secondary law as well as secondary trade law and primary EU law. There are different constellations and possibilities for the ECJ to be involved. The ECJ can assess whether the Member State has implemented the EU directive correctly or whether the administration applied the law in an EU law consistent manner. The waste directives are a good example for these two possibilities. Here, the ECJ decided several times about the content of the norm.52 Especially the vague definition of waste needed clarification and had led to differences in the implementation process in some Member States.53 In this role as a rule enforcer, the ECJ can in general stabilize normative expectations about the content of certain EU law. This can lead to an intensification of positive integration. The positive secondary law is clarified and the Member States are more aware about what the content of the EU law is and how to implement it.

52 53

Cichowski (2007), p. 131; Edwards (2013), pp. 515–530. ECJ C-302/86 Commission v Denmark, ECR 1998, 4607.

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The DSB

At the WTO level, the enforcement of secondary environmental law is not part of the DSB jurisdiction. Despite calls for an integration of multilateral environmental agreements into the WTO, subjecting them to the dispute settlement procedures and retaliation measures in the case of non-compliance, this calls have gone unheard.54 However, rule enforcement is also one of the functions of the DSB: rule enforcement of already existing WTO agreements. In the international realm, this rule enforcement capacity of the DSB makes the WTO the most legalized global institution.55 Does this lead to the less likelihood of further cooperation between WTO members? Some authors have argued in this direction and stated: Strong judicial enforcement might hinder further cooperation at the WTO level.56 However, this assumption has been questioned by others. As some WTO agreements are already in place and part of the strong rule enforcement, cooperation within the WTO happens in the shadow of the law. Some Members might cooperate while well aware that other Member States might sue them.57 In addition, cooperating at the WTO level might be more worthwhile. Here, a Member State is aware that agreed rules can be enforced at the end.58 So the mere existence of the rule enforcement possibility at the WTO might foster international cooperation and therefore positive integration.

4.2

Positive Integration Through Clarification of the Room to Manoeuvre of Member States

Case law as well as reports of the panels or the DSB can enable positive integration or at least build the middle ground of non-integration. In a case the court can declare certain national measures to be compatible with EU or WTO law. Others can copy this EU or WTO approved example.

4.2.1

ECJ

Another role of the ECJ that relates to positive integration and the stabilization of normative expectations is the clarification of the room to manoeuvre that is left for the Member States to unilateral act to protect the environment.59 This does not lead 54

For an overview see about sanctions see Charnowitz (2001), pp. 792–832. De Bièvre and Polletti (2015), p. 3. 56 Goldstein and Martin (2000), pp. 603–632. 57 Poletti et al. (2015), pp. 33–58. 58 De Bièvre (2006), pp. 851–866. 59 For an overview of the case law see Reid (2019) in this special issue. 55

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to harmonisation at the EU level, however, it leads to harmonisation about the policy space that is left for the Member States. It stabilises normative expectations and shows in which areas Member States can still act unilaterally. It also enables Member States to become pioneers in certain areas of environmental policy. Of course, it also bears the cost of diverse rules and a possible distortion of the internal market and can lead to non-integration but it also creates new opportunity structures at the EU level for harmonisation. The most famous case in this regard is the Cassis de Dijon case60 which created the “new approach to harmonisation” and so made the “Single European Act” from 1986 possible.61 The first case with regard to the “trade and environment” debate is the Danish bottle case.62 The case concerned a Danish regulation that authorised the sale of beer and soft drinks in Denmark only in reusable containers and further required the manufactures to establish a deposit-and-return system for empty containers. In the infringement procedure, the European Commission argued that this requirement was a violation of the principle of free movement of goods within the EU. Referring to the Cassis de Dijon judgement,63 the ECJ established in this case that environmental protection could be a mandatory requirement which could justify a violation of the free movement of goods principle and upheld most parts of the Danish law.64 This judgement clarified the room to manoeuvre for Member State measures. Member States could enact national environmental measures without the fear of being sued or lose a case in Luxembourg. Due to this fact, we can expect less regulatory chill with regard to environmental policy. However, the case also changed the EU opportunity structures and pushed the Commission to find a European wide solution for packaging, the Packaging Waste Directive (94/62/EC). Some even claim this directive was the legislative outcome of the Danish Bottle case.65 The non-integration through clarification of the room to manoeuvre in an ECJ judgement can lead to “real” harmonisation and positive integration. Another case in this direction is the well-known Preussen Elektra case.66 In this case the ECJ had to decide whether the German law on feeding electricity from renewable energy sources into the public grid was compatible with the free movement of goods principle. The ECJ upheld the German law and positive integration, at least to some extent, happened through another path: convergence or policy diffusion. The German law was used by other Member States as a model. The Czech

60

ECJ C-120/78 Rewe-Zentral AG v Bundesmonopolverwaltung für Branntwein (Cassis), ECR 1979, I-649. 61 Alter and Meunier-Aitsahalia (1994). 62 ECJ C-302/86 Commission v Denmark, ECR 1998, 4607. 63 ECJ C-120/78 Rewe-Zentral AG v Bundesmonopolverwaltung für Branntwein (Cassis), ECR 1979, I-649. 64 For an overview how this justification developed further in ECJ jurisprudence see Jacobs (2006), pp. 185–205. 65 Louka (2004), p. 231. 66 ECJ C-379/98 PreussenElektra AG v Schleswag AG, ECR 2001, I-2159.

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Renewable Energy Association for example arranged a translation of the German feed in law and distributed this to all members of the Czech Parliament.67

4.2.2

DSB

Positive integration through the clarification of the room to manoeuvre of the Members of the WTO can also happen in DSB proceedings. Environmental protection measures can, for example, be justified in accordance with Article XX GATT.68 By clarifying the scope of Article XX GATT, WTO Members are enabled to use this room and unilateral enact environmental protection measures. One example is the recent seal case,69 in which the DSB clarified that non-instrumental values like animal welfare can be justified. Now Member States are well aware that for public moral concerns they can defend animal welfare protection legislation before the WTO. DSB approved Panel or Appellate Body reports can therefore also clarify the room to manoeuvre for the Member States and change opportunity structures. Member States are enabled to enact national environmental protection measures, the possibility for regulatory chill is diminished and there are less incentives for other Member States to sue one another. In addition, WTO approved measures like the most parts of the Seal regime can be used as a template in other Member States. Switzerland for example put their seal regime on hold until the Appellate Body had approved the EU regime and then copied the EU model.70

4.3

The Role as Facilitator of Positive Integration

Courts can make the process of positive integration easier by providing compatible solutions for a certain problem. This solution can afterwards be codified by the legislator. They can assist and help in achieving positive integration. Through their judgements, they can change the status quo and the bargaining behaviour of the Member or signatory States. In addition, they can require certain cooperative behaviour in their judgements.

67

Bechberger and Reiche (2007), pp. 31–50. For an overview of the case law see Reid (2019) in this special issue. 69 Appellate Body Report, European Communities – Measures Prohibiting the Importation and Marketing of Seal Products, WT/DS/401/AB/R, adopted 18 June 2014. 70 Krämer-Hoppe and Krüger (2017), pp. 535–550. 68

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The ECJ

A facilitator is a person or thing that helps an organisation or a person to reach goals more easily and who enables them to find answers to a problem by suggesting answers or providing more arguments.71 With regard to the “trade and environment” debate, the ECJ can provide solutions, how to strike a balance between these competing goals. The ECJ can provide the argumentative frame, which finds its way into the regulatory process. The role of the ECJ here is not bluntly law-making, instead the role is subtler. The ECJ offers a model or argument. It engages in a dialog with the other branches of government and feeds in its views for a solution of a certain constellation. One example for this role is the legislative process regarding green or sustainable public procurement. The topic has been controversially discussed since the 90th in the EU. Green procurement is a perfect example for the difficult relationship between trade and environment in multilevel settings as Kunzlik has put it: “Green procurement sits at one of the many intersections between the objectives of environmental protection and of the maintenance of the integrity of the Internal Market and, as such, reflects the tensions that can exist between those competing policy objectives”.72 As long as green public procurement criteria are not totally harmonised at the EU level, green procurement criteria bear the possibility to distort the market. Public authorities in the various Member States may use different criteria which might make it difficult for tenders from other Member States to bid. However, the ECJ provided a “solution”, at least an argumentative frame, for this policy conflict. Due to the trade distortive effects, at least the Directorate General (DG) internal market, was not very much in favour of including such options, when the European Commission started drafting the new procurement directives in 2000.73 In contrast, especially the European Parliament required a less restrictive approach towards green procurement. This conflict between the European Commission, some Member States and the European Parliament was gradually solved by the first judgement of the ECJ dealing with green procurement, the famous Concordia Bus case.74 The important question in this case was whether environmental criteria are eligible for consideration within the economically most advantageous tender. In the end, to put it plainly, the ECJ stated that Member States can include environmental criteria as longs as they are linked to the subject-matter.75 This link to the subject matter was the solution given by the ECJ and this solution made a compromise in the legislative process possible. And in 2004, it was finally included in the first European

71 Cambridge Dictionary, http://dictionary.cambridge.org/dictionary/english/facilitator assessed 21 May 2019). 72 Kunzlik (2003), pp. 175–201. 73 For the developments see Krämer (2013), p. 83 ff. 74 ECJ C-513/99 Concordia Bus Finland Oy Ab, ECR 2002, I-07213. 75 ECJ C-513/99 Concordia Bus Finland Oy Ab, ECR 2002, I-07213.

(last

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procurement directives (2004/17 and 2004/18). The ECJ proposed a certain solution which was later codified. The judgement enabled positive integration. The European procurement law has been a battle ground for further trade and environment conflicts. In the more recent Dutch Coffee case, the ECJ provided another solution for the interpretation of the link to the subject matter requirement.76 These new case law has also been codified in the new procurement directives 2014/ 24, 2014/25 and 2014/23.

4.3.2

The DSB

At the WTO-level the DSB can also act as a facilitator for positive integration and cooperation. One prominent example for this is the “duty to negotiate” as required by the Chapeau of the General Exception in Article XX GATT.77 Early on in the Appellate Body jurisprudence, the Appellate Body had to decide the US-Gasoline Case.78 The concerned U.S. measure set out different standards for foreign and domestic refiners for clean air reasons. The Appellate Body found the measure to be inconsistent with Article III:4 GATT as it treated imported gasoline less favourable. The measure, so the Appellate Body, could be provisionally justified as relating to the conservation of an exhaustible resource under the General Exception in Article XX lit g. The Appellate Body, however, declared the measure to be a violation of the Chapeau of Article XX GATT. The requirements of the Chapeau are: a measure is not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a measure is not a disguised restriction on international trade. This Chapeau is concerned with the manner in which the measure is applied. The Chapeau aims at preventing the abuse or misuse of the exception clause. No one should invoke an exception as a matter of legal right and apply it to frustrate or defeat the rights of other Members.79 Why was the measure a violation of the Chapeau? The Appellate Body presented two reasons for this: First, the United States had not pursued the possibility of entering into cooperative arrangements with the governments concerned or, if it had, not to the point where it encountered governments that were unwilling to cooperate. In addition, the United States did not take into consideration the higher costs for foreign producers. Both constituted an unjustifiable discrimination as well as a disguised restriction on international trade.

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ECJ C-368/10 Commission v Netherlands (Dutch Coffee), ECR 2012, I-000. Van den Bossche and Prévost (2016), p. 101 f. 78 Appellate Body Report, United States – Standards for Reformulated and Conventional Gasoline, WT/DS2/AB/R, adopted 20 May 1996. 79 Appellate Body Report, United States – Standards for Reformulated and Conventional Gasoline, WT/DS2/AB/R, adopted 20 May 1996. 77

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The second famous case dealing with the duty to negotiate was the Shrimp/Turtle case.80 The issue at hand was a U.S. measure which prohibited the import of shrimp into the United States from any country which did not have a turtle conservation program comparable to the U.S. one in place. The Appellate Body declared that the measure fit the Article XX lit g GATT exception for the conservation of exhaustible natural resources. The Appellate Body, however, declared the measure to be a violation of the Chapeau of Article XX GATT for mainly three reasons. First, the Appellate Body declared the measure to be an unjustifiable discrimination between countries where the same conditions prevail. The U.S. measure is intended to coerce foreign governments to enact essentially the same regulatory measure “without taking into consideration different conditions which may occur in the territories of those other Members.”81 Second, the Appellate Body saw an unjustifiable discrimination in the failure of the United States to engage in serious, across-the-border negotiations with other Members. Such an engagement would have suited the objective of the measure. Third, the United States negotiated seriously with some, but not with other Members that export shrimp to the United States. “The effect is plainly discriminatory and, in our view, unjustifiable.”82 Some have argued that in these two case the Appellate Body constructed a duty to negotiate before the enactment of unilateral measures.83 Some still argue that “one factor that may contribute to finding of unjustifiable discrimination”, as required in the Chapeau, “is a failure to make serious efforts, in good faith, to negotiate a multilateral solution before resorting to unilateral measures”.84 Others have argued that the wording of the Chapeau as well as the context of Article XX GATT does not require negotiations in order to comply with the Chapeau. “The right of States to protect human life and health cannot be interpreted to require negotiations where there is an urgent need to act, unilaterally or otherwise. Similarly, tackling urgent environmental threats like climate change requires multiple approaches to mitigation and adaptation incentives and should not be hobbled by the judicial imposition of impractical negotiation requirements.”85 Between these two positions, one can find different arguments for a duty to negotiate in different situations.86 Even so the overall scope and the different requirements of the duty to negotiate are unclear, it is fair to argue for a duty to at least consider to negotiate. This understanding is supported by Article 4 DSU which requires the Member State to undergo

80 Appellate Body Report, United States - Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R, adopted October 12 1998. 81 Appellate Body Report, United States - Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R, adopted October 12 1998. 82 Appellate Body Report, United States - Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R, adopted October 12 1998. 83 For an overview of the different positions see Condon (2018), pp. 73–110. 84 Van den Bossche and Prévost (2016). 85 Condon (2018), p. 76. 86 Howse (2002), p. 491; Scott (2001).

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consultations before requesting the establishment of a panel. This duty to consider negotiations can facilitate positive integration as bilateral as well as multilateral negotiations take place, which might lead to the adoption of new agreements. Another example is the jurisprudence regarding the requirements for international standardizing bodies in the Agreement on Technical Barriers to Trade (TBT). This agreement deals with technical regulations and requirements for imports for example certain rules which lay down product characteristics. The TBT agreement itself already fosters harmonisation and therefore positive integration in Article 2.4 TBT. According to this Article Members shall use international standards as a basis for their technical regulations except when such international standards or relevant parts would be an ineffective or inappropriate means for the fulfilment of the legitimate objectives pursued, for instance because of fundamental climatic or geographical factors or fundamental technological problems. Unclear was, however, what requirements such an international standard has to fulfil. In the more recent US-Tuna II Appellate Body report,87 the Appellate Body has clarified the factual and normative requirements that standardizing bodies have to fulfil in order to be recognized as an international standardizing body within the meaning of Article 2.4 TBT agreement. This decision can facilitate positive harmonisation through international standards as now the requirements a standardizing body has to fulfil are quite clear.88 The Agreement on the Application of Sanitary and Phytosanitary Measures (SPS) even includes a far greater harmonization device laid down in Article 3. According to Article 3.1 Members shall base their sanitary or phytosanitary measures on international standards guidelines or recommendations, where they exist. Currently only three organisations can issue such international standards, guidelines or recommendations, the Codex Alimentarius Commission, standards developed under the auspices of the International Office of Epizootics and standards developed under the auspices of the Secretariat of the International Plant Protection Convention in cooperation with regional organizations operating within the framework of the International Plant Protection Convention (Annex A para 3 SPS Agreement). Early on in its jurisprudence, in the Hormone case, a Panel declared that in accordance with Article 3.1 all international standards from the three bodies count as international standards. It further highlighted that no other conditions are imposed in the SPS Agreement on the relevance of international standards for the purposes of Article 3. “Therefore, as a panel making a finding on whether or not a Member has an obligation to base its sanitary measure on international standards in accordance with Article 3.1, we only need to determine whether such international standards exist. For these purposes, we need not consider (i) whether the standards reflect levels of protection or sanitary measures or the type of sanitary measure they recommend, or

Appellate Body Report, United States – Measures Concerning the Importation, Marketing and Sale of Tuna Products (US-Tuna II), WT/DS381/AB/R, adopted 16 May 2012. 88 Weimer (2017), pp. 901–924; Crowley and Howse (2014), pp. 338–342; Partiti (2013), pp. 86–93. 87

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(ii) whether these standards have been adopted by consensus or by a wide or narrow majority, or (iii) whether the period during which they have been discussed or the date of their adoption was before or after the entry into force of the SPS Agreement.”89 This interpretation of the panel has de facto given legal effect to international standards, guidelines as well as recommendations.90 Before this inclusion into the SPS Agreement as well as the decision of the panel, these standards had no particular binding force unless they had been incorporated into national legislation.91 This interpretation by the panel therefore facilitated a push for these standards, guidelines and recommendations. The jurisprudence has undoubtedly influenced regulatory processes in the Member States which will look into these standards when legislating in this specific area. They will take them into consideration even so they are not required to do so by WTO law.92 It has to be kept in mind, that the SPS agreement does not require a measure to be based on an international standard. In contrast, it allows for deviation when a Member State can bring forward scientific evidence for a higher level of protection. The Appellate Body made it quite clear that this possibility is not an exemption but an equivalent right of the Member States.93 The room to manoeuvre to deviate is therefore quite broad and the SPS agreement does not require Member States to only use these standards. Nevertheless, the panel report in the Hormones case settled all the questions regarding the existence of an international standards and certainly pushed this type of positive integration through standard setting outside the WTO.

5 Conclusion Positive environmental law is part of the acquis communautaire and therefore the ECJ is equipped to assess whether this law has been applied or correctly implemented by Member States or not. In these cases, usually NGOs inform the commission of Member States about non-compliance with EU law. In contrast, the DSB has no direct jurisdiction to assess whether a Member State violates its international environmental law obligation, question like this can only be part of the proceedings before the DSB if they are relevant for trade related questions. In addition, the standing rights before the DSB are rather limited. These facts could in general make the DSB less equipped to deeply engage in the “trade and” debate. Due to the limited standing rights, case law cannot so easily be overruled in subsequent

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Panel Report, EC - Measures Concerning Meat and Meat Products (Hormones), WT/DS26/R/ USA, circulated 18 August 1997. 90 Landwehr (2007), para 2. 91 Marceau and Trachtman (2002), p. 839; Viktor (2000), pp. 885–895. 92 Du (2010), p. 312. 93 Appellate Body Report, EC - Measures Concerning Meat and Meat Products (Hormones), WT/DS26/AB/R, adopted 13 February 1998.

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cases and the WTO is one of very few international organisations with binding third party dispute resolution making it an influential player. To conclude, both courts are frequently asked similar questions and have to strike a balance between environmental protection and free trade or the internal market. They both intentionally or unintentionally shape the “trade and” debate. Striking such a balance and also pursuing the integration of markets would leave the DSB as well as the ECJ with only one possibility: negative integration. They could only rule against Member States environmental measures. Neither the ECJ nor the DSB always rule against Member State measures, instead they sometimes rule in favour and so engage in the “trade and environment” debate and obtain a role also in positive integration. This role of the DSB and the ECJ in positive integration can vary and ranges from rule enforcement of EU secondary environmental law or WTO obligation over the clarification of the room to manoeuvre of Member States which can create EU or WTO approved examples other states will follow to more direct ways of acting as a facilitator for positive integration, for example by requiring a duty to negotiate before enacting unilateral environmental law. Besides deciding the case at hand both courts or court-like institutions engage in the “trade and environment” debate and change opportunity structures sometimes leading to positive integration in the form of harmonisation or cooperation. Examples from both ECJ jurisprudence as well as panel and Appellate Body reports show that both institution already engage in these three roles. In some circumstances these institutions foster positive integration. The picture for neither the ECJ nor the WTO with regard to the “trade and environment” debate should not be drawn so grim. In further research and comparative work, also in legal research, this possibility of shaping positive integration should be kept in mind. A judgement of the ECJ or a report of an Appellate Body is not the end of a legal and political debate. It is rather the starting point. Legal scholarship should not only take further or former judgements into account but also legislative and political developments which constitute the overall context in which legal decisions are taken place and in which they shape future behaviour. Acknowledgements I gratefully acknowledge helpful comments from all the participants of the workshop “Trade and Environment – Positive Integration in the EU and the WTO” 9.–10. May 2016 at the Ruhr-University Bochum especially from Adelheid Puttler.

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Myths and Virtues of Positive and Negative Integration: Some Concluding Remarks Piet Eeckhout

Abstract I applaud and recommend this collection of papers, which re-considers the positive/negative integration paradigm in the EU and the WTO, through the lens of the laws and institutions which govern the interaction between trade liberalisation and environmental and food regulation. This is technical stuff, but its technicality belies deep questions posed of our contemporary polities: about the nature and governance of globalisation, and about our economic, welfare and environmental protection concepts. The authors are to be commended for drilling down where the technicality of the subject requires this, yet without losing sight of the broader questions.

I applaud and recommend this collection of papers, which re-considers the positive/ negative integration paradigm in the EU and the WTO, through the lens of the laws and institutions which govern the interaction between trade liberalisation and environmental and food regulation. This is technical stuff, but its technicality belies deep questions posed of our contemporary polities: about the nature and governance of globalisation, and about our economic, welfare and environmental protection concepts. The authors are to be commended for drilling down where the technicality of the subject requires this, yet without losing sight of the broader questions. These conclusions are not aimed at summarising the preceding papers. Instead, they focus on some of the virtuous themes which run through them. With the term virtuous I do not just mean that they are academically rewarding. One of the great goals, and achievements, of this collection is that it aims to debunk various myths about the very meanings of positive and negative integration, and about the interactions between the phenomena to which those concepts refer. Taking the risk of sounding trite, one could say that positive integration can have negative effects, and vice versa. Moreover, the interactions, if of the right kind, can trigger a virtuous cycle, which leads to a thickening of effective laws and institutions governing P. Eeckhout (*) Faculty of Laws, University College London, London, UK e-mail: [email protected] © Springer Nature Switzerland AG 2020 R. Krämer-Hoppe (ed.), Positive Integration - EU and WTO Approaches Towards the “Trade and” Debate, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-25662-3_7

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globalisation. But those interactions can also be counterproductive, enhancing the harmful effects of negative integration (adjudicative decisions) or hampering positive integration (effective harmonisation, mutual recognition or equivalence). One theme is that the difficulties which positive and negative integration face are context-or sector-dependent. That can be seen by contrasting Wieck/Rudloff and Espa/Marin-Duran. The former look at the different regulatory philosophies and institutions in the area of food safety, in the EU and the US. The latter focus on feedin-tariffs (FITs) as an instrument for promoting renewable energy. The differences in EU and US approaches to food security are so diverse, embedded, and determinative that it is difficult to see how progress can be made. TTIP did not succeed in doing so, nor did the WTO DSB. FITs seem to be a different story, because the instrument is rather fixed in its outlook. This means that the variations between FITs can be managed and overcome—be it through the closely entwined positive/negative integration instruments of the EU, or the mostly negative integration focus of the WTO. The broader point is that both the EU and the WTO—the regional/global governance institutions which are the focus of this collection—had better acknowledge and take account of these contextual and sectoral differences. Another theme is that positive integration takes many different forms, perhaps increasingly so, and perhaps because of the developing interactions with negative integration. We no longer just speak of harmonisation, but include instruments such as flexible equivalence and institutional cooperation (Wieck/Rudloff). Adjudicative decisions may lead to various forms of positive integration, because they enforce rules, clarify room for manoeuver, or facilitate positive integration (Krämer-Hoppe). Principles such as proportionality and non-discrimination are not just negative integration tools (see Reid), but may become a common law which, as a result of the volume and sophistication of adjudicative decisions, achieves positive integration. A third theme is that the trade-and-environment debate has definitely taught us that policy and regulatory differences between jurisdictions are not necessarily detrimental. Krämer-Hoppe draws attention, in the introduction, to the benefits of non-integration as a way of maintaining diversity. The legitimacy issues which Reid studies also play out in different ways in, respectively, the WTO and the EU. Santeramo/Lamonaca offer further insights into the conceptual shift from “non-tariff-barriers” to “non-tariff-measures”: those measures may be protectionist, or indeed competitive for trade, and may address market imperfections. It is moreover clear that barriers to trade in agri-food products may have positive environmental effects, by supporting local food production and consumption. There doesn’t have to be a world market for every sector and every product. This leads me to a deeper question which these papers throws up, and which merits further study. We have a pretty clear economics vocabulary and analytical framework for trade liberalisation and the creation of competitive markets. We are however groping in the dark when it comes to environmental protection. The economics vocabulary speaks of negative environmental effects as “externalities”, in an attempt to capture them. Many observers will however argue that the benefits of at least certain types of environmental protection and of economic efficiency are

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incommensurable. We have not agreed a single metric between them, and that renders the required balancing acts much more difficult. We may look at certain environmental protection policies as benefiting from economic efficiencies; yet we are reluctant to universalise such approaches. A glimpse of that issue can be seen in the paper by Espa/Marin-Duran, which shows how the EU and the WTO operate very different definitions of relevant markets in (renewable) energy. And it is remarkable to see that it is the WTO, not the EU, which has opted for a definition which arguable is more respectful of the “special case” of environmental protection. Reid’s paper also draws attention to this “special case”, focused on the local (energy in her case) rather than the global. But the authors of this collection have in no sense failed by leaving this deeper question unanswered. The fact that their papers lead us all to think deeper and harder is a sign of success.