The Shifting Landscape of Global Trade Governance: World Trade Forum 1108485677, 9781108485678, 9781108757683

Table of contents :
Cover
Half-title page
Title page
Copyright page
Contents
Figures
Tables
Contributors
Preface
Abbreviations
1 Introduction: Current Challenges and Future Scenarios
1.1 The Rationale for the Volume
1.2 Content of the Book
1.3 Conclusions
References
PART I New and Old Challenges
2 The Elephant in the Negotiation Room: PTAs through the Eyes of Citizens
2.1 Introduction
2.2 Determinants of Individual Trade Policy Preferences
2.2.1 International Trade Theory and Individual Trade Policy Preferences
2.2.2 The Impact of Non-Economic Factors
2.3 Preferences with Regard to the Design of Preferential Trade Agreements
2.4 Scenarios
2.4.1 Scenario 1: Business as Usual or Following the Trend towards Ever More and Deeper PTAs
2.4.2 Scenario 2: Bilateral PTAs and Tariff Only, Trump’s Favourite
2.4.3 Scenario 3: Return to WTO and Roll Back on PTAs
2.5 Embedding Liberalisation?
References
3 Corporate Strategy in Times of Anti-Trade Sentiment: Current Challenges and Future Scenarios
3.1 Introduction
3.2 Understanding the Roots and Multiple Faces of the Anti-Globalization Backlash
3.2.1 Concerns about Negative Impacts of Globalization on Developing Countries
3.2.2 Concerns about the Impact of Globalization on Developed Countries
3.3 Anti-Globalization Sentiments and Corporate Political Activity
3.4 EU Trade-Dependent Firms and the Current Protectionist Threat
3.5 Concluding Remarks and Three Scenarios for the Future
3.5.1 Scenario 1: The Status Quo Scenario
3.5.2 Scenario 2: A Global Trade War with Tit-for-Tat Protectionism
3.5.3 Scenario 3: Protectionism Will Become the New Normal for the Foreseeable Future
References
4 Understanding and Shaping Trade Rules for the Digital Era
4.1 Introduction
4.2 Current and Emergent Trends in Disruptive Technologies: The Sweeping Effects of Digitization
4.2.1 Overview and Terminological Remarks
4.2.2 Digital Technologies as GPTs: Characteristics and First Lessons to Be Learned
4.2.3 Digitization
4.2.3.1 Convergence
4.2.3.2 Data and Big Data
4.2.3.3 The Internet of Things
4.3 The Effects of Digitization on Trade
4.3.1 Overview of Developments and Trends
4.3.1.1 Global Value Chains
4.3.1.2 Growing Importance of Services Trade and Servicification
4.3.1.3 Implications for Domestic Regulation
4.3.1.4 New Types of Trade Barriers
4.4 Trade Policy Responses to Digital Transformation
4.4.1 The Existing Regulatory Framework for Digital Trade
4.4.1.1 The World Trade Organization
4.4.1.2 Beyond the WTO: Free-Trade Agreements
4.4.1.3 CPTPP
4.5 Deliberate Responses to the Digital Challenge: An Appraisal of the State of Affairs
4.6 Concluding Remarks
References
5 The Need for Better Disciplines on Rules of Origins in the WTO: Evidence from NAFTA
5.1 Introduction
5.2 What Are Rules of Origin and Why Do We Have Them?
5.2.1 Rules of Origin Are Used As Protection
5.2.2 Multiplying Rules of Origin
5.2.2.1 When It Comes to Rules of Origin, Stricter Does Not Mean Better
5.2.2.2 Higher Tariffs Lead to Higher NAFTA Utilization, But Stricter Rules of Origin Lower Utilization
5.2.2.3 Rules of Origin Put Small Exporters and Start-ups at a Disadvantage
5.2.2.4 Rules of Origin Constrain the Transport Sector
5.3 Toward a Better System of Rules of Origin
References
6 For Whom the Bell Tolls: The WTO’s Third Decade
6.1 Introduction
6.2 Preserving the WTO as a Universal Organization: Variable Geometry as Key
6.3 Relevant Topics
6.4 Fundamental Reform of Trade Remedies Laws: Safeguards to the Rescue?
6.5 Developing Country Classification
6.6 China and Intellectual Property
6.7 Issues Related to the Dispute Settlement Mechanism
6.8 Conclusions
References
PART II Trade Policy and Trade-Related Concerns
7 Reconceiving Trade Agreements for Social Inclusion
7.1 Introduction
7.2 Purposes of the WTO and Trade Agreements
7.3 Main Challenges to the System
7.4 The Rise of Global Supply Chains and the Response of the TPP
7.5 Reconceiving Trade Agreements: Moving beyond the TPP
7.5.1 Organizing Principle
7.5.2 Tax, Trade, and Inequality
7.5.3 Safeguarding Policy Space for Complementary Domestic Social Policies
7.5.3.1 Social Security
7.5.3.2 Job Flexicurity
7.5.3.3 Trade Adjustment Policies
7.5.3.4 Labor Clauses
7.5.4 Reconceiving Negotiations as over Market Access and Policy Space
7.5.4.1 Existing Mechanisms for Ensuring Policy Space
7.5.4.2 Negotiating over Policy Space between the Global North and Global South
7.6 Conclusion
References
8 Our Alarming Climate Crisis Demands Border Adjustments Now
8.1 Introduction
8.2 What Is at Stake
8.3 An Illustrative Policy Sketch
8.4 WTO Compatibility
8.5 Administration to Minimize Transaction Costs and Incentivize Decarbonization
8.6 Other Major Objections and Questions
8.7 Too Late for Further Delay
References
9 The Multilateralization of PTAs’ Environmental Clauses: Scenarios for the Future?
9.1 Introduction
9.2 The Convergence of (Some) PTA Environmental Clauses
9.3 Multilateralization Scenarios
9.3.1 The Routine Scenario
9.3.2 The Consensual Scenario
9.3.3 The Trendy Scenario
9.3.4 The Power Game Scenario
9.3.5 The Appropriate Scenario
9.4 Analyzing the Scenarios
9.4.1 Comparing the Scenarios
9.4.2 Merging the Scenarios: The Common Ground Agreement
9.5 Conclusion
References
10 The Trend to More and Stricter Non-Trade Issues in Preferential Trade Agreements
10.1 Introduction
10.2 How to Measure the Design of NTIs in PTAs
10.3 Three Trends to More and Stricter NTIs in PTAs
10.3.1 Broadening the NTI Agenda
10.3.2 Convergence in Commitment Style
10.3.3 The Catch-Up of Developing Countries
10.4 Conclusion
10.4.1 Summary of Trends
10.4.2 Future Research
10.4.3 Likely Future Scenarios
References
PART III Development Angles
11 The Trade-Migration Nexus from a Multilevel Perspective
11.1 Introduction
11.2 Migration’s Entry onto the Multilateral Trade Agenda
11.3 The Trade-Migration Nexus in Regional Economic Communities
11.3.1 NAFTA
11.3.2 ASEAN
11.3.3 MERCOSUR
11.4 Expanding the Status Quo through Bilateral PTAs
11.4.1 Demandeurs on Mode 4: India and China
11.4.2 Receiving Economies: Japan and South Korea
11.5 Projecting towards 2025
11.5.1 Global Level
11.5.2 Regional Level
11.5.3 Bilateral Level
11.6 Conclusions
References
List of Interviews
12 TRIPS Implementation in Developing Countries: Likely Scenarios to 2025
12.1 Introduction
12.2 Features of the IP Regime and Adaptation by Emerging Economies to TRIPS
12.3 TRIPS Implementation in Brazil, India, and China
12.3.1 Brazil
12.3.2 India
12.3.3 China
12.4 Likely Scenarios to 2025
12.5 Conclusions
References
13 Investment Promotion and Facilitation for LDCs
13.1 Introduction
13.2 Framing Investment Promotion and Facilitation
13.3 Development Partners Direct Support
13.3.1 Preferential Financing Programs
13.3.1.1 Grants
13.3.1.2 Loans
13.3.1.3 Financial Guarantees
13.3.1.4 Equity Participation
13.3.2 Fiscal Incentives
13.3.2.1 Tax Exemptions from Corporate Tax
13.3.2.2 Corporate Tax Relief
13.3.2.3 Fiscal Allowances for Qualifying Activities
13.3.2.4 Tax Deferral
13.3.2.5 Tax Credits
13.3.3 Risk Management Tools, Including Political Risk Insurance
13.3.3.1 International Political Risk Insurance: MIGA
13.3.3.2 National Political Risk Insurance
13.3.3.3 Private Risk Insurance
13.3.4 Project-Business Development, Feasibility, and Information Services
13.3.4.1 Dissemination of Investment Opportunities
13.3.4.2 Educational Services
13.3.4.3 Investment Missions
13.3.4.4 Match-Making Services
13.3.4.5 Feasibility Studies
13.3.5 Promoting Sustainable and Responsible Investment
13.4 Development Partners Indirect Support
13.4.1 Improving the Investment Climate
13.4.2 Strengthening LDCs’ Investment Promotion Agencies
13.4.3 Support Private Sector in the Host Country
13.4.4 Support LDCs in Investment-Related Negotiations
13.5 Conclusions: Possible Future Scenarios to Foster FDI in LDCs
13.5.1 Challenges and Opportunities
13.5.2 Efficiency and Efficacy of Direct Support
13.5.3 Promises and Pitfalls of Indirect Support
13.5.4 The Role of Other Actors
References
PART IV Diffusion across Economic Treaties
14 Heading for Divorce?: Investment Protection Rules in Free Trade Agreements
14.1 Introduction
14.2 Investment Chapters in Trade Agreements: From Union to Divorce
14.2.1 The Inclusion of Investment Protection Rules in Trade Agreements
14.2.2 The Looming Split of Investment Protection Rules from Trade Agreements
14.2.2.1 The EU and the CJEU Singapore Decision
14.2.2.2 The US Policy Shift and the “America First” Trade Policy
14.2.2.3 The Split between Trade and Investment Protection in other Parts of the Worlds
14.3 The Trade/Investment Convergence Debate Revisited
14.3.1 Normative Convergence through PTIAs
14.3.2 Normative Convergence through Litigation
14.4 Are Investment Chapters More Than a BIT Dropped into an FTA?
14.4.1 Are Investment Chapters Different from BITs in Content?
14.4.2 Does the Wider Trade Agreement Affect the Interpretation and Application of an Investment Chapter?
14.5 Conclusion: Investment Chapters as a BIT Dropped into an FTA
References
15 The Regime Complex for Investment Governance: Overlapping Provisions in PTAs and BITs
15.1 Introduction
15.2 The Regime Complex for Investment Governance
15.2.1 International Regime Complexity in Investment Governance
15.3 Governing Investment with PTAs and BITs
15.3.1 Longitudinal Patterns in the Formation of BITs and PTAs
15.4 Mapping Investment Provisions
15.4.1 Coding Scheme for PTAs
15.4.2 Coding Scheme for BITs
15.5 Analysis
15.5.1 Investment Provisions in PTAs
15.5.2 Provisions in BITs
15.5.3 Principal Component Analysis
15.5.4 Joint Memberships in PTAs and BITs
15.5.5 Overlapping Commitments
15.6 Conclusion
Appendix: PTAs Included in the Analysis
References
16 Asian Trade Agreements in Services: Filling Form with Content
16.1 Introduction
16.2 PTAs in Services: Questions of Institutional Design
16.3 Patterns of Services Liberalization in PTAs
16.4 Data and Estimation
16.5 The Outlook for Services PTAs
16.5.1 Scenario 1: A Renewed TPP
16.5.2 Scenario 2: Minimal Liberalization around a Chinese Hub
16.5.3 Scenario 3: A China-Centric Trade Regime in Asia–Pacific
References
Index

Citation preview

The Shifting Landscape of Global Trade Governance World Trade Forum Edited by Manfred Elsig, Michael Hahn and Gabriele Spilker

more information - www.cambridge.org/9781108485678

THE SHIFTING LANDSCAPE OF GLOBAL TRADE GOVERNANCE

Today’s trade regime and its rules are under pressure. Increasing societal discontent with globalization and the rise of protectionist measures threaten the trade regime’s legitimacy and effectiveness. The authors explore systemic challenges to the trade regime, inter alia, related to development, migration, inequality, the digital economy and climate change. The Shifting Landscape of Global Trade Governance allows the readers, in times of change, to put current developments into context and offers an understanding of the different dynamics defining today’s regulation of the global economy. Chapters authored by leading researchers from different disciplines – law, political science and economics – address the challenges of the global economic system and share novel outlooks, both theory- and data-based, for the future. manfred elsig is Professor of International Relations and Deputy Managing Director of the World Trade Institute at the University of Bern. His research focuses on international political economy, international organizations, international courts, preferential trade agreements and European trade policy. He has published over thirty peer-reviewed articles. He is the co-editor of Governing the WTO: Past, Present and Beyond Doha (with Thomas Cottier, Cambridge University Press, 2011) and Trade Cooperation: The Purpose, Design and Effects of Preferential Trade Agreements (with Andreas Dür, Cambridge University Press, 2015). michael hahn is Managing Director of the University of Bern’s Institute for European and International Economic Law and a director at its World Trade Institute. He is an honorary professor at the University of Waikato School of Law, Hamilton, New Zealand, and an adjunct professor at Murdoch University School of Law, Perth, Australia. Michael researches in the areas of Swiss–EU relations, EU trade policy and WTO law. He is a co-editor of the Zeitschrift für Europarechtliche Studien (ZEuS) and sits on the editorial boards of the Journal of World Trade and the New Zealand Yearbook of International Law. With Mitsuo Matsushita, Tom Schoenbaum, and Petros Mavroidis, he co-authored The World Trade Organization – Law, Practice, and Policy, Third Edition (Oxford University Press, 2015).

gabriele spilker is Associate Professor of International Politics in the Department of Political Science and Sociology at the University of Salzburg. Her main research interests are in the areas of international political economy, international cooperation, globalization and environmental politics. Her work has been published in major peerreviewed journals, such as International Organization, International Studies Quarterly and the Journal of Politics. She is the author of Globalization, Political Institutions and the Environment in Developing Countries (Routledge, 2013).

THE SHIFTING LANDSCAPE OF GLOBAL TRADE GOVERNANCE World Trade Forum

Edited by MANFRED ELSIG University of Bern

MICHAEL HAHN University of Bern

GABRIELE SPILKER University of Salzburg

University Printing House, Cambridge CB2 8BS, United Kingdom One Liberty Plaza, 20th Floor, New York, NY 10006, USA 477 Williamstown Road, Port Melbourne, VIC 3207, Australia 314–321, 3rd Floor, Plot 3, Splendor Forum, Jasola District Centre, New Delhi – 110025, India 79 Anson Road, #06-04/06, Singapore 079906 Cambridge University Press is part of the University of Cambridge. It furthers the University’s mission by disseminating knowledge in the pursuit of education, learning, and research at the highest international levels of excellence. www.cambridge.org Information on this title: www.cambridge.org/9781108485678 DOI: 10.1017/9781108757683 © Cambridge University Press 2019 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2019 Printed and bound in Great Britain by Clays Ltd, Elcograf S.p.A. A catalogue record for this publication is available from the British Library. ISBN 978-1-108-48567-8 Hardback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication and does not guarantee that any content on such websites is, or will remain, accurate or appropriate.

CONTENTS

List of Figures   vii List of Tables   ix List of Contributors   xi Preface  xix List of Abbreviations   xxi

1 Introduction: Current Challenges and Future Scenarios

1

manfred elsig, michael hahn, and gabriele spilker

part i  New and Old Challenges   15

2 The Elephant in the Negotiation Room: PTAs through the Eyes of Citizens

17

quynh nguyen and gabriele spilker



3 Corporate Strategy in Times of Anti-Trade Sentiment: Current Challenges and Future Scenarios

48

jappe eckhardt and louise curran



4 Understanding and Shaping Trade Rules for the Digital Era

73

mira burri



5 The Need for Better Disciplines on Rules of Origins in the WTO: Evidence from NAFTA

107

caroline freund



6 For Whom the Bell Tolls: The WTO’s Third Decade

121

michael hahn

part ii  Trade Policy and Trade-Related Concerns   155

7 Reconceiving Trade Agreements for Social Inclusion gregory shaffer

v

157

contents

vi



8 Our Alarming Climate Crisis Demands Border Adjustments Now 182 john odell



9 The Multilateralization of PTAs’ Environmental Clauses: Scenarios for the Future?

207

jean-frédéric morin, clara brandi, and axel berger



10 The Trend to More and Stricter Non-Trade Issues in Preferential Trade Agreements

233

lisa lechner

part iii  Development Angles  253

11 The Trade-Migration Nexus from a Multilevel Perspective

255

flavia jurje and sandra lavenex



12 TRIPS Implementation in Developing Countries: Likely Scenarios to 2025

275

omar serrano and mira burri



13 Investment Promotion and Facilitation for LDCs

295

rodrigo polanco lazo and azernoosh bazrafkan

part iv  Diffusion across Economic Treaties   323

14 Heading for Divorce? Investment Protection Rules in Free Trade Agreements 325 wolfgang alschner



15 The Regime Complex for Investment Governance: Overlapping Provisions in PTAs and BITs

359

soo yeon kim and clara lee



16 Asian Trade Agreements in Services: Filling Form with Content 388 mark manger

Index  407

FIGURES

2.1 5.1 5.2 5.3 5.4 5.5 5.6 9.1 9.2 9.3 9.4 9.5 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 11.1 15.1 15.2 15.3 15.4

Public support for protectionism  19 Rules of origin and tariffs are correlated  111 Regional content and rules of origin at the firm level  113 Regional content and rules of origin at the industry level  113 Average share of products entering through MFN instead of NAFTA, by tariff level 115 Average share of US imports from Mexico through MFN and product size  116 US import share transport, by country  117 Number of environmental provisions per trade agreement (moving average ± 2 years) 211 Number of occurrences for each of the 286 types of environmental provisions documented in TREND  213 Heat mapping of the similarity of trade agreements, by year  213 Jaccard distance between the five ideal-type agreements  221 Kendall rank correlation between the five ideal-type agreements  221 Summary of the codebook: Mode of legalization of NTIs in PTAs  239 Evolvement in scope of NTIs  240 Evolvement of civil and political rights aspects in PTAs  241 Evolvement of economic and social rights aspects in PTAs  242 Evolvement of environmental protection aspects in PTAs  243 Evolvement of security aspects in PTAs  244 Convergence of enforcement and empowerment approach  247 Development of NTIs over time  248 Mobility-related provisions in bilateral PTAs: India, China, Japan and South Korea 265 State participation in BITs and PTAs  365 Proportion of PTAs with provisions  371 Proportion of BITs with provisions  372 Proportion of BITs that duplicated provisions from PTAs  377

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viii

figures

15.5 Proportion of PTAs that duplicated provisions from BITs  378 16.1 Cumulative number of negative- and positive-list PTAs in the Asia-Pacific, 1994–2016 395 16.2 Average liberalization depth by type and party (DESTA)  395

TABLES

2.1 Factor endowments versus industry interests  24 2.2 Non-economic determinants of individual trade policy preference  28 5.1 Supply chains are important  117 8.1 CO2 and energy tax rate per country  188 9.1 The 43 clauses of the Common Ground Agreement  224 10.1 Number of PTAs with high enforcement and/or empowerment indices  246 11.1 Categories of service suppliers GATS Mode 4  259 14.1 (Almost) perfect comparators – BITs and PTIAs signed by the same parties in close succession  344 15.1 PTA and BIT provisions in the analysis  370 15.2 Factor loadings from principal component analysis of PTA and BIT provisions 374 15.3 Network density of PTAs, BITs, and the overlap  375 15.4 Correlation of investment provisions in overlapping PTAs and BITs  376 16.1 Countries in sample  398 16.2 Effect of services trade on PTA formation and services liberalization  400

ix

CONTRIBUTORS

wolfgang alschner is an assistant professor at the University of Ottawa, Common Law Section. Wolfgang is an empirical legal scholar specializing in international economic law and computational analysis of law. Prior to joining the University of Ottawa, Wolfgang worked for several years as an individual contractor for United Nations Conference on Trade and Development’s Section on International Investment Agreements and was a research fellow at the Graduate Institute in Geneva and the World Trade Institute in Bern, Switzerland. He is a co-founder of the investment treaty analytics website (www.mappinginvestmenttreaties.com) and has published in leading peer-reviewed journals such as the Yale Journal of International Law, the European Journal of International Law, and the Journal of International Economic Law. Wolfgang holds a PhD in international law from the Graduate Institute of International and Development Studies in Geneva; a Master of Law from Stanford Law School; a Master in International Affairs from the Graduate Institute; an LLB from the University of London; and a BA in international relations from the University of Dresden, Germany. azernoosh bazrafkan is a doctoral researcher at Maastricht University, focusing on international investment law from the perspective of development. She obtained an LLM in international and European law from the Free University Amsterdam and a bachelor’s degree with a major in law and a minor in economics from Leiden University. Azernoosh’s research interests are in the field of globalization, the development of international trade and investment law and human rights. axel berger is a senior researcher at the German Development Institute/ Deutsches Institut für Entwicklungspolitik (DIE). He heads the G20 Policy Research Group at DIE and has been leading the T20 Task Force on Trade, Investment and Tax Cooperation throughout the German (2017), Argentinian (2018) and now the Japanese (2019) G20 presidency. xi

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contributors

Axel works on the design, effects and diffusion patterns of international trade and investment agreements, with a focus on emerging markets and developing countries. clara brandi is a senior researcher at the German Development Institute/Deutsches Institut für Entwicklungspolitik. As an economist and political scientist, she works on global governance, international political economy and international normative theory, focusing on international trade and sustainable development and the linkages between trade and the environment, with a special interest in the role of developing countries and rising powers. She completed a PhD at the European University Institute, a MPhil in economics at the University of Freiburg, and an MPhil in politics at the University of Oxford. mira burri is a senior lecturer at the Faculty of Law of the University of Lucerne, Switzerland. She teaches international intellectual property, media, internet and trade law. Mira’s current research interests are in the areas of digital trade, copyright and culture. Mira is the principal investigator of the project “The Governance of Big Data in Trade Agreements,” which seeks to provide a thorough analysis of the relevance of PTAs for the regulation of data and data flows. Mira has co-edited the publications Trade Governance in the Digital Age (Cambridge University Press, 2012) and Big Data and Global Trade Law (Cambridge University Press, 2019). She is the author of Public Service Broadcasting 3.0: Legal Design for the Digital Present (Routledge, 2015). Mira’s publications are available at: http://ssrn.com/author=483457. louise curran is a lecturer in international business at Toulouse Business School in France. Her research has focused on the impact of trade policy on trade flows. Her publications cover both analysis of the structure and evolution of trade flows at different levels of the value chain and the impact of anti-dumping actions, preferential trade regimes, quotas and free trade agreements on trade. jappe eckhardt is a lecturer in politics and international relations at the University of York (UK). His research focuses on the political economy of trade, the role and influence of non-state actors in global governance and the politics of global value chains. He is the author of the book Business Lobbying and Trade Governance: The Case of EU–China Relations (Palgrave, 2015).

contributors

xiii

manfred elsig is Professor of International Relations at the University of Bern and Deputy Managing Director of the World Trade Institute. He holds a PhD from the University of ETH Zurich. His research focuses on the political economy of trade, international organizations and trade agreements. He is a co-founder of the design of trade agreements (DESTA) database (www.designoftradeagreements.org) and of the electronic database on investment treaties (EDIT). caroline freund is Director of Trade, Regional Integration and Investment Climate at the World Bank. She was a senior fellow at the Peterson Institute for International Economics when her contribution was written. She has also worked as Chief Economist for the Middle East and North Africa at the World Bank, after working for nearly a decade in the international trade unit of the research department. Freund began her career in the international finance division of the Federal Reserve Board and spent a year visiting the research department of the International Monetary Fund. She has published extensively in academic journals and is the author of Rich People Poor Countries: The Rise of Emerging Market Tycoons and Their Mega Firms. She received a PhD in economics from Colombia University. michael hahn has been the managing director of the Institute for European and International Economic Law of the University of Bern Law School since 2015; he is also a director at the World Trade Institute. Before joining Bern University, Michael held the Chair of European Law at the University of Lausanne and was a full professor of law at the University of Waikato, Hamilton (New Zealand). He holds a PhD from the University of Heidelberg and a master’s degree from the University of Michigan Law School in Ann Arbor. He publishes on World Trade Organization law, European Union external relations law and the relationship between Switzerland and the European Union. His most recent pertinent publication is The World Trade Organization – Law, Practice, and Policy (with Mitsuo Matsushita, Thomas Schoenbaum and Petros Mavroidis), Oxford University Press, 3rd paperback edn, 2017. flavia jurje is a guest lecturer at the Swiss Graduate School of Public Administration (IDHEAP), University of Lausanne. Her main research focus is on global trade regulations and labor mobility, international migration governance and the role of private actors, regional integration and social network analysis. Flavia has authored several

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contributors

publications, including “Mobility norms in free trade agreements: migration governance in Asia between regional integration and free trade” (European Journal of East Asian Studies, 2018, co-authored); “EU/US migration policy towards emerging countries: regulatory power reversed?” (European Foreign Affairs Review, 2017, co-authored); “Regional Migration Governance” (Oxford Handbook of Comparative Regionalism, 2016, co-authored); “Trade agreements as venues for ‘Market Power Europe’? The case of immigration policy” (Journal of Common Market Studies, 2014, co-authored); and Europeanization in New Member States (Routledge, 2013). Flavia received a PhD in political science from ETH Zurich in 2010. soo yeon kim is Associate Professor of Political Science at the National University of Singapore. She is a former fellow of the Transatlantic Academy, based at the German Marshall Fund of the United States (Washington, DC), and of the Niehaus Center for Globalization and Governance, Woodrow Wilson School of Public and International Affairs, Princeton University. Soo Yeon Kim holds a PhD in political science from Yale University and a BA in political science and international relations from Yonsei University. She is the author of Power and the Governance of Global Trade: From the GATT to the WTO (Cornell University Press, 2010). Her current research focuses on production networks, multinational firms and the politics of free trade agreements in Asia; the politics of compliance in WTO disputes; and rising powers in the global economy. Soo Yeon Kim’s recent publications include “Regional Trade Governance” (with Edward D. Mansfield and Helen V. Milner), The Oxford Handbook of Comparative Regionalism (Oxford University Press, 2016); “Yin and Yank: public opinion in Europe toward the United States and China” (with Sophie Meunier and Zsolt Nyiri), Comparative European Politics (Palgrave, 2016); and “Hubs of governance: path dependence and higher-order effects of preferential trade agreement formation” (with Mark Manger), Political Science Research and Methods (Cambridge University Press, 2017). sandra lavenex is Professor of European and International Politics at the University of Geneva and Visiting Professor at the College of Europe, Natolin Campus. She holds a PhD in political science from the European University Institute, obtained in 1999. Her main research areas are European, comparative regional and international migration policies,

contributors

xv

and their nexus with trade policy, European Union external relations and democracy in the international realm. lisa lechner is a postdoctoral researcher at the University of Innsbruck. She obtained her PhD in 2017 with a dissertation entitled “The political, social, and ecological weight of preferential trade agreements” at the University of Salzburg. Before that, she studied international economics and political science at the University of Innsbruck and Audencia Nantes in France. An article based on her PhD dissertation has appeared in the Review of International Political Economy. Her research interests are in the areas of political economy and international relations. More specifically, most of her current research focuses on quantitative methods, trade policy, issue-linkage and international negotiations. clara lee is a doctoral student in political science at the University of Pennsylvania. She received her BBA and MSocSci in political science from the National University of Singapore. mark manger is Associate Professor of Political Economy at the Munk School of Global Affairs and Public Policy and in the Department of Political Science at the University of Toronto. He holds a PhD in political science from the University of British Columbia and an MSc in political science from the University of Hamburg. He is the author of Investing in Protection: The Politics of Preferential Trade Agreements between North and South (Cambridge University Press, 2009). Mark Manger’s main research is in the field of international trade and capital. His current project investigates the sources of persistent trade imbalances and the link between domestic institutions and trade and financial policy outcomes. jean-frédéric morin is Full Professor at Laval University, where he holds the Canada Research Chair in International Political Economy. Before being invited to hold this research chair, he was a professor of international relations at the Free University of Brussels from 2008 to 2014 and researcher at McGill University from 2006 to 2008. His most recent research projects look at institutional complexes, regulatory innovations, expert networks and policy diffusion in the fields of trade, intellectual property and the environment. His current working papers can be downloaded from www.chaire-epi.ulaval.ca.

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contributors

quynh nguyen is a postdoctoral fellow at the Niehaus Center for Globalization and Governance at Princeton University’s Woodrow Wilson School for Public and International Affairs. She earned a PhD in international relations at the Swiss Federal Institute of Technology’s (ETH Zurich) Center for Comparative and International Studies. Her research interests are at the intersection of international political economy, environmental politics, public opinion and political psychology. john odell is Professor Emeritus of International Relations, University of Southern California, and Senior Fellow, Centre for International Governance Innovation. He is the author and editor of publications on the politics of the world economy, the World Trade Organization and the process of international negotiation, including Negotiating the World Economy (Cornell University Press, 2000), Negotiating Trade: Developing Countries in NAFTA and the WTO (Cambridge University Press, 2006) and “Negotiating Agreements in International Relations” in Political Negotiation (Brookings, 2016). Currently, he is working to improve global governance of climate change and US climate policy. Other recent proposals include How the United States Can Do Much More on Climate and Jobs (CIGI, 2016). rodrigo polanco lazo is a senior lecturer and researcher at the World Trade Institute of the University of Bern. He is also a postdoctoral researcher at the University of Lucerne and a visiting professor at the University of Chile, where he also served as an assistant professor and Director of International Relations of the Faculty of Law. He holds a Bachelor and a Master of Laws from University of Chile; an LLM in International Legal Studies from New York University; and a PhD from the University of Bern, specializing in international investment law. Rodrigo is a visiting professor at the Externado University of Colombia and of the Pontifical Catholic University of Peru. He is also a co-founder of Fiscalía del Medio Ambiente, a Chilean non-profit environmental organization, where he serves as the director of its environmental law journal (Justicia Ambiental). Rodrigo’s main research areas are investment law, trade law, international environmental law and international economic law. omar serrano (欧山) is a research associate at the School of Governance of the Technical University of Munich. He holds a PhD in international relations/political science from the Graduate Institute, Geneva; an MSc in

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global politics from the London School of Economics; and a licenciatura in international relations from ITAM University. He is the author of The Domestic Sources of European Foreign Policy: Defence and Enlargement (Amsterdam University Press, 2013) and numerous scholarly articles looking at China and other emerging economies’ role in global trade governance, especially intellectual property rights. He has held research fellowships in Shanghai (Fudan), Beijing (UIBE), New Delhi (JNU), Mexico City (ITAM), Rio de Janeiro and São Paulo (FGV). gregory shaffer is Chancellor’s Professor and Director of the Center on Globalization, Law, and Society at the University of California, Irvine. He is a member of the board of editors of the American Journal of International Law and the Journal of International Economic Law, among other peer-reviewed journals, and has served as vice president of the American Society of International Law. He received his JD from Stanford Law School and his BA from Dartmouth College. His publications include seven books and more than a hundred articles and book chapters. The books and edited volumes are Constitution-Making as a Transnational Legal Order (with Tom Ginsburg and Terence Halliday, Cambridge University Press, 2018); Transnational Legal Orders (with Terence Halliday, Cambridge University Press, 2015); Transnational Legal Ordering and State Change (Cambridge University Press, 2013); Dispute Settlement at the WTO: The Developing Country Experience (with Ricardo Melendez, Cambridge University Press, 2011); When Cooperation Fails: The International Law and Politics of Genetically Modified Foods (with Mark Pollack, Cambridge University Press, 2008); Defending Interests: Public-Private Partnerships in WTO Litigation (Brookings, 2003) and Transatlantic Governance in the Global Economy (with Mark Pollack, Cambridge University Press, 2001). gabriele spilker is Associate Professor of International Politics in the Department of Political Science and Sociology of the University of Salzburg. She holds a PhD from ETH Zurich. Before joining the University of Salzburg, she was a postdoctoral researcher at ETH Zurich and a Fritz Thyssen Fellow at the Weatherhead Center of International Affairs at Harvard University. Her main research interests are in the areas of international political economy, international cooperation, globalization and environmental politics.

PREFACE

In October 2017, the World Trade Forum took place in beautiful Grindelwald within walking distance of the famous Eiger north face. It marked the end of the National Centre of Competence in Research (NCCR) Trade Regulation research program, which ran from 2005 to 2017. On this occasion, the traditional book session focused on the overarching question of how the global trading system might evolve in years to come. Based on participants’ past research, they were asked to sketch scenarios for the near future. Given both the various disciplinary backgrounds of the authors and their respective fields of expertise, we were able to gather a unique mix of scholars to tackle this question. The Shifting Landscape of Global Trade Governance has benefited greatly from the presentations and the interactions with scholars and experts alike at the Forum. We hope that readers will find the various chapters thought-provoking and insightful, in particular for understanding the potential impact of different key factors to guide transformations to come. This book would not have been possible without the generous support of the Swiss National Science Foundation’s NCCR Trade Regulation and the help of many dedicated colleagues at the World Trade Institute. We also wish to thank Rachel Liechti and Sophia Thompson for their editorial support, and Finola O’Sullivan from Cambridge University Press for her excellent guidance throughout the entire process, as well as her continued support for the World Trade Forum Series.

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ABBREVIATIONS

AAAA ABS ADA AFAS APEC ASEAN ASEM BCA BIC BIS BIT CBD CETA CJEU CPAs CPRs CPTPP CSR CSSs CUSFTA DESTA DFI DSB DSM DSU ECI ECOWAS EFTA EGA

Addis Ababa Action Agenda access and benefit sharing Anti-Dumping Agreement ASEAN Framework Agreement on Services Asia-Pacific Economic Cooperation Association of the Southeast Asian Nations Asia Europe Meeting border carbon adjustment Brazil, India and China Bank for International Settlements bilateral investment treaty Convention on Biological Diversity Comprehensive Economic and Trade Agreement Court of Justice of European Union corporate political activities civil and political rights Comprehensive and Progressive Agreement for Trans-Pacific Partnership corporate social responsibility contractual service suppliers Canada–United States Free Trade Agreement Design of Trade Agreements Database Development Finance Institution Dispute Settlement Body dispute settlement mechanism dispute settlement understanding European Citizens’ Initiative Economic Community of West African States European Free Trade Association Environmental Goods Agreement

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ENT economic needs test EP environmental protection ESRs economic and social rights EU European Union FATCA Foreign Account Tax Compliance Act FDI foreign direct investment FIRA Foreign Investment Review Act FTA free trade agreement G20 Group of Twenty General Agreement on Trade in Services GATS GATT General Agreement on Tariff and Trade GCM Global Compact for Migration GDP gross domestic product GDPR general data protection regulation GE General Electric GFC global financial crisis GHG greenhouse gas GPT general purpose technology GSP generalized system of preferences GTA global trade alert GVC global value chain HCM home country measure HO Heckscher–Ohlin ICSID International Court for the Settlement of Investment Disputes intra-corporate transferees ICTs IFDI inward forward direct investment International Investment Agreement IIA IIT intra-industry trade ILO International Labour Organization International Monetary Fund IMF IP Intellectual Property IPA investment promotion agency ISDS investor-state dispute settlement International Social Survey Programme ISSP IT information technology least developed country LDC MAI multilateral agreement on investment MEAs multilateral environmental agreements Southern Common Market MERCOSUR

abbreviations MFN most favored nation MIGA Multilateral Investment Guarantee Agency MNP movement of natural persons MRA mutual recognition arrangement NAFTA North American Free Trade Agreement NES national election survey NT national treatment NTI non-trade issue OECD Organisation of Economic Co-operation and Development outward foreign direct investment OFDI PTA preferential trade agreement PTIA preferential trade and investment agreement RCEP regional comprehensive economic partnership RV Ricardo-Viner SCMs subsidies and countervailing measures SMEs small and medium-sized enterprises TFEU Treaty on the Functioning of the European Union TIEA tax information exchange agreement TIP treaty with investment provision TiSA Trade in Services Agreement TN Treaty NAFTA TPA trade promotion authority Trans-Pacific Partnership TPP TREND Trade and Environment Database trade-related investment measures TRIMs TRIPS trade-related aspects of intellectual property rights Transatlantic Trade and Investment Partnership TTIP UNCTAD United Nations Conference on Trade and Development UNFCC United Nations Framework Convention on Climate Change United States-Mexico-Canada Agreement USMCA USTR United States Trade Representative VAT value-added tax WAIPA World Association of Investment Promotion Agencies World Health Organization WHO WIPO World Intellectual Property Organization World Trade Organization WTO

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1 Introduction Current Challenges and Future Scenarios

manfred elsig, michael hahn, and gabriele spilker 1.1  The Rationale for the Volume The global economic system and its governing laws have developed substantially over the past fifty years. Increased economic interdependence and a growing number of countries opening up to international trade have induced most of these changes. The trade regime has been characterized in the period following World War II by an evolving multilateral system, first through successive tariff negotiations in the realm of the General Agreement on Tariffs and Trade (GATT), followed by a deepening and strengthening through the creation of the World Trade Organization (WTO) with all its covered agreements and an independent third-party system to address trade disputes. Next to the creation of the WTO a parallel development has set in, namely the negotiation of bilateral and plurilateral trade agreements which was coined “new regionalism” (Mansfield and Milner 1999). As progress on the “legislative” agenda of the WTO has been limited, preferential trade agreements (PTAs) have become a major platform for further liberalization. In addition, these agreements have served as laboratories for designing “behind the border rules” and addressing non-trade concerns (Dür et al. 2014). To a large degree, this reflects market needs as liberalization today puts less emphasis on the reduction of barriers at the border in forms of tariffs and quotas, but has moved attention to regulatory issues and behind-the-border barriers to trade, such as safety standards or environmental and health regulations. In addition, the appearance of new issues on the trade agenda, such as digital trade, and the interaction between trade and other topics, such as migration or environmental regulation, have further contributed to the evolution of the international trade regime and have created inter-linkages with other policy areas (Dupont and Elsig 2017). The jury is still out on to 1

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what degree PTAs act as complements or substitutes of multilateralism (Allee et al. 2017b), but certainly they have become more important and increasingly politicized over time. The challenges the trading system faces today are manifold. Challenges, and crises, however, also come with opportunities for developing more coherent sets of rules for global trade. One particular difficulty of global rules is that they are often not reacting in a timely manner to evolving changes: the WTO in particular mainly relies on trade deals that have been agreed upon in the early 1990s. This puts an additional burden on its dispute settlement system that needs to address complaints. Third-party adjudicators are tasked to balance in their interpretations the intentions of the treaty drafters with the realities on the ground twenty years after the conclusions of WTO legal treaties. The past twenty years have shown that adjustments to treaty commitments or the elaboration of new treaties are difficult in the context of an organization that has grown substantially in numbers and still takes decisions by consensus. This has led de facto to an asymmetry between the legislative and the judicial branch of the organization. Other forms of trade arrangements suffer similar fates. Bilateral trade agreements are usually difficult to renegotiate, because often forces that prefer the status quo are very vocal and oppose changes to existing treaties. However, we have seen some mega-regional trade agreement projects, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), exploring novel approaches to address today’s business and civil society concerns including regulatory cooperation, labor rights, the influence of state-owned companies, environmental protection, data protection, competition policy, and promoting global value chains. If such initiatives are successful and new treaty commitments are agreed upon, past research has shown that attractive trade rules and legal texts can diffuse quickly across treaty networks (Allee et al. 2017a). In the following we outline a number of factors that we expect to shape global trade regulation for years to come. These factors put pressure on trade governance to adapt and to change. One of the key market-induced changes to the international trading system certainly comes from the emergence of regional and global value chains. As a result of lower tariff barriers and the increasing equivalence of national production standards, numerous firms have followed a strategy to outsource not just the entire production but also specific parts of the production process within the same company across different countries (Baldwin 2016). This has affected the political economy of domestic lobbying with the emergence of a greater number of import-dependent firms

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and firms dependent on global value chains (Baccini et al. forthcoming) as well as multinational companies that are able to generate disproportional influence on the course of trade negotiations (Rodrick 2018). As a result of the increasing trade in parts and components and services outsourcing, trade policy initiatives to protect national industries face more domestic opposition than in previous times when the trading system was characterized by inter-industry or even intra-industry trade patterns. Another trend is the increasing progress and diffusion of technology. As a further driver of trade liberalization, it comes with many important regulatory challenges related to intellectual property rights, consumer protection, data privacy, and market concentration and dominance. In addition, technological progress and changing consumption patterns impact on today’s and future work environments. Pressures on job security are not only related to international competition and outsourcing, but also to automation and the increasing use of robots and artificial intelligence in more and more industries. Research using US household data shows that many jobs are being lost to robots and such factors often outpace employment effects related to trade liberalization (Acemoglu and Restrepo 2018). The rapid changes through trade and technology are also increasingly resonating in domestic political systems. In particular, in developed countries we have witnessed that economic openness and economic interdependence have been accompanied by increasing public discontent. While many left and green parties have been skeptical vis-à-vis trade liberalization for decades, we observe today an increasing polarization on the right. In particular, we witness how new actors question the benefits of international cooperation, object to (regional) integration (e.g. in the context of the European Union), and are speaking out against trade agreements. In consequence, protectionist pressures have increased and the return of mercantilist thinking has become more virulent. In particular, US President Trump has campaigned on an anti-trade platform, lamenting that international trade agreements have been unfair to the United States. He has called to renegotiate these agreements or abandon them altogether and has rediscovered unilateral trade policies that have been largely absent in the United States since the 1980s. The current development is a substantial U-turn from past US involvement in building today’s global economic system. The founders of the system based on liberal rules currently seem to undermine the rules they had a strong hand in negotiating. The above-mentioned challenges currently dominate discussions on the trading system and relegate other long-term trends to the background,

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many of which involve trade-related issues. What stand out as longterm trends are climate change, continued development challenges, and increased influence by emerging economies, all of which will affect future governance of trade. In terms of climate change, trade negotiators have been exploring how the multilateral system or the dense network of trade agreements can be used to address challenges related to climate change either in the form of easing trade for environmental goods and services or by protecting the climate by using border measures, such as a border carbon adjustment tax. From this perspective, trade can be seen more as a part of the solution rather than the problem and this opens the door for new initiatives. In any event, the pressure due to climate change to develop new trade measures will certainly increase in years to come as climate change will further dominate global politics. As to development, it has become increasingly accepted to use trade instruments to leverage growth. We have seen a “rapprochement” between the development and trade communities through agreeing on programs such as “aid for trade” in the context of international economic organizations. Some consensus among trade and development experts has emerged that support is needed to address countries’ supply-side constraints to increase competitiveness. Building economic infrastructure and streamlining processes related to trade have moved up on the development priority list of many countries. On the international level, developing countries are also actively involved in shaping the content of trade agreements and developmental needs become more prominent through trade facilitation initiatives. Besides supply-side challenges, however, issues such as the continued use of domestic and export subsidies in highly industrialized countries as well as the reluctance to increase labor mobility from developing countries will continue to inhibit the true growth potential. A new grand bargain (Ostry 2002) will thus be needed. On the geopolitical front, the ascent of emerging economies will likely continue and their attempts to move from rule-takers to rule-makers in the global economy will intensify. This will further shape trade regulation. With the United States currently holding back leadership in global rule making, a vacuum has built up.  This will create new opportunities for developing countries but also established powers, such as the European Union, to step in and push for global rules. However, increasing geopolitical ambitions by countries, such as China, will also intensify regional initiatives and pressure to build regional spheres of economic influence. We have already seen increasing protectionism in Group of

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Twenty (G20) countries and reliance on unilateral measures to become more accepted. This is another trend that will create challenges to global trade regulation when single countries set unilateral standards and try to impose these.

1.2  Content of the Book In this edited volume, we strive to evaluate in some detail how each of these factors (or a combination of these) currently influence the trading system and how the respective relationship could evolve in the near future. Particular interest lies in the development of what we call future scenarios, in which the various authors of the chapters describe potential developments in their area of expertise and how policymakers could take action to meet the various, sometimes immense challenges to the international trading system. Part I of the book, “New and Old Challenges,” deals with four topics that have over the last decades persistently turned out to challenge and thus shape the development of international trade regulation. In p ­ articular, these are public backlashes against trade liberalization, the digitalization of trade, rules of origin, and firm-level strategies to deal with anti-­globalization sentiment. While these issues are definitely not the only challenges to the trade system, they illustrate the various angles from which challenges to the trade system can arise and thus are highly illuminating for the broader development of trade regulation. First, by discussing public resentments vis-à-vis international trade, Nguyen and Spilker provide a perspective on how trade liberalization is challenged from below. The authors start with the question of whether the large public backlash observed against various trade agreements in recent years, such as the Trans-Pacific Partnership (TPP), the Transatlantic Trade and Investment Partnership (TTIP), or the Comprehensive Economic and Trade Agreement (CETA), constitutes a paradigm shift in public perception of world trade and what determines people’s attitudes towards international economic integration more generally. Next to providing an overview of the major determinants of support for or opposition to trade liberalization in general and PTAs in particular, the chapter discusses how much room to maneuver policymakers may have in designing such agreements. In particular, Nguyen and Spilker argue that whereas public skepticism against trade liberalization initiatives presents a major challenge to the international trading regime, it also provides strong impulses to policymakers to re-evaluate

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and potentially redesign trade liberalization in ways more consistent with the public will. This assessment then builds the basis for three different future scenarios of trade liberalization and the potential impacts for public opinion. Taking off where the previous chapter ends, Curran and Eckhardt ­analyze the ways trade-dependent firms are responding to this rising skepticism on the merits of free trade and globalization. What strategies do trade-dependent firms mobilize to persuade the public and their political representatives of the merits of openness? To answer this question the authors present an analytical framework of market and nonmarket business strategies in times of rising protectionism and explore empirically – through survey data and interviews – in how far recent responses of European import-dependent firms are consistent with this framework. Their contribution shows how corporate strategies can adjust to rising discontent with globalization. Next to the challenges posed by the public backlash and the responses firms could potentially use to counter them, Part I of the book deals with two challenges that arise out of finding suitable solutions to particular trade barriers, namely in the context of digital trade and with respect to rules of origin. In particular, Burri in her chapter starts from the premise that digital technologies have had disruptive effects on many sectors of the economy and spurred a significant amount of innovative activity. For a growing number of countries – both developed and developing – digital goods and services have become an important engine of economic growth and a clear priority in their future-oriented economic strategies. Yet, neither the rapid technological developments associated with digitization, nor their increased societal significance have so far been reflected in international economic law in a comprehensive manner. The law of the WTO in particular has not reacted proactively. PTAs have compensated for the lack of progress under the WTO and become a platform for new digital trade rules, ultimately leading to the creation of a tailored regime that is unevenly spread and influenced by few regulatory models. The chapter seeks to contextualize and assess the impact of PTAs on the burgeoning digital economy by looking at the most advanced model of the CPTPP and by highlighting the positive as well as the negative sides of proactive, power-driven norm-setting. The chapter ultimately asks whether there are better ways to address the data-driven economy and what the essential ­elements of such a model should be. In the fourth chapter in Part I, Freund deals with the role of rules of origins and analyses these technical rules in light of political economy

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considerations. She shows that the rules of origin, which are meant to protect against the transhipment of foreign goods in free trade areas, are instead being used to promote particular industries. Namely, strict rules of origin add to production costs by forcing firms to use more expensive parts and pay administrative costs. They also prevent firms from exporting to markets governed by different trade agreements and disproportionately hurt small firms. The ongoing renegotiation of the North American Free Trade Agreement (NAFTA) highlights the potential to expand the use of rules of origin as a form of trade protection. The chapter further suggests that the WTO currently has only limited disciplines on rules of origin and she pledges for clear and enforceable international regulations that help thwart the spread of complex rules. The final chapter in Part I focuses on the WTO’s current crisis, most visibly manifested in the forced vacancies on the Appellate Body and the foreseeable disappearance of what used to be described as the “jewel in the crown” of the WTO: at the end of 2019, only one of the seven Appellate Body member slots will be filled. Hahn is of the opinion that this crisis will only end if the Members can agree on a number of reform steps relating to the broader governance of the system. The author predicts that without those changes, the organization will wither away like a picture of Dorian Gray. Hahn deems it likely that unless the following points are addressed, there will be no (relevant) WTO, sooner rather than later: the WTO has to create a space for enhanced forms of cooperation between interested partners (“variable geometry/multi-speed WTO”); an organization with 164 sovereign states as members can only succeed if the general rules address foundational questions, whereas substantive issues need to be taken up by a critical mass of interested parties, always mindful of the fact that these sub-regimes should enhance the value of the overall system and not endanger it. This would allow the WTO to claim the role as premier forum of trade negotiations that it should be pursuant to the WTO-Agreement. Also, the status of developing country must be based on objective criteria; the practice of self-declaration is no longer acceptable to significant parts of the electorate in the developed world, which find it unacceptable that economic sectors of a comparable (or even superior) health and competitiveness get preferential treatment just because their state can declare itself to be developing. The multifaceted appropriation of foreign intellectual property by China is a topic that will also need addressing to ensure the continuing existence of a relevant world trade organization. While Hahn deems changes in antidumping and anti-subsidies law desirable, he suggests the unlocking of the potential that the Safeguard Agreement offers.

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The latter’s focus on the situation of the country that suffers disadvantages as a consequence of imports may allow to partially avoid a discussion that could be too difficult to solve: how to bring one of the most competitive market economies that happens to be an instrument for a totalitarian government into the structures of the WTO that are built on the premise that state and society are not identical, many exceptions notwithstanding. Hahn suggests that the Appellate Body-specific issues are comparably easy to solve once the previously mentioned subject matters are dealt with in a satisfactory manner. In Part II of the book, “Trade Policy and Trade-Related Concerns,” we move from challenges to the trade system in a narrow sense, to challenges that are a consequence of trade and how they might be regulated in trade agreements. In particular, this part of the book focuses on concerns of inequality, environmental regulation, social standards, and climate change. Shaffer starts the discussion of trade-related concerns with his analysis of how trade agreements affect inequality. He works on the assumption that international trade law has been oblivious to social inclusion. Although not the cause of the weakening of the US economy and entrenchments of poverty, it is nevertheless blamed on them, including the shutting of factories, joblessness, and even homelessness. Although not primarily to blame for these conditions, it is not wholly innocent. International trade law plays a powerful role in fomenting the conditions under which people are able to thrive, implicating social equality and inclusion. This chapter addresses why international trade law needs to be structured in ways that support social inclusion if society is to turn the tide against rising neo-nationalism, racism, and authoritarianism. The chapter presents a scenario on how international economic law can and should be retooled. By doing so, it can: (1) help combat harmful tax competition, avoidance, and evasion; (2) aid domestic social security and job retraining; (3) support labor protection; (4) dis-incentivise social dumping; and (5) enable industrial policy experimentation for development. Moving from inequality to climate change, Odell argues that, because the climate crisis has reached alarming proportions, each country that imposes positive net taxes on fossil fuel use at home should now extend the same treatment to all goods the country imports, unilaterally if necessary. It should set a default border carbon adjustment (BCA) on an imported product equal to net carbon energy taxes imposed on the competing home good in any jurisdictions along its supply chain. The importing government should reduce this default surcharge for a particular

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shipment to the extent that costs due to net carbon energy taxes, or other measures that are comparable in effectiveness in reducing greenhouse gas emissions, have already been paid on the imported good in any jurisdiction along its own supply chain. The immediate goal of this proposal is to drive exporter industries in high-emitting countries to lobby for more effective domestic carbon mitigation so their goods will gain exemption. As long as those governments delay, the new surcharges will discourage carbon leakage through trade. The BCAs should exempt all exports from countries whose CO2 emissions per capita are low. Additional research is needed to flesh out such a policy fully. In an illustration, low emissions are defined as less than the Organization for Economic Cooperation and Development (OECD) median, 7.15 tons per capita. This case would likely mean new carbon surcharges on exports of 33 countries today, including the United States, China, Russia, Canada, and other oil producing countries. The chapter suggests a way to administer this policy so as to impose the smallest possible additional transaction costs on domestic and international trade. Odell argues these trade measures can and should be designed to qualify for the GATT Article XX exemption. Staying in the context of environmental regulation but taking on a somewhat broader perspective, Morin, Brandi, and Berger start from the premise that the WTO agreements’ approach to environmental concerns is out-dated. While GATT Article XX b) and g) exceptions are still fundamental pillars of the trade and environment interplay, PTAs concluded over the last twenty-five years cover a much wider diversity of specific environmental clauses, including on genetic resources, climate changes, fisheries, endangered species, and forestry. This chapter compares five different scenarios for a potential multilateralization of PTAs’ environmental clauses: (1) The “consensual scenario,” i.e. a compilation of clauses accepted at least once by a high number of WTO members; (2) The “routine scenario,” i.e. a compilation of the most frequent clauses; (3) The “trendy scenario,” i.e. a compilation of the clauses that are becoming increasingly popular; (4) “The power-game scenario,” i.e. a compilation of clauses supported by the United States and the EU; (5) The “appropriate scenario,” i.e. a compilation of clauses typically included in North/ South agreements with a large membership.  The chapter contrasts the political, economic, and environmental implications of each scenario. Although they are ideal types unlikely to materialize, their comparison offers insights into how the multilateral trade system can move forward. Finally, Lechner provides an overview of all these different non-trade issues (NTIs) in PTAs, ranging from civil and political rights, economic

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and social rights, environmental protection, to security issues. This chapter presents an original dataset on the design of non-trade issues in PTAs. Covering 265 data-points in 645 PTAs signed between 1945 and 2016, the data shows large variation over time, across countries, and issue areas. Whereas security issues, civil and political, are the most traditional norms, environmental protection represents the most modern aspect in PTAs. European countries tend to push for civil and political rights, North America for economic and social rights as well as environmental protection, Asia for ecological aspects, and Arab countries for security issues. Plotting regional and chronological trends of non-trade issues (NTIs) in PTAs leads to new research questions that cover political economy puzzles, but also go far beyond the International Political Economy (IPE) literature. The data set is of particular relevance in studying issuelinkage, institutional design, foreign policy strategies, diffusion, and compliance. The chapter ends with outlining avenues for future research on NTIs in PTAs. Part III of the book, “Development Angles,” deals with issues in trade regulation from different development angles. Development concerns have been voiced early in the global trading system. Since the proclamation of a new international economic order in the 1960s and the creation of the United Nations Conference on Trade and Development (UNCTAD) in the 1970s, the need to make the trading system more developmentfriendly has been at the forefront of many initiatives. In Part III the book zooms in on three areas that include migration, intellectual property rights, and foreign investment, and discusses challenges and opportunities ahead. In their chapter, Jurje and Lavenex map the trade-migration nexus at the multilateral, regional, and bilateral level and highlight in particular the innovative role played by emerging countries, most prominently China and India, in seizing trade agreements as a venue for advancing migration policy goals. Ongoing power shifts in the global economy are likely to sustain these trends, thus suggesting a further expansion of labor mobility provisions in trade agreements – notwithstanding restrictive trends in immigration policy. The analysis in this chapter draws on primary data coded from multilateral, regional, and bilateral trade agreements as well as extensive field research conducted within various regional integration frameworks from Europe, the Americas, and Southeast Asia and across emerging markets. Moving from migration to intellectual property rights, Serrano and Burri sketch in their chapter future scenarios for the implementation of the

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TRIPS (Trade-Related Aspects of Intellectual Property Rights) Agreement in developing countries by looking at Brazil, India, and China, and by examining past experience and current trends, as well as comparing historical and cross-country patterns. Emerging economies, particularly Brazil and India, have been at the forefront of challenging a maximalist, strict interpretation of the TRIPS. Through international contestation, domestic implementation, and even rule-making, they have been able to ensure that some flexibilities in the implementation of the TRIPS remain and thus have resisted the pressure of industrialized countries. Shifts in the political economy of these countries towards 2025 involving rising innovation and patenting would mean that Brazil and India are likely to calibrate or even drop their opposition to maximalist policies, at least in some fields. China will likely be an innovation giant by then. This has previously occurred in cases such as Japan and Korea and to a certain degree is already taking place in China. However, there is one area where emerging countries are likely to become collective rule-makers by including a new issue into TRIPS, namely access to and benefit of sharing of genetic resources and related traditional knowledge − an issue championed by China. Some degree of homologation of TRIPS and the Nagoya Protocol appears also likely. Finally, access to health and the high price of pharmaceuticals are likely to keep being hotly debated issues in both developed and developing countries and challenge the intersection between intellectual property (IP) and public health. In the third and final chapter of Part III, Rodrigo Polanco Lazo and Bazrafkan look at foreign direct investment and its effects on developing countries. In particular, they argue that not all types of foreign investment are beneficial to developing countries. Hence what can the development partners of developing countries do to help those countries to receive more quality and sustainable foreign direct investment (FDI)? To provide an answer, this chapter reviews investment promotion and facilitation measures that can be undertaken by foreign investor’s home countries and development agencies, and develops recommendations to achieve development objectives. Part IV of the book, “Diffusion Across Economic Treaties,” ends with an investigation of how the networks of both trade and investment treaties have evolved over time. In doing so, the three final chapters of this book analyze governance in both the network of trade agreements and the network of bilateral investment agreements, compare them and evaluate how they have influenced each other. In Chapter 14, Alschner argues that after three decades of growing convergence, investment protection rules, and trade agreements are

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now heading for a divorce. Investment chapters have been included in PTAs since the late 1980s, but have recently come under fire. The new US administration considers privately enforceable investment protection obligations as an unwanted incentive to offshore American jobs, and the European Union (EU) Commission seeks to omit them to benefit from the accelerated ratification process reserved for trade agreements that fall under exclusive EU competency. After decades of coexistence, investment protection rules and trade agreements are thus likely to go their separate ways. Consequently, this article empirically evaluates the impact of their thirty-year companionship and concludes that the architecture of a wider trade agreement did not have a systematic influence on the content of investment protection rules or their interpretation. Since investment chapters are thus not more than bilateral investment treaties plugged into a trade agreement, their separation should raise little cause for concern. Further investigating their joint relationship, Kim and Lee analyze the governance of the trade-investment nexus, as observed through commitments in PTAs and bilaterial investment treaties (BITs). Their theoretical framework conceptualizes PTAs and BITs together as a regime complex, in which the agreement provisions partially overlap and, in some cases, complement each other to produce synergistic outcomes. Individually, Kim and Lee differentiate PTAs as institutions for the joint liberalization of trade and investment and BITs as institutions largely for protection of investment. The study employs principal components analysis for a sample of PTAs and BITs to identify the relative significance of particular provisions and governance areas. The chapter also investigates the degree of overlap in the commitments states make across these two types of agreements and the direction of influence between them. In the final chapter of this book, Manger takes stock of the dense network of trade agreements that has evolved in the East Asian region, and considers some of its prospects in the wake of the withdrawal of the United States from the TPP negotiations. Perhaps surprising for a region associated with booming economies, trade agreements in Asia have not always been driven by economic considerations. At the same time, it remains unclear if services trade has been as much a factor in trade agreement formation as in other regions. The econometric analysis in the chapter shows clearly that at this point, China cannot supplant the United States as driver of services liberalization in PTAs – to the contrary, Chinese trade agreements stand out in the region as being the least liberalizing. In the Asia Pacific region at least, there appears to be a strong complementarity between trade in goods and trade in services, so that there are some

introduction

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grounds for optimism that liberalization of one type of commerce will give a boost to the other as well.

1.3 Conclusions We are writing this book in turbulent times. In addition to several persistent challenges to trade regulation, ranging from technological innovation to non-trade concerns such as environmental protection, several new challenges from populism to global value chains call for our attention. This book strives to cover the most important of these challenges and to map future scenarios. Based on these scenarios, the book allows for several conclusions. First, several of the chapters in this book make it abundantly clear that public opinion will stay a crucial factor limiting both elected governments’ ability to (re-)negotiate trade agreements and influencing firms’ responses to increasing economic integration. In particular in light of increasing inequality, the success of the global trade regime will critically hinge upon policymakers success in redesigning trade agreements in ways that better tackle social but also environmental concerns. This connects to the second conclusion of this book that, although we have observed much improvement in the direction towards more environmental and social standards in trade agreements, it will be in the end the ability of policymakers to include climate change and other non-trade concerns in the trade regime that judges its ultimate success. Third, the scenarios developed in this volume let us expect that after decades of coexistence, the two main drivers of economic integration – investment protection rules and trade agreements – might go separate ways again. Yet in contrast to the other conclusions, this development should lead to less concern in that most investment chapters in trade agreements have been little else than bilateral investment treaties plugged into a trade agreement. Fourth, while the system as we know it today was mainly designed by the United States and its allies, it might rather be today’s rising powers, especially China and India, that will determine its future face. This is to be expected in issue areas as diverse as migration, digital trade, trade in services, and intellectual property rights. Finally, while we have seen that the trade system is relatively resilient with respect to economic and financial crises, it is less clear how the system recovers if there is across-the-board unilateralism and the United States turns its back on the trading system.

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References Acemoglu, D. and P. Restrepo. 2018. “Robots and Jobs: Evidence from US Labor Markets,” NBER Working Paper No. 23285. Allee, T., M. Elsig, and A. Lugg. 2017a. “Is the European Union Trade Deal with Canada New or Recycled? A Text-as-data Approach,” Global Policy 8(2):246–52.   2017b. “The Ties between the World Trade Organization and Preferential Trade Agreements: A Textual Analysis,” Journal of International Economic Law 20(2):333–63. Baccini, L., A. Dür, and M. Elsig. Forthcoming. “Intra-Industry Trade, Global Value Chains, and Preferential Tariff Liberalisation,” International Studies Quarterly. Baldwin, R. 2016. The Great Convergence: Information Technology and the New Globalisation, Cambridge: Harvard University Press. Dupont, C. and M. Elsig. 2017. “Performance and International Organizations’ Borders: The Case of the World Trade Organization,” In: M. Elsig, B. Hoekman and J. Pauwelyn (Eds), Assessing the World Trade Organization: Fit for Purpose? Cambridge: Cambridge University Press. Dür, A., L. Baccini, and M. Elsig. 2014. “The Design of International Trade Agreements: Introducing a New Dataset,” The Review of International Organizations 9(3):353–75. Mansfield, E. and H. Milner. 1999. “The New Wave of Regionalism,” International Organization 53(3):589–627. Ostry, S. 2002. “The Uruguay Round North–South Grand Bargain: Implications for Future Negotiations,” In: D. Kennedy and J. Southwick (Eds), The Political Economy of International Trade Law: Essays in Honor of Robert E. Hudec, Cambridge: Cambridge University Press. Rodrick, D. 2018. “What Do Trade Agreements Really Do?” Copy at http://j.mp/2EsEOPk.

PART I New and Old Challenges

2 The Elephant in the Negotiation Room PTAs through the Eyes of Citizens

quynh nguyen and gabriele spilker 2.1 Introduction Recent events have pushed the issue of international trade to the top of the economic agenda. In Europe, the Brexit vote has not only called into question the UK’s trade relationship with its European trading partners but also with the rest of the world. On the other side of the Atlantic, the unexpected victory of Donald Trump in the 2016 US presidential e­ lection and his vocal criticism of free trade threatens to jeopardise existing trade ties with the world’s largest economy. Within his first one hundred days in office, the president withdrew US participation from the Trans-Pacific Partnership (TPP), a trade agreement between the United States and eleven Asian and Pacific Rim countries that was negotiated by his predecessor, Barack Obama. He then went on to sign an executive order to review all trade agreements and to review the US membership in the World Trade Organization (WTO). Meanwhile, the WTO is warning of the slowest growth of exports and imports since the global financial crisis. These dramatic policy shifts across various parts of the world were fuelled by a growing public backlash against international trade. For example, as the results from various polls show, public opinion on free trade was one of the crucial issues to Donald Trump’s success in both the Republican primary and the general election: whereas, historically, the general American public has been supportive of free trade, this optimism towards free trade has declined in recent years. Results from a national representative opinion poll by the Pew Research Center (Bradely 2017) indicate that the share of Americans who believe free trade agreements with other countries are a good thing for the United States has steadily decreased from a peak of 59 per cent in 2014 to 45 per cent just before the 2016 presidential election. Furthermore, while roughly half of the

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American voters thought that US trade with other countries leads to job losses, ten years later, a clear majority of 60 per cent of respondents were convinced that the United States was losing jobs as a result of free trade (CBS/NYT 2016). Among those who believed international trade took away US jobs, nearly two-thirds (64 per cent) voted for Trump (CNN 2016). Similarly, a Pew Research Center poll (2006) found that among registered Republican voters, 67 per cent of Trump supporters believe that free trade agreements have been a bad thing for the United States, while just 27 per cent think that trade agreements have been a good thing. In contrast, among Democratic voters, a majority of Clinton supporters (58 per cent) state that free trade agreements have been a good thing for the United States (Jones 2016). Meanwhile, the negotiations on the Transatlantic Trade and Investment Partnership (TTIP) between the United States and the European Union, which officially began in 2013, have de facto been stalled following an increase in opposition towards the agreement in numerous European countries. Across Europe, an alliance of 500 European organisations set up a European Citizens’ Initiative (ECI) to stop TTIP. Within a year, the initiative collected more than three million signatures from citizens in twenty-three EU member states supporting the initiative. Interestingly, one of the countries in which public opposition against TTIP was strongest is Germany. According to a survey conducted by the Bertelsmann Foundation, only 17 per cent of Germans believe that the TTIP is a good thing – a huge drop from a majority of 55 per cent reported two years earlier (Bertelsmann Foundation 2016). Asked about the specific reasons for their discontent, many Germans fear that the TTIP will lower environmental, labour and consumer protection standards. More importantly, the survey pointed to a dramatic drop in general support for free trade in Germany, a global export champion. While an overwhelming majority of 88 per cent of respondents in Germany showed support for free trade in 2014 within two years, this number decreased to 56 per cent. This public discontent among Germans finally culminated in a large anti-TTIP demonstration mobilising 150,000 citizens to the streets of Berlin in late 2015. An obvious question arising from these events is whether we are observing a paradigm shift of what once used to be a public consensus on free trade, or whether this decline in favour of free trade is a long-time trend. Time-series public opinion data suggests the latter. As Figure 2.1 shows, public opinion towards protectionism is relatively time-invariant in most countries. While there exist significant differences between countries as to how many individuals would like to see their government

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the elephant in the negotiation room

2013

USA

Sweden

Switzerland Taiwan

South Korea Spain

Slovenia

South Africa

Portugal

Norway

Philippines Poland

Latvia

New Zealand

2003

Russia Slovak Republic

1995

Netherlands

Israel

Japan

Ireland

Hungary

GB

Germany

France

Finland

Denmark

Canada

Czech Republic

Austria

Bulgaria

Disagreement to the statement: Country should limit import of foreign products to protect its economy.

Australia

60% 50% 40% 30% 20% 10% 0%

Figure 2.1  Public support for protectionism. Data from the International Social Survey Program (ISSP Research Group 1998, 2012, 2015).

placing limits on foreign products, in very few countries can we detect a clear time trend towards more protectionism. Furthermore, a look at historical developments corroborates this picture. Throughout the 1980s and 1990s, politicians and mainstream economists in industrialised countries upheld the consensus on the merits of international economic integration (Rodrik 2011). This was underpinned by milestones of economic integration, such as the foundation of the WTO in 1995 and the ratification of the North American Free Trade Agreement (NAFTA). At the same time, however, across the globe, a growing coalition, labelled as the ‘anti-globalisation’ movement, began to voice discontentment with globalisation and the way it evolved. The group’s main criticism concerned the increasing political power enjoyed by multinational corporations through a growing web of free trade agreements and deregulated financial markets. According to the movement, these multinational firms seek profit maximisation at the expense of labour and environmental standards, especially in developing countries (Singh 2017). At the WTO Ministerial Conference in Seattle in 1999, during which a new round of trade negotiations was to be launched, the protests consisting of a coalition of labour rights and environmental protection groups achieved an unprecedented level of potency and ultimately led to the suspension of the WTO meeting. However, in the early 2000s, despite the anti-globalisation movement having achieved great visibility the movement lost ground. As a consequence, policy consensus settled in favour of globalisation. In addition, other major political events such as the invasion of Iraq and the subsequent launch of the ‘war on terror’ turned the world’s attention away from free trade, thus leaving the consensus for globalisation intact. This period also witnessed staggering Gross Domestic Product (GDP) growth and

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poverty reduction rates in various developing countries, such as China and India, which contributed to the widespread perception that globalisation was working as prescribed. Even among economists, the free trade paradigm seemed to be uncritically accepted, as revealed in a television interview with Thomas Friedman who admitted ‘I wrote a column supporting the CAFTA, the Caribbean Free Trade initiative. I didn’t even know what was in it. I just knew two words: free trade.’1 However, in the wake of the financial crisis, the globalisation consensus began to wane. The excesses of the financial system, which led to the crisis, and which were closely associated in the public mind with world trade, again fuelled opposition to big business and globalisation (Saval 2017). Once fervent supporters of economic globalisation started conceding that they may have underestimated the negative consequences of free trade and that it has produced inequality, unemployment, and downward pressure on wages (ibid.). We might, therefore, currently observe the political consequences of this development. However, seen from a more long-term perspective, major increases in trade have always been accompanied by insecurity and job displacement (Hays 2009) with the potential to lead to political retrenchment. If the social and strong distributional consequences of free trade are overlooked, political backlash can easily follow, a diagnosis Dani Rodrik (1998) had already made two decades ago. While history suggests that the current public backlash against economic globalisation does not reflect a profound paradigm shift, this should not imply that political leaders can simply revert to a general consensus on globalisation and to magically defuse the existing protectionist pressures (Hays 2009; Rodrik 2011). We are now in a world where the protectionist tide is rising. Major new trade initiatives are struggling to garner political support. As a consequence, political leaders must make a more convincing case about the benefits of greater integration to avoid the dismal outcome of the late 1920s and 1930s, which saw the deepening of trade protectionism adding to the length of the global depression. To do so, policymakers have a great deal to learn from the literature on individual trade policy preferences. The aim of this chapter is to provide an overview of the major determinants of individual-level trade attitudes. The chapter will reflect both the broader literature on this topic but also, and mainly so, discuss in detail the research on individual-level trade policy preferences as undertaken in the context of the NCCR ‘Trade Regulation’.2 Building on this Cited in Sirota (2006). www.nccr-trade.org

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review, we will develop scenarios and options policymakers can rely on to better align trade liberalisation and public perception of globalisation.

2.2  Determinants of Individual Trade Policy Preferences The literature on individual trade preferences is very encompassing and develops vividly. The origins of this literature can be found in studies examining the individual-level implications of macro-economic theories on trade liberalisation. In particular, these early studies mainly focused on the redistributional consequences of trade and therefore analysed whether those individuals who are supposed to personally profit from trade in economic terms are indeed in favour of liberalising trade. This rather narrow focus of the literature was then expanded into various directions. However, a common theme of these emerging strands in the literature was scepticism towards the assumption made in previous studies that individuals readily understand the economic implications of trade liberalisation on their own material welfare. In response, a number of studies began to look at non-economic determinants of trade preferences, focusing on how individuals’ socio-demographic characteristics – such as gender and age – determine their attitudes towards trade liberalisation. Another strand of literature focused on the impact of ideological and cultural factors, including social capital, environmental concerns, nationalism or inequality aversion. Finally, more recent research has moved away from the dichotomy of supporting versus opposing trade and tried to understand whether different ways of designing trade liberalisation, in the form of preferential trade agreements (PTAs), matter for individuallevel support. We discuss each strand of the literature in turn.

2.2.1  International Trade Theory and Individual Trade Policy Preferences The first generation of studies on the determinants of individual trade policy preferences mainly examined economic factors. These studies were guided by the standard workhorse models of international trade, namely the factor-endowments (Heckscher-Ohlin) model and the specific factors (Ricardo-Viner) model, which have well-defined but distinct implications for the distributive consequences of trade and hence for how individuals form attitudes towards trade liberalisation. As a starting point, both models posit that changes in trade policy will have an effect on individuals’ employment and incomes, with trade either increasing or decreasing one’s

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employment prospects and level of income. Accordingly, if trade leads to the loss of one’s job or lower income, an individual will oppose trade. By contrast, if an individual experiences higher incomes under trade, this person will support trade. Thus, individual attitudes towards free trade are largely seen as a function of trade’s distributional consequences, i.e. who personally gains or losses as a result of trade liberalisation. The Heckscher-Ohlin (HO) model assumes that factors are mobile across industries of employment such that workers can easily change jobs from one industry to another, and capital can be re-invested in any industry. Therefore, it does not matter what industry one works for or invests in, as one can simply move to a new industry when the old industry is hurt by economic openness. Instead, international trade should affect individuals’ incomes according to their factor ownership.3 Based on these assumptions, Stolper and Samuelson (1941) showed that, in a given country, open trade will tend to benefit the owners of factors of production in which a country is abundantly endowed relative to the remainder of the world while harming the interests of owners of relatively scarce factors. Consequently, in a country endowed with an abundance of highly skilled and well-educated labour relative to the rest of world like, for instance, in the United States, free trade benefits highly skilled workers and hurts less-skilled individuals (Leamer 1984). Thus, low-skilled individuals in advanced industrialised countries are predicted to favour protectionism, while their skilled counterparts are expected to gain from trade openness and will therefore favour international trade. In short, under the HO framework, individual trade policy preferences are determined by factor ownership irrespective of the employment sector. In contrast, the RV theorem assumes that certain factors of production are specific, i.e. they cannot easily shift (without costs) from one industry to another. For instance, if one works in a certain industry, then it is believed that one has skills specific to this industry that are not easily transferable to another industry and vice versa. Since factors are immobile, trade liberalisation affects the incomes of all factors employed in one industry in the same way. As a result, individuals will base their trade preferences on how changes in trade policy are expected to affect the industry in which they are currently employed. The RV model suggests that individuals who work in export-oriented sectors of the economy will therefore embrace international trade, since they can expect economic gains. The classic treatment of the model uses capital and labour as the two factors of production. However, scholars of public opinion about trade have used the bifurcation of skilled and unskilled labour.

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In contrast, those individuals employed in import-competing industries should oppose further trade liberalisation as they face losses from open trade as a result of increased competition from foreign firms. Accordingly, both owners and workers in export-oriented sectors will have more positive attitudes towards international trade than their counterparts in import-competing industries. In sum, under the RV logic of factor immobility, industry characteristics – not individuals’ factor ownership as posited by the HO model – will determine how individuals’ income varies with trade and thus their resulting trade preferences. Numerous scholars have set out to test the predictions put forward by the two models. As shown in Table 2.1, while early empirical evidence mainly suggests that attitudes towards open trade appear to form along industry lines and thus are consistent with the predictions made by the RV model, later studies have found stronger support for the HO framework. For instance, using county-level data to regress county votes on measures of county factor and industry mix, Irwin (1994) finds that industry interests best explain voting in the 1923 British general election – an election that hinged primarily on the issue of the implementation of new trade barriers. Following a similar approach, Weck-Hannemann (1990) examined the Swiss referenda in 1975 and 1986 on processed food tariffs and on the means of protection in the sugar market, respectively. Her findings also lend support to the RV prediction that voting patterns are formed along industry lines rather than factor groupings. However, findings from these early studies have been criticised for solely relying on indirect inferences of individual trade opinions from aggregated information such as voting, campaign contributions or policy outcomes – an approach that can easily result in ecological fallacies. In contrast to the findings from these early studies, Scheve and Slaughter (2001), analyzing individuals’ stated trade policy preference from the 1992 US National Election Survey (ANES), showed that respondents’ stated trade policy preferences reflect factor, not industry interests. In particular, while a person’s skill level seems to be significantly correlated with her trade policy preference, a person’s industry of employment does not appear to affect the way a person thinks about free trade. Using survey data from the 1995 International Social Survey Programme (ISSP), O’Rourke and Sinnott (2001) also find support for the factor-endowment hypothesis. The study results corroborate the finding that skill levels, measured by occupational categories, have large effects on trade attitudes, with lower-skilled individuals being most protectionist.

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Table 2.1 Factor endowments versus industry interests Predicted Relationship

Data

Author(s)

Industry interests

Export-oriented industries favour open trade. Import-competing industries oppose open trade. Export-oriented industries favour open trade. Import-competing industries oppose open trade. High-skilled workers are more supportive of free trade than low-skilled workers. Lower-skilled individuals are most likely to embrace protectionism.

County-level data from 1923 British general election

Irwin (1994)

Aggregate data from two Swiss referenda in 1975 and 1986

Weck-Hannemann (1990)

Individual-level survey data from the 1992 US National Election Survey (NES)

Scheve and Slaughter (2001)

Individual-level cross-country survey data from the 1995 International Social Survey Programme (ISSP); 23 countries Individual-level cross-country survey data from the 1995 International Social Survey Programme (ISSP); 23 countries and 1995–97 World Values Survey (WVS); 47 countries Individual-level cross-country survey data from the 1995 International Social Survey Programme (ISSP); 23 countries and 1995–97 World Values Survey (WVS); 47 countries

O’Rourke and Sinnott (2001)

Industry interests

Factor endowments: Skills/Education Factor endowments: Skills/Education Factor endowments: Skills/Education and Occupation Industry interests

Individuals with high skills and those with capital endowments are more likely to support trade. Individuals working in export industries are more supportive of open trade than their counterparts employed in import-competing sectors.

Mayda and Rodrik (2005)

Mayda and Rodrik (2005)

quynh nguyen and gabriele spilker

Main Variable

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A study by Mayda and Rodrik (2005), which also relies on crosssectional survey data from the World Values Survey Wave 3 (1995–98) (Inglehart et al. 2014) and the ISSP 1995 (ISSP Research Group 1998), finds that both factor type and industry of employment matter. The empirical evidence from their study indicates that in countries well-endowed with human capital, such as advanced industrialised countries, individuals with high skills, as measured by their educational attainment, and those with capital endowments, as measured by income, were more likely to support trade. In addition, pro-trade attitudes are also more likely to be observed among those who work in export industries than among their counterparts employed in import-competing sectors. Thus, Mayda and Rodrik’s (2005) results can be interpreted as lending support to both the HO and the RV model. Both the HO and the RV model derive their implications for trade preferences on the presumed effects trade liberalisation has on people’s income. However, trade also affects the price of consumption goods and thus allows for a different, yet also purely economic, way to influence individual trade preferences (Baker 2003, 2005, 2009). Based on the HO framework, Baker (2005) develops a model of how preferences for exportable versus imported goods affect trade preferences. Using data from the World Values Survey Wave 3 (1995–98) (Inglehart et al. 2014), Baker shows that individuals who mostly consume their countries’ exportables tend to be more protectionist as prices for these goods tend to increase due to trade liberalisation. In contrast, those individuals who favour consumption of imported goods benefit from liberalisation and thus have more positive attitudes towards trade.

2.2.2  The Impact of Non-Economic Factors The literature’s heavy focus on the economic drivers of individuals’ trade policy preferences attracted criticism by a new generation of researchers who posit that these explanatory models make very strong, and probably unrealistic, assumptions about the ability of individuals to understand the economic consequences of trade on their personal economic welfare. Public opinion studies show that factual knowledge and issue salience about trade liberalisation is typically low compared to other issue areas (Guisinger 2009; Hiscox 2006). To compensate for shortfalls in information, individuals are likely to use heuristics or cues based on psychological, ideological or cultural factors to determine their trade attitudes (Hicks et  al. 2014; Kaltenthaler and Miller 2013;

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Kocher and Minushkin 2007; Lupia and McCubbins 1998). In response, one strand of this literature focuses on examining the impact of sociodemographic factors, while another is primarily concerned with the influence of psychological, ideological or cultural factors on individuals’ trade attitudes. An overview of these factors is presented in Table 2.2. Already the above-mentioned early studies on trade preferences find, mostly as a side note, that political orientation, as a non-economic factor outside the context of both the HO and RV models, influences the way people perceive free trade. For example, Mayda and Rodrik (2005) find that political orientation can colour the way people think about free trade. The authors observe that political orientation on the left-right spectrum is an influential predictor of individual trade preferences, with respondents located on the right being more supportive of free trade. In a similar vein, testing the impact of political ideology among US respondents, Scheve and Slaughter (2001) conclude that notably identification with the Democratic Party appears to be correlated with protectionist attitudes. Most studies consistently find employment status, independent of skill level as theorized in the HO model, to have a strong effect on people’s trade attitudes with unemployed individuals expressing stronger support for limiting open trade than their employed counterparts. These individuals are often presumed to either blame trade for their loss of employment or believe open trade will hurt their prospect of securing new employment (Ehrlich et al. 2010; Mansfield and Mutz 2009). Other studies also find that older individuals and married individuals are more supportive of protectionism (Ehrlich et al. 2010; Kaltenthaler et al. 2004; Mansfield and Mutz 2009; Mayda and Rodrik 2005; O’Rourke and Sinnott 2001). The effect of age and marital status is commonly attributed to an increased sensitivity to losing income. Another individual characteristic, which seems to assert strong influence on the way people form their trade preferences, is gender. The existing literature offers considerable evidence that females are more likely than males to oppose trade liberalisation even after controlling for a broad range of socio-economic characteristics (Beaulieu and Napier 2008; Kaltenthaler et al. 2004; Mayda and Rodrik 2005; O’Rourke and Sinnott 2001). Several potential explanations for this so-called gender gap in trade preferences exist. First, and in line with the HO model presented above, women may on average have a lower skill set than men, implying that trade liberalisation would economically hurt the average woman (Mayda and Rodrik 2005; O’Rourke and Sinnott 2001). Second, and also related to

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skills, yet following a different causal mechanism, it could be that women on average receive less education in economics than men, suggesting a knowledge-based explanation of the gender gap (Burgoon and Hiscox 2008). Third, and closely tied to the RV model, women could be less mobile than men and thus trade-induced job relocation could be more difficult for women leading to less favorable views on trade (Mansfield et al. 2015). Finally, women tend to be more risk-averse than men and tend to view competition in more negative terms (Mansfield et al. 2015). Hence, women could weigh the potential economic losses that accompany trade liberalisation more heavily than men. While Burgoon and Hiscox (2008) find some support for the economic education mechanism, later studies provide evidence questioning the validity of this mechanism (Guisinger 2016; Mansfield et al. 2015). It rather seems that a mixture of economic self-interest, immobility, risk aversion and a more negative view on international affairs in general are responsible for the gender gap (Guisinger 2016; Mansfield et al. 2015). So, while the jury is still out for the exact mechanism underlying the gender gap, the one thing we know for sure so far is that this gender gap exists and persistently so. While it features somewhat prominently in the explanation of the gender gap, the role of economic education as a driver for international trade preferences has been introduced to the literature earlier. In particular, the seminal work by Hainmueller and Hiscox (2006) has paved the way for at least two further refinements of the literature – one approaching trade preferences from a knowledge-based perspective, and one emphasizing cultural and ideological determinants of individual trade policy preferences (we will discuss both strands of the literature in more detail below). Examining the relationship between education and support for trade openness, the authors criticise the hitherto prevailing interpretation of education as a measure of workers’ skill levels. More precisely, Hainmueller and Hiscox (2006) disagree with the standard approach of perceiving the effect of education on trade attitudes only via how education affects individuals’ expected income. Instead, they argue that educational attainment facilitates exposure to economic ideas and information sharing, which in turn should play an important role in shaping trade opinions. To test their arguments, the authors compare the effect of education on trade policy preferences across active and non-active members of the labour force. Their results show that no significant differences exist between the two groups. These results cast doubts on the

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Table 2.2 Non-economic determinants of individual trade policy preference Predicted Relationship

Data

Political ideology

Individuals located on the right-hand side of the political spectrum are more supportive of free trade

Partisanship

Individuals who identify themselves strongly with the Democratic party are more likely to oppose trade. Unemployed individuals express stronger support for limiting open trade than their employed counterparts. Older individuals are more supportive of protectionist measures.

Mayda and Rodrik (2005) Individual-level cross-country survey data from the 1995 International Social Survey Programme (ISSP); 23 countries and 1995–97 World Values Survey (WVS); 47 countries Individual-level survey data Scheve and Slaughter (2001) from the 1992 US National Election Survey (NES)

Employment

Age

Marriage

Married individuals are more supportive of protectionist measures.

Author(s)

Individual-level survey data

Ehrlich et al. (2010); Mansfield and Mutz (2009)

Individual-level survey data

Ehrlich et al. (2010); Mansfield and Mutz (2009); Mayda and Rodrik (2005); Kaltenthaler et al. (2004); O’Rourke and Sinnott (2001) Ehrlich et al. (2010); Mansfield and Mutz (2009); Mayda and Rodrik (2005); Kaltenthaler et al. (2004); O’Rourke and Sinnott (2001)

Individual-level survey data

quynh nguyen and gabriele spilker

Main Variable

Education

Well-educated people are more Individual-level survey data supportive of open trade (for from the 1992 and 1996 US ideological and cultural reasons). National Election Studies and the 1995 ISSP Individual-level survey data Individuals who think that from 2002 Pew Research globalisation has caused negative Center’s Global Attitudes cultural consequences are more Project 2002 survey and the supportive of protectionist 2003 International Social measures. Survey Program, and a survey experiment Nationalist and chauvinistic Individual-level cross-country individuals are more supportive survey data from the 1995 of protectionist measures. International Social Survey Programme (ISSP); 23 countries Population-based survey experiment People with higher levels of trust Individual-level survey data are more likely to support free trade.

Cultural dislocation

Nationalism

In-group favouritism Social trust

Beaulieu and Napier (2008); Mayda and Rodrik (2005); Burgoon and Hiscox (2004); Kaltenthaler et al. (2004); O’Rourke and Sinnott (2001) Hainmueller and Hiscox (2006)

Margalit (2012)

O’Rourke and Sinnott (2001)

Mutz and Kim (2017) Spilker et al. (2012), Kaltenthaler and Miller (2013), Nguyen and Bernauer (2018)

29

Females are more likely than males Individual-level survey data to oppose trade liberalisation

the elephant in the negotiation room

Gender

30

Table 2.2 (cont.) Predicted Relationship

Data

Environmental concerns

Individuals showing stronger concerns towards the environment are less likely to support economic openness. Individuals who are more concerned about the environment are more likely to support free trade. Perceptions of how the country is economically faring under trade determine individuals’ attitudes towards trade. Perceptions of how the individual is economically faring under trade matter for individuals’ trade policy preferences.

Individual-level survey data from Bechtel et al. (2012) 2007 Swiss Environmental Survey

Sociotropic hypothesis

Author(s)

Population-based survey experiment

Bernauer and Nguyen (2015)

Individual-level data collected through a telephone and internet survey among US citizens Population-based survey experiment

Mansfield and Mutz (2009)

Schaffer and Spilker (2016), Rho and Tomz (2017)

quynh nguyen and gabriele spilker

Main Variable

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redistributive logic of the factor-endowments model since people outside the labour force, such as retired citizens, should be less concerned about the distributive implications of skill levels. Moreover, Hainmueller and Hiscox (2006) find that while individuals with college-level education are far more likely to favour trade openness than others, other types of education have no significant effects on trade opinion. This indicates that more education tends to socialize students to have more tolerant, cosmopolitan views of the world rather than merely reflecting distributional concerns. As mentioned above, the contribution by Hainmueller and Hiscox (2006) opened the floor for at least two further refinements of the literature. In a more conceptual manner, the first strand of literature following on Hainmueller and Hiscox (2006) started to question the assumptions underlying the workhorse models of trade preference formation. One implicit assumption underlying most studies up to this point is that individuals can and do assess whether, based on their education or their sector of employment, they win or lose from trade liberalisation. Yet, for an issue that for most people most of the time is of little importance (Guisinger 2009; Hiscox 2006), this might be a fairly strong assumption. Hence, several studies have begun to question results from earlier studies from a knowledge-based perspective. Especially, studies relying on framingbased survey experiments can show that the respective wording of how trade is supposed to affect individuals strongly matters for their support or opposition to trade (Hiscox 2006; Rho and Tomz 2017; Schaffer and Spilker 2016). This suggests that indeed individuals seem to have a hard time placing themselves clearly into categories of globalisation winners and losers. The second strand of literature following on Hainmueller and Hiscox (2006) centers upon cultural and ideological determinants of individual trade policy preferences. Already O’Rourke and Sinnott (2001) demonstrate that individuals with more nationalistic and chauvinistic attitudes are more supportive of protectionist measures as a result of national pride, feelings of national superiority, and at the extreme, even antagonistic attitudes towards foreign nationals. Similarly, Margalit (2012) argues that individuals fear not only the often-cited material consequences of trade openness, but also what they perceive to be its social and cultural consequences. Relying both on cross-national survey data and a survey experiment, he finds that a heightening of cultural concerns intensifies people’s view of trade liberalisation as harmful. Mutz and Kim (2017) further elaborate on the impact of in-group favouritism by means of a

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population-based survey experiment. They vary information on which countries gain or lose from a certain trade policy proposal. Their experimental results indicate Americans prefer outcomes that maximize ingroup well-being over maximising total gains. Thus, unsurprisingly, Americans value the well-being of other Americans more than that of people outside their own country. This tendency is exacerbated by a sense of national superiority. Additionally, the authors find that high levels of perceived intergroup competition lead some Americans to support trade policies that benefit the in-group and hurt the out-group over policies that help both their own country and the trading partner country. A related concept introduced to account for individuals’ relation to their society is social trust. As trade liberalisation processes set in, economic exchanges increasingly take place between strangers. Inevitably, the issue of trust or the lack thereof gains great significance in such settings. Uslaner (2003) argues that people with higher levels of social trust are less prone to see high levels of risk and, thus, are more likely to perceive interactions with strangers as opportunities for mutual advantage rather than as a threat to their economic existence. In contrast to their low-trust counterparts, high trusters have a more positive view of human nature that leads them to believe that others are generally trustworthy, equally share a moral commitment to others’ well-being, and, hence, will not exploit one’s goodwill. Consequently, they are more capable of seeing the opportunities that the process of trade liberalisation provides rather than focusing on the potential threats from such an interaction (Spilker et al. 2012: 8–10). Accordingly, the micro-level implication of the relation between social trust and trade openness is that the less trusting individuals are, the less willing they are to support economic openness. Using measures of generalised social trust as an indicator for individuals’ social capital endowment, Spilker et al. (2012), based on survey data from Switzerland and from the American National Election Study, examined whether social trust affects trade policy preferences. Their empirical results suggest that higher levels of generalised social trust are positively correlated with support for trade liberalisation. Similarly, Kaltenthaler and Miller (2013) test the trust-trade hypothesis based on cross-sectional survey data for six OECD countries from the World Values Surveys 1995–98. They also find a positive effect of trust on public support for free trade. The authors infer from these results that people with lower levels of trust are more likely to be distrustful of things that come from people who are unknown to them, including imported goods from abroad

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(Kaltenthaler and Miller 2013). Hence, less trusting individuals are less likely to support free trade and more supportive of protectionist policies. To gauge the precise causal impact of social trust on individual trade preferences Nguyen and Bernauer (2018) combine an interactive voluntary contribution game in a natural field setting with a survey tapping individuals’ trade attitudes. The results show that, overall, social trust increases public support for international trade. However, when disaggregating, i.e. separating the various components of individual trade preferences, a person’s level of trust only has a significant effect on certain dimensions of trade opinion. Thus, existing findings based on observational studies suggesting a general positive relationship between social trust on positive attitudes towards trade need to be qualified. A growing number of studies have also begun to examine how nonmaterial costs of international trade enter individuals’ evaluation of the costs and benefits of free trade. In particular, concerns over the environmental impacts of economic integration or the effects of open markets on income inequality can also give rise to demand for protectionism. For instance, Bechtel et al. (2012), using survey data from Switzerland, observe that individuals showing stronger concerns towards the environment are inherently less likely to support economic openness. This argument builds on the work of postmodern values and value change advanced by Inglehart (1997) and Inglehart and Flanagan (1987). According to this literature, narrow economic considerations as implied by the standard economic models of international trade become less important as countries and their citizens become wealthier. In this process, individuals are supposed to prioritize environmental protection over other policy goals, in particular economic growth. Surprisingly, examining the relationship between environmental considerations and individual trade policy preferences in two lower-income countries (Nicaragua and Vietnam), Bernauer and Nguyen (2015) did not find empirical evidence for a perceived trade-off between free trade and environmental protection among the surveyed citizens. Rather, it is observed that people who are aware and concerned about environmental problems are more supportive of free trade. This is supported by the research of Spilker et al. (2016a, 2018), which we will discuss in more detail below. Another non-economic cost associated with free trade is that the process of trade liberalisation intensifies the gap between the rich and the poor (Cline 1999; Dollar and Kraay 2002; Galbraith 2002; Jesuit and Smeeding 2002). To examine whether citizens link income inequality to trade liberalisation and, if so, how this linkage affects their attitudes

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towards international trade, Nguyen (2017) uses data from a populationbased, survey-embedded experiment. Two key findings emerge from this study. First, individuals readily associate skewed trends of income distribution with international trade. Second, however, this perceived linkage between rising income inequality and trade liberalisation does not influence individuals’ trade policy preferences. These findings suggest that the association between rising income inequality and trade liberalisation does not automatically lead citizens to endorse protectionist trade measures. And the reason is not that they are ignorant about the distributional effects of international trade. Rather, citizens fail to connect income inequality to foreign trade policy because they may not perceive trade-induced inequality as unfair. The topic of inequality connects to a more general issue, which is subject to an ongoing debate in the literature, namely, the question of which specific consequences of trade liberalisation are decisive in forming people’s assessment of international trade. More specifically, there is disagreement over whether individuals evaluate trade liberalisation from an individual, i.e. egotropic, or an aggregate, i.e. sociotropic, perspective. In other words, when weighing the advantages and disadvantages of economic openness, do individuals simply look out for themselves or are they more likely to be persuaded by trade’s potential impact on the country as a whole? In their seminal contribution to this field, Mansfield and Mutz (2009) posit that when formulating policy preferences individuals base their decision on collective-level information, that is, on their perceptions of how a given policy has affected the nation as a whole. This does not imply that sociotropic preference formation occurs necessarily out of a mass tendency towards altruism, but rather because citizens tend to have difficulties linking their own personal economic situation to public policies. For example, an unemployed person is unlikely to blame the government for his or her personal situation, but people who are aware of rising employment in their communities are likely to hold the government accountable for this development, independently of their own employment status (Mansfield and Mutz 2009: 12). To test their theoretical propositions, the authors used data collected through a telephone and internet survey with US citizens. Their results show that if an individual believes that the United States as a nation is adversely affected by free trade, independent of the effect of trade on the individual’s economic welfare, it will be this sociotropic perception that is crucial for her trade policy preference.

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Though theoretically plausible, this sociotropic account of individual trade policy preference formation came under fire from a methodological point of view. Fordham and Kleinberg (2012) extensively illustrate the so-called attitudes-on-attitudes problem in their rebuttal of Mansfield and Mutz (2009). In particular, the attitudes-on-attitudes problem arises in all regression analysis that rely on one attitude to predict another. In this case, one cannot be sure whether the specific attitude the researcher has singled out as the independent variable has indeed been developed prior to the relevant attitude the study tries to explain, in our case trade attitudes. Hence, we are faced with a question of causal direction. For example, in their study on social trust and trade attitudes, Schaffer and Spilker (2014) also regress one attitude, i.e. social trust, on another one, i.e. trade attitudes, without being able to ensure that indeed a person’s level of trust has been developed before she formed an opinion on trade. The only way to circumvent this problem is by using an experimental setup as in Nguyen and Bernauer (2018). So, while this problem is not only confined to Mansfield and Mutz (2009), it is particularly strong in their analysis of sociotropic trade preferences. The reason is that not only does the analysis consist of two attitudes regressed on each other, but also on two attitudes that are strongly intertwined: Asking individuals whether they think trade is good for their country and asking them whether trade is good for themselves will, most of the times, result in a very similar answer. This is so because for most people the two things go together: If their country is profiting from trade liberalisation, they might, too, and vice versa. Hence, the difficulty in determining whether trade preferences have a sociotropic rather than an egotropic basis is that only if the two things indeed differ can we detect genuine sociotropic preferences. We would therefore need to show that individuals who would egotropically benefit from trade liberalisation still especially hold negative attitudes on trade precisely because they think that trade harms their country. This challenge has been taken up by two studies so far. Both, Rho and Tomz (2017) and Schaffer and Spilker (2016) used survey experiments to better understand the potential sociotropic roots of trade preferences, yet both studies find that, at the end of the day, egotropic preferences seem to trump sociotropic reactions. Next to the attitudes-on-attitudes problem, another major methodological impediment to studying trade attitudes is the way questions on trade liberalisation are often formulated in existing surveys. As we have already hinted at throughout this chapter, thinking about their opinion on trade liberalisation is not something people do very often. Hence,

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asking individuals what they think about trade is not a straightforward task. As a consequence, most surveys include either a short explanation on what trade liberalisation is or list potential consequences of trade liberalisation in the question text. Probably, the most used and known question on trade liberalisation comes from the American National Election Survey (ANES) and reads: Some people have suggested placing new limits on foreign imports in order to protect American jobs. Others say that such limits would raise consumer prices and hurt American exports. Do you favor or oppose placing new limits on imports, or haven’t you thought much about this?

The methodological problem that comes with such a question is that it suggests a trade-off: People could be in favour of trade liberalisation because of prices and exports or they could be against liberalisation because of job concerns. Yet what if a person does not agree with the statement that placing limits on foreign imports will result in protecting jobs but still does not like trade liberalisation? By mixing various dimensions into one question – job creation and consumer prices – respondents might have difficulties answering. Clearly, such methodological problems due to question wording are not unique to research on trade attitudes. However, only recently with the advance of research relying on experiments and unique, research-tailored survey designs, has the research on trade attitudes began to overcome this methodological hurdle. In summary, this section has outlined the various non-economic determinants of individual trade preferences. We demonstrate that many non-economic considerations – from gender to social trust to environmental attitudes – seem important for how people perceive international trade. However, important methodological obstacles exist and will be decisive in influencing future research, such as the attitudes-on-attitudes problem, but also the more fundamental problem of how well people can understand something as complex as international trade.

2.3  Preferences with Regard to the Design of Preferential Trade Agreements While trade negotiations within the WTO framework have stalled since the Doha Round, preferential trade agreements (PTAs) have witnessed a rapid proliferation and their conclusion and they have become the dominant form of trade liberalisation (Dür et al. 2014). Hence today, PTAs are the most important driving forces in how trade is actually liberalised.

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And while these agreements are, of course, designed to liberalise trade, they also encompass various other aspects, from environmental regulation to labour standards to migration provisions. Furthermore, and in stark contrast to the WTO framework, these agreements are discriminatory, as they liberalise trade only among PTA member countries and thus explicitly exclude other countries. These two aspects point to two important sources of variation that accompany PTAs: their member countries and their precise content. Yet, and as should have become obvious from the previous discussion, most of the relevant literature on trade preferences regards trade preferences as one-dimensional, i.e. whether individuals want more or less free trade. But in reality, the question is probably not so much whether individuals want more or less trade liberalisation, but how and with whom. In two related studies, Spilker et al. (2016a, 2018) test what kinds of trade liberalisation individuals in three developing countries – Costa Rica, Nicaragua and Vietnam – actually prefer, and what kinds of trading partner they would opt for. They use conjoint experiments to account for the multidimensional nature of both PTA content and partner characteristics. Conjoint survey experiments present individuals with several sets of paired choices that consist of several distinct dimensions. More precisely, individuals are asked to choose between two types of trade agreement, both consisting of several dimensions, such as whether the agreement in question includes regulations on the environment and labour standards, and which sector (i.e. agriculture, services and manufacturing) will see how much liberalisation. This type of experimental setting then allows estimating the relative importance of each dimension on the likelihood that an individual chooses this specific trade agreement. Both studies reveal that citizens in all three countries have rather similar preferences with regard to both PTA content and PTA partner countries. This is noteworthy, as the three countries differ significantly with respect to how democratic they are and how strong their environmental standards are, among other factors. Yet, it also reinforces several points that we have discussed already above. First, despite the obvious economic benefits that a majority of citizens like about PTAs, most individuals independent of their economic development seem to place great emphasis on the fact that trade is liberalised in ways that do not harm the environment. Similarly, individuals also highly value both partner countries with strong labour regulations but also PTAs that include such standards. Finally, with respect to trade partner countries,

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individuals tend to prefer partner countries that are culturally similar and democratic. While the latter finding is of little surprise in countries such as Costa Rica and Nicaragua that are democratic, it is more surprising in the context of Vietnam, a one-party autocracy. A potential explanation might be that individuals perceive democracy as a cue for the rule-of-law, which should be conducive to trade liberalisation. Yet, whether this is indeed the case is open for future research. Overall, the main point to take away from this type of research is that individuals seem to hold very clear and specific preferences about whom they want to trade with, and how, which are surprisingly similar across different countries. Going beyond the design features of PTAs, a study by Spilker et al. (2016b) examines information-updating processes in the context of the negotiations of the TTIP. At times, the heated public debate on the trade deal between the European Union and the United States involved large campaigns by different stakeholder groups in an attempt to win the public’s support for their respective causes. This debate highlights the importance of information in the context of how individuals form their trade policy preferences. Studying the three most prominent issues that have evolved over the course of the public discourse on TTIP (economic implications, standard harmonization and investor-state dispute settlement), the authors ask whether people updated their prior opinions on TTIP in response to new information and, if so, how opinion updating is contingent on people’s prior opinions and the type of the information they encounter. The study finds that individuals indeed update their opinion upon exposure to new information. Both TTIP supporters and opponents adjust their opinions of TTIP following information treatments. This is an important finding as it suggests that it should be possible for policymakers to communicate the benefits and disadvantages of a specific trade agreement to their electorates, and that citizens are able to understand these consequences and update their opinion, respectively. However, the study further shows that the type of information clearly constrains this updating process, as negative information on TTIP’s consequences elicits much stronger reactions than positive information. Hence, this chapter provides a clear micro-foundation as to why politicians who strongly argue against trade liberalisation as such, and certain PTAs in particular, seem to have a much easier time than their counterparts defending these agreements. This review of the literature once more illustrates the multidimensionality and complexity involved in the formation of individual trade policy preferences. Thus, in taking the economic integration project forward,

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policymakers will have to consider a multitude of factors that can be decisive in building a broad level of public support for this undertaking. In what follows, we describe three scenarios for future trade agreements and outline – based upon what we have learned from existing studies on individual trade policy preferences – recommendations as to how policymakers can better align the negotiation and design of future trade agreements with the demands of their constituencies.

2.4 Scenarios In the following section, we will discuss three stylized scenarios of how trade liberalisation within the next decade could develop and what the potential implications for public opinion might be. In particular, we discuss the business-as-usual scenario, in which trade liberalisation would continue mostly along the preferential liberalisation route of ever more and deeper integration. We then discuss a scenario that we label Trump’s favourite, bilateral agreements focusing on tariff barriers only. And third, we discuss the opposite scenario of a back-to-the-roots WTO scenario. Clearly, all of our discussions are strictly hypothetical, yet since the purpose of this endeavour is to point out specific challenges that could arise due to public backlash, we believe that this discussion can deliver some additional insights.

2.4.1  Scenario 1: Business as Usual or Following the Trend towards Ever More and Deeper PTAs In this first scenario, policymakers would continue trade liberalisation as pursued over the last two decades. In essence, this means that not much further liberalisation takes place in the context of the WTO, but that the bulk of liberalisation happens within the context of PTAs. However, this would likely imply that the trend towards more encompassing PTAs would also continue. In particular, while early types of PTAs mostly dealt with tariff barriers to trade, modern types of PTAs also include numerous so-called behind-the-border measures (Dür et al. 2014). Hence, these PTAs strongly intrude into the policy space of domestic governments due to their clauses on environmental regulation and labour standards, among others. As we have discussed previously, issues such as environmental concerns are important drivers for individual-level trade preferences. Furthermore, the question of international regulation impinging on the

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room-to-manoeuvre of democratically elected governments can easily trigger nationalistic feelings, as both the election of President Trump and the Brexit vote have illustrated. Since both of these aspects are highly salient – especially for individuals opposing trade, as our discussion has shown – this process could likely provoke further public backlash. However, at the same time these behind-the-border measures could also be a way to appease at least parts of the citizenry. Hence, in some sense these measures are a double-edged sword. More precisely, many critics of trade liberalisation do not fear so much the economic implications of these agreements but are rather concerned that they could lead to downward pressures on environmental or social, health and safety standards. Hence, from this point of view, policymakers, by carefully designing PTAs in ways that guarantee strict regulatory behaviour in these issue areas, could alleviate public concerns – a perspective in line with the results discussed previously on individual level preferences of PTAs (Spilker et al. 2016a). At the same time, however, foreign governments or investors could use these standards to intrude into the domestic policy space of PTA partner countries and bring about regulatory change that these countries did not want – a perspective strongly shared by many Britons on the role of the EU and clearly one of the reasons underlying the Brexit vote. Hence, there is a delicate balance to strike between including standards that ensure that the non-economic side effects of PTAs are minimised and leaving domestic governments the regulatory space they need. To make matters even more complex, as research on the type of partner countries in PTAs have shown (Spilker et al. 2018), several concerns often voiced by the general public tend to become salient only vis-à-vis specific trade partners (see also Nguyen 2018; Taylor 2015). For example, while the negotiation processes of the Singapore–EU or Japan–EU trade agreements have passed without much public backlash, EU negotiations on the TTIP were seen as a threat. Hence, in the public’s eye, several of these behindthe-border measures are more significant in the context of specific trade partners than for others. However, it might be difficult in the process of negotiating such agreements to grant specific rights and obligations to one trading partner, e.g., Singapore or Japan, and not to others, e.g., the United States. Hence, what is included in one such agreement will likely influence what will be included in others and thus act as a precedent (Dür and Elsig 2015). As a consequence, governments might need to be careful in weighing today’s decisions with respect to PTA design in light of future options available.

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2.4.2  Scenario 2: Bilateral PTAs and Tariff Only, Trump’s Favourite This second scenario would in essence correspond to the ideal strategy as imagined by President Trump. In this case, countries would focus on negotiating new trade agreements, or renegotiating existing ones, in order to simplify these agreements and to realign them with their initial intention, namely, to regulate tariff barriers to trade. Non-economic issues in this scenario would not play such a prominent role in PTAs. While we deliberately do not want to address the debate on whether this strategy is sensible from an economic perspective (as most economists argue that tariff barriers to trade are no longer the major hurdle to trade but that it is non-tariff barriers to trade that really impinge upon trade flows), from a public opinion perspective this scenario would be attractive for reasons opposite to Scenario 1. Hence, those individuals who dislike the fact that trade regulation affects domestic policy should most likely strongly favour this option, i.e. those who are also more likely to hold (strong) nationalistic attitudes. This is because, from their point of view, domestic regulation should be the exclusive responsibility of democratically elected governments and not imposed by international regulations. Under this scenario, it would be individuals fearing the negative effects of economic liberalisation on the environment, social standards or human health that would potentially voice their opposition. Interestingly, as shown in Spilker et al. (2018), we also observe in developing countries that PTAs that include strict labour and environmental standards garner most public support.

2.4.3  Scenario 3: Return to WTO and Roll Back on PTAs Even more radical would be our third scenario, namely the option to curb back preferential trade liberalisation and return to multilateral trade liberalisation in the context of the WTO. While the political feasibility of this option is, of course, highly questionable given the current standstill of the Doha Round, its implications for public opinion are nevertheless an interesting thought experiment. The big unknown in this scenario is the role of non-trade issues. Will it be possible to include such regulations more strongly into the WTO framework, as Chapter 9 of this book discusses? If not, how will policymakers decide on the trade-offs between free trade and environmental or safety standards when negotiating e.g., environmental agreements? And again, no matter how this would play out, there would always exist

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individuals who favour stronger environmental, labour or health standards and would like to see these concerns put above liberalising trade, as well as those who favour as little as possible international regulation on these allegedly domestic-only issues. However, one aspect that would differ from both Scenario 1 and Scenario 2 is the potential effects arising from non-discrimination. Since the WTO is explicitly based on non-discrimination, this scenario implies that all countries are in principle treated equally independent of their institutions, values or regulations. However, given the prominent role these dimensions play in how individuals tend to evaluate whether they would like a country to become a potential trade partner country (or not), this might be problematic. Hence, on average individuals seem to be more willing to accept that their country offers economic concessions to foreign countries if the partner country shares cultural ties and is more democratic. While specific other factors, especially social trust, can to some extent compensate in settings for which trade occurs between countries that are not similar, this again does not bode all too well for public support.

2.5  Embedding Liberalisation? It has become apparent from all three scenarios that public backlash to further liberalisation could very well arise even in the best-case scenarios of designing trade agreements in line with public demand. Does this mean that the only way forward is to reverse the ambitious trade liberalisation agenda of the last decades? While we do not want to make a judgement on the latter question, one aspect to consider that we have not yet discussed, and which seems critical to how citizens accept the consequences of liberalizing trade, is compensation. The idea behind the compensation hypothesis is that governments, by providing a strong social safety net, can compensate for the negative side effects of globalisation and thus make the losers in this process become less antagonised (Hays et al. 2005; Schaffer and Spilker 2016). Some scholars, however, claim that it might be already too late to compensate the losers of globalisation since this process has persisted for several decades (Rodrik 2011). Other studies are more optimistic in their outlook (Hays 2009; Margalit 2011; Rickard 2015; Schaffer and Spilker 2016). These studies show that while welfare payments in general might not necessarily help to compensate the losers from globalisation rather narrow or tailored forms of compensation can (Margalit 2011; Schaffer and Spilker 2016).

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Policy measures, such as active labour market interventions or targeted income assistance for affected workers, can cushion the losers from trade and thus make them overall more supportive towards trade liberalisation.

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Irwin, D. A. 1994. “The Political Economy of Free Trade,” Journal of Law and Economics 37: 75–108. ISSP Research Group. 1998. “International Social Survey Programme: National Identity I – ISSP 1995,” Cologne: GESIS Data Archive.   2012. “International Social Survey Programme: National Identity II – ISSP 2003,” Cologne: GESIS Data Archive.   2015. “International Social Survey Programme: National Identity III – ISSP 2013,” Cologne: GESIS Data Archive. Jesuit, D., and T. Smeeding. 2002. “Poverty and Income Distribution,” Working Paper No. 293, Luxembourg Income Study, www.lisproject.org/publications/ liswps/293.pdf, accessed on 15 November 2017. Jones, B. 2016. “Support for Free Trade Agreements Rebounds Modestly, But Wide Partisan Differences Remain,” Pew Research Center. www.pewresearch.org/ fact-tank/2017/04/25/support-for-free-trade-agreements-rebounds-modestlybut-wide-partisan-differences-remain/, accessed on 15 January 2018. Jones, B. 2017. Support for Trade Agreements Rebounds Modestly, but Wide Partisan Differences Remain. Washington, DC: Pew Research Center, https://www.pewresearch.org/fact-tank/2017/04/25/support-for-free-tradeagreements-rebounds-modestly-but-wide-partisan-differences-remain/. Kaltenthaler, K., R. D. Geleeny, and S. J. Ceccoli. 2004. “Explaining Citizen Support for Trade Liberalization,” International Studies Quarterly 48(4):829–51. Kaltenthaler, K., and W. Miller. 2013. “Social Psychology and Public Support for Trade Liberalization,” International Studies Quarterly 57(4):784–90. Kocher, M. A., and S. Minushkin. 2007. “Trade and Investment Policy Preferences and Public Opinion in Mexico,” Office of International Academic Affairs (CIDE), Nr. 134, http://cide.edu/publicaciones/status/dts/DTEI%20134.pdf, accessed on 18 September 2011. Leamer, E. 1984. Sources of International Comparative Advantage. Cambridge, MA: MIT Press. Lupia, A., and M. D. McCubbins. 1998. The Democratic Dilemma: Can Citizens Learn What They Need to Know? Cambridge: Cambridge University Press. Mansfield, E. D., and D. C. Mutz. 2009. “Support for Free Trade: Self-Interest, Sociotropic Politics, and Out-Group Anxiety,” International Organization 63(3):425–57. Mansfield, E. D., D. C. Mutz, and L. R. Silver. 2015. “Men, Women, Trade, and Free Markets,” International Studies Quarterly 59(2):303–15. Margalit, Y. 2011. “Costly Jobs: Trade-related Layoffs, Government Compensation, and Voting in US Elections,” American Political Science Review 105(1):166–88.   2012. “Lost in Globalization: International Economic Integration and the Sources of Popular Discontent,” International Studies Quarterly 56(3):484–500. Mayda, A. M., and D. Rodrik. 2005. “Why Are Some People (and Countries) More Protectionist than Others?” European Economic Review 49(6):1393–430.

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Mutz, D., and E. Kim. 2017. “The Impact of In-group Favoritism on Trade Preferences,” International Organization 71(4):827–50. Nguyen, Q. 2017. “Mind the Gap: Rising Income Inequality and Individual Trade Policy Preferences,” European Journal of Political Economy 50:92–105.   2018. “Taking a Step Back: Economic Performance and Salience of International Trade Issues,” International Journal of Public Opinion. DOI: 10.1093/ijpor/ edx024. Nguyen, Q., and T. Bernauer. 2018. “Does Social Trust Affect Public Support for International Trade? Insights from an Experiment in Vietnam,” Political Studies. DOI: 10.1177/0032321718773560. O’Rourke, K., and R. Sinnott. 2001. “The Determinants of Individual Trade Policy Preferences: International Survey Evidence,” Paper presented at the Brookings Trade Policy Forum, www.cepr.org/meets/wkcn/2/2306/papers/ o’rourke.pdf, accessed on 17 July 2017. Pew Research Center. 2006. “Free Trade Agreements Get a Mixed Review,” Pew Research Center Poll, 19 December. (survey dates December 6–10), www.people-press.org/2006/12/19/free-trade-agreements-get-a-mixedreview/, accessed on 15 February 2017. Rho, S., and M. Tomz. 2017. “Why Don’t Trade Preferences Reflect Economic SelfInterest?” International Organization 71(S1):85–108. Rickard, S. J. 2015. “Compensating the Losers: An Examination of Congressional Votes on Trade Adjustment Assistance,” International Interactions 41(1):46–60. Rodrik, D. 1998. “Has Globalization Gone Too Far?” Challenge 41(2):81–94.  2011. The Globalization Paradox: Why Global Markets, States, and Democracy Can’t Coexist. Oxford: Oxford University Press. Saval, N. 2017. “Globalisation: The Rise and Fall of an Idea that Swept the World,” The Guardian. www.theguardian.com/world/2017/jul/14/globalisation-therise-and-fall-of-an-idea-that-swept-the-world, accessed on 15 September 2017. Schaffer, L., and G. Spilker. 2014. “Ego- vs. Sociotropic: Using Survey Experiments to Understand Individuals’ Trade Preferences,” NCCR Trade Working Paper No.2013/08.   2016. “Adding Another Level Individual Responses to Globalization and Government Welfare Policies,” Political Science Research and Methods 4(2):399–426. Scheve, K. F., and M. J. Slaughter. 2001. “What Determines Individual Trade Policy Preferences?” Journal of International Economics 54(2):267–92. Singh, J. P. 2017. Sweet Talk: Paternalism and Collective Action in North-South Trade Relations. Stanford, CA: Stanford University Press. Sirota, D. 2006. “Caught on Tape: Tom Friedman’s Shocking Admission,” Huffington Post, 25 July, www.huffingtonpost.com/david-sirota/caught-ontape-tom-friedm_b_25789.html, accessed on 29 January 2018.

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Spilker, G., L. Schaffer, and T. Bernauer. 2012. “Does Social Capital Increase Public Support for Economic Globalisation?” European Journal of Political Research 51(6):756–84. Spilker, G., T. Bernauer, and V. Umaña. 2016a. “Selecting Partner Countries for Preferential Trade Agreements: Experimental Evidence from Costa Rica, Nicaragua, and Vietnam,” International Studies Quarterly 60(4):706–18. Spilker, G., Q. Nguyen, and T. Bernauer. 2016b. “The Transatlantic Trade and Investment Partnership in the Public Spotlight,” Paper presented at 6th Annual General Conference of the European Political Science Association (EPSA), 23–25 June 2016, Brussels. Spilker, G., T. Bernauer, and V. Umaña. 2018. “What Kind of Trade Liberalization Agreements Do People in Developing Countries Want?” International Interactions 44(3):510–36. Stolper, W. F., and P. A. Samuelson. 1941. “Protection and Real Wages,” Review of Economic Studies 9(2):58–73. Taylor, T. W. 2015. “The Electoral Salience of Trade Policy: Experimental Evidence on the Effects of Welfare and Complexity,” International Interactions 41(4):84–109. Uslaner, E. M. 2003. “Trust as an Alternative to Risk,” Paper presented at the Conference on Trust and the Management of Technological Risk: Implications for Business and Society, University of Zurich, Zurich. 17–20 September.

Weck-Hannemann, H. 1990. “Protectionism in Direct Democracy,” Journal of International Theoretical Economics 146(3):389–418.

3 Corporate Strategy in Times of Anti-Trade Sentiment Current Challenges and Future Scenarios

jappe eckhardt and louise curran 3.1 Introduction An increasing share of the population in developed countries seems to believe that free trade has failed to provide opportunities for them, which has led to disillusion with the so-called elite and their global vision (Kobrin 2017). Trade protectionism was a key issue in the 2016 US presidential election campaign, with both Hillary Clinton and Donald Trump openly disapproving of the Trans-Pacific Partnership (TPP) trade agreement. This was a remarkable turnaround, both for the Republican Party, traditionally pro-trade, and Clinton, who was involved in the negotiations leading to TPP. In Europe, distrust of trade agreements has crystalized around resistance to the Transatlantic Trade and Investment Partnership (TTIP), where skeptical civil society actors have challenged the positive impact forecasts of the European Commission and criticized the whole basis of much of the negotiations (De Ville and Siles-Brugge 2015). What is more, the ratification of an agreed extensive trade agreement with Canada – the Comprehensive Economic and Trade Agreement (CETA) – was blocked for several weeks following similar criticisms, culminating in the refusal of the Belgian region of Wallonia to ratify the deal (Bauer 2016; De Gauwe 2016). As the visibly frustrated Canadian minster of trade remarked at the time: [T]he EU is now not capable of having an international deal, even with a country which has values as European as Canada, even with a country as kind, as patient (Marks 2016)

The backlash against liberal trade policy has not just led to a change of tone among politicians and protest among civil society actors. It has also led to electoral victories for pro-protectionist populist candidates and the 48

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implementation of protectionist policy solutions. A free-trade critic won the 2016 US presidential election (VanGrasstek 2016) and has since then pulled the United States out of the TPP and has started renegotiated North American Free Trade Agreement (NAFTA), indicating that terminating the agreement would in fact “be the best deal” for America.1 In the United Kingdom, a majority voted for Brexit, i.e., leaving the deepest global economic integration project – the EU (Korski 2016). In the recent French presidential election, despite a victory for the liberal pro-EU candidate Macron, the far-right candidate picked up an unprecedented third of the vote, campaigning on “economic patriotism and intelligent protectionism” (FN 2017). However, what that would mean in real terms was left rather vague – in a TV debate she blamed free trade for job losses: “We’re going to watch jobs destroyed … Why are free trade agreements still being defended?” (Haddad 2017, own translation). The recent rise in protectionist political rhetoric has already resulted in concrete changes in market access, as the Global Trade Alert (GTA), published by Simon Evenett et al., indicate. The GTA reports show an increase in the imposition of protectionist measures since the global financial crisis (GFC) of 2007–2008. More precisely, we have seen a surge in protectionism around the globe in 2008 and 2009, a drop in new measures imposed, as the global economy improved in 2010 and 2011, followed by a return to protectionism once the slowdown in global economic growth became apparent in 2012 and beyond (see, e.g., Evenett 2014; Evenett and Fritz 2015, 2016, 2017). The threat of more far-reaching protectionist actions by governments is very real, particularly in the United States, where the Trump administration is actively revising its trade policy (Rashish 2017), which may lead to a “tit-for-tat escalation of protectionist measures” around the globe.2 Firms acknowledge that these developments require shifts in their market and non-market strategies. For instance, in a recent speech, Jeff Immelt, chair of the board of General Electric (GE), addressed the consequences of what he describes as an unprecedented “attack on globalization” and growing “protectionism” for his company:

www.cnbc.com/2018/01/17/trump-nafta-termination-negotiation.html. www.theguardian.com/business/2018/mar/10/war-over-steel-trump-tips-global-tradeturmoil-tariffs.

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jappe eckhardt and louise curran The anti-free-trade sentiment will not be solved by one election or in one country or with one leader. So the globalization I grew up with – based on trade and global integration – is changing … In the face of [such] a protectionist global environment, companies must navigate the world on their own. We must level the playing field, without government engagement. This requires dramatic transformation. Going forward: We will localize. In the future, sustainable growth will require a local capability inside a global footprint.3

How to operationalize such lofty objectives, however, often remains unclear. Addressing protectionism often involves persuading the public and policymakers of the merits, or at least neutral impacts, of openness, which is not an easy task. In this chapter we explore the roots and the multiple faces of the globalization backlash, as well as corporate strategic responses to this changing context. The reasons behind shifts in government and consumer attitudes to trade and globalization are multi-faceted (Kobrin 2017; Mansfield and Mutz 2013; Mansfield et al. 2015), which means firms are likely to take action on several levels, through coordinated market and political (or non-market) strategies (Baron 1995). Our focus here will be mainly on the latter.

3.2  Understanding the Roots and Multiple Faces of the Anti-Globalization Backlash Concerns about the impact of globalization in both developed and developing countries are as old as economic integration itself. In developed countries, there have long been concerns about unequal distribution of the gains from economic integration, especially through potential negative effects on domestic employment (Brenton and Pelmans 1999; Cline 1997; Rodrik 2017; Martin and Schumann 1997; Baker 2005; Kobrin 2017), while in developing countries, there have been persistent concerns about negative social and environmental impacts (Gibbon and Ponte 2005; Schrempf-Stirling and Palazzo 2016; World Bank 2002). In this section we look at both types of anti-globalization sentiments in more detail.

www.gereports.com/the-world-i-see-immelts-advice-to-win-in-the-time-of-globalization/.

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3.2.1  Concerns about Negative Impacts of Globalization on Developing Countries Most criticism of globalization prior to the GFC tended to focus on concerns about the negative impacts of globalization on developing countries, especially as a result of lack of respect for basic labor standards and/ or unsafe working conditions (Auger et al. 2003; Schrempf-Stirling and Palazzo 2016). These concerns were fueled by a series of revelations of highly exploitative labor conditions within the supply chains of international companies, especially in developing countries, which led to severe criticism of the sourcing practices of global retailers and brands (LundThomsen and Lindgreen 2014; Schrempf-Stirling and Palazzo 2016). Nongovernmental organizations (NGOs) and trade unions launched naming and shaming campaigns, mobilizing consumers to boycott companies failing to safeguard the working environment and ensure minimum labor standards in their supplier factories in low-income countries (Locke et al. 2009). In response to this public scrutiny, private social auditing (­sometimes also referred to as corporate codes of conduct), based on c­ ompliance initiatives, emerged as a key tool to improve working conditions (EgelsZandén 2014). However, research seems to suggest that codes of conduct, although sometimes leading to (marginal) improvements in overall ­workers’ conditions, rarely lead to noteworthy advances in specific worker rights, particularly in developing country export-oriented industries and at the lower tiers of the value chain (Egels-Zandén and Lindholm 2015; Nadvi and Raj-Reichert 2015). Dissatisfied with suboptimal outcomes, a coalition of global retailers and marketers, in cooperation with private consultants, academics, and NGOs, have started to advocate a different policy paradigm, based on cooperation rather than strict compliance (Lund-Thomsen and Lindgreen 2014). There is some debate on the effectiveness of such an approach. Lund-Thomsen and Lindgreen (2014: 19) argue that the new paradigm seems unable to secure significantly higher incomes or improved conditions for workers, considering the constraints imposed by worldwide competition among suppliers.

However, others seem to hold a more positive view. For example, Riisgaard and Hammer (2011) note positive impacts from social and labor standards initiatives in the banana and cut-flower sectors, although governance of the value chain and the local context were very important to outcomes. The importance of the local context to the impact of labor standards

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initiatives is echoed in work by Locke et al. (2013). Nevertheless, recurring tragedies – the fire in the Ali garment factory in Karachi, Pakistan, in 2012 that killed more than 300 workers, and especially the collapse of the Rana Plaza factory in Bangladesh that killed more than 1,100 (Locke 2013; Taplin 2014) – fuel continued concerns about serious abuses of safety standards in developing countries. NGOs and trade unions may have such ethical concerns, but what about consumers? A cross-country study in the early 2000s was not optimistic about the impact of ethical concerns on consumer activity. It concluded: Some consumers do bring ethical concerns into their product choices, but most would rather have a good product at a good price, regardless of who makes it, the conditions of workers, the uses made of animals, or issues of copyright versus counterfeit. (Belk et al. 2005: 282)

More recent surveys indicate an increase in willingness to take ethical issues into account. In an EU survey in 2010, 37% of respondents said that they would pay up to 10% more for products from companies “that respect labour rights and apply high social standards,” although only 4% would pay more than 10%. The figures were 42% and 5%, respectively, for those products that respected the environment (CEC 2010). Although NGOs continue to voice developmental concerns about workers’ rights in developing countries, since the GFC these concerns have, once more, been overshadowed by fears about the impact of trade liberalization on developed economies and especially on jobs.

3.2.2  Concerns about the Impact of Globalization on Developed Countries In the early 1990s, Ross Perot, a US presidential candidate, famously referred to what he called the giant sucking sound of jobs flowing south to Mexico after NAFTA (The New York Times 1992). However, Perot lost the election by some margin and in the years up to the GFC, protectionist rhetoric waned. As Kobrin (2017) underlined, the GFC refueled skepticism about the gains from trade: While one can certainly argue that there is a broad-based gain from cheaper products … that is a difficult argument to make to people who have lost their jobs. (2017: 163)

As politicians picked up on, and exploited, the negative sentiment that emerged from the impact of the crisis, anti-globalization rhetoric moved from the margins to the mainstream in many developed counties, most

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notably the United States but also in France, Greece, Italy, Spain, and the United Kingdom (Cuervo-Cazurra et al. 2017). It is important to note, however, that these movements differ by country, and thus generalizations about their objectives being a wholesale rollback of the process of globalization are simplistic. As Dani Rodrik (2017) has recently pointed out, although the above examples may all represent political backlashes against economic globalization, the societal cleavages that populist politicians highlight vary. This reflects differences in the manner in which globalization shocks, as Rodrik calls them, make themselves felt in societies. As he observes: It is easier for populist politicians to mobilize along ethno-national/ cultural cleavages when the globalization shock becomes salient in the form of immigration and refugees … [while] it is easier to mobilize along income/social class lines when the globalization shock takes the form mainly of trade, finance, and foreign investment.

The former (ethno-national/cultural) seems to have been the cleavage mobilized in the Brexit discussions, which was mainly driven by antiimmigration sentiments rather than opposition to free trade (see also Schmidt 2017). In the United States and France, however, it was a combination of the two (Rodrik 2017). In fact, some (but by no means all) proponents of Brexit wished to leave the EU in order to forge their own trade relationships with the rest of the world. In the words of the prime minister, people in the United Kingdom “… voted to leave the European Union and embrace the world” (May 2017). Indeed, the UK government has made clear that its post-Brexit strategy will involve extensive free-trade agreements with partner countries (HMSO 2017), and one recent report by a pro-Brexit economist suggested that the United Kingdom should remove all trade barriers unilaterally (Dowd 2017). Thus, although disillusion with the status quo and the economic integration that underpins it is a common factor, the trade policy prescriptions that politicians and NGOs advocate differ markedly. In terms of understanding the roots of more widespread disillusion in the West, research indicates that anti-globalization sentiment is not solely based on intuitive factors, such as personal circumstances, and exposure to negative impacts, such as job losses. Clearly it is not a coincidence that support for Trump, Brexit, and the far right in France is highest in rust belt, post-industrial regions where manufacturing employment has fallen in recent years (see, e.g., Goodwin and Heath 2016; Walley 2017). Indeed, early research found that exposure to import competition risk did indeed

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play an important role in people’s opposition to free-trade agreements, as did their level of education (Denslow and Fullerton 1996; Hainmueller and Hiscox 2006; Mayda and Rodrik 2005). At the same time consumption patterns also had an impact in that consumers of imported goods are more in favour of free trade than consumers of exportables (Baker 2005). In these studies, attachment to the home country or region and national pride (Mayda and Rodrik 2005), as well as nationalist sentiment (Baker 2005), were correlated with anti-trade sentiment. In a later article, Mayda (2008) explores why anti-trade sentiment is weaker than anti-immigration sentiment. She notes that the cleavage in attitudes to trade between those involved in traded and non-traded sectors is absent in attitudes to immigration. Thus, individuals’ economic position and the extent to which it is threatened by different aspects of globalization clearly have an impact on their attitudes. In a series of articles, Mansfield and Mutz (2009) and Mansfield et al. (2015) explore attitudes to globalization, trade, and outsourcing in the United States in a more granular way. Although they confirm that personal circumstances, including education (Mansfield and Mutz 2009, 2013) and gender (Mansfield et al. 2015) are important, they also find that underlying attitudes have a strong effect. In particular, isolationist attitudes (the feeling that the United States should not get involved in global problems or protect others from aggression, pollution, or hunger) and ethnocentrism (negative feelings about others) play an important role in people’s views of globalization and trade. They summarize their findings thus: [A]ttitudes about outsourcing are not entirely about economics. They are shaped in powerful ways by one’s sense of obligation to those in other countries and one’s attitudes toward out-groups. (Mansfield and Mutz 2013: 595)

Although muted by information and education, these feelings are deepseated, and the findings raise important questions for those, like global corporations, who are threatened by protectionism. Clearly, if voters do not feel much empathy for people they consider to be other, pointing out that trade has brought hundreds of thousands of Asian workers out of poverty is unlikely to change negative attitudes. One interesting finding is that language matters: the term outsourcing itself is unpalatable (Mansfield and Mutz 2013). However, another important aspect in current debates about free trade and globalization, complicating this task of re-framing, is the

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increasing distrust of expertise referred to above. Clarke and Newman (2017) trace how this distrust has increased as the complexity of technocratic government has expanded, partly in response to globalization itself. They argue that, during the Brexit referendum in the United Kingdom, the Leave campaign effectively created a binary conflict between experts and the wisdom of the people, which is problematic for future public debate: This articulation … poses a problem for progressive political movements in relation to what forms/modes of knowledge and expertise are/might be valued and recognized. (2017: 111)

At the same time, trust in business is very low in many Western democracies (Ghemawat 2011). Research in the EU context indicates that trust in institutions is also low. Only 36% of EU28 citizens trusted the EU in 2016 (down from 48% in 2007) (CEC 2016, 2008), although this was higher than national governments, at 31% (CEC 2016). In a 2012 survey, only 52% had a positive or very positive image of business (CEC 2012). However, negative perceptions of trade are lower in the EU than in the United States. In the survey of attitudes to trade analyzed by Mansfield and Mutz (2009), negative and positive attitudes to trade and globalization were fairly balanced in the US population. In an EU survey in 2010, 65% of respondents agreed that the EU had benefited from international trade, compared to 16% who disagreed (CEC 2010). Even in the latest survey, nearly 10 years into the crisis, 68% of EU28 citizens surveyed were fairly or very positive about free trade. Approval ratings ranged from a high of 82% in Lithuania to a low of 52% in Austria (CEC 2016). However, opinions on globalization were closer to those registered in the United States: only 45% of EU respondents were positive compared to 40% negative. The most positive country was Denmark (75%) and the least Greece (23%). Of the larger EU powers, France was the country with the lowest positive image of globalization (38%) (CEC 2016). Finally, while the business models of import-dependent companies are threatened by domestic protectionist sentiment, export-dependent firms face another set of challenges, especially the changing structure of their export markets. The GFC has served not only to increase insecurity and calls for protection in the North but also to increase the relative importance of the emerging countries in the global economy. As Horner and Nadvi (2018) have recently pointed out, the share of global GDP represented by developing countries increased from 21% in 2000 to 32% in 2015.

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This development coincided with the rise of the global South, not only as a key supplier but also as an important market. These evolutions mean that northern Multinational Enterprises (MNEs) are paying increasing attention to southern markets, raising new strategic challenges. In addition, as in emerging markets learn from foreign competitors and upgrade their technological capacity, some firmspecific advantages that had enabled European companies to overcome these barriers in the past are being eroded (Curran and Ng 2018). Thus, export-dependent MNEs face not only increasing protectionism in their traditional markets and home bases in the north but also the rise of important local challengers in emerging markets, often supported by longstanding protectionist policies. This considerably complicates the task of developing their business in these markets at a time when they are becoming increasingly important centers of global consumption. Companies need to adapt their market and non-market (or political) strategies to this new context. We turn next to this very issue, mainly focusing on corporate political activities (CPAs).

3.3  Anti-Globalization Sentiments and Corporate Political Activity In the literature, a distinction is often made between market and nonmarket strategies (NMSs). Baron (1995: 47) defined both as follows: A market strategy is a concerted pattern of actions taken in the m ­ arket environment to create value by improving economic ­performance. … A nonmarket strategy is a concerted pattern of actions taken in the nonmarket environment to create value by improving its overall ­performance.

Over time, the area of NMSs has evolved to include two distinct types of actions in the non-market environment: CPAs, defined as “… corporate attempts to shape government policy in ways favorable to the firm” (Hillman et al. 2004: 838, and corporate social responsibility (CSR), defined as “… context-specific organizational actions and policies that take into account stakeholders’ expectations and the triple bottom line of economic, social, and environmental performance” (Aguinis 2011: 855). As indicated earlier, our focus in this chapter will be on CPA and protectionism. As most of the threat of protectionism emanates from the non-market environment, it seems most likely that it is non-market strategies that will be effective in addressing this threat.

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As indicated above, public concerns about the negative effects of free trade and dealing with consequent protectionist pressures is by no means a new challenge for corporations. Yet research on how companies (could) use CPAs to address the challenge of rising protectionism is surprisingly limited. Most students of trade policy have focused on the general issue of how and why companies access the policymaking process (Brook 2005; Schuler and Rehbein 2011; Solis 2013; Thacker 2000), with a particular focus on lobbying by pro-protectionist societal interests (Brook 2005; De Bièvre and Eckhardt 2011; Lindeque and McGuire 2010; Rugman and Verbeke 1989). The question of how firms (can) counteract protectionist pressure has attracted much less attention. This bias in the literature is understandable. Although, as Irwin (1996) claims, “free trade enjoys an intellectual status unrivaled by any other doctrine in the field of economics,” Bhagwati (1989: 72) points out that, in most states, there has been a bias toward protectionist trade policies such that there is a clear discord “between the elegance of the irrefutable demonstration of the advantages of free trade and the inelegance with which practical politics embraces protection.” There are two key reasons for this historical bias toward protectionism. First, trade policy is typically a battle between the special interests of import-competing firms (i.e., the losers of international trade) that favor protectionism and the diffuse interests of the general public, who gain from freer trade due to low-cost imports and increased choice. The former has much stronger incentive to defend its interests in the political arena than the latter, whose gains may not be clearly perceived as such or simply taken for granted. Second, despite a significant increase in the number of firms that trade during the last decades, the percentage of trade-dependent firms in any given economy remains relatively small (Bernard et al. 2009). Only the largest and most productive firms in any society are able to trade (Kasahara and Lapman 2013) and hence are likely to rally in support of free trade. As the efforts of protectionist interests are more visible than those of anti-protectionist actors, the former have received much more scholarly attention. There is a growing body of work, however, that does look at the political role of pro-liberal firms in trade politics. The main focus of this literature has been on their policy preferences and the circumstances under which they enter the political arena. What this research shows is that, although a typical export-dependent company benefits from foreign market access through tariff reduction in the context of bilateral or multilateral trade agreements (Osgood 2017), trade-dependent firms

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do not automatically support trade liberalization actively. For instance, Madeira (2016: 685) shows that, in the case of unilateral trade liberalization, “exporting firms would not benefit from increased access to foreign markets and would have no reason to support liberalization.” In contrast, import-dependent firms (which could also be exportdependent) do benefit from unilateral trade liberalization because it offers them access to lower-cost imports, even if liberalization is not ­reciprocal. However, this is not to say that an import-dependent firm automatically lobbies in favor of unilateral trade liberalization. Research has shown that trade-dependent firms are more inclined to mobilize to fend off potential losses than in pursuit of possible gains. That is, both export- and import-dependent firms are more likely to oppose unilaterally proposed protectionist measures, such as antidumping duties, because of possible foreign retaliation and rising costs of inputs, respectively (Eckhardt 2015), than lobby for market opening. In this context, Dür (2010) has shown that exporters overcome the collective action problem and lobby in favor of foreign market access in particular when confronted with the threat of trade diversion. There is also some (albeit limited) literature that has looked at actual political strategies by trade-dependent firms. This literature teaches us several lessons about (possible) political responses to (rising) protectionism. First, issue framing and its salience for voters are important. Destler et al. (1987: 30–59) find that if pro-protection forces in society manage to label imports as unfair, it reduces political opposition to their cause. On the topic of issue salience, Farrand (2015: 512) argues that “… where an issue becomes ‘high profile’, the usual tactics of quiet politics are ineffective.” In other words, the kind of language that anti-trade interests use, as well as the ability to politicize an issue and mobilize voter sentiment, both play a pivotal role in whether or not they are able to convince policymakers to resort to protectionism. The implication is that trade-dependent firms need to be vocal and explain the benefits of trade, as well as emphasize the costs of protection for domestic consumers and other sectors of the economy (Destler et al. 1987). This is not an easy task. Schnietz and Nieman (1999: 234–5) argue that the complexity of the arguments for liberalization can be disadvantageous: Opponents’ arguments about the costs of free trade [are] easier to understand than the more abstract arguments about the benefits of free trade, and thus lend themselves more easily to better advertising and other political tactics for swaying the preferences of the median voter.

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The challenge has become even bigger in an age of fragmentation of production and global value chains (GVCs). In a recent public survey, Mansfield and Mutz (2013: 602) note the difficulty in presenting GVCs, and the restructuring of production in particular, in a positive light: If outsourcing is economically beneficial and [companies want] to generate public support for this practice, they need to do a better job of framing the issue.

Second, the literature highlights the importance of timing. In the case of pro-protectionist lobbying and advocacy, it is key for trade-dependent firms to respond quickly. Research has shown that the success of antitrade groups to rally public and political support for protectionism depends to a very significant extent on the ability or failure of tradedependent firms to organize early countermobilization (Farrand 2015; Schnietz and Nieman 1999). It often happens that trade-dependent firms fail to recognize the protectionist threat until it is too late, in which case the issue is already framed in a manner that makes it very hard to defend a liberal stance. The recent debate on TTIP in the EU mirrored this experience of complacency leading to negative framing by civil society, which very rapidly set the terms of the debate so that corporate interests were immediately on the defensive (Bauer 2016). Third, an anti-protectionist lobbying campaign is most likely to be successful if grassroots networks are mobilized and/or when a broader set of actors is included in the CPA campaign. As Destler et al. (1987) already argued in the 1980s, associations should make use of their grassroots networks by encouraging their members (individual firms) within the same sector, as well as other stakeholders, to become politically active. Such political activity is often organized by trade associations, yet lobbying by individual firms may not always be driven by such cooperative structures. Some studies have looked at the circumstances under which firms lobby as a group or individually. For instance, Bombardini and Trebbi (2012) show that firms tend to lobby as a group in more competitive industries, while individual lobbying is more common in differentiated industries. Other researchers have focused on how GVC integration and the level of intra-industry trade (IIT) affect the decision to lobby together or alone on trade policy issues. Gilligan (1997: 456), for instance, argues that, in the case of a high level of IIT, individual firms are subject to much more specific trade adjustment costs from import competition

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such that “… lobbying for protection against intra-industry trade is virtually a private good.” Others have argued that there is increasing divergence within sectors between firms that are threatened by international trade and those that benefit from openness. This heterogeneity in the performance of firms, the argument goes, leads to divergence of interests between firms within the same sector. In terms of their lobbying behavior, the more trade-dependent firms are most likely to lobby individually rather than collectively via an association (see, e.g., Osgood 2017). Madeira (2016) puts forward yet another argument for individual versus collective lobbying. She argues that, in cases where protection or liberalization is targeted at a specific product and hence affects only a limited number of firms, individual lobbying is the most likely outcome. In case of more generalized protectionism or liberalization, on the other hand, the benefits or costs affect many companies; in turn, firms are more likely to rely on trade associations to lobby on their behalf. Finally, a body of work suggests that anti-protectionist lobbying efforts can be strengthened through transnational lobbying (i.e., lobbying host rather than home states) and the creation of ad hoc trade lobby groups. These techniques have become increasingly common in recent years (Curran and Eckhardt 2017; Eckhardt and de Bièvre 2015). Given the global nature of the protectionism threat, a transnational solution seems pertinent. Extensive work seeks to better understand how companies leverage the international legal system – especially the World Trade Organization (WTO) – to challenge protectionism. The establishment of the WTO resulted in a more powerful and robust dispute settlement system, which opened opportunities for CPAs challenging member states’ protectionist measures (Lawton et al. 2009). Research indicates that MNEs are using ever more sophisticated strategies to cooperate among themselves, including across frontiers, in order to persuade countries to use the WTO to challenge protectionist policies (Curran and Eckhardt 2017; Eckhardt and de Bièvre 2015). As long as the WTO continues to function, it provides a bulwark against new protectionist measures (Kobrin 2017). However, WTO challenges are rare and costly, and only the largest global firms facing major threats to their business models lobby for such action (Curran and Eckhardt 2017). Thus, the reality is that most firms do not use this option to challenge protectionism and, even today, most trade barriers remain unchallenged (Yildirim et al. 2018).

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3.4  EU Trade-Dependent Firms and the Current Protectionist Threat In this section, we present some results from an ongoing analysis of the responses of EU trade-dependent firms in light of the protectionist threat in the aftermath of the GFC. This discussion gives some insights into whether trade-dependent firms indeed behave in accordance with the literature summarized above when confronted with rising protectionism. Because of space constraints, we give only a snapshot of our findings (for a more in-depth and extensive analysis see Curran and Eckhardt 2018). The analysis is based on survey data (existing published sources and internal surveys from Amorfi)4 and twelve semi-structured interviews, conducted in the second half of 2017, with representatives of key trade associations; European Commission officials; the author of an Organisation for Economic Cooperation and Development (OECD) publication on GVCs; and an analyst from the EU Think Tank ECIPE who follows the public debate on trade, especially on TTIP. Our interviews reveal a high level of awareness and concern about rising protectionism on the side of trade associations, but not among individual companies, in the last couple of years. As a result, most anti-protectionist political mobilization, at the EU and national level, has so far come from peak associations rather than firms. Our interviewees indicate an active engagement from trade associations but have seen little indication that rising trade protectionism has so far lead to any major strategic reassessment or reorientation at the firm level. For instance, a representative from Business Europe indicated: The call has been for companies to be more active. … We really need companies to come out publicly for what they stand for … and to explain why they need trade.

This attitude and low awareness among companies is a concern, in particular because the protectionist threat is very real according to representative of peak associations: I think the trade sector is losing the battle for the hearts and minds, in and around the developed world (Author interview, December 2017).

This lack of concern among individual trade-dependent firms in the EU is also reflected in survey data and other studies. In 2016, the Swedish Amorfi (formerly the Foreign Trade Association) is an EU business association with 2,000 members (retailers, importers, brands, and associations).

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Foreign Trade Board undertook a survey of 850 Swedish companies involved in international trade (Altenberg 2017). High tariffs were viewed as a problem by 27% of firms, up from 23% in the previous survey in 2009. Thus, the level of concern about trade barriers, although increasing, was still relatively low. What is more, Amfori sent a survey on our behalf to their membership concerning responses to trade protectionism through their monthly newsletter. Despite the low response rate, the results give some indication of EU company strategy in this context and show that individual companies are indeed not strongly engaging in CPAs to counter protectionism or in defense of trade openness (for further details, see Curran and Eckhardt 2018). In a detailed analysis of over 1,500 events in Germany on TTIP in the 2015–16 period, Bauer found that most participants and speakers at these events were actors who opposed TTIP. His conclusion is that: [b]usinesses and political parties that are generally pro trade show a weak motivation to engage and shape the debate, compared to organisations that officially constitute or show sympathy to the anti-TTIP campaign network (2016: 4).

A key question, of course, is, why, in terms of CPA, has there been a lack of engagement of trade-dependent firms so far in the debate on protectionism, as highlighted during several of our interviews and in surveys? An official from the European Commission indicated that there is a certain amount of complacency among trade-dependent firms in the EU: “people didn’t think it was plausible … no one remembers protectionism. You have to go back 30 years” (Author interview, November 2017). The representative of Business Europe we interviewed confirmed this but also indicated that firms do not necessarily know exactly how best to address the problem of rising protectionism (Author interview, December 2017). Other interviewees pointed to the lack of a clear and present danger of protectionism. That is, they felt that most of the protectionist threat had been rhetorical rather than actual concrete action and they indicated that, unless there was a major policy shift in the near future that had a real discriminatory impact on EU firms (i.e., did not affect non-EU companies in the same way), companies would refrain from mobilizing. A remark by a representative from the European Engineering Industries Association Orgalime is a case in point: “It’s more a wait and see approach for the time being …” (Author interview, December 2017). Others blame the lack of political engagement from EU trade-dependent firms on the negative way in which trade has recently been framed.

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One  interviewee told us that some firms may be concerned about defending free trade because they fear the impacts on their reputation of supporting something that is increasingly unpopular (Author interview, November 2017). During several interviews, the TTIP debate in the EU was described as toxic and, in turn, this toxicity now also plays a key role in more general debates on trade, which may reduce the willingness of firms to openly support trade liberalization (Author interview, December 2017).

3.5  Concluding Remarks and Three Scenarios for the Future Rising skepticism on the merits of free trade and globalization, together with a willingness to favor local companies, has become a political reality across several key economies in the aftermath of the global financial crisis. In this chapter, we explored the roots and the multiple faces of this current trade and globalization backlash. We also discussed what we can learn from existing literature on CPAs in such a changing context, where anti-globalization sentiment and the threat of trade protectionism have become part of the political landscape. We also presented some preliminary findings from our study on the responses of trade-dependent companies to rising protectionism in the EU. A key finding is that there is a high level of consensus among EU trade associations that trade protectionism is a threat and, although individual companies have been passive so far, trade associations have had a mandate to lobby against it. In our interviews, we also discussed how the engagement of trade-dependent firms may change depending on how the political context evolves. In the remainder of this concluding section, we discuss three possible scenarios for the future. We do not draw solely on interview material but also on secondary literature, and our aim is to link our scenarios to some of the key issues discussed above. As our empirical analysis is mainly focused on trade-dependent firms in the EU, we pay the most attention to the European context, yet our discussion of the different scenarios at times goes beyond the EU.

3.5.1  Scenario 1: The Status Quo Scenario This first scenario assumes that things stay more or less as they are: the anti-trade rhetoric remains strong for the time being, and some concrete protectionist measures are imposed, yet there will be no long-lasting global trade war. Under these conditions, individual firms do not perceive protectionism to be a major threat and it is unlikely that individual

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trade-dependent firms in the EU, the United States, and elsewhere will engage much more actively in CPAs than they have done so far. Such a continued lack of engagement of individual trade-dependent firms in the discussion on protectionism brings risks. Other actors may continue to set the terms and tone of the debate and, over time, further political threats may emerge as a result. As previously discussed, the capacity of pro-protectionist groups to frame discussions on trade in negative terms has played a major role in the past in defeating liberalization efforts by trade-dependent companies (Farrand 2015; Schnietz and Nieman 1999). In the status quo scenario, peak associations hence remain the most active when it comes to anti-protectionist CPAs. A key challenge for them is to develop strategies to counteract nebulous civil society actors, and for their political supporters, critical of trade liberalization (Farrand 2015; Schnietz and Nieman 1999). The kind of economic expertise usually mobilized in government-oriented policy advocacy, as argued above, tends to be regarded by citizens with, at best, skepticism. This was most clearly seen in the remark of one of the key Brexit campaigners that people “… have had enough of experts” (Clarke and Newman 2017).

3.5.2  Scenario 2: A Global Trade War with Tit-for-Tat Protectionism Under this second scenario, the level of protectionism increases and as result so to the uncertainty within the business community. That is, Trump and other populist leaders deliver on their promise to impose protectionist measures, which leads to countermeasures from the EU, China and others. At the same time, the Brexit negotiations will not be finalized on time5 and the future relationship with the EU remains unclear; this will lead to increasing levels of uncertainty among firms in the United Kingdom and the EU (Financial Times 2018). The perception of our interviewees is that, under such a scenario, individual companies are likely to become more politically active. That is, our interviewees indicated that company mobilization would only happen if trade policy becomes more like a private good, such that EU companies are threatened by a specific discriminatory measure affecting their sector. Business Europe indicated during our interview that it was actively debating with their members on the best course of action to take in case of such a scenario and said it was confident that action would be forthcoming if See www.bbc.co.uk/news/uk-43871319.

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protectionism indeed increased further: “We are considering all options and we will go for all options” (Author interview, November 2017). This is in line with the political economy literature on US trade politics discussed above (e.g., Gilligan 1997; Madeira 2016). This perception that only clear discriminatory protectionism forces mobilization reflects the point made by Madeira (2016) that the tendency of companies to focus on the short term undermines their interest in mobilizing in support of global public goods (in this case, open trade). However, in case of Brexit, which has been an eminent threat for quite some time now, firm-level concerns have remained relatively low and firms were still not mobilized in the first half of 2018 (i.e., two years after the Brexit referendum). For instance, in our interview with a representative from the European Apparel and Textile Confederation (Euratex) it was noted that there was a lack of feedback from individual member firms on concerns about Brexit: “Nothing. No-one moves. For me, it’s a bit of a mystery” (Author interview, December 2017). However, since mid-2018, some major producers, such as bmw and airbus, and UK based retailers, have come with regular public Brexit warning which has been be the start of a more active CPA campaign.6 Under this scenario, broader anti-protectionist business-led coalitions would likely be formed, yet our interviewees indicated that such structures are relatively difficult to build in the EU context, with the notable exception of anti-dumping action, where there have been several recent coalitions (Eckhardt 2011, 2013; Kolk and Curran 2017). One interviewee noted an interesting difference in political culture between the United States and the EU in this regard “They [the US] have companies who are personally engaging and that are happy to speak and to put their face on a policy objective” (Author interview, December 2017). Thus, business coalitions are more likely to be formed in the United States under our scenario 2. It is also unlikely that the EU business community will establish alliances with civil society in support of trade openness, as suggested in the literature as a possible way to fight protectionism effectively. The peak associations we interviewed in Brussels reported little positive engagement with civil society in recent years and a very negative attitude within the NGO community to trade. Even people working for trade-dependent companies seem to have ambiguous attitudes to trade. A representative of Business See www.bbc.co.uk/news/business-44582831; and https://www.bbc.co.uk/news/business47028748.

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Europe told us that during the TTIP debate, several trade-dependent firms surveyed their employees and found very similar anti-trade attitudes to those found in the general population. They said, “[W]ell maybe we should start with our own employees and how can we make them change their minds” (Author interview, December 2017). They reported no concrete subsequent alliance-building with employees, however.

3.5.3  Scenario 3: Protectionism Will Become the New Normal for the Foreseeable Future Scenarios 1 and/or 2 may end in a couple of years if, for instance, Trump and other populist leaders lose their next elections. However, it is also possible that Trump and others remain in power and that the tit-for-tat protectionism of scenario 2 will lead to a situation in which protectionist trade policies have become the new normal. If that happens, firms and their peak associations may continue their anti-protectionist CPAs, as described under scenario 2, but they may (also) adjust their market strategy. If protectionism has indeed become the new normal, firms may need to reconsider in particular where to produce. The trade associations we interviewed did not have the perception that their members were already reassessing the geography of their global production networks in response to protectionism. The representative from Business Europe noted: “I believe that companies have not decided to change production location based on rising protectionism” (Author interview, December 2017). An exhaustive OECD analysis of re-shoring also concluded that it has so far been a very marginal phenomenon affecting 2% to 4% of companies in EU surveys (De Backer et al. 2016). In these surveys, political factors were not indicated to be key motivators for re-shoring. The key reasons were quality and flexibility, and the practice was most common in high-tech industries rather than in low-tech labor-intensive ones, underlining the lack of any impact on potential employment. Under scenario 3, with trade barriers becoming more common, political factors could become a motivator for companies to re-shore or make other changes to their production process. However, technology is usually considered more likely to result in changing production structures than trade policy. In other words, regardless of the kind of trade policy a country adopts, we are likely to witness the bringing back of production to the EU, the United States, and other developed countries in the foreseeable future simply because new technologies like three-dimensional (3D) printing enable production to move to high-cost locations. This is not

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likely to equate with bringing back jobs that Trump and other populists have repeatedly promised (The New York Times 2018) and thus will not mitigate criticisms on the employment impacts of trade. Our interviewees confirmed this. For example, Orgalime saw the digitalization of the industry as bringing new possibilities to bring back production to wealthy countries: “We are very involved in the digitalisation of the industry … and we see this as a big possibility for Europe to re-industralise and regain back control of our manufacturing.” However, they acknowledged that such production does not result in the relocation of large numbers of low or unskilled jobs: “that is a bit the difficulty with this discussion” (Author interview, November, 2017). This is also the conclusion of the exhaustive OECD study into re-shoring: “Reshoring of activities is expected to become increasingly attractive when these activities can be highly automated; the employment impact of reshoring can thus be expected to be rather limited” (De Backer and Flaig 2017: 6).

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Osgood, I. 2017. “Industrial Fragmentation over Trade: The Role of Variation in Global Engagement,” International Studies Quarterly 61(3):642–59. Rashish, P. S. 2017. US Trade Policy in the Age of Trump: What Role for Europe in the ‘New Nationalism’? Brussels: European Policy Centre. Riisgaard, L., and N. Hammer. 2011. “Prospects for Labour in Global Value Chains: Labour Standards in the Cut Flower and Banana Industries,” British Journal of Industrial Relations 49(1):168–90. Rodrik, D. 2017. “Populism and the Economics of Globalization,” CEPR Discussion Paper DP12119, London: Centre for Economic Policy Research. Rugman, A., and A.Verbeke. 1989. “Trade Policy and Global Corporate Strategy,” Journal of Global Marketing 2 (3):1–18. Schmidt, V. A. 2017. “Britain-out and Trump-in: A Discursive Institutionalist Analysis of the British Referendum on the EU and the US Presidential Election,” Review of International Political Economy 24(2):248–69. Schnietz, K. E., and T. Nieman. 1999. “Politics Matter: The 1997 Derailment of FastTrack Trade Authority,” Business and Politics 1(2):233–51. Schrempf-Stirling, J., and G.Guido Palazzo. 2016. “Upstream Corporate Social Responsibility: The Evolution from Contract Responsibility to Full Producer Responsibility,” Business & Society 55(4):491–527. Schuler, D. A., and K. Rehbein. 2011. “Determinants of Access to Legislative and Executive Branch Officials: Business Firms and Trade Policymaking in the U.S.,” Business and Politics 13 (3):1–30. Solis, M. 2013. “Business Advocacy in Asian PTAs: A Model of Selective Corporate Lobbying with Evidence from Japan,” Business and Politics 15(1):87–116. Taplin, I. M. 2014. “Who Is to Blame? A Re-examination of Fast Fashion after the 2013 Factory Disaster in Bangladesh,” Critical Perspectives on International Business 10(1/2):72–83. Thacker, S. C. 2000. “Private Sector Trade Politics in Mexico,” Business and Politics 2 (2):161–87. VanGrasstek, C. 2016. “What Will Happen to U.S. Trade Policy When Trump Runs the Zoo?,” ECIPE Occasional Paper, 03/2016. Brussels: European Centre for International Political Economy. Walley, C. J. 2017. “Trump’s Election and the ‘White Working Class’: What We Missed,” American Ethnologist 44(2):231–6. World Bank. 2002. “Globalization, Growth and Poverty,” Washington, DC: The World Bank. Yildirim, A. B., Chatagnier, J. T., Poletti, A., and D. De Bièvre. 2018. “The Internationalization of Production and the Politics of Compliance in WTO Disputes,” The Review of International Organizations 13(1):49–75.

4 Understanding and Shaping Trade Rules for the Digital Era mira burri 4.1 Introduction Technological advances are so rapid that we tend to become somewhat weary in trying to understand all their effects and in anticipating the next new buzzword that will supposedly revolutionize our world. Yet we do need to pay attention because some technologies have the full potential to induce deep societal changes. Policymakers in particular ought to be able to discern, contextualize, and adequately react to certain technological developments first, because they need to adapt to the effects of these technologies in different domains of societal life; second, because the very development of these technologies and their distribution, deployment, and innovative path depend on the choices made for the regulatory environment they face. Some technologies can be particularly disruptive and create completely new business models and markets; trigger radical changes in existing economic sectors; and enable new modes of work, production, and consumption. Digital technologies, taken as a broad generic category of technological inventions and applications, fall under this rare kind of disruptive technology. To make apt policy decisions, we need to understand their current state of evolution and integration in the economy and in other areas of society, we must figure out their effects on different existing policies and institutions, and we need to know how to react to these technologies now and in the future. This chapter addresses the effects of digital technologies for trade and analyzes the implications of the new technological affordances and the new patterns of digital trade for global trade law and policies. The chapter starts with an overview of the current and emerging trends in disruptive technologies and the sweeping effects of digitization at different levels of the economy. We break down the broad and somewhat vague concepts of digitization or digital technologies to discrete, more palpable technological types and technological applications. Whenever possible, we use examples that illustrate, on the one hand, the potential of these 73

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technological advances and, on the other, highlight their possible effects on trade. Our focus then shifts to the effects of digitization on trade and explores the implications for trade policy. In order to understand what needs to be changed or at least calibrated in existing external trade policies, we need to know what we have in terms of existing regulatory frameworks – both at the international and at the regional and bilateral levels. The third part of this chapter attends to this need and shows how selected countries have responded to the digital challenge and formulated distinct or less distinct responses in their respective external trade policies. Here, in particular, an understanding of the digital agenda of the United States, as well as of the new templates for electronic commerce, is essential and this chapter conveys this knowledge by focusing on the most advanced model so far – that of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The chapter goes on to contextualize and assess the impact of the existing legal frameworks as shaped by preferential trade agreements. The last part of the chapter discusses the new demands of an economy that is heavily reliant on cross-border data flows and the new trade barriers that have been erected to protect vital public interests, the most critical of which is the protection of privacy. The chapter ultimately asks whether there are better ways to address the data-driven economy and what the essential elements of such a model should be.

4.2  Current and Emergent Trends in Disruptive Technologies: The Sweeping Effects of Digitization 4.2.1  Overview and Terminological Remarks There is no clear definition of what should qualify as a disruptive technology. Definitions vary but there seems to be one common feature across the different technological advances: they all “have the potential to disrupt the status quo, alter the way people live and work, rearrange value pools, and lead to entirely new products and services” (Manyika et al. 2013, 1). This is similar to the idea voiced by Joseph Schumpeter that the significant advances in economies can be accompanied by a process of “creative destruction, … which shifts profit pools, rearranges industry structures, and replaces incumbent businesses” (Schumpeter 1950, 83), and which may be driven by technologies in the hand of entrepreneurs (Manyika et al. 2013, 1). The McKinsey Global Institute identified in 2013 twentyfive technologies as disruptive because (1) they were rapidly advancing, (2) their potential scope of impact was broad, (3) they produced significant

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economic value, and (4) their economic impact was potentially disruptive (Manyika et al. 2013, 2–3). Among the technologies listed were mobile Internet, automation of knowledge work, the Internet of Things, cloud technology, advanced robotics, autonomous and near-autonomous vehicles, next-generation genomics, energy storage, three-dimensional (3D) printing, advanced materials, advanced oil and gas exploration, and renewable energy (Manyika et al. 2013, 2–9; also Schwab 2017). It is evident that many, indeed the majority, of these technologies are related to information technology (IT) and the process of digitization. Even if we consider genomics, one of the less IT-related examples, its development too is in fact highly dependent on improvements in computational power and Big Data analytics, and thus again on IT (Manyika et al. 2013, 14). This underlying critical importance of digital technologies is a good argument for singling them out as one disruptive technology that needs to be carefully examined and its policy effects well understood. Before moving on to a more focused examination with regard to the implications of digital technologies for trade, two other buzzwords often heard in this context need to be briefly clarified. The first has to do with what is now commonly discussed in the literature and in policy circles: that digital technologies have brought about and are continuously fueling the so-called fourth industrial revolution (Floridi 2014; Schwab 2017). These revolutions are meant to denote (r)evolutionary phases in time that can be associated with certain technologies, patterns of production, and societal processes.1 Signaling the dawn of a new phase is also meant to mobilize policymakers and convey the message that things are different now and they need to respond accordingly (Schwab 2017). Implications that have been mentioned in the context of the fourth industrial revolution relate in particular to the fusion of technologies as a result of highly sophisticated IT that ultimately blurs the lines between the physical, digital, and biological realms. This development is said to have a profound impact on people, business, and government because of the new structures needed to compete, cooperate, and adapt while at the same time coping with new types of societal risks (Schwab 2017). Another and possibly more useful way of thinking about the multiple and multifaceted effects of digital technology is to see it as a general-purpose Schwab (2017) makes the following distinctions: The first industrial revolution used water and steam power to mechanize production. The second used electric power to create mass production. The third used electronics and information technology to automate production. Now a fourth industrial revolution is building on the third. It is characterized by a fusion of technologies that is blurring the lines between the physical, digital, and biological realms.

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technology (GPT) (Jovanovic and Rousseau 2005). This is an important qualification because it tries to capture distinct features of certain technological breakthroughs that set them apart from other technologies and may help policymakers to prepare better in dealing with them. The next section sheds light on GPTs and the Internet as falling under this category.

4.2.2  Digital Technologies as GPTs: Characteristics and First Lessons to Be Learned A GPT is a specific type of technology that has broad-ranging enabling effects across many sectors of the economy. Technologists typically define a GPT as a generic technology that comes to (1) be widely used, (2) have multiple uses, and (3) have many spillover effects (Whitt and Schultze 2009; Whitt 2013, 717–729). GPTs are not only non-rival and long-lasting but play the role of enabling technologies by opening up new opportunities rather than offering complete, final solutions (Whitt 2013). GPTs also tend to shift value to consumers, at least in the long run, and ultimately give all players an opportunity to raise productivity, driving increased competition that leads to lower prices (Manyika et al. 2013, 24). The Internet is, as we see below in more detail, an excellent example of a GPT. It introduced new ways of producing, distributing, accessing, and re-using information that enabled major innovations. Some of them, like online shopping, may seem trivial because they plainly transform existing market processes to a new space, but others are truly far-reaching, for example, the emergence of new global value chains and new forms of competition, entirely new disruptive platforms like search engines and social networking sites, or the sharing economy applications like Airbnb and Uber. Another feature of GPTs that may be critical for policymakers is that their evolution is not linear. Instead, their effects are complex and it may be difficult to predict where and how changes will unfold.2 Digital An example from history with another GPT is the development of the printing press. The printing press was first used as a way to make the Bible accessible, but it became instrumental for the leaders of the Reformation, who adopted the technology to print the pamphlets that spread the movement at unprecedented speed. The printing press also helped spark the scientific revolution and the Enlightenment by disseminating research and discoveries. Indirect effects included accelerated city growth; some historians attribute Europe’s rapid growth and global influence and the eclipse of Islamic nations after the fifteenth century to the rapid adoption of printing in Europe and its slow adoption in Islamic economies (Manyika et al. 2013, 25; Dittmar 2011).

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technologies are deeply intertwined with societies, which are in themselves complex and multi-directional, so matters only become more complicated. Policies and regulations, including those in the trade domain, have also a critical role to play, as we explain below. It has been argued, for instance, in this context that the benefits of the Internet as an enabling platform for innovation and growth cannot be taken somehow as given but need to be seen as a consequence of its original design, which embedded openness and generativity (Zittrain 2008). Benkler and others have shown that innovation occurs differently in this networked environment and that it is typified by change and complexity rather than predictability and well-behaved change; innovation rather than efficiency and optimization; and scruffy, adaptive learning systems that do better than slower-moving, optimized systems (Benkler 2011, 314). Regulators must thus understand these systemic specificities; they need to learn to deal with unpredictability and to think of policy design that can adequately address it. Also, because the effects of digital technologies are multi-directional, some applications that have the potential to drive productivity growth, such as advanced robotics and automated knowledge work, could at the same time cause negative effects on other fields – such as, notably, employment (Manyika et al. 2013, 27). In this sense, policymakers need to continually balance the benefits against the risks. The stakes are high, but if policy is properly designed, over the long term and on an economy-wide basis, productivity growth and job creation can continue to develop in tandem (Manyika et al. 2013, 27). The innovation policy literature has offered valuable lessons on different aspects of how innovation occurs and evolves under the conditions of the digital environment, the related causality effects, and ultimately the policy framework that can best accommodate them (Whitt 2013; Kauffman Taskforce on Law, Innovation and Growth 2011). Trade policy, be it domestic or international, has not been linked so far to these debates, except for some discussions in the field of intellectual property (IP) rights protection (Yu 2014). One can argue that, while such a discourse disconnect is not infrequent in complex fields of policymaking with different origins and actors, it is unfortunate, especially because policymakers have at the very same time prioritized digital innovation as one of the key drivers of economic growth and global welfare and made digital trade an important item on their agendas.

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4.2.3 Digitization Digitization is the ability to express all information (audio, text, still or moving images) as binary digits; it frees information from a tangible medium, and makes it networkable and easy to manipulate (Flew 2014). Digitization has allowed computers to talk a common language. The emergence of the Internet as a network of networks enabled computers to interconnect and communicate with each other by sharing bits of data through a common protocol (Grimmelmann 2016). Starting in the 1980s, a range of new information processing and transmission technologies developed rapidly in addition to these technological foundations. Five factors were key in this process: (1) increase in processing speed – following Moore’s law, the processing power of semiconductors doubles every 18 months (and this rule has, through employment of a number of innovations, such as distributed processing, remained valid until today); (2) increase in storage capacity – the size and speed of storage devices also increased by the equivalent of Moore’s law, and this increase was enabled by hardware advances but also by new software and a restructuring of the nature of storage itself, which places much lower demand on the capacity of both storage and communication nodes; (3) increase in transmission speed – this is related to the availability of more bandwidth, which now enables broadband delivery to the home and to mobile devices; (4) compression software – thanks to compression, video can now be delivered, also in real time; and (5) standardization of software platforms as well as the Internet communications and programming software and protocols has made it possible to spread the above technological advances and reduce their cost to levels that enable mass consumption. An important consequence of these factors has been the exponential growth of information offerings available to the consumer. As a result, consumers have learned to reach for tools to screen and select information of value and have become more sensitive to reputation and branding as a way of recognizing relevance and quality of information. The growth of the network itself became a major driver of change.3 The Internet was created as an end-to-end operating, generative platform that allows “permissionless innovation.”4 As a consequence, we have witnessed in the past decades “an explosion of goods and services in the Metcalfe’s law states that the value of a network to society is proportional to the square of the number of users of the network (van Oranje-Nassau et al. 2008, 6–7). 4 This is a phrase attributed to Vint Cerf, the father of the Internet (Chesbrough and Van Alstyne 2015, 24–26). 3

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IT industry,” an amazing amount of new applications, and new forms of content creation and communication (Zittrain 2008). There is a lot of data gathered over different periods of time that show the different beneficial effects of the global digital platform – some relate to a great increase of consumer welfare because consumers are now able to search, compare, and buy products and services on a global scale from a much greater variety of offerings. Others relate to the inclusiveness of the platform because the Internet has allowed not only big companies but also small and medium-sized enterprises (SMEs), as well as developing countries, to engage in global trade because of the lower thresholds for participation and the real economic gains to be reaped.5 The objective of this chaper is not to capture all these experiences but rather to elaborate on those aspects that matter for trade and trade policy, and to contemplate how this innovation environment can be sustained and fostered. For this purpose, we highlight here three aspects of the digital evolution that have caused different regulatory challenges. We look in turn at the process of convergence, the emergence and application of great amounts of data, and at the Internet of Things.

4.2.3.1  Convergence We begin with one of the early regulatory dilemmas that digitization brought about: the process of convergence. The technological advances that we noted above (increased transmission speed, storage capacity, etc.) allowed, already in the early years of digitization somewhere in the 1990s, for a single or similar set of services (such as TV, phone, and Internet access) to be offered over different platforms (cable, satellite, or telecommunication networks) and enabled the bundling of distinct services onto a single platform (van Oranje-Nassau et al. 2008). This naturally triggered the erosion of the previously distinct boundaries between the media, the telecommunications, and the IT sectors, ultimately leading to a convergence of their products, services, and companies. Companies like Google, Facebook, and or Yahoo! are good examples in this context because they not only transcend the conventional sectoral boundaries but also clearly illustrate the power of the few in imposing certain standards worldwide (Chander 2012), as we discuss in more detail below. Facebook estimates that 50 million SMEs are on its platform, up from 25 million in 2013. To put this number in perspective, consider that the World Bank estimated there were 125 million SMEs worldwide in 2010. For small businesses in the developing world, digital platforms are a way to overcome constraints in their local markets (Manyika et al. 2016, 7; Meltzer 2016).

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Convergence is problematic from a regulatory perspective because it makes the existing legal frameworks for telecom and media outdated, especially if they are based on technology-based classifications. Convergence also poses serious questions about appropriate regulatory design that is capable of reconciling the very different regulatory rationales, histories, rules, and actors that these previously distinct sectors had. The reason we have media regulation is not same reason we have telecom rules.6 At the same time, many new services – such as the socalled over-the-top services like Skype, YouTube, and Netflix – do not fall under any of the existing regulatory categories, yet they effectively serve the same consumer needs and compete in the same markets. The regulator thus has to make important decisions about the regulatory burden to be imposed on new (and old) companies and on the degree of competition and the safeguarding of essential societal objectives, such as freedom of speech and access to high-quality information (van Oranje-Nassau et al. 2008; Burri 2015c). We have seen regulatory reforms unfold due to convergence effects – the European Union, for instance, has twice adopted such reform packages (Burri 1997) and is now in the process of undergoing a third reform as part of its Digital Single Market strategy (European Commission 2015). At the international level however, there have not been any deliberate regulatory responses, as we explain below; as a result, there is a mismatch between the rules framework and the market reality.

4.2.3.2  Data and Big Data In contrast to convergence, data is a relatively new buzzword in the contemporary debates of digitally driven economic growth and innovation.7 Enabled by a new generation of digital technologies and because of their deep embeddedness in all facets of societal life, companies increasingly capture vast amounts of information about their customers, suppliers, and operations. Millions of networked sensors are now implanted in the physical world, in devices such as mobile phones and cars, extracting, creating, and communicating data. Multimedia and individuals with smartphones and on social network sites only fuel this exponential growth of data and ultimately lead to accumulation of Big Broadcasting often had a strong public service rationale, driven by concerns about free speech, diversity of supply, decency, protection of minors, etc. Telecommunications markets were mostly ruled by economic and technical issues, including network access (van Oranje-Nassau et al. 2008). 7 There were some debates on data flows in the 1980s. See, for example, Kuner 2011; Aaronson 2015; Drake 2016. 6

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Data sets (Manyika et al. 2011).8 Data has become so essential to economic processes that it is said to be the “new oil” (The Economist 2017). Like other factors of production, such as natural resources and human capital, it is increasingly the case that much of modern economic activity, innovation, and growth cannot occur without data (Manyika et al. 2011). A plethora of studies and expert reports point at the vast potential of data as a trigger for more efficient business operations, highly innovative societal solutions, and ultimately better policy choices (Manyika et al. 2011; Mayer-Schönberger and Cukier 2013; Henke et al. 2016). The transformative potential is great and refers not only to new digital native areas, such as search or social networking, but also to brick-and-mortar, physical businesses. The data gathered in manufacturing, for instance, can help improve processes, anticipate risks, and prevent accidents; public sector administration can also be better structured, made more efficient, and more citizen-oriented (Manyika et al. 2011). The implications of data and Big Data availability and analytics are multiple and some of them far-reaching (Mayer-Schönberger and Cukier 2013). At a micro-level, for instance, the value of data changes the traditional relationship between consumers and producers. While in the past, companies sold products to their customers in return for money and some negligible data, “[t]oday, transactions – and indeed every interaction with a consumer – produce valuable information. Sometimes the data itself is so valuable that companies such as Facebook, LinkedIn, Pinterest, Twitter, and many others are willing to offer free services in order to obtain it. […] To maintain an edge in consumer data, user acquisition and user interaction are both critical” (Henke et al. 2016, 26). Data becomes also absolutely essential in terms of competition and market power. Some firms, like Apple, Google, Amazon, Facebook, Microsoft, General Electric, and Baidu, have had a sizable first-mover advantage in the field and become analytics leaders, while at the same time establishing themselves as some of the most valuable companies in the world (Henke et al. 2016, 26). These companies have differentiated themselves through unique data sources, analytics talent, and investment in data infrastructure. The same trend can be seen among younger companies, the next wave of disruptors, which tend to be companies with business models There are no clear definitions of small versus Big Data. Definitions vary and scholars seem to agree that the term Big Data is generalized and slightly imprecise. One common identification of Big Data is through its characteristics of volume, velocity, and variety, also referred to as the 3 Vs. Increasingly, experts add a fourth V that relates to the veracity or reliability of the underlying data (Mayer-Schönberger and Cukier 2013, 13; Burri 2019).

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predicated on data analytics, such as Uber, Flipkart, Airbnb, Snapchat, Pinterest, and Spotify (Henke et al. 2016, 26). It should be noted that the capacity to handle data increasingly turns into a competitive advantage for countries and plays as a power move in the global political economy. For instance, China unveiled in 2016 that it is in possession of the world’s fastest supercomputer, which is 40 times more powerful than the fastest computer of 2010.9 Overall, companies as well as governments are increasingly encouraged to use their potential and to mobilize their resources aptly to make the data-driven economy real (Manyika et al. 2011; Henke et al. 2016; Bughin et al. 2016). In the context of trade and trade policies, the growing importance of data for the digital economy has one crucial implication: data must flow across borders. Many of the economic innovations based on digital technologies do rely on global data flows. Things like the app economy, the outsourcing of many services, the provision of digital products and streaming services, many cloud computing applications, or the Internet of Things would not function under restrictions on the cross-border flow of data (Chander 2016, 2). This critical interdependence puts trade policy under pressure and demands clear-cut solutions. These solutions may not be easy, however, because the use of data and Big Data opens many regulatory questions about the balance between access to and control of data and the protection of privacy and national security (Mayer-Schönberger and Cukier 2013; Gasser 2015, 2016). Furthermore, when data leaves the country, many jurisdictional issues arise, and countries feel that they are no longer in a position to secure adequate protection for their citizens, as notably the EU does (Burri and Schär 2016). In sum, while convergence has been one of the early regulatory challenges, it fades in comparison to the magnitude of issues that the data governance issues involve. This is true for the trade policy context too, as we explain below.

4.2.3.3  The Internet of Things Our last example of the applications of digitization is the Internet of Things. We use it in particular to underline that, although typically when we talk about the digital revolution, we mean intangibles, this should not always be the case. Indeed, increasingly, the connected world includes physical objects. Machinery, shipments, infrastructure, and www.top500.org/list/2016/06/ (last accessed October 10, 2018).

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devices are equipped with networked sensors that enable them to monitor their environment, report their status, receive instructions, and even take action based on the information received. This is what we understand under the term the Internet of Things, and it can be used in many ways to improve productivity and enable new types of products and services – in health care, infrastructure, and in the public sector (Henke et al. 2016, 51–60). The Internet of Things is one of the disruptive technologies that is also said to hold a vast future potential. More than 9 billion devices around the world are currently connected to the Internet, including computers and smartphones, but this number is expected to increase dramatically within the next decade, with estimates ranging from 50 billion devices to 1 trillion. The potential economic impact is equally astounding and ranges from USD 2.7 trillion to USD 6.2 trillion annually by 2025 (Henke et al. 2016, 51–60). For this chapter’s discussion, the importance of the Internet of Things for future digital innovation reminds us that we cannot simply concentrate on services regulation when we conceive of a regulatory framework for digital trade but must include adequate rules for trade in goods as well.10 When we think of trade policy and law in the next sections, we ought to carefully consider all layers of the so-called communications model, with full awareness of all these shifts and developments brought about by digitization (Wu 1999; Benkler 2000; Werbach 2002). This model is well established in the IT literature and depicts contemporary communication architecture as having three layers: (1) the physical layer, consisting of the network plus the hardware attached; (2) the logical layer, consisting of software, applications, and protocols; and (3) the content layer, where the actual human-readable messages are placed. International trade law is directly relevant for all these layers, but the level of its potency to accommodate changes in the layers, as well as the political economy behind each of the layers, may vary, as we show below. Three-dimensional printing is another pertinent example in this context. It belongs to a class of techniques known as additive manufacturing. Additive processes build objects layer-by-layer rather than through molding or subtractive techniques. Three-dimsnional printing can create objects from a variety of materials, including plastic, metal, ceramics, glass, paper, and even living cells. With some techniques, a single object can be printed in multiple materials and colors, and a single print job can even produce interconnected moving parts (such as hinges or mesh). Current limitations of 3D printing include relatively slow build speed, limited object size, limited object detail, and high materials cost (Manyika et al. 2011, 105–113; Kommerskollegium 2016).

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4.3  The Effects of Digitization on Trade 4.3.1  Overview of Developments and Trends Digitization has had and continues to have multiple effects on trade – first, taken broadly as an important part of globalization, and second, taken more narrowly, as a trigger of new patterns of trade in services and goods and enabler of new types of competition. The McKinsey Global Institute published in 2016 an influential report on digital globalization that includes comprehensive data and econometric analyses of the changes in trade due to the advent and wide spread of digital technologies, and the Internet in particular (Manyika et al. 2016). It establishes that the world has never been more deeply connected by commerce, communication, and travel than it is today. But it also clearly shows that the pattern of globalization is shifting – and to a large extent because of the disrupting effects of digital technologies. First, digitization contributes to growth. McKinsey’s research indicates that global flows of goods, foreign direct investment, and data have increased current global Gross Domestic Product (GDP) by roughly 10% compared to what would have occurred in a world without any flows.11 This value was equivalent to USD 7.8 trillion in 2014 alone. Data flows account for USD 2.8 trillion of this effect, exerting a larger impact on growth than traditional goods flows. This is a remarkable development given that the world’s trade networks have developed over centuries, while cross-border data flows are relatively young (Manyika et al. 2016, 73). Second, the share of digital trade is sizable. Approximately 12% of the global goods trade is conducted via international electronic commerce, with much of it driven by platforms such as Alibaba, Amazon, eBay, and Flipkart. Also, some 50% of the world’s traded services are already digitized (Manyika et al. 2016, 7). Digitization enables instantaneous exchanges of virtual goods. E-books, apps, online games, music and streaming services, software, and cloud computing services can all be transmitted to connected customers anywhere in the world. As a result, many media websites are shifting from building national audiences to global ones; a range of publications, including The Guardian, Vogue, and BuzzFeed, attract more than half of their online traffic from foreign countries (Manyika et al. 2016). Global flows of data primarily consist of information, searches, communications, transactions, video, and intracompany traffic. They underpin and enable virtually every other kind of cross-border flow. Container ships still move products to markets around the world, but now customers order them online, track their movement using RFID codes, and pay for them via digital transactions.

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Third, digitization is making global flows more inclusive. The nearzero marginal costs of digital communications and transactions open new possibilities for conducting business across borders on a massive scale. While trade previously was driven largely by advanced economies and their multinational companies, digital platforms allow more countries and smaller enterprises to participate. One trend that needs to be carefully considered, however, is the power of the few because network effects that are intrinsic to digital markets often trigger winner-takes-all scenarios (Shapiro and Varian 1999). Companies like Google, Facebook, Amazon, and Apple have dominant positions in multiple markets and ways to leverage this dominance into other markets. The vast data assets that these firms possess only make these effects stronger and may call for intervention (Ezrachi and Stucke 2016).

4.3.1.1  Global Value Chains The first palpable effect of digitization on trade has been the emergence of the so-called global value chains (GVCs). In the last decade, international production, trade, and investments have increasingly become organized within these GVCs, where different production stages are located across different countries (OECD et al. 2014). Production in GVCs is commonly portrayed as the flow of intermediary goods and services being brought together, sold and used. The fast spread of digital technologies and the Internet have been the main driver behind the proliferation of GVCs. They allow manufacturers to manage and optimize complex industrial processes with tasks performed by various partners in different geographical locations (Kommerskollegium 2015). Again, for GVCs to function, it is essential that large quantities of data must be moved across borders. Note that, in this context, it is not only large companies, like Google or Facebook, that rely on data flows but smaller ones do as well, as shown by a study of the Swedish Board of Trade. It is also shown that the amount of data that needs to be moved to ensure effective production processes is already immense now (Kommerskollegium 2015). Despite being not an entirely new phenomenon, GVCs have not yet been properly addressed in trade policies. 4.3.1.2  Growing Importance of Services Trade and Servicification Another, perhaps more sweeping change that can be attributed to digitization is its impact on trade in services. Services were thought for a long time to be non-tradable because it is the nature of many services that

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their provision coincides with the consumption and requires the physical proximity and interaction of the producer and the consumer (hairdressing is the textbook example). Digitization and the Internet in particular have changed this. Many services, such as legal, engineering, computerrelated, and financial services, can now be provided online in part or in whole, depending on the nature of the service and the extent to which the domestic regulatory framework permits it. As mentioned above, 50% of the world’s traded services are already digitized, which opens entirely new opportunities for global trade in services (Castro and McQuinn 2015; Manyika et al. 2016). Digitization also strengthens the current trend of servicification, which is an increase in the use, production, and sale of services (Kommerskollegium 2012; Lanz and Maurer 2015). This happens as some goods are traded as services: for example, while software has been typically distributed on a tangible medium (such as a CD), now that same software can be delivered and updated online. The same is true for trade in books, movies, and music, where trade in the physical form has been replaced by a cross-border movement of digital content. In addition, many of the newer generation of IT products, such as smartphones, music players, and video games, inherently include some sort of support, continuous maintenance or new content, which transcends the purchase of the initial product. The McKinsey Global Institute has identified another effect of digitization on the relationship between products and services. It argues that the technology component of some goods can fundamentally affect the value of the good. The so-called digital wrappers, such as digital add-ons, can enable or raise the value of other activities: for example, logistics companies use sensors to track physical shipments, reducing losses in transit and enabling more valuable merchandise to be shipped and insured. Online user-generated reviews and ratings increase the level of trust for many individuals, who then feel more confident in making cross-­border transactions – whether buying a book on Amazon or booking a hotel (Manyika et al. 2016). Overall, the relationship between trade in goods and trade in services becomes more complex in the digital space. Previous distinctions between goods and services may not be valid any longer and this has regulatory implications under current international trade law, as we explain below.

4.3.1.3  Implications for Domestic Regulation Global digital trade is hard to stop at the border. At the same time, digital content and applications have profound effects on individuals within

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a country, as well as on its society as a whole. They may induce certain behavioral patterns and affect the conditions for diversity, social cohesion, and democratic practice; they may influence consumer protection, financial stability, and safety. They may affect national security. Overall, digital trade can affect the capacity of domestic regulators to achieve their regulatory aims in many aspects and in many different areas. The increased centrality of data and the importance of cross-border data flows have brought a new set of concerns. The sheer volume and the personal nature of the information collected and used can be worrying (Gasser 2015, 349). Big Data methods provide new and powerful means to sort, combine, and analyze data. The inherent ability of such technologies to capture sensitive details from information that, to the average customer, might seem mundane or meaningless is astounding (Gasser 2015; Solove 2006). Furthermore, the practices behind Big Data are often not transparent and, as mentioned above, are under the control of few gatekeepers (Gasser 2015, 343–350). Privacy policy reports in the United States as well as in the EU point out that conventional methods of protecting users, such as anonymization and de-identification, are no longer effective (US President’s Advisory Council on Science and Technology 2014; ENISA 2014). Related concerns, such as discrimination or control over an individual’s future activities, are multiple. The possible permanence of personal data also means that it can potentially be reused in the future for unanticipated purposes (Gasser 2015, 353). Privacy, which is a fundamental right according to international human rights law and the constitutions of many countries, as well as under the EU Charter of Fundamental Rights, is endangered (Gasser 2015; Gasser 2016; Bennett and Bayley 2016). Tensions between domestic and global rules in general, and between privacy and free data flows in particular, are bound to increase, and policymakers will need to find appropriate frameworks to balance the trade-offs between the them. This may be particularly hard because the approaches of the United States and the EU toward the protection of privacy are at this stage hardly reconcilable (Schwartz 2013; Schwartz and Solove 2014). We address this issue in more detail below.

4.3.1.4  New Types of Trade Barriers Digital trade has changed dramatically in the last decade. States have reacted to this change and the perils associated with it – such as risks for citizens’ privacy and national security – in a number of ways. Some of these reactions have been associated also with a new palette of measures that inhibit digital trade. Several studies in the past five years have compiled

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and analyzed information on these new digital trade barriers (USITC 2013, 2014; Fefer et al. 2017). In the following, we provide a brief overview. One of the first comprehensive taxonomies on digital trade barriers was provided through the reports of the United States International Trade Commission (USITC) (USITC 2013, 2014). Based on inquiries of industry participants and experts, as well as fieldwork, the reports pointed out several types of non-tariff trade barriers. Some can be grouped under the so-called digital trade localization measures. Others are not strictly trade measures and encompass issues relating to censorship, divergent approaches to data privacy, and Independent Professional (IP) protection that different countries have adopted and which in different ways disrupt digital trade, increase the cost of doing business, and hinder innovation. Localization measures can be defined as measures that compel companies to conduct certain digital trade-related activities within a country’s borders. They may include policies that require data servers to be located within the country, local content, government procurement preferences, and technology standards that favor local digital companies. Russia, Turkey, China, and a number of other countries have installed a variety of these measures, especially after the 2013 Snowden revelations (Chander and Lê 2015). Such policies essentially limit market access and may result in higher costs and suboptimal processes for foreign firms (OECD 2015). They may be justified, however, on grounds of privacy or national security protection. Data privacy and protection measures: Divergent approaches to privacy and data protection can also qualify as a trade barrier. Particularly in the context of the data traffic between the United States and the EU, it has often been reported that divergence imposes substantial costs and uncertainty on firms, especially SMEs. In the United States, digital industry representatives are particularly keen on finding common ground and interoperability in regulatory approaches to data protection. Here, beyond the US perception, it is perhaps useful to note that too low standards of data protection can also be construed as obstacle to trade because they do not provide sufficient consumer confidence and trust as a condition for a functioning digital trade. Intellectual property related measures: Representatives of digital content providers and of Internet intermediaries report substantial, although different, IPR-related concerns. The content industries, including software, music, movies, books and journals, and video games, identify Internet piracy as the single most important barrier to digital trade for

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their industries (China being the main culprit).12 In contrast, representatives of intermediaries are particularly concerned about being held liable for IP infringing or illegal conduct of users of their systems. Censorship: Censorship permits countries to determine what information is accessible in the country and allows them to control internal dissent. Censorship has been one of the early Internet barriers and an immediate (although ill-placed) reaction to the borderless nature of the Internet. Censorship has been typical of autocratic states like China and Russia, but over the years it has proliferated and diversified. It has also become much more sophisticated and far-reaching (Zittrain et al. 2017). Blocking and filtering of online platforms and content can be compared to customs officials stopping goods from a particular company at the border. The negative economic effects can be substantial, but they can also be substantial for human rights, in particular for the freedom of expression in its active (as imparting information) and passive (as receiving information) natures (Human Rights Council 2011). Cybersecurity: The growth in digital trade has raised issues related to cybersecurity, the act of protecting IT systems and their contents from cyberattacks. Cyberattacks in general are deliberate attempts by unauthorized persons to access IT systems, usually with the goal of theft, disruption, damage, or other unlawful actions. Cybersecurity can also be an important tool in protecting privacy and preventing unauthorized surveillance or intelligence gathering (Fefer et al. 2017). Border measures: Although not necessarily falling under the category of new trade barriers, traditional impediments, such as border measures and regulatory complexity, should not be forgotten because they can still substantially impede online business, particularly that of SMEs. Overall, one can maintain that the landscape of digital trade barriers is dynamic. Curbing the new digital protectionism should be addressed as a priority in policy agendas.

4.4  Trade Policy Responses to Digital Transformation 4.4.1  The Existing Regulatory Framework for Digital Trade Digitization and digital trade do not happen in a regulatory vacuum. Despite the fact that some may call for different governance adjustments, digitization and digital trade can be subsumed under existing rules at the Other examples include foreign websites that facilitate IP infringement, software piracy, circumvention of technological protection measures, cybertheft of trade secrets, and trademark infringement related to domain names.

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international level. The law of the World Trade Organization (WTO) is at the core of this framework, which has been complemented over time by a number of bilateral and regional trade deals of a preferential nature. We discuss these rules in turn and try to explain briefly what their relevance for the contemporary digital economy is, where legal adaptation has failed, and where countries have managed to formulate some new rules as a response to the digital challenge.

4.4.1.1  The World Trade Organization The WTO Agreements were negotiated and adopted during the Uruguay Round (1986–1994).13 Despite a few updates – such as the Information Technology Agreement – the WTO rules have so far not adapted to the various changes triggered by digitization. Nonetheless, WTO law does regulate digital trade in many ways – and this as a matter of hard law, agreed upon by the now 164 members and enforceable through the quasijudicial mechanism of the WTO’s dispute settlement procedures. The WTO endorses far-reaching principles of non-discrimination: the most-favored-nation (MFN) and the national treatment (NT) obligations. They ban countries from discriminating between products and services coming from different WTO members (which is MFN) and from discriminating between foreign and domestic products and services (which is NT). The WTO-created constraints on national legal frameworks are substantial. Next to these general rules of the WTO architecture, specific WTO agreements regulating trade in goods, trade in services, the protection of intellectual property rights, the provisions on subsidies, standards, government procurement, or trade facilitation, include many rules that matter for the digital economy – either by endorsing and detailing the application of the non-discrimination principles or by specifically addressing certain issues (Burri 2015a, 2017a; Burri and Cottier 2012). With regard to trade in IT products, the WTO secures one of the most accommodating conditions for free trade. In addition to the far-reaching framework of the GATT for trade in goods, the Information Technology Agreement (ITA) provides a special regime for trade in IT products and ensures that trade in communication equipment is duty free. The ITA was adopted at the Singapore Ministerial Conference in 1996 (WTO 1996), largely as a result of the pressure put by the US IT industry. The The WTO agreements comprise the Marrakesh Agreement Establishing the World Trade Organization and the General Agreement on Tariffs and Trade (GATT), General Agreement on Trade in Services (GATS), and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

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proclaimed objective of the ITA is to “achieve maximum freedom of world trade in information technology products.” The ITA signatories pledged to provide zero tariffs for selected IT products, such as computers, semiconductors, semiconductor manufacturing equipment, telecommunication apparatus, data-storage media, and software (WTO 2012). Although only a plurilateral agreement, the ITA has been successful in attracting the major stakeholders in both the developed and developing worlds. Originally signed by 29 countries, the ITA currently lists 82 WTO members. Together, these members account for more than 97% of global trade in IT products (WTO 2012). In 2015, 50 WTO members agreed on the expansion of the ITA to cover additional 201 product lines that have been valued at over USD 1.3 trillion per year. Overall and despite some flaws, the ITA can be deemed truly successful and has made a real difference in trade practice. It ultimately provides for a very liberal regime for trade in IT-related hardware, which spurs competition and benefits consumers (Copenhagen Economics 2010). Together with the far-reaching commitments in the telecommunication services sector, the ITA boosts the emergence of GVCs for IT trade and substantially facilitates the worldwide spread and adoption of technological advances and the emergence of the data economy. It is a prime example that vividly shows how regulation matters for shaping innovation (Chander 2014). The effects of the WTO are felt also in the field of digital services. The GATS, similarly to the GATT, aims at protecting equality of competitive opportunities for companies regardless of their origin and the origin of their services, and at facilitating the progressive liberalization of services markets. Its legal design is different, however, and allows for flexibility in committing through the so-called specific commitments accepted by individual WTO members and listed in their Schedules of Specific Commitments. These schedules show the positive obligations of a member with regard to national treatment and market access.14 The fairly flexible regime of the GATS allows for opening of some services markets but also for keeping others protected, partially or completely. In terms of services sectors that are pertinent for the digital economy, one commonly considers the telecommunications, the computer and related, and the audiovisual as well as the financial services sectors. The level of openness of these sectors varies substantially. One can maintain “Market access” is articulated in Article XVI of the GATS and addresses quantitative restrictions to services trade. The “national treatment” obligation, specified in Article XVII of the GATS, is of a broader, qualitative nature and bans discrimination between domestic and foreign services and service suppliers.

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generally that while the regime for digital infrastructure and applications is liberal under the WTO, content-related services lack commitments. A deeper form of intervention, which may substantially limit the domestic regulatory space, comes from the GATS rules on computer and related services. For computer and related services, which was a fairly new sector at the time of the Uruguay Round and thus largely devoid of either domestic regulation or trade barriers, many WTO members have made far-reaching commitments for both market access and national treatment. For instance, the EU has committed to all the listed subsectors: (a) consultancy services related to the installation of computer hardware; (b) software implementation services; (c) data processing services; (d) data base services, maintenance, and repair; and (e) other computer services.15 The implications of these commitments are real and the leeway available for domestic regulators is severely constrained. If we imagine a situation where the EU would like to install new measures with regard to search engines that somehow limit market access or discriminate against foreign companies and their services, this may implicate a violation of WTO law because search engines can be subsumed under “data processing services” (Gao 2012; Weber and Burri 2012, 115) and because the EU agreed to full commitment in regards to these services. Localization requirements would also be GATS-inconsistent in the sectors where specific commitments are made made (Cimino et al. 2014; Hestermeyer and Nielsen 2014). Yet such situations have not been tested before a WTO panel, at least, not so far. The EU and other WTO members have often looked for an escape in this context by relying on one argument related to the technical issue of services classification is also linked to an intense political debate. Whenever they want to preserve policy space, WTO members argue that such digital services should be classified as “audiovisual services”16 because of their inherent function as content platforms (WTO 2003, para. 7). There is arguably room for interpretation, and members use the lack of clear distinctions in the existing classification schemes, which is exacerbated by their pre-Internet origin. In the sector of audiovisual services, very few WTO members have made commitments and the great The EU has listed no limitations for the first three modes of supply (cross-border, consumption abroad, and commercial presence) and remains unbound only for the presence of natural persons (mode 4) (WTO 1997). 16 Audiovisual services include motion picture and videotape production and distribution services, motion picture projection services, radio and television services, radio and television transmission services, and sound recording. 15

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majority of WTO members remain relatively free to sustain discriminatory measures and adopt new ones (WTO 2010). This is the result of a pronounced and politically charged contention between trade and cultural interests that unfolded during the Uruguay Round of negotiations. It was associated with a rupture between the key negotiating parties – the EU and the United States – on the question of how to regulate cultural matters and whether to make them subject to the rules of the WTO – the so-called exception culturelle debate (Burri 2009, 2015b). The current round of trade negotiations – the Doha Development Agenda, launched in 2001 and originally to be completed by 2005 – holds no promise of changes in the status quo for audiovisual services (Tuthill and Roy 2012). Despite the recognition, widely shared by key WTO members, that the audiovisual sector has changed dramatically (WTO 2011), in particular in the face of the sweeping transformations caused by the Internet, there is little agreement on the best way forward (WTO 2006). This is a major setback for data as content and undermines the very liberal regime that the WTO has established with regard to infrastructure and some services sectors like telecom and computer and related services. It may also be worth keeping in mind the specific case of trade versus culture, its negative spillover effects, and how the distributional conflict between the United States and the EU has played out. This situation may very well be replicated in the area of privacy protection, where the positions of the two key stakeholders also diverge profoundly. Overall, while the WTO agreements have fairly comprehensive rules, and digital trade can be subsumed under the law of the GATT and the GATS, it is evident that legal adaptation under the auspices of the WTO has not progressed. Despite the utility of the WTO’s dispute settlement, illustrated in a number of Internet-related cases, such as US–Gambling and China-Audiovisual Products,17 judicial transplants cannot replace political consensus on the substance, particularly in a complex and highly technical domain such as digital trade. Legal certainty has been seriously Panel Report, United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services (US – Gambling), WT/DS285/R, adopted November 10, 2004; Appellate Body Report, United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services (US – Gambling), WT/DS285/AB/R, adopted April 7, 2005; Panel Report, China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products (China – Publications and Audiovisual Products), WT/DS363/R, adopted August 12, 2009; Appellate Body Report, China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products (China – Publications and Audiovisual Products), WT/DS363/AB/R, adopted December 21, 2009.

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compromised. The classification dilemma, often discussed in the field of services regulation and particularly critical for the legal categorization of data flows, exposes vividly the disconnectedness of trade rules from trade practices and the state of paralysis in the WTO.18 Many other issues discussed in the framework of the 1998 WTO Work Programme on Electronic Commerce have been left without a solution or even a clarification (Wunsch-Vincent and Hold 2012, 181). For instance, there is still no agreement on a permanent, duty-free moratorium on electronic transmissions.19 The lack of progress under the WTO has triggered forum-shopping through bilateral, regional, and multilateral initiatives. Many of these efforts have also sought answers to the regulatory challenges posed by digital technologies.

4.4.1.2  Beyond the WTO: Free-Trade Agreements The regulatory environment for digital trade has been substantially influenced by free-trade agreements (FTAs) and in particular by those led by the United States. The United States has endorsed and attempted to ensure implementation of its so-called “Digital Agenda” (Wunsch-Vincent 2003) through the FTA channel. The agreements reached since 2002 with Australia, Bahrain, Chile, Morocco, Oman, Peru, Singapore, the Central American countries, Panama, Colombia, and South Korea, and most recently with Canada and Mexico under the renegotiated NAFTA, all contain critical WTO-plus (going above the WTO commitments) and WTO-extra (addressing issues not covered by the WTO) provisions in the broader field of digital trade. The emerging regulatory template on digital issues is not limited, however, to US agreements but has diffused and can be found in other FTAs as well, such as Singapore–Australia, Thailand– Australia, Thailand–New Zealand, New Zealand–Singapore, India– Singapore, Japan–Singapore, and South Korea–Singapore.20 Australia, Japan, New Zealand, and Colombia have been among the major drivers of this diffusion. The US template regulates key aspects of digital trade in Online games, for instance, as a new type of content platform, could potentially be fitted into the discrete categories of computer and related services, value-added telecommunications services, entertainment, or audiovisual services. The classification is not trivial because it triggers different obligations; see Weber and Burri (2012). 19 The moratorium has only been temporarily extended several times; the last time was for a period of two years following a decision taken during the Buenos Aires Ministerial Conference in 2017. 20 We have created a database for all FTAs after the US Digital Agenda. We have also examined in more detail the e-commerce chapters in particular, which can be found in 69 FTAs. 18

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(1) specifically dedicated e-commerce chapters, (2) the chapters on crossborder supply of services, and (3) the intellectual property chapters. In this study, we only thematize the e-commerce chapters because they contain deliberate responses to digital trade. The e-commerce c­hapters have also evolved over time – from less to more binding and from a mere compensation for the lack of progress in the WTO toward new (and partially innovative) digital rule-making. In addressing the WTO deficiencies, these chapters have included a clear definition of digital products, which treats digital products delivered offline as equal to those delivered online so that technological neutrality is ensured. The ­chapters also recognize the applicability of WTO rules to e-commerce, and establish a permanent duty-free moratorium on the import or export of digital products by electronic ­transmission. Critically, the e-commerce chapters ensure both MFN and NT for digital products trade; discrimination is banned on the basis that digital products are “created, produced, published, stored, transmitted, contracted for, commissioned, or first made available on commercial terms outside the country’s territory” or “whose author, performer, producer, developer, or distributor is a person of another party or a non-party.”21 The e-commerce chapters also include rules that go beyond the WTO. These cover different issues in the broader IT policy field, such as those for telecommunications policy, IT standards and interoperability, cybersecurity, electronic signatures and payments, paperless trading, self-regulation, and e-government projects. More important for data flows, they seek to achieve some common ground rules for the digital marketplace, where increasingly inadequate and incompatible national regulations are seen as an important digital trade barrier. The US–South Korea FTA has been particularly advanced in this regard. It includes “Principles on Access to and Use of the Internet for Electronic Commerce,” which details rights for the consumers to (a) access and use services and digital products of their choice; (b) run applications and services of their choice; (c) connect their choice of devices to the Internet; and (d) have the benefit of competition among network providers, application and service providers, and content providers.22 Next to these fairly solid safeguards against censorship and other types of constrained access and use, the US–South Korea FTA provides for free cross-border information See, for example, US–Singapore FTA, Article 14.3; US–Australia FTA, Article 16.4. In many FTAs, digital products must not be fully produced and exported through one of the contracting parties of the bilateral FTAs to benefit from the non-discrimination obligations. This is an interesting way to avoid complex rules of origin. 22 US–South Korea, Article 15.7. 21

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flows and obliges the parties, although in a non-binding manner, “to refrain from imposing or maintaining unnecessary barriers to electronic information flows across borders.”23 In the following, we look at the most comprehensive model that we have had so far – that of the CPTTP. Interestingly enough, the e-commerce chapter of the CPTPP has survived the TPP negotiations24 without any change and still reflects the efforts of the United States in this domain. So, in a sense, we have a far-reaching implementation of the US model, without the United States participating in it.

4.4.1.3 CPTPP The Comprehensive and Progressive Agreement for Transpacific Partnership (CPTPP; also known as the TPP11 or TPP 2.0)25 was agreed upon (but has not been ratified) in 2017 by 11 countries in the Pacific Rim.26 The CPTPP represents 13.4% of the global gross domestic product, or $13.5 trillion, making it the third largest trade agreement after the North American Free Trade Agreement and European Union (Torrey 2018). The CPTPP also (and important for us) represents a new level in the evolution of digital trade provisions in FTAs. The CPTPP chapter on e-commerce is clearly the most comprehensive so far. It comprises 18 articles and includes new features that in effect signal an expansion of the US template for digital trade – a fact that has been recently confirmed by the United States Mexico Canada Agreement (USMCA). New issues covered by the CPTPP include provisions on domestic electronic transactions framework, personal information protection, Internet interconnection charge sharing, location of computing facilities, unsolicited commercial electronic messages, source code, and dispute settlement.27 In the following, we look more closely at these. US–South Korea, Article 15.8: “Recognizing the importance of the free flow of ­information in facilitating trade, and acknowledging the importance of protecting ­personal ­information, the Parties shall endeavor to refrain from imposing or maintaining unnecessary barriers to electronic information flows across borders.” 24 The Trans-Pacific Partnership Agreement, https://ustr.gov/trade-agreements/free-tradeagreements/trans-pacific-partnership/tpp-full-text [hereinafter TPP] (last accessed April 18, 2018). 25 The Comprehensive and Progressive Agreement for Transpacific Partnership, full text available at: http://international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/ agr-acc/cptpp-ptpgp/text-texte/index.aspx?lang=eng (last accessed April 18, 2018). 26 Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. 27 CPTPP Articles 14.5, 14.8, 14.12, 14.13, 14.14, 14.17, and 14.18, respectively. 23

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The CPTPP explicitly seeks to restrict the use of data localization measures. Article 14.13(2) prohibits the parties from requiring a “covered person to use or locate computing facilities in that Party’s territory as a condition for conducting business in that territory.” The soft language from the US–South Korea FTA on free data flows is now framed as a hard rule: “[e]ach Party shall allow the cross-border transfer of information by electronic means, including personal information, when this activity is for the conduct of the business of a covered person.”28 The rule has a broad scope and most data that is transferred over the Internet is likely to be covered, although the word for may suggest the need for some causality between the flow of data and the business of the covered person. Measures restricting digital flows or localization requirements under Article 14.13 CPTPP are permitted only if they do not amount to “arbitrary or unjustifiable discrimination or a disguised restriction on trade” and do not “impose restrictions on transfers of information greater than are required to achieve the objective.”29 These non-discriminatory conditions are similar to the strict test formulated by the GATS Article XIV and GATT Article XX, a test that is supposed to balance trade and non-trade interests but is also extremely hard to pass (Andersen 2015). The CPTPP test differs from the WTO norms in one significant element: while there is a list of public policy objectives in the GATT and the GATS, the CPTPP provides no such enumeration and simply speaks of a “legitimate public policy objective.”30 This permits more regulatory autonomy for the CPTPP signatories; however, it also may lead to abuses and overall legal uncertainty. It should also be noted that the ban on localization measures is somewhat softened with regard to financial services and institutions.31 An annex to the Financial Services chapter has a separate data transfer requirement, whereby certain restrictions on data flows may apply for the protection of privacy or confidentiality of individual records, or for prudential reasons.32 Government procurement is also excluded.33 Article 14.11(2) CPTPP. Article 14.11(3) CPTPP. 30 Article 14.11(3) CPTPP. 31 See the definition of “a covered person” in Article 14.1, which is said to exclude a “financial institution” and a “cross-border financial service supplier.” 32 The provision reads: “Each Party shall allow a financial institution of another Party to transfer information in electronic or other form, into and out of its territory, for data processing if such processing is required in the institution’s ordinary course of business.” 33 Article 14.8(3) CPTPP. 28

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Pursuant to Article 14.17, a CPTPP member may not require the transfer of, or access to, source code of software owned by a person of another party as a condition for the import, distribution, sale, or use of such software, or of products containing such software, in its territory. The prohibition applies only to mass-market software or products containing such software.34 This means that tailor-made products are excluded, as well as software used for critical infrastructure and those in commercially negotiated contracts.35 The aim of this provision is to protect software companies and address their concerns about loss of IP or about cracks in the security of their proprietary code36 – however, its real effect is hard to predict. These provisions illustrate an interesting development because it is evident that they do not simply entail a clarification of existing bans on discrimination, nor do they merely set higher standards, as is generally anticipated from trade agreements. Rather, they shape the regulatory space domestically and may actually lower certain standards. A commitment to lower standards of protection is particularly noticeable in the field of privacy and data protection. Article 14.8(2) requires every CPTPP party to “adopt or maintain a legal framework that provides for the protection of the personal information of the users of electronic commerce.” No standards or benchmarks for the legal framework have been specified, except for a general requirement that CPTPP parties “take into account principles or guidelines of relevant international bodies.”37 A footnote provides some clarification: “[f]or greater certainty, a Party may comply with the obligation in this paragraph by adopting or maintaining measures such as a comprehensive privacy, personal information or personal data protection laws, sectorspecific laws covering privacy, or laws that provide for the enforcement of voluntary undertakings by enterprises relating to privacy.”38 Parties are also invited to promote compatibility between their data protection regimes, essentially by treating lower standards as equivalent.39 Overall, the goal seems to be to prioritize trade over privacy rights. This commitment had been pushed by the United States, which subscribes to a relatively weak and patchy protection of privacy. This insertion was a Article 14.17(2) CPTPP. Article 14.17(2) CPTPP. 36 It is interesting to note that China does demand access to source code from software producers selling in its market, so this provision may be interpreted as a reaction to China’s demand. 37 Article 14.8(2) CPTPP. 38 Article 14.8(2) CPTPP, at footnote 6. 39 Article 14.8(5) CPTPP. 34

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consequence of the judgment of the Court of Justice of European Union (CJEU) that struck down the EU–US Safe Harbor Agreement.40 While attention is focused on data protection, it should be noted that the CPTPP also has provisions, although they are fairly weak, on consumer protection41 and spam control.42 The same is true for the newly introduced rules on cybersecurity. Article 14.16 is non-binding and identifies a relatively limited scope of activities for cooperation, in situations of “malicious intrusions” or “dissemination of malicious code,” and capacity-building of governmental bodies dealing with cybersecurity incidents. Net neutrality is another important digital economy topic that has been given specific attention in the CPTPP, although its rules are non-binding. Article 14.10 states, “[s]ubject to applicable policies, laws and regulations, the Parties recognize the benefits of consumers in their territories having the ability to: (a) access and use services and applications of a consumer’s choice available on the Internet, subject to reasonable network management; (b) connect the enduser devices of a consumer’s choice to the Internet, provided that such devices do not harm the network; and (c) access information on the network management practices of a consumer’s Internet access service supplier.” While it is commendable that net neutrality is endorsed, it comes with many reservations, as evidenced from the above provision, stemming from the domestic laws of CPTPP countries, from undefined situations that call for “reasonable network management,”43 or from exclusive services. The obligations are ultimately not linked to legal remedies for situations, such as blocking or filtering content, and are unlikely to lead to a uniform approach across CPTPP countries.

4.5  Deliberate Responses to the Digital Challenge: An Appraisal of the State of Affairs Against the backdrop of failing legal adaptation under the auspices of the WTO, much has happened in preferential trade venues. Although not a revolutionary change, there is a new emergent regime for digital trade. It includes a number of WTO-plus commitments and clarifies some issues that the WTO members could not agree on, such as a duty-free regime C-362/14, Maximillian Schrems v. Data Protection Commissioner, judgment of October 6, 2015, ECLI:EU:C:2015:650. 41 Article 14.17 CPTPP. 42 Article 14.14 CPTPP. 43 Article 14.10(a) CPTPP. Footnote 6 to this paragraph specifies that: ‘The Parties recognise that an Internet access service supplier that offers its subscribers certain content on an exclusive basis would not be acting contrary to this principle’. 40

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for electronic transactions. The FTAs also tackle certain non-trade or WTO-extra issues, such as consumer protection, privacy, and safeguards for the free flow of data, which are perhaps more important. The CPTPP stands out with regard to digital trade not only because of its high standards but also because of the breadth of issues covered that matter more or less immediately for the digital economy. The clear ban on localization measures and the subscription to a binding norm on free data flows with a potentially broad scope of application are unprecedented. It should also be noted that the CPTPP appears to take a first, although somewhat vague and insecure, step toward reconciling economic and non-economic interests because it attempts some sort of a balance between free data flows and other public interests. Overall, FTA partners do benefit from swifter solutions, from the deeper, and often clearer, provisions. It appears that FTAs work better, although not always, for reconciling diverging interests – on long-standing trade topics, such as classification, and in politically charged domains, such as audiovisual services. The United States has made far-reaching concessions in this regard – for example in its FTAs with Australia. FTAs are also in a good position to address the new generation of trade barriers, such as data localization measures. The benefits of FTAs’ may be offset, however, by the fact that a patchwork of multiple and overlapping agreements exacerbates the world’s asymmetric wealth distribution and rule fragmentation, and does not contribute to the free cross-border flow of information on a global scale. It must be underscored in this context that, although we concentrated here on the advanced template of the United States and the follow-up CPTPP, many other countries, even developed ones like the members of the European Free Trade Association (EFTA), do not have a digital strategy and have not entered into any substantial WTO-extra commitments in their FTAs. In addition, FTAs may be undermining the value and impact of multilateral venues and the role of international law in general. Without engaging in the debate of preferentialism versus multilateralism, and purely from the perspective of digital trade and its demands for seamlessness and interoperability (Gasser and Palfrey 2012), the multilateral forum appears more sensible as a solution.44

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One can also point at the deficiencies of the WTO as a brick-and-mortar forum based on a state-centric, top-down paradigm of rule-making (Cho and Kelly 2013; Burri 2017b).

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4.6  Concluding Remarks Beyond the narrow question of the suitability of FTAs to address digital trade, there is a broader one on appropriate legal design. To be sure, the novel design that is needed does not concern the type of rules that were discussed during the 1998 E-Commerce Work Programme of the WTO – it is less about ensuring market access and more about interfacing domestic regimes to provide interoperability and certainty. As noted earlier, digital trade has dramatically changed in the past years. It is all about data and data flows now,45 and this radically changes the perspective on state sovereignty and international cooperation in the domain of trade governance. Several questions are critical in this context. The first important question is how the state, as a global governance actor, reacts and positions itself in this fluid environment; the second asks how the state can enable innovation that is global and decoupled from the nation state while at the same time address the essential interests of its citizenry; the third question relates to the appropriate decision-making processes of bringing about these changes and of moving toward an apt and sustainable legal design for digital trade. There is some urgency attached to addressing these questions because even in seemingly technical decisionmaking, such as for localization requirements for foreign services and service suppliers, essential rights and values, such as freedom of expression, equality of opportunity, and justice may be affected (Chander and Lê 2013). An even more urgent as well as more contentious issue relates to the protection of privacy and family life that appears in many ways endangered in a data-driven economy. While governments do have the right and the responsibility to protect interests and values important to their citizens, they also have a variety of tools available to achieve these goals, and many of them are congruent with the functional nature of the Internet and with the fostering of an open and innovative data economy (Chander and Lê 2015, 677–739; Zittrain 2008). We find ourselves on the cusp of a process of addressing this governance dilemma. For us as international legal scholars, it will be important to stress the dangers of data protectionism and to seek engagement of all stakeholders – regardless of discipline, trade policy, human rights, or technological background – in order to find appropriate solutions. We should seek to find the right language that can frame opportunities to balance the conflicting goals and enable both cross-border data flows and the safeguarding of privacy as a fundamental right. 45

The rhetoric of data flows is not necessarily new but is now very present in trade discussions (Drake 2016).

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References Aaronson, S. 2015. “Why Trade Agreements Are Not Setting Information Free: The Lost History and Reinvigorated Debate over Cross-Border Data Flows, Human Rights and National Security,” World Trade Review 14(4):671–700. Andersen, H. 2015. “Protection of Non-Trade Values in WTO Appellate Body Jurisprudence: Exceptions, Economic Arguments, and Eluding Questions,” Journal of International Economic Law 18: 383–405. Benkler, Y. 2000. “From Consumers to Users,” Federal Communications Law Journal 52: 561–79.   2011. “Growth-oriented Law for the Networked Information Economy: Emphasizing Freedom to Operate Over Power to Appropriate,” In: Kauffman Taskforce on Law, Innovation and Growth (Ed.), Rules for Growth: Promoting Innovation and Growth through Legal Reform. Kansas City, MO: Kauffman Foundation, pp. 313–42. Bennett, C. J. and R. M. Bayley. 2016. “Privacy Protection in the Era of ‘Big Data’: Regulatory Challenges and Social Assessments,” In: B. van der Sloot, D.  Broeders, and E. Schrijvers (Eds.), Exploring the Boundaries of Big Data. Amsterdam: University of Amsterdam Press, pp. 205–27. Bughin, J. et al. 2016. Digital Europe: Pushing the Frontier, Capturing the Benefits. Washington, DC: McKinsey Global Institute. Burri, M. 1997. EC Electronic Communications and Competition Law. London: Cameron May.   2009. “Trade versus Culture in the Digital Environment: An Old Conflict in Need of a New Definition,” Journal of International Economic Law 12: 17–62.   2015a. “The International Economic Law Framework for Digital Trade,” Zeitschrift für Schweizerisches Recht 135: 10–72.   2015b. “The EU, the WTO and Cultural Diversity,” In: E. Psychogiopoulou (Ed.), Cultural Governance and the European Union: Protecting and Promoting Cultural Diversity in Europe. Basingstoke: Palgrave Macmillan, pp. 195–204.  2015c. Public Service Broadcasting 3.0: Legal Design for the Digital Present. Abingdon: Routledge.   2017a. “The Regulation of Data Flows in Trade Agreements,” Georgetown Journal of International Law 48: 408–48.   2017b. “The Governance of Data and Data Flows in Trade Agreements: The Pitfalls of Legal Adaptation,” UC Davies Law Review 51: 65–132. Burri, M. and Cottier, T. (Eds.) 2012. Trade Governance in the Digital Age. Cambridge: Cambridge University Press. Burri, M. and Schär, R. 2016. “The Reform of the EU Data Protection Framework: Outlining Key Changes and Assessing Their Fitness for a Data-Driven Economy,” Journal of Information Policy 6:479–511. Chander, A. 2012. “Facebookistan,” North Carolina Law Review 90: 1807–42.   2014. “How Law Made Silicon Valley,” Emory Law Journal 63: 639–94.

understanding and shaping trade rules for the digital era 103   2016. “National Data Governance in a Global Economy,” UC Davis Legal Studies Research Paper 495. Chander, A. and U.P. Lê. 2013, “Free Speech,” UC Davis Legal Studies Research Paper Series Research Paper 351: 1–51.   2015. “Data Nationalism,” Emory Law Journal 64: 677–739. Castro, D. and A. McQuinn. 2015. Cross-border Data Flows Enable Growth in All Industries. Washington, DC: Information Technology and Innovation Foundation. Chesbrough, H. and M. Van Alstyne. 2015. “Permissionless Innovation,” Commu­ nications of the ACM 58: 24–6. Cho, S. and C. R. Kelly. 2013. “Are World Trading Rules Passé?,” Virginia Journal of International Law 53: 623–66. Cimino, C., Hufbauer, G. C. and J. J.Schott. 2014. “A Proposed Code to Discipline Local Content Requirements,” Peterson Institute of International Economics Policy Brief 4. Copenhagen Economics. 2010. Expanding the Information Technology Agreement (ITA): Economic and Trade Impacts, Final Report for the European Commission. Dittmar, J. E. 2011. “Information Technology and Economic Change: The Impact of the Printing Press,” The Quarterly Journal of Economics 126: 1133–72. Drake W. J. 2016. “Background Paper for the Workshop on Data Localization and Barriers to Transborder Data Flows,” September 14–15, 2016, World Economic Forum, Geneva. The Economist. 2017. “The World’s Most Valuable Resource Is No Longer Oil, but Data,” print edition, May 6, 2017. European Commission. 2015. A Digital Single Market Strategy for Europe, COM (2015) 192 final, May 6, 2015. European Union Agency for Network and Information Security (ENISA). 2014. Privacy and Data Protection by Design – from Policy to Engineering. Brussels: ENISA. Ezrachi, A. and M. E.Stucke. 2016. Virtual Competition: The Promise and Perils of the Algorithm-driven Economy. Cambridge, MA: Harvard University Press. Fefer, R. et al. 2017. Digital Trade and US Trade Policy. Congressional Research Service, CRS Report R44565. Flew, T. 2014. New Media: An Introduction. 2nd ed. Oxford: Oxford University Press. Floridi, L. 2014. The Fourth Revolution: How the Infosphere Is Reshaping Human Reality. Oxford: Oxford University Press. Gao, H. 2012. “Googling for the Trade−Human Rights Nexus in China: Can the WTO Help?” In: M. Burri and T. Cottier (Eds.), Trade Governance in the Digital Age. Cambridge: Cambridge University Press, pp. 247–75. Gasser, U. 2015. “Perspectives on the Future of Digital Privacy,” Zeitschrift für Schweizerisches Recht 135: 335–448.

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  2016. “Recoding Privacy Law: Reflections on the Future Relationship Among Law, Technology, and Privacy,” Harvard Law Review 130: 61–70. Gasser, U. and J. Palfrey. 2012, “Fostering Innovation and Trade in the Global Information Society: The Different Facets and Roles of Interoperability,” In: M. Burri and T. Cottier (Eds.), Trade Governance in the Digital Age. Cambridge: Cambridge University Press, pp. 123–53. Grimmelmann, J. 2016. Internet Law. Oregon City, OR: Semaphore Press. Henke, N. et al. 2016. The Age of Analytics: Competing in a Data-Driven World. Washington, DC: McKinsey Global Institute. Hestermeyer, H. P. and L. Nielsen. 2014. “The Legality of Local Content Measures under WTO Law,” Journal of World Trade 48: 553–92. Human Rights Council. 2011. Report of the Special Rapporteur on the promotion and protection of the right to freedom of opinion and expression, Frank La Rue, A/HRC/17/27, May 16, 2011. Jovanovic, B. and P.  L. Rousseau. 2005. “General Purpose Technologies,” In: P. Aghion and S. N. Durlauf (Eds.), Handbook of Economic Growth. Amsterdam: Elsevier, pp. 1182–1224. Kauffman Taskforce on Law, Innovation and Growth. 2011. Rules for Growth: Promoting Innovation and Growth through Legal Reform. Kansas City, MO: Kauffman Foundation. Kommerskollegium. 2012. Everybody Is in Services: The Impact of Servicifcation in Manufacturing on Trade and Trade Policy. Stockholm: National Board of Trade.  2015. No Transfer, No Production: Report on Cross-border Data Transfers, Global Value Chains, and the Production of Goods. Stockholm: Swedish Board of Trade.  2016. Trade Regulation in a 3D Printed World. Stockholm: Swedish National Board of Trade. Kuner, C. 2011. “Regulation of Transborder Data Flows under Data Protection and Privacy Law: Past, Present and Future,” OECD Digital Economy Paper 187. Lanz, R. and A. Maurer. 2015. “Services and Global Value Chains – Some Evidence on Servicification of Manufacturing and Services Networks,” WTO Working Paper ERSD 3. Manyika, J. et al. 2011. Big Data: The Next Frontier for Innovation, Competition, and Productivity. Washington, DC: McKinsey Global Institute.  2013. Disruptive Technologies: Advances That Will Transform Life, Business, and the Global Economy. Washington, DC: McKinsey Global Institute.  2016. Digital Globalization: The New Era of Global Flows. Washington, DC: McKinsey Global Institute. Mayer-Schönberger, V. and K. Cukier. 2013. Big Data: A Revolution That Will Transform How We Live, Work, and Think. New York: Eamon Dolan/ Houghton Mifflin Harcourt.

understanding and shaping trade rules for the digital era 105 Meltzer, J. P. 2016. “Maximizing the Opportunities of the Internet for International Trade,” E15 Expert Group on the Digital Economy – Policy Options Paper. Geneva: ICTSD. OECD. 2015. Emerging Policy Issues: Localisation Barriers to Trade, TAD/TC/ WP(2014)17/FINAL, May 12, 2015. OECD, WTO and World Bank Group. 2014. Global Value Chains: Challenges, Opportunities, and Implications for Policy. Report prepared for submission to the G20 Trade Ministers Meeting Sydney, July 19, 2014. Schumpeter, J. A. 1950. Capitalism, Socialism, and Democracy. 3rd ed. New York: Harper. Schwab, K. 2017. The Fourth Industrial Revolution. New York: Portfolio. Schwartz, P. M. 2013. “The EU-US Privacy Collision: A Turn to Institutions and Procedures,” Harvard Law Review 126: 1966–2009. Schwartz, P. M. and D. J. Solove. 2014. “Reconciling Personal Information in the United States and European Union,” California Law Review 102: 877–916. Shapiro, C. and H.R. Varian. 1999. Information Rules. Boston, MA: Harvard Business School Press. Solove, D. J. 2006. “A Taxonomy of Privacy,” University of Pennsylvania Law Review 154: 477–560. Tuthill, L. and M. Roy. 2012. “GATS Classification Issues for Information and Communication Technology Services,” In: M. Burri and T. Cottier (Eds.), Trade Governance in the Digital Age. Cambridge: Cambridge University Press, pp. 157–78. Torrey, Z. 2018, “TPP 2.0: The Deal without the US: What’s New about the CPTPP and What Do the Changes Mean?” The Diplomat, February 3, 2018, available at: https://thediplomat.com/2018/02/tpp-2-0-the-deal-without-the-us/. United States International Trade Commission (USITC). 2013. Digital Trade in the US and Global Economies, Part 1, Investigation No 332–531. Washington, DC.  2014. Digital Trade in the US and Global Economies, Part 2, Investigation No 332–540. Washington, DC. US President’s Advisory Council on Science and Technology. 2014. Big Data and Privacy: A Technological Perspective, Washington, DC. van Oranje-Nassau, C. et al. 2008. Responding to Convergence, Prepared for the Dutch Independent Telecommunications and Post Regulator. Oxford: RAND Corporation. Weber, R. H. and M. Burri. 2012. Classification of Services in the Digital Economy. Bern: Stämpfli. Werbach, K. 2002. “A Layered Model for Internet Policy,” Journal of Telecommunications and High Technology Law 1: 37–67. Whitt, R. S. 2013. “A Deference to Protocol: Fashioning a Three-dimensional Public Policy Framework for the Internet Age,” Cardozo Arts and Entertainment Law Journal 31: 689–768.

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Whitt, R. S. and S. Schultze. 2009. “The New ‘Emergence Economics’ of Innovation and Growth, and What It Means for Communications Policy,” Journal of Telecommunication and High Technology Law 7: 217–315. WTO. 1996. Ministerial Declaration on Trade in Information Technology Products, WT/MIN(96)/16.   1997. European Communities and Their Member States, Schedule of Specific Commitments, Trade in Services, Supplement 3, GATS/SC/31/Suppl. 3.   2003. Work Programme on Electronic Commerce, Submission by the European Communities WT/GC/W/497.   2006. Communication from the European Communities and Its Member States, Draft consolidated GATS Schedule, S/C/W/273.   2010. Council for Trade in Services, Audiovisual Services, Background Note by the Secretariat, S/C/W/310.   2011. Communication from the European Union and the United States: Contribution to the Work Programme on Electronic Commerce, S/C/W/338.  2012. 15 Years of the Information Technology Agreement: Trade, Innovation and Global Production Networks. Geneva: WTO. Wu, T. 1999. “Application-Centered Internet Analysis,” Virginia Law Review 85: 1163–204. Wunsch-Vincent, S. 2003. “The Digital Trade Agenda of the US: Parallel Tracks of Bilateral, Regional and Multilateral Liberalization,” Aussenwirtschaft 1: 7–46. Wunsch-Vincent, S. and A. Hold. 2012. “Towards Coherent Rules for Digital Trade: Building on Efforts in Multilateral versus Preferential Trade Negotiations,” In: M.Burri and T. Cottier (Eds.), Trade Governance in the Digital Age. Cambridge: Cambridge University Press, pp. 179–221. Yu, P.  K. 2014. “Trade Agreement Cats and Digital Technology Mouse,” In: B.  Mercurio and N. Kuei-Jung (Eds.), Science and Technology in International Economic Law: Balancing Competing Interests. Abington: Routledge, pp. 185–211. Zittrain, J. L. 2008. The Future of the Internet – and How to Stop It. New Haven, CT: Yale University Press. Zittrain, J. L. et al. 2017. “The Shifting Landscape of Global Internet Censorship,” Berkman Klein Center Research Publication No. 2017-4.

5 The Need for Better Disciplines on Rules of Origins in the WTO Evidence from NAFTA

caroline freund 5.1 Introduction 1 Rules of origin have been renegotiated in North American Free Trade Agreement (NAFTA). US trade officials wanted stricter rules to prevent goods from Asia and Europe from entering the United States duty free via Mexico. Rules of origin protect against such transshipment by specifying the regional value content a product must have to enter the United States duty free under NAFTA. There are limited international disciplines on rules of origin; as a result, they have been used not only to protect against transshipment but also as a form of trade protection. Because strict rules expand the share or type of value added that must be produced regionally, they transfer protection of final goods onto the parts used to produce them. This cascading of protection means some regionally produced parts are used even when the tariff on imported parts is zero and foreign parts are cheaper. Sensitive products, such as autos and apparel, tend to face tougher rules of origin. Similarly, goods facing higher tariffs also tend to have stricter rules of origin, offering evidence that rules are used to fortify the protection around these goods. The use of rules of origin as protection from foreign competition was clear in the NAFTA negotiations. The agreement was almost scuttled over US demands for stricter rules of origin in autos. The final agreement includes an increase from 62.5% to 75% of auto content to be made in North America, as well as a requirement that 40% of content be made by workers making $16 an hour, in a direct effort to promote US production. This chapter was written while the author was working at the Peterson Institute for International Economics.

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While using more parts produced in Canada, Mexico, or the United States may have benefits in terms of regional production, it also creates production inefficiencies and raises prices for consumers of the final goods. In a world of global supply chains, regional production can be hurt if rules are too strict, perversely lowering the share of regional content. In addition to affecting the input mix, complex rules of origin create inefficiencies because they are cumbersome to comply with and add to the costs of trade. To be granted duty-free access under NAFTA, firms are required to document the origin of parts used in production and obtain a certificate of origin. These additional administrative costs imply that some trade between NAFTA countries enters through most-favored-nation (MFN) tariffs instead of NAFTA trade preferences (which typically allow duty-free access). It also means that some trade does not take place, particularly for small businesses that lack the legal personnel with knowledge on the NAFTA certification process. This chapter uses NAFTA to examine how rules of origin are used as protection and their effects on trade. It describes the rules of origin in NAFTA and discusses how they have been utilized, with a focus on the auto industry, where rules are subject to intense debate. It also considers how they could be improved to make regional supply chains more efficient while protecting against leakage of NAFTA preferences to non-members. The analysis shows, consistent with numerous academic studies of the agreement, that NAFTA rules of origin are highly complex and strict compared with rules in other free-trade agreements (FTAs). Tightening them could perversely lead to lower regional content and disrupt regional supply chains as more importers eschew NAFTA preferences because of costly rules of origin and instead trade under standard MFN tariffs. Once goods are imported through non-preferential channels, rules of origin become irrelevant, so regional content is likely to fall. Finally, small businesses are especially disadvantaged by cumbersome rules of origin because the bureaucratic costs of doing business are a larger share of their total costs. Given the complexity of the NAFTA rules of origin, this chapter argues in favor of streamlining rules, with regional content requirements for all goods set at one rate, as opposed to the current product-by-product rules in NAFTA. Moving toward a global norm is an important goal to ensure that firms exporting to multiple destinations are not forced to choose between agreements.

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5.2  What Are Rules of Origin and Why Do We Have Them? Rules of origin are allowed in FTAs to ensure that products produced outside the member countries are not entitled to the preferences that regionally produced goods receive. Countries in an FTA have different tariffs on externally produced goods; without rules of origin, imports could evade tariffs by being imported to the lowest-tariff country and then re-exported to another regional agreement member. For example, the US MFN average tariff on imported peanuts (HS 1202) is over 100%; in contrast, the tariff on imported peanuts in Mexico is zero. To export peanuts to the United States from Mexico, a certificate of origin must show that the peanuts were grown in a NAFTA member. Without rules of origin, peanuts could enter Mexico duty free from an external peanut-producing nation, such as Brazil, and then be shipped to the United States through NAFTA, avoiding the hefty duty. Chapter 4 of the NAFTA agreement describes the rules of origin requirements. As with other trade policies, the devil is in the details, and they can be found in a 304-page Annex to NAFTA (Annex 401) that specifies the rules of origin at the product level. NAFTA rules of origin require goods to originate in the region and be significantly transformed. Significant transformation may include switching tariff codes and/or a percentage requirement of regional content. For example, the rules of origin on cars (HS 8703.21-8703.9) require the following: A change to subheading 8703.21 through 8703.90 from any other heading, provided there is a regional value content of not less than 62.5% under the net cost method. There are three parts to this rule. The first part requires a heading change to ensure that assembly of motor vehicles originates in the region. Therefore, even if a motor vehicle is made abroad with 80% NAFTA components, it will not qualify for special treatment. The second part is the content requirement, which ensures that there is significant NAFTA value added. And the third part explains how regional content is calculated. The net cost method, preferred in NAFTA, excludes costs of distribution, shipping, royalties, interest, promotion, and retail. The net cost method also incorporates “tracing” rules for large car parts that may themselves be made up of regional and imported parts (these are contained in a separate annex to the chapter). For example, if an electric motor imported from Asia is attached to a Mexican-made car seat and sold to a car company, the electric motor is subtracted from the

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calculation of regional value because it is a traced product (NAFTA Rules of Origin Regulations).2 The rules also dictate other parameters, such as the level of aggregation, that provide manufacturers with more or less flexibility in meeting rules of origin requirements. Textiles and apparel also have complex rules of origin. For example, the rule for men’s cotton boxer shorts extends for more than a page, listing in detail the types of fabric that qualify. Many agricultural and food products also have cumbersome technical requirements.

5.2.1  Rules of Origin Are Used As Protection The World Trade Organization (WTO) imposes few strict disciplines on rules of origin, and as a result they have been used not only to protect against transshipment but also as a form of trade protection, particularly in sensitive products such as apparel and autos. Economic theory shows that rules of origin can be used to transfer protection of a final good onto the parts and components used to produce it (Krishna and Krueger 1995; Falvey and Reed 1998; Krishna 2005). Parts that are more efficiently produced outside the region may be bought from local suppliers or imported from a regional trade partner. An extensive empirical literature finds that rules of origin are designed to protect some industries and result in production distortions (Cadot and De Melo 2007). The correlation between tariffs and rules of origin in NAFTA supports the view that they are used as protection in NAFTA. Figure 5.1 shows the average tariff for products according to the rules of origin as defined by Estevadeordal and Suominen (2003), where 1 is less strict and 7 is the most strict. The products with stricter rules of origin tend to be special-interest goods that also have higher MFN average tariffs. The simple correlation between rules of origin and MFN tariffs, for 2057 six-digit HS products with positive tariffs, is 0.19 and highly significant. The most comprehensive empirical paper to date that examines the effect of NAFTA rules of origin on Mexican imports of parts finds a large and significant effect. Conconi et al. (2016) concord rules of origin and tariffs on final goods to the parts used in their production. They find that, on average, strict rules of origin reduced imports of parts from non-NAFTA countries by 30%. Cadot et al. (2002) also examine NAFTA and find that rules of origin roughly offset tariff preferences in some industries, NAFTA Rules of Origin Regulations, www.law.cornell.edu/cfr/text/19/appendix-to_ part_181.

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Figure 5.1  Rules of origin and tariffs are correlated. Source: US Commerce and Estevad­ eordal and Suominen (2003). Rules of origin rated on a scale of 1 to 7, where 7 is the strictest.

especially footwear, food, and tobacco. Using data on a large cross section of countries, Estevadeordal et al. (2009) find that FTAs expand trade, but stricter rules of origin reduce trade.

5.2.2  Multiplying Rules of Origin Many countries now have FTAs with numerous partners. As the number of FTAs grows, so too do the rules of origin protecting the agreements. For firms, this means that they must comply with distinct rules of origin if they want to take advantage of the duty-free access offered by the agreements. This is not always possible, however, because the rules of one agreement can conflict with rules of another agreement in terms of what foreign parts count toward regional content. The substantial differences sometime forces firms to choose between regional trade agreements (Moroz 2017). Estevadeordal and Suominen (2003) examine rules of origin in 35 trade agreements. After characterizing each product on a scale of 1 to 7, they average across products. NAFTA is found to have the strictest rules of all agreements, with an average score of 5.1. In comparison, the EU–Mexico agreement has an average score of 4.8 and Japan–Singapore 4.6. One reason NAFTA rules tend to be more onerous is because they require more extensive transformations by tariff category. Substantial transformation under NAFTA often requires a change of chapter (first two digits). In contrast, EU rules requiring tariff class changes are typically at

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the classification heading (first 4 digits). Therefore, EU rules allow some products from the same chapter to be transformed, and thus qualify for EU preferences, that the NAFTA does not. For example, Mexican-made canned tomato soup requires a change from another chapter under NAFTA rules. Thus the soup cannot be made from imported canned tomatoes. In contrast, such a soup would qualify under EU preferences. Given the large and increasing number of trade agreements, coordination among countries to work toward a global set of accepted rules would improve business efficiency. As the number of regional agreements multiply, it would also ease the move toward cumulation, where countries can count goods from countries in different or expanded FTAs toward the content requirement.

5.2.2.1  When It Comes to Rules of Origin, Stricter Does Not Mean Better While rules of origin encourage the use of regional inputs, they also increase costs because of production distortions and the administrative burden. For an exporter, the costs of complying with rules of origin must be balanced against the tariff preferences received. If the tariff is low and foreign inputs are relatively inexpensive (or administrative costs associated with rules of origin are high), firms may choose to eschew FTA preferences and trade through MFN tariffs. Because rules of origin raise the costs of obtaining duty-free access, and as they become more strict, regional content can fall if they lead firms to trade without FTA preferences (Ju and Krishna 2005). The relationship between rules of origin and regional content for an individual firm is displayed in Figure 5.2. When rules of origin are low, and assuming some fraction of the total content is optimally of FTA origin, rules of origin do not bind, and regional content remains constant. Eventually, the content requirement required to receive preferences becomes binding, and the firm replaces foreign inputs with more costly FTA inputs. This is represented by the rise in regional content equal to the rule of origin. The firm will pick those parts where the cost (or quality) differential between FTA-produced goods and foreign-produced goods is lowest. As rules of origin become stricter, the firm replaces more foreign parts with FTA parts. At some point, however, the cost differential between FTA inputs and foreign inputs is too great, and it becomes more profitable to pay the tariff than use regional inputs. Once the firm decides to pay the tariff, regional content falls, dropping back to the optimal input mix.

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Figure 5.2  Regional content and rules of origin at the firm level.

For total imports of a product, where a heterogenous group of firms uses different input mixes in production, the maximum point differs somewhat across firms. But overall, the shape still has a maximum, with a point beyond which stricter rules of origin begin to lower regional content (Figure 5.3). This point occurs when the loss in regional content from the marginal firm that stops using the FTA equals the gain in regional content from all the firms that comply with the new rule.

Increasing level of regional content use

Increase regional content to avoid tariffs

Pay tariff, import lowest priced foreign content

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Too low RoO to maximize Too high to bind local content to bind Rules of origin strictness (percent required regional content)

Figure 5.3  Regional content and rules of origin at the industry level.

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The shape of the curve also depends on the tariff preference. When the import tariff is high, firms are more willing to substitute expensive FTA intermediates for cheaper foreign ones to avoid paying it. A higher tariff therefore shifts the point at which regional content is maximized to the right (Figure 5.3). For example, the low US tariff on autos of 2.5% makes stricter rules of origin less disruptive to supply chains because cars can always enter under the relatively low tariff. However, a tariff of 25%, which is in place for pickup trucks and has been threatened for autos, would make NAFTA preferences critical for trade. Even when stricter rules lead to more regional content, there can be a significant loss from a welfare perspective. Increasing regional content must also be balanced against efficiency. As the industry approaches the maximum regional content, the product mix is moving away from the efficient mix, raising costs. If stricter rules lead to more Mexican content, then, from a US perspective, there is a pure loss from higher regional content requirements because consumers face higher prices but no new US jobs are created.

5.2.2.2  Higher Tariffs Lead to Higher NAFTA Utilization, But Stricter Rules of Origin Lower Utilization The costs of rules of origin are apparent in the incomplete preference utilization in NAFTA trade. Two forces determine the extent to which NAFTA preferences are utilized: the costliness of adhering to the rule and the extent of tariff protection. When external tariffs are high, companies have more to gain from abiding by rules of origin and entering through NAFTA. US customs provides data at the product level on the share of goods that enter through NAFTA. The data show that rules of origin prevent some importers from using NAFTA. When tariffs are low, on average across tariff lines, a greater share of the importers of a product pay the tariff. Figure 5.4 shows the average share of products that enter through MFN instead of NAFTA, for goods with positive tariffs. Products with zero tariffs always enter through MFN (not shown in the figure). When tariffs are positive but below 2%, on average, one-quarter of the value of a product enters through MFN, with the remaining three-quarters using NAFTA preferences. As tariffs rise, a smaller share of goods use MFN and a greater share of goods enter through NAFTA. When specific tariffs are present, which typically are more costly than ad valorem tariffs, over 95% of the value of goods on average enters through NAFTA, though even in these high tariff categories, there are some products with low utilization rates.

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Above 10

Specific Ad Valorem Tariff

Figure 5.4  Average share of products entering through MFN instead of NAFTA, by tariff level. Source: US Commerce and author’s calculation.

5.2.2.3  Rules of Origin Put Small Exporters and Start-ups at a Disadvantage Rules of origin create a barrier to entry for new or small businesses because certificates of origin must be obtained. Because large and incumbent exporters have a bigger administration office that can handle the additional costs of documenting origin, they are at an advantage. For small businesses thinking about exporting, the added costs of documenting origin discourages exporting. Because the administrative cost of rules of origin acts as a fixed cost, it places a heavier burden on small firms and low-value products. While the import data are not calculated at the firm level, the effect of rules of origin on low-value exports is apparent in product-level data. Figure 5.5 shows the share of products where preferences are not utilized for 3,903 eight-digit products with positive tariffs and positive trade, by product size class. For the nearly 400 products that are in the bottom 10% of US imports from Mexico, more than 30% enter without using NAFTA. In contrast, for higher-volume products, less than 15% of imports enter without using NAFTA. One potential way to improve market access for small businesses is to raise the de minimis threshold under which rules of origin do not bind. Currently, shipments under $2,500 are typically not obliged to meet certification requirement. But even for small businesses, this is not a commercially viable amount – it only allows samples to be sent in preparation

caroline freund

116 Average share 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0

0 to 10

10 to 25

25 to 50

above 50 Size percentile

Figure 5.5  Average share of US imports from Mexico through MFN and product size. Source: US Commerce and author’s calculation.

for trade. One alternative would be to base the threshold not on the value of goods shipped but on the value of the tariff revenue. This would lead to lower de minimis thresholds on higher tariff products, where the incentive to cheat is the greatest, and potentially allow a little more leeway for small businesses.

5.2.2.4  Rules of Origin Constrain the Transport Sector The transport sector (Chapter 87) – which includes cars, trucks, tractors, and their associated parts – accounts for a large and growing share of US–Mexico trade because of the extensive auto supply chain. Transport now accounts for 25% of imports from Mexico, up from 11% in the early 1990s, before NAFTA. Imports from Mexico largely replaced imports from Canada over the last two decades. Figure 5.6 shows that NAFTA’s share of US imports in the transport sector have remained fairly flat at 40–50%; what has changed is a shift away from Canada toward Mexico. A serious concern about changing rules of origin requirements is that the supply chains, which have developed with current rules in place, would be disrupted. The importance of supply chains is visible in terms of the types of products that are traded (Table 5.1). There are high shares of intermediate goods and intra-firm trade in US–Mexico trade compared with US trade with the world. Supply chains are especially prevalent in the transport sector, where intermediates make up half of imports and three-quarters of exports, and most trade is within the firm (referred to as related-party trade).

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Import Share 0.6 0.5 0.4 0.3 0.2

0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

0.1

Canada

Mexico

NAFTA

Figure 5.6  US import share transport, by country. Source: World Bank, World Integrated Trade Solution, and author’s calculations.

Table 5.1 Supply chains are important All Goods

Transport

US Imports From

US Exports From

US Imports From

US Exports From

Mexico

Mexico

World

Mexico

World

Mexico

World

75

61

46

38

76

45

World

Share of US Trade in Goods (%): Intermediate 40 51 input trade Relatedparty trade

67

51

40

29

84

74

61

34

Majorityowned affiliate trade

21

16

22

29

43

26

na

34

Source: US Census Bureau, Bureau of Economic Analysis. Note: Related-party trade is defined as trade within firms with at least 10% ownership in the trading partner.

Evidence shows that rules of origin in transport are already tight. Not only are cars and trucks required to have 62.5% NAFTA content, but, as noted above, many parts used in the production of cars and trucks are “traced” for content. Traced parts are decomposed by origin and only the regional ones, within any given component, are counted toward

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the 62.5%. In contrast, the rules of origin in the FTAs signed by the EU require 45% of value added and, instead of tracing, use a simpler roll-up method where individual parts are counted as wholly regional provided they meet content rules. Evidence that the rules are strict is apparent in preference utilization in autos, where some imports forgo NAFTA preferences. On average, across product lines in the transport category with positive tariffs, 23% forgo preferences and enter the United States through MFN as opposed to NAFTA, above the 18% for all products, with similar tariffs. As noted above, many of the smaller product lines have low NAFTA utilization, but there are also some high-volume products where NAFTA utilization is relatively low. As an example, consider the $1.5 billion of drive axles (HS 870850) that the United States imports from Mexico. The tariff is 2.5% and the rule of origin is complex, listing in detail which transformations for which types of vehicles permit it to qualify for NAFTA preferences and also requiring a minimum of 62.5% content if the drive axle uses parts from the drive axles categories (8482.10 through 8482.80). Roughly 20% of the value of drive axles enter through MFN, i.e. without using NAFTA. Another important part with low NAFTA utilization is car radiators (HS 87089150), where the tariff is also 2.5% and the rule of origin requires a 62.5% NAFTA content, unless the radiator is made without using radiator parts (transformed from category besides 870891). For these important car parts, about 25% enter without using NAFTA. Raising the regional content requirement would further reduce the share of imports that come through NAFTA – and thus, likely, the share with a high NAFTA content. In recent decades, according to the Trade in Value Added database (OECD), the NAFTA and the US share of value added in Mexican exports of “motor vehicles, trailers and semitrailers” has fallen slightly. The NAFTA share is estimated at around 70% in 2011 (the most recent year available), suggesting the rules of origin are binding.3 While the share is above the 62.5 rule of origin, it includes some value added that would not qualify under NAFTA, such as the US value added in car parts imported from Asia or Europe. In addition, car companies regularly use slightly more regional content than the restrictions require to ensure that potential disruptions from regional supplier or paperwork/verification issues do not prevent them from achieving NAFTA certification. Given that global supply chains make it more difficult to certify where Calculated for the sector.

3

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goods are produced, many producers state that they are operating very close to the margin, with a small buffer to ensure that they meet NAFTA requirements. While there is a chance that raising content thresholds could lead to more NAFTA content (especially Mexican), there is a risk that raising rules would lead to more autos and parts entering through MFN, thus with lower NAFTA content. There are also the higher production distortions and added costs of complying with rules of origin to consider.

5.3  Toward a Better System of Rules of Origin Because the rules of origin in NAFTA are especially complex and were designed before the global-supply-chain revolution, it is time to reform them. Replacing the 304-page Annex describing rules at the product level with a simple rule that can cut across all trade would be an improvement. Three ideal reforms would be the following: •  A uniform rule applying to all products, with a simple regional content rule of 40–50%. The complex tariff line change restrictions should be amended to always allow for an alternative to showing regional value above the required amount. •  Expanding the de minimis threshold under which products do not have to be certified would help small businesses that find rules of origin too cumbersome to comply with. •  Move toward a global norm that would make it easier for exporters to conform to the rules in different trade agreements and would also allow cumulation when regional agreements expand to include other countries.

Making rules of origin stricter would be bad for producers and would lead to higher prices for consumers, without guaranteeing more US content. Stricter rules could lead to more trade going through MFN tariffs, and lower regional content. In cases, where regional content expands, it could be Mexican, US, or Canadian. While new wage-related content restrictions may push more production to the United States and Canada, they will also add to production and administrative costs, hurting consumers. Small businesses are especially deterred from trading because the added compliance cost is a higher share of low-value shipments. Coordination on rules of origin among WTO members to achieve one simple set of rules that all FTAs follow would be an improvement on the current system, where companies must learn the intricacies of each agreement

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and their product-specific rules, and obtain a corresponding certification. Ideally, there could also be a single stop for certification for goods with value added of at least 50% from the source country, which could be used for all trade agreements to which the source country is a signatory.

References Cadot, O. and J. de Melo. 2007. “Why OECD Countries Should Reform Rules of Origin,” Manuscript, University of Lausanne. Cadot, O., de Melo, J., Estevadeordal, A., Suwa-Eisenman, A. and B. Tumurchudur. 2002. “Assessing the Effect of NAFTA’s Rules of Origin,” In: Laboratoire d’Economie Appliquee, INRA, Research Unit Working Papers. Conconi, P., Garcia-Santana, M., Puccio, L., and R. Venturini. 2016. “From Final Goods to Inputs: The Protectionish Effect of Rules of Origin,” CEPR Discussion Paper No. DP11084, https://ssrn.com/abstract=2726564. Estevadeordal, A. and K. Suominen. 2003. “Rules of Origin in the World Trading System,” Paper Prepared for the Seminar on Regional Trade Agreements and the WTO. Geneva, 14 November. Estevadeordal, A., Suominen, K., Harris, J. and M. Shearer. 2009. Bridging Regional Trade Agreements in the Americas: Special Report on Integration and Trade. IDB Publications, Interamerican Development Bank, no 255. Falvey, R. and G. Reed. 1998. “Economic Effects of Rules of Origin,” Weltwirtschaftliches Archiv 134(2):209–29. Ju, J. and K. Krishna. 2005. “Firm Behaviour and Market Access in a Free Trade Area with Rules of Origin,” Canadian Journal of Economics 38(1):290–308. Krishna, K. 2005. “Understanding Rules of Origin,” NBER Working Paper 11150. Krishna, K. and A. Krueger. 1995. “Implementing Free Trade Areas: Rules of Origin and Hidden Protection,” In: A. Deardorff, J. Levinsohn and R. Stern (Eds.), New Directions in Trade Theory. University of Michigan Press, pp. 149–87. Moroz, A. 2017. “Navigating the Maze: Canada, Rules of Origin and the TransPacific Partnership (and Two Tales of Supply Chains),” In: A. Van Assche, R. Wolfe and S. Tapp (Eds.), Redesigning Canadian Trade Policies for New Global Realities. Montreal, Canada: IRPP.

6 For Whom the Bell Tolls The WTO’s Third Decade

michael hahn 6.1 Introduction 1 The rules-based multilateral trading system is facing its deepest crisis since the creation of the World Trade Organization (WTO), threatening the basic functions of the organization, including its jewel in the crown: the dispute settlement mechanisms established by the Dispute Settlement Understanding (DSU) that – through the binding character of its decisions and with an independent and impartial review body – has been an envied model for many other sub-regimes of public international law. As of this writing, “the Appellate Body’s membership fell to the minimum number of judges it needs to function … leaving only three judges appointed; … this deadlock, caused by the US administration, could lead to the collapse of a system that is essential to managing disputes among all WTO members” (European Parliament resolution, November 29, 2018, para. G). The preceding paragraph paraphrases and quotes a November 29, 2018, resolution of the European Parliament, indicating that the future of the WTO has developed from being merely a pet speculation subject of academics to a subject of the gravest concern in the real world where, as the Appellate Body (AB) has taught us, people “live, work and die.”2 The resolution goes on to “firmly [call] on the US to resolve this ­situation in a way that allows for the vacant AB seats to be filled expeditiously” (European Parliament resolution, November 29, 2018, para. 4), expresses support for some proposals of the Commission to satisfy (­comparatively easily) WTO dispute settlement mechanism (DSM) reforms (“transitional

Sincere thanks for valuable research support are due to Ms. Laurianne Junnod, BLaw, Junior Research Fellow at the Institute for European and International Economic Law. 2 Thus, the current situation of the WTO system seems scarily well aligned with the Appellate Body’s rather joyless world vision. 1

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rules for outgoing members or changes to the length of terms on the AB or to the maximum time allowed before the publication of a report”), and acknowledges that some of the US criticism will need to go beyond measures limited to the DSM or the AB. In a similar fashion, the G20 leaders’ declaration of December 2018 concurs that “[t]he system is currently falling short of its objectives and there is room for improvement. We therefore support the necessary reform of the WTO to improve its functioning” (G20 leader’s declaration 2018, para. 27). The WTO system is one of the most successful manifestations of the US-led international order established after World War II. Concluded 19933 at the end of the Uruguay Round that had started seven years earlier in Punta del Este (GATT MIN.DEC 1986), its creation was a testament to a post–World War II world order that had been shaped by the United States and its Western allies: attached to the rule of law in international relations; built on the premise that rational discourse between the members would lead to timely adaptions of the WTO rulebook, allowing it to react to, or even anticipate, future challenges. Also, the WTO agreements are fundamentally attached to the idea that state intervention should be the exception, whereas market forces should be the determining factors for success at the domestic and international level. This did not make the WTO a Shangri-La for multilateralism: it was always clear that some states, notably the United States, had more of a say in the development of the law than others. With regard to law-making, the “Quad” proposals4 and the “green room” discussions (Van den Bossche and Zdouc 2017, 153) were the visible recognition that some partners had more clout than others. Also, it was always evident that the much-praised DSU enforcement mechanism (Article 22 DSU) was in reality a privilege accessible only to economic superpowers such as the United States, the EU, China, or Japan. The ambition of the negotiators to create, with and in the WTO agreement, a truly foundational document (“Magna Charta of international trade”) is also evident in the rejection of the à la carte approach that had Negotiations were concluded in December 1993. The results of the Uruguay Round were embodied in the Final Act signed on April 15, 1994. www.wto.org/english/docs_e/ legal_e/03-fa_e.htm (last accessed November 12, 2018). 4 As an example, note the influence of the Quad’s progress in negotiations relating to market access at the Q7 (1993) held in Tokyo for the Uruguay Round negotiations. See Report on the Uruguay Round by the United States, Canada, the European Communities and Japan (MTN.TNC/W/113, July 13, 1993). www.wto.org/gatt_docs/English/ SULPDF/92140026.pdf (last accessed November 26, 2018). 3

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been a hallmark of the Tokyo-Round agreements (Jackson 1998, 21–24). To the contrary, the “single-undertaking approach” established a single rule set that GATT contracting parties either had to accept or, alternatively, be left behind in a moribund GATT 1947: at the end of the Uruguay Round, the United States and its allies were ready to establish a WTO without those that were not prepared to follow. “GATT 1947” would have been the place of the holdouts, which their former fellow contracting parties would have terminated in due course. In the same manner, WTO drafters established a dispute settlement mechanism that established for the first time an appeals body (the AB) that was geared to become, even without certain hypertrophic tendencies shown over the last 20 years, the authoritative source for jurisprudential interpretation of the agreements. Thus, in a way, the beginnings of the WTO were the high point of American leadership that began in earnest 100 years ago, when the guns fell silent in Europe, and the United States became the world’s leading power (Shaffer et al. 2018; Acheson 1969). The success of the WTO proved irresistible: China joined, and the deadlines in the protocol of accession seem to indicate that Western negotiators, having just witnessed the implosion of the Soviet empire, expected that, within 15 years, communism would also be curtailed in that part of the world. The dispute settlement mechanism went from strength to strength, or so it seemed, attracting not just the world’s biggest traders – the United States, the EU, Japan, China – but also many others.5 How then is it possible that the dire situation, alluded to in the opening paragraph, came to be? The most immediate and obvious reason is the current US administration’s worldview, and (more specifically) its opinion of any other institution of the international order that the United States has co-created since Armistice Day 1918. Every invective imaginable (for a juridical person, that is) has been applied to the WTO by the current tenant of the White House.6 That the current US president will be succeeded Since 1995, 570 requests for consultations have been submitted by more than 50 members and in relation to 20 WTO agreements. More than 400 panel reports, Appellate Body reports, and arbitral awards or decisions were circulated between 1995 and the end of 2017. www.wto.org/english/tratop_e/dispu_e/dispu_status_e.htm; www.wto.org/english/ tratop_e/dispu_e/dispustats_e.htm#more_numbers (last accessed November 12, 2018). 6 The forty-fifth US president is on record with a statement that would seem to be in conflict with WTO rules. In his inauguration speech, he stated, inter alia, “it’s going to be America First. Every decision on trade … will be made to benefit American workers and American families … We will follow two simple rules: Buy American and Hire American.” (www.whitehouse.gov/inaugural-address, last accessed October 1, 2018). See also “… The 5

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by the forty-sixth president may be cold comfort: unless this happens very fast,7 his remaining time in office may suffice to withdraw, de iure or de facto, the United States from the WTO. While it is no longer inconceivable that the organization would not implode, it is far from assured that the WTO would indeed survive that ultimate Trump shock. In any case, many of the substantive concerns voiced by the current administration have been on the US agenda since 1994. In fact, the Obama administration advanced some of these concerns with great urgency,8 and it would be surprising, if future US presidents would change course. While other world leaders, since January 20, 2017, at least, speak very highly of the WTO, the fact remains that, in almost 25 years of its existence, its rulebook has hardly been adapted to new challenges. For developments in crucial areas of trade law – electronic commerce, the role of big data, human rights, the linkage between economic growth and sustainable development, trade in data, energy and services – students of international economic law look at the law of bi- or multilateral free-trade agreements (FTAs) such as the Comprehensive Economic and Trade Agreement (CETA)9 or the Trans-Pacific Partnership (TPP)10, or even domestic law such as the EU’s General Data Protection Regulation (GDPR)11, whereas developments in the WTO with regard to environmental goods, services, and other topics remain – forever, it seems – in the making. Thus, while the current US president’s contempt for law and mutually agreeable solutions may be the most immediate threat to the WTO, it would seem that the major structural threat for the WTO’s continuing existence is its success in WTO is unfair to the U.S.” (https://twitter.com/realdonaldtrump/status/982264844136 017921?lang=en, last accessed November 26, 2018); “… These trade deals are a disaster, Chuck. World Trade Organization is a disaster” (www.nbcnews.com/meet-the-press/ meet-press-july-24-2016-n615706, last accessed November 26, 2018). 7 “Toobin: Today Is The First Day I Thought Trump May Not Finish Term,” (www.realclearpolitics.com/video/2018/11/30/toobin_today_is_the_first_day_i_ thought_trump_may_not_finish_term.html, November 30, 2018), relating to the guilty plea of Michael Cohen, former lawyer to Donald Trump. 8 The then-USTR did not support the otherwise certain consensus for the reappointment of a sitting Appellate Body member, in the person of Mr. Chang. See WT/AB/27, “Composition of the Appellate Body” of the WTO, Appellate Body Annual Report for 2016, May 16, 2017. 9 https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L:2017:011:FULL&from =FR (last accessed November 27, 2018). 10 https://ustr.gov/trade-agreements/free-trade-agreements/trans-pacific-partnership/ tpp-full-text (last accessed November 27, 2018). 11 https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32016R0679&from =EN (last accessed November 27, 2018).

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becoming a truly universal international organization. This has brought almost every economically relevant country (with the exception of Iran) into the organization, making it inefficient and preventing reforms. By now, it is evident that the remarkable size and heterogeneity of the membership have made adaptation of WTO rules and practices inevitable. Of course, WTO reform should happen only if all members are, in principle, prepared to subscribe. The goal cannot be to have an enlarged Organisation for Economic Co-operation and Development (OECD) or Association of Southeast Asian Nations (ASEAN). Rather, the universal nature of the organization should be preserved. Reforms therefore must still represent a balance of rights and obligations that seem acceptable to a universal membership.  For example, a WTO reform needs to address the problems almost all fellow members have with China – some Western countries openly so, the others complaining privately and providing the office of the United States Trade Representative (USTR) and Directorate General for Trade of the European Commission (DG Trade) with pertinent information. The world biggest trader12 and most populous nation should equally continue to see benefits flowing from its WTO membership: it is highly desirable to keep China as an integral part of the international trading system. But there is no future for an unreformed WTO and unreformed WTODSM: both will either vanish or be irrelevant sooner rather than later, if the basic law of the organization does not change. One can imagine a long list of desirable changes. However, this chapter limits itself to address the issues that need to be addressed immediately in order to prevent the WTO’s demise (i.e. in the slow-moving world of international negotiations, within the next five years) to have an organization that can be tasked with relevant activities.

6.2  Preserving the WTO as a Universal Organization: Variable Geometry as Key The WTO is a truly universal organization: 164 states are members. Its rulebook may be stagnating, but it remains the floor and the framework for most FTAs, which, not only pro forma but also in substance, largely

See China’s profile on the WTO Database at http://stat.wto.org/CountryProfile/ WSDBCountryPFView.aspx?Language=E&Country=CN (last accessed December 7, 2018).

12

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defer to the body of WTO law.13 Also, many topics cannot be addressed at the bilateral or multilateral level: agricultural subsidies, food security, and sustainable development, to name but three examples, will not be tackled by bilateral trade agreements; they can only be addressed effectively by universal rules. Despite this universalism and the emphasis on the single undertaking approach, the Marrakesh Agreement recognizes that some topics merit separate treatment by interested and affected parties: hence, four multilateral agreements are also attached to the WTO agreement. While three of these four are not any longer in force, the Government Procurement Agreement has seen an important reform in the last five years and is one of the more successful legal regimes established by the WTO agreement (Anderson and Müller 2017, 14). In practice, members wanting to address new issues, from tariff rates for IT equipment to environmental goods as well as services, have engaged in multilateral negotiations because the single undertaking approach (everything is connected to everything else) is used to block even exploratory talks regarding those issues in order to force progress for demands and issues that are not yet, or are not any longer, of interest to all members. It is not an exaggeration to say that due to such use of the consensus rule,14 the single undertaking has failed. If it remains impossible to Often also to the Appellate Body jurisprudence. CETA is an example: in the preamble of CETA, it is noted that the parties resolve to “further strengthen their close economic relationship and build upon their respective rights and obligations under the Marrakesh Agreement Establishing the World Trade Organization.” In Article 1.5, the relation between the CETA and WTO agreements is clarified. There are also more specific linkages to provisions of agreements in the substantive part, for instance, in Article 3.2, para. 2 (“… without … prejudice to Article 12.4 of the SCM Agreement”), Article 8.15, para. 4 (derogations permitted by the TRIPS Agreement), and Article 19.18, para. 6 (cycle of notifications provided by the GPA) as provisions stating the relationship of a chapter of the CETA with WTO agreements (for instance, in Article 7.8). There is also a linkage to the WTO Dispute Settlement Body, as the arbitration panel of the CETA shall take into account relevant interpretations in reports of Panels and the Appellate Body (Article 29.17). 14 As provided by Article IX, para. 1 of the WTO Agreement (Marrakesh Agreement Establishing the WTO), consensus is the decision-making mode in the WTO, continuing the GATT 1947 tradition. While the law prescribes that where a decision cannot be reached by consensus, a matter shall be decided by voting, this option has remained unused. One does wonder whether the use of the elaborated qualified majority voting rules (a three-quarter majority in the Ministerial Conference for waiving an obligation, a two-thirds majority to admit a new member, a two-thirds majority to amend certain provisions of the multilateral agreements) would be acceptable in an environment of heightened (economic) nationalism. This author cannot see Australia, China, Russia, the United States, Brazil, or Indonesia, to name just a few examples, accept being outvoted in the WTO. 13

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address new issues in the WTO, other forums will be used to do so. But forcing negotiators to leave the WTO’s building in Geneva to negotiate across the road at rented rooms in neighbouring headquarters of other international organisations is the opposite of strengthening the WTO. It also happens to weaken the leverage of developing and emerging nations because such behavior encourages bi- and multilateral deals. Without the framework of the universal WTO, individual developing countries are – with a handful of exceptions – at a disadvantage vis-à-vis OECD countries. Trade negotiations since 1994 bear a resemblance to a slow-motion train wreck: 20 years of drôle de négociations have not only led to (almost) no tangible outcome but also to a conviction in many quarters that the other side(s) are not acting in good faith. For example, even the European Parliament, institutionally and normatively (Article 3, 21 TEU) a friend of the developing countries, does not view them any longer as a reliable ally of its value-driven trade policy because of the Singapore ministerial Conference’s brash rejection of the wish to align core labor rights and human rights with trade law issues. The consensus principle had worked well, by and large, before 1994. The membership was smaller and more homogenous, and the GATT’s reach was limited to trade in goods. The WTO portfolio is much broader; the membership has tripled (depending on how one counts); and China, an authoritarian developing country that is planning 10 aircraft carrier groups and engages as much in intellectual property (IP) violations as the current OECD countries did when they were emerging economies, has become one of the largest traders. Among the few negotiating successes are the AIDS-medicine waiver incorporated in the TRIPS (WT/L/641), the ending of export subsidies in agriculture,15 and the Bali-package (WT/MIN(13)/DEC). While all these successes have rightly been praised, they are very modest goals for the world’s premier world trade negotiation forum.16

The Ministerial Conference held in Nairobi in December 2015 eliminated agricultural export subsidies (WT/MIN(15)/45 – WT/L/980, December 19, 2015). 16 The ninth Ministerial Conference in Bali, held in December 2013, marked the end of a series of ministerial conferences resulting in no outcomes at  all. The Bali Package includes trade facilitation, the use of agricultural export subsidies, and special conditions for LCDs. Implementation proved to be difficult, however; see Bellmann, paras. 49, 50, 56. 15

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In contrast, the more selective approach practiced with regard to the only proper WTO-multilateral agreement, the Government Procurement Agreement (GPA), has produced a most welcome update.17 In the same vein, the Agreement on Trade in Information Technology Products (ITA)18 has been negotiated by an interested subgroup of the membership and was implemented once a critical mass of states representing 97% of the world trade in IT products (20 Years of ITA. p. 4) had agreed to follow suit. The commitments to reduce pertinent tariffs to zero are multilateralized. While this allows free-riding – benefit of low market-access barriers for others while maintaining one’s own market access impediments – the acceptance by all relevant actors has rendered this inconvenience bearable. The ongoing negotiations on the Trade in Services Agreement (TiSA)19 and Environmental Goods Agreement (EGA)20 face opposition from those who believe that every decision must emanate from a process that is not only open to all 164 members (this is an indispensable prerequisite for the meaningful continuing existence of the WTO, which otherwise should be ended), but rather must emanate from a process that is indeed the end result of negotiations between 164 members. Thus, negotiations among a “coalition of the interested” (which may eventually become a coalition of the willing) are to be negotiated outside the WTO premises in Geneva and without the support of the secretariat (Kaszubska 2016, 2).21 But a WTO that cannot even serve as a forum of negotiations between those that are willing to explore the adaptation of the rules is moribund. Abolishing that dysfunctionality is hence a precondition for continuing relevance: all those interested in certain topics must have the possibility

The initial GPA of 1994 was subject to a comprehensive renegotiation that ended in March 2012 and led to a revised agreement that entered into force in 2014 (www.wto.org/ english/docs_e/legal_e/rev-gpr-94_01_e.pdf). About the advantages of the multilateral nature and the policy significance of the agreement, see Anderson and Müller 2017, 15 and 22 et seq. 18 The Information Technology Agreement was concluded in 1996 at the Singapore Ministerial Conference. See Ministerial Declaration on Trade Information Technology Products (WT/MIN(96)/16, December 13, 1996). 19 The Trade in Services Agreement negotiations started in March 2013 and are currently taking place among 23 WTO members. 20 The Environmental Goods Agreement negotiations started in July 2014 and are currently taking place among 46 WTO members (Hahn and Holzer 2016). 21 The BRICS countries (Brazil, Russia, India, China, South Africa) have initially shown opposition, on the basis of the single-undertaking approach, to the negotiations continuing outside the framework of the WTO. While some countries maintained their position, China, for instance, requested to join the negotiations in 2013. 17

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to engage in discussion to enhance cooperation, without vetoes from states attached to the status quo. The possibility of adding subject matters to the WTO portfolio by a sub-group of the membership is compatible with the idea of a ­universal WTO only if both procedural and substantive bridges to the entire membership and the common law of the WTO are being kept. (1) The WTO s­ecretariat should service those negotiations, ensuring that the WTO interests proper always have a voice at the negotiation table. An involved and informed secretariat is beneficial to all sides because it can support those exploring enhanced cooperation in avoiding conflicts with WTO law and overall institutional interests. It can also support members who do not want to be formally involved but want to stay sufficiently linked in to take informed decisions regarding their negotiating stance. (2) Negotiations must be open to the whole membership. (3) They are to be started only if a critical mass of members has undertaken to initiate negotiations among the entire membership but has failed to succeed. The critical mass starting discussions about enhanced cooperation between a sub-group of the membership may be smaller than the one necessary to conclude an agreement. (4) The sub-regime must not contradict central tenets of WTO law: outcomes of WTO 2.0 negotiations must not infringe on the common law of the WTO (“WTO 1.0”). (5) As the law stands, any “advantage, favour, privilege or immunity granted by any contracting party” has to be extended to each and every one of the WTO members, both with regard to goods (Article I GATT) and with regard to services (Article II GATS, although many exemptions apply pursuant to para. (2). While the right to most-favoured nation treatment (MFN) has become the most emblematic right (and corresponding obligation) of all, it has lost much of its relevance due to the sprawl of preferential trade agreements (PTAs).22 In this light, certain state representatives voice scepticism with regard to the viability of unconditional MFN for all WTO members, including those who chose to stay away from a consensual development of new law. That it is possible to create a subset of obligations that is not subject to general MFN obligations is evidenced by the excellent track record of the GPA (Dawar 2017, 115). Only those who have subscribed to the GPA-specific set of rights and obligations enjoy all the rights and benefits of the GPA. The possibility that even in a system where MFN reigns supreme (in principle), certain specific subsets of members may 22

According to the Sutherland Report (paras. 51, 60, 74), MFN has become almost the worst treatment.

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not be fully subject to the benefits and disadvantages of MFN is also evident from the enabling clause23 and the by now ubiquitous preferential trade agreements. In 1947, Article I of the GATT was supposed to ensure equality of ­treatment among “all club members”, i.e. initially less than three dozen contracting parties. When a club is defined by a single-undertaking approach and the applicable rules are the same for all, it makes sense to have a duty to treat all members equally unless exceptions apply. The current WTO club now counts 164 members and has proven incapable of serving as a meaningful negotiating platform. It will vanish if it cannot offer to its membership the possibility to address the issues that are important to them and that they will address in any case. Therefore, variable geometry, or a more modular approach, while no guarantee for survival of the WTO, is a condicio sine qua non. In this context, it seems worthwhile to reflect on whether there should be the possibility of a sub-sector-specific MFN. The Chinese proposal of November 30, 2018, addresses these issues only indirectly. It would seem that the First Principle (China’s Position Paper on WTO Reform 2018) – “the WTO reform shall preserve the core values of the multilateral trading system. The reform shall reinforce these fundamental rules … including non-discrimination and openness” – might be understood as a plea to keep the status quo also with regard to the MFN rule, although it is broad enough to be compatible with a “variable geometry-WTO.” Of course, without consensus among all 164 members, a multi-speed WTO will not happen. This may be what the Chinese position currently is: “The choice of the reform agenda, the formulation of any work plan as well as the final outcomes shall be decided through extensive consultations, based on mutual respect and dialogues on equal footing. The process shall be inclusive and open to all Members, especially the developing ones. The reform cannot be dictated by a few, nor decided by an exclusive small group of Members” (China’s Position Paper on WTO Reform 2018). However, if that statement purports to be a description of the ­governance of the reformed WTO, it would be the kiss of death for this organization. It is by now accepted wisdom that the WTO system “is currently falling short of its objectives.” Unless some form of variable 23

The decision of November 28, 1979, GATT Doc. L/4903, Para. 1: “Notwithstanding the provisions of Article I of the General Agreement, contracting parties may accord differential and more favourable treatment to developing countries, without according such treatment to other contracting parties.”

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geometry is possible within the broader tent of the WTO, the current practice that has been used to prevent any progress will continue. In that event, the OECD countries, maybe like-minded countries in South America, Asia, and even Africa, may well walk away from the WTO, either formally or by not engaging any longer.

6.3  Relevant Topics Closely related to the problems deriving from the consensus rule is the necessity to regulate heretofore unaddressed topics if and when a critical mass of interested members exists. The political precedent for this is the ITA, where the determining factor was not the number of members participating but rather the percentage of pertinent global market share held by the signatories. This approach is neither “dictated by a few” nor “decided by an exclusive small group of members” because, while potentially small, it would not be exclusive but rather inclusive. Most important, the principle to allow a multi-speed WTO will have to be accepted by the entire membership. It is true that currently a significant group of states may be prepared to abandon (de iure or de facto) the WTO if this fundamental reform does not happen. This enormous pressure and the ensuing fluidity of positions may be the one positive result of the Trump/ Lighthizer era with regard to international trade law. Some of the areas most in need of remediation include, inter alia, e-commerce and Big Data,24 regulatory cooperation, the linkage between trade and climate change,25 and possibly other non-trade concerns, now typically included in new FTAs by OECD countries, such as provisions on the linkage between market access and the implementation of core labor rights, climate change measures, and other measures implementing the UN’s sustainable development goals.26 Another topic of major interest for significant parts of the membership is still agricultural trade (ICTSD 2018). According to Wu (2017, 6), in September 2017, there were 69 existing FTAs that included a chapter on e-commerce. This number also encompasses FTAs not yet entered into force, like the TPP. The scope and the importance of those provisions differ, however. See, e.g., CETA (Chapter 16), TPP (Chapter 14), FTA Japan – Mongolia (Chapter 9). On the contrary, there is a standstill situation in the WTO; see Weber (2015). 25 See Morin, Pauwelyn, and Holloway (2017) regarding the implementation of climaterelated provisions in FTAs. See Condon and Sinha (2014), among others, for the actual difficulties of a multilateral approach and Häberli (2016) for possible solutions; see Bacchus (2018) for the need of a WTO climate waiver. 26 See Ptashkina (2018, 8) concerning the positive effect of e-commerce on the progress in the UN development goals. 24

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6.4  Fundamental Reform of Trade Remedies Laws: Safeguards to the Rescue? Dissatisfaction with trade remedies law used to be an American specialty, and it used to concern rather technical issues, even if they were of great importance (Bungenberg et al. 2018). Thus, the United States opposed, in the strongest possible terms, the pertinent jurisprudence of the AB, including its Zeroing cases;27 its somewhat narrow interpretation of Article 17, para. 6 ADA;28 and the very broad interpretation of the “entrust or direct” language of Article 1.1 (a) (iv) SCM-Agreement;29 and expressed great alarm over the obiter remarks of the AB regarding the protocol of accession of China30 (Payosova et al. 2018, 9). However, it would seem that the aggressive trade and intellectual policy– related activities of China that continue despite its impressive success have led to a pushback that is not limited to the current US administration. Rather, a heterogenous plurality of states has become concerned: the most obvious one are the Western partners of the United States. While the EU, Canada, and others go out of their way to demonstrate their commitment See WT/DS24/18, paras. 32 et seq. According to Alford (2006, 215), in US – Zeroing, the Appellate Body completed the factual findings of the panel and did not fulfill its task of “reviewing the legal interpretations that developed from the panel’s factual findings.” In doing so, the AB relied on evidences that the panel avoided. See Panel report, US – Zeroing, para. 7.107. 28 Article 17.6 ADA reads: “In examining the matter referred to in paragraph 5: (i)  in its assessment of the facts of the matter, the panel shall determine whether the authorities’ establishment of the facts was proper and whether their evaluation of those facts was unbiased and objective. If the establishment of the facts was proper and the evaluation was unbiased and objective, even though the panel might have reached a different conclusion, the evaluation shall not be overturned; (ii) the panel shall interpret the relevant provisions of the Agreement in accordance with customary rules of interpretation of public international law. Where the panel finds that a relevant provision of the Agreement admits of more than one permissible interpretation, the panel shall find the authorities’ measure to be in conformity with the Agreement if it rests upon one of those permissible interpretations.” 29 Article 1.1. (a) (iv) of the SCM agreement reads: [a subsidy shall be deemed to exist if:] “a government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments; [and (b) a benefit is thereby conferred.]” Regarding the broad interpretation of the words entrust and direct: ABR, US – Countervailing Duty Investigation on DRAMS, paras. 110, 111, 117 and 118. 30 ABR, EU – Biodiesel, para. 6.87 with reference to ABR, EC – Fasteners (China) (Article 21.5 – China), para. 5.2. See also Zhou (2018a, 611). 27

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to undertake the reform of the WTO with China, they have made equally clear that they do not view the continuation of the status quo as an option (USTR 2018c, Zhou 2018b, Mavroidis and Janow 2017). The joint initiatives of the United States, EU, and Japan regarding notification of subsidies reveal that many of China’s partners view its approach as unfair. The world largest trader uses the openness and transparency of its fellow WTO members while relying on the possibilities of an authoritarian system. This renders trade remedies tools largely ineffective because of the lack of notification and the negative consequences associated with complaining to the home country. The de iure and clandestine appropriation of intellectual property continues to be of the greatest concern,31 and so is stateinduced building of excess capacities in steel and other products. In fact, in a system in which every operator has a party cell that may determine any decision considered to affect the interests of the ruling party, the distinctions that underlie the current law of unfair trade become obsolete and can no longer curtail unfair trading practices. In China, the West’s complaints about unfair practices meet with China’s own experience of being treated unfairly by the former colonial powers. Its experience with “unequal treaties” makes it highly uncomfortable with positions that it perceives are advanced to clip its wings once again (Hahn 2018). But it is difficult to overlook, even from a Chinese perspective, that the current state of affairs is not sustainable for OECD countries; they will use their right to walk away from the current arrangement if these issues are not addressed. It is also clear that China will not be the only country whose methods of doing business are not compatible with the current “unfair trade” rules. Indeed, many of the emerging nations, from the Middle East

In the Joint Statement on the Trilateral Meeting of the Trade Ministers of the United States, Japan, and the European Union (USTR 2018a) of May 31, 2018, the ministers confirmed that “no country should require or pressure technology transfer from foreign companies to domestic companies, including, for example, through the use of joint venture requirements, foreign equity limitation, administrative review and licensing processes, or other means.” More specifically “the Ministers discussed the need to establish and share best practices, coordinating where useful, on mechanisms to stop the practices by governments that direct and unfairly facilitate the systematic investment in, and acquisition of, foreign companies and assets to obtain technologies and intellectual property and generate the transfer of technology to domestic companies.” This view was reaffirmed in the Joint Statement on the Trilateral Meeting of September 25, 2018 (USTR 2018b). https://ustr.gov/about-us/ policy-offices/press-office/press-releases/2018/may/joint-statement-­trilateral-meeting; https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/september/ joint-statement-trilateral.

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to the Far East, have totalitarian or authoritarian forms of government where the wish of prince or party has effects that are equal or surpass the law in Western-style democracies, whose principled separation from state and society, from the private and public sectors, have shaped the pertinent WTO regulations. It is also true that, since 1947, strong state involvement in the national economy or in large or important sectors of the economy has been an integral part of the reality of international trade relations.32 However, China has brought new challenges to the system because of its unique quality as both a totalitarian system (arguably with an extended life span due to artificial intelligence) and a vibrant, almost nineteenthcentury Mancunian-quality free market system. Due to the concentration of economic powers that are normally dispersed between state and private corporations in a market economy, certain central rules and concepts have become largely irrelevant for China. The distinction between dumping and subsidization loses its relevance, and so do the various concepts that want to ensure that state activities are not wrongly attributed to private corporations, and vice versa. China opposes “special and discriminatory disciplines against stateowned enterprises in the name of WTO reform, and the inclusion of issues based on groundless accusations in the WTO reform agenda” (China’s Position Paper on WTO Reform 2018). While this statement is in itself open enough to allow appropriate reforms to address legitimate concerns with regard to the practices of certain state-owned enterprises, any reform discussion about dumping and anti-dumping, subsidies, and countervailing measures may pitch the Western-style democracies against modern or ancient authoritarian regimes, and against China in particular. Any proposal that is China-specific will be unacceptable to a superpower with strong memories of being forced into servitude. Thus, criteria will need to be developed that are objective and verifiable; these will also have effects on other countries of the global North and the global South. It would also seem worthwhile to allow members to focus more on  the situation of the countries negatively affected by free trade than on those acting allegedly in an unfair fashion. The Safeguard Agreement was

32

Examples of state involvement by sectors and methods: milk and dairy (Australia, Canada, New Zealand), agricultural products in general (Switzerland, the United States, European Union), and governmental involvement in a broad range of sectors (France and Japan).

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destined to allow members suffering from “too much winning”33 (of free trade, that is) to suspend, on an MFN basis, certain commitments. Pursuant to the jurisprudence of the AB (ABR, US – Steel Safeguards, paras. 264 and 331), the conditions for the use of this exceptional protectionist measure are not found exclusively in the Safeguard Agreement; rather, the provision of Article 2.1 of the Safeguard Agreement must be read together with Article XIX of the GATT (Howse 2016, 14). As a consequence, a safeguard may only be used as a protectionist instrument if the rise of imports is sudden, recent, and sharp and the consequence of unforeseen developments (ABR, Argentina – Footwear (EC), para. 131; ABR, US – Steel Safeguards, paras. 358 and 360). In practice, these conditions are impossible to meet.34 For example, the EU has not initiated a single safeguards investigation during the last years (European Commission, COM 2018, 561 final).35 Other trade-remedies-using countries have acted similarly. If that practice could be changed, the use of safeguards would be greatly facilitated. The exceptional character would still be ensured by the elaborate conditions in the Safeguard Agreement (Piérola 2014). However, the very political issues associated with anti-dumping and countervailing-duty law would be circumvented, at least partially. This shift would constitute a remarkable break with a quarter-century practice prescribed by the AB (and against the expectations of many negotiators); it would also render the international trade regime less liberal than it is now, at least in theory. Even when based exclusively on the provisions of the Safeguard Agreement, however, the right to use that extraordinary protectionist tool would not be unlimited. Also, time is of the essence: necessary changes of the law would be comparatively easy to achieve. An authoritative interpretation by the General Council Jenna Johnson, “25 Quotes Capturing Donald Trump’s Final Pitch to South Carolina,” Washington Post, February 19, 2016, www.washingtonpost.com/news/postpolitics/wp/2016/02/19/25-quotes-capturing-donald-trumps-final-pitch-to-southcarolina/?utm_term=.a1e6722d72cb (last accessed December 8, 2018): 15). Trump then promised: “We’re going to win so much. You’re going to get tired of winning. You’re going to say, ‘Please Mr. President, I have a headache. Please, don’t win so much. This is getting terrible.’ And I’m going to say, ‘No, we have to make America great again.’ You’re gonna say, ‘Please.’ I said, ‘Nope, nope. We’re gonna keep winning.’” 34 According to Van den Bossche and Zdouc (2017, 633) between the establishment of the WTO in 1995 and December 2015, 311 initiations of safeguard measure investigations were started at the WTO. Only half of these investigations were actually imposed through safeguard measures. 35 This changed on March 26, 2018, as a consequence of the US tariffs on steel and aluminium (European Commission, 2018/C111/10; see also European Commission, OJ 2018 L 181/39). 33

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(or a ministerial conference) pursuant to Article IX, para. 2 of the WTO Agreement clarifying that the definition in the Safeguard Agreement is comprehensive and lex specialis to Article XIX of the GATT would ensure the desired outcome. Of course, that would not exclude some of the further steps envisaged in the context of the subsidies negotiations, such as a notification regime with teeth (see, for instance, TN/RL/GEN/188 EU proposal of May 30, 2017).

6.5  Developing Country Classification The status of developing country has both political and legal importance. The political importance is particularly important for certain global and regional hegemonial powers because they tend to assume the mantle of leader of the developing world. Sending spacecraft to the Moon or to Mars (or other activities in outer space) and counting aircraft carrier groups in one’s military arsenal are currently not prohibiting a nation’s eligibility for LDC status, as the examples of China, India, Singapore, and South Korea show. From a legal perspective, developing countries have limited additional “hard” rights. Part IV of the GATT recognizes that “individual and joint action is essential to further the development of” LDCs. More specifically, in Article XXXVI, para. 9 of the GATT, the developed contracting parties declare that they “do not expect reciprocity for commitments made by them in trade negotiations to reduce tariffs and other barriers to the trade of less-developed contracting parties.” In Article XXXVII, a number of best endeavor commitments are listed.36 On that basis, the Enabling Clause (footnote 23) was passed by the GATT-contracting parties and has become an integral part of GATT 1994 pursuant to its Paragraph 1 (b) (iv).37 The claim of leading economic powers that they should receive special and differential treatment – i.e. to receive a break – when it comes to new commitments is therefore supported by legal arguments. This has proven to be politically toxic: it cannot be explained to a Greek or

According to para. 1 “developed contracting parties shall to the fullest extent possible – that is, except when compelling reasons, which may include legal reasons, make it impossible – give effect to” provisions aimed at increasing the trade opportunities of developing country Members. 37 Similar provision can be found elsewhere in the legal texts. See e.g. Article XIX of the GATS. 36

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Alabamian blue-collar worker why their Singaporean, Chinese, or Indian counterparts are supposed to get competitive advantages when they do not, courtesy of their country belonging to the group of developed economies. This is evidently (so far, that is) not a rejection of North-South solidarity. No developed member disputes the rights of countries that are determined, on the basis of transparent developmental parameters, to be “least developed” by the United Nations Economic and Social Council’s (ECOSOC’s) Committee for Development Policy. With regard to the remaining group of states claiming less-developed status, the current state of affairs will need resolutions. Again, the linkage to the first issue mentioned here (flexible geometry) is obvious. Developed countries have increasingly started to differentiate in their respective Generalized System of Preferences (GSP) schemes between developing countries on the basis of economic and governance-measuring criteria (such as abundance of legal instruments viewed as conducive to good governance and thus development). So far, the AB’s jurisprudence has been supportive of the differentiation between LDCs in developed countries’ GSP schemes, provided that identical treatment is available to “similarly situated” countries (ABR, EC – Tariff Preferences, para. 173). More recently, developed countries have differentiated also between the sectors in one and the same state. If an industry is world class, developed countries are not prepared to extend preferential treatment to worthy competitors, regardless of the state of development in the country overall (e.g. Article 8 of Regulation [EU] No 978/2012). The world’s developed economies are currently experiencing a considerable popular backlash against internationalism. It will not be possible politically to grant the very same countries that buy up the local high-tech industries and flood the market with their electronic devices “developing country status.”

6.6  China and Intellectual Property In March 2018, USTR published a report on allegedly unfair Chinese trade practices (USTR 2018d). In it, the USTR concludes that China has required US companies to transfer their technology to Chinese competitors and otherwise harmed US intellectual property rights holders and US companies seeking to invest in China. Based on the findings in the Section 301 report, the president directed that USTR propose additional tariffs of 25% (in addition to ordinary customs duties and anti-dumping and countervailing duties) on imports of aerospace, information communication

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technology, and machinery products because these sectors are said to be supported by China’s unfair industrial policy. At the Dispute Settlement Body (DSB) meeting of April 27, 2018, the US representative summarized the report’s content as follows: 5.6. First, China used foreign ownership restrictions, such as joint venture requirements and foreign equity limitations, and various administrative review and licensing processes, to require or pressure technology transfer from foreign companies. These foreign ownership restrictions prohibited foreign investors from operating in certain industries unless they partnered with a Chinese company, and in some cases, unless the Chinese partner was the controlling shareholder. These requirements precluded foreign companies from entering the market on their own terms, and laid the foundation for China to require or pressure the transfer of technology. China also used its administrative licensing and approvals processes to force technology transfer in exchange for the numerous approvals needed to establish and operate a business in China. Vague provisions and uncertainty about the applicable rules provided Chinese authorities with wide discretion to use administrative processes to pressure technology transfer or otherwise act in furtherance of China’s trade-distorting industrial policy objectives. 5.7. Second, China’s regime of technology regulations forced US companies seeking to license technologies to Chinese entities to do so on non-marketbased terms that favoured Chinese recipients. China imposed a different set of rules for imported technology transfers originating from outside China, such as from foreign entities attempting to do business in China. These rules did not apply to technology transfers occurring between two domestic Chinese companies. China’s mandatory requirements for importation of foreign technology were discriminatory and clearly more burdensome than the requirements applicable to domestic Chinese companies. Specifically, China mandated that all indemnity risks were borne by the foreign technology transferor. Parties could not negotiate the allocation of this risk, even if the transferee would be willing to bear the risk under the contract. China also mandated that all improvements belong to the party making the improvement and that a foreign licensor could not stop the Chinese licensee from making improvements to the technology. China further required that joint ventures, mandated under Chinese law, may continue to use transferred technology after the conclusion of any licensing contract. These restrictions tipped the technology transfer regime in favour of Chinese entities before a foreign company even attempted to enter the market in China. 5.8. Third, China directed and unfairly facilitated the systematic investment in, and acquisition of, foreign companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and to generate the transfer of technology to Chinese companies. The role of the state in directing and supporting this outbound investment strategy was

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pervasive and evident at multiple levels of government – central, regional, and local. China had devoted massive amounts of financing to encourage and facilitate outbound investment in areas it deemed strategic. To implement these policies, China employed tools such as investment approval mechanisms and a system of “encouraged” sectors to channel and support outbound investment. These investments and acquisitions aligned with state objectives and policies, and were often undertaken by State-owned enterprises that were, by definition, owned and controlled by the government. Even when undertaken by companies, in which the government did not own an observable controlling stake, these transactions were frequently guided and directed by the State. In addition, many of these transactions were funded by State-owned entities or banks, often in situations where comparable commercial financing would have been unavailable. 5.9. Fourth, China conducted and supported unauthorized intrusions into, and theft from, the computer networks of foreign companies to access their sensitive commercial information and trade secrets. For over a decade, China had conducted and supported cyber intrusions into US commercial networks, targeting confidential business information held by US firms. Through these cyber intrusions, China had gained unauthorized access to a wide range of commercially-valuable business information, including trade secrets, technical data, negotiating positions, and sensitive and proprietary internal communications. China had used cyber-enabled theft and cyber intrusions to serve its strategic economic objectives. Documented incidents of China’s cyber intrusions against US commercial entities aligned closely with China’s industrial policy objectives. 5.10. These four technology transfer policies harmed every WTO Member, and every industry in every WTO Member, that relied on technology for maintaining competitiveness in world markets and increasing its people’s standard of living. (WT/DSB/M/412, emphasis added).

Few in the Independent Professional (IP)-generating world would not sympathize with most of the points the United States is advancing in the Section 301 report. For this reason, both the EU (WT/DS542/3) and Japan (WT/DS542/2) joined as third parties in China – Certain Measures Concerning the Protection of Intellectual Property Rights, initiated by the United States (WT/DS542/1, IP/D/38). The detailed communications by Japan and other third parties leave little doubt that the United States is far from alone in viewing the Chinese attitude vis-à-vis foreign intellectual property as unacceptable. While the use of Section 301 of the Trade Act of 1974 is in itself incompatible with the US obligations under Article 23 DSU, the magnitude of the damages inflicted on Western Intellectual property rights (IPR) holders will need to be convincingly addressed by China in order to preserve the current WTO system.

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6.7  Issues Related to the Dispute Settlement Mechanism The WTO dispute settlement mechanism is the result of a grand compromise between the United States, which wanted to preserve the sharp enforcement possibilities under Section 301 of the Trade Act of 1974, and the EU and Canada, which were only prepared to accept that wish on the condition that it would be subject to independent third-party judicial control. The result is the current DSU, which provides for strong enforcement possibilities, including “cross-retaliation” (Article 22 DSU) under the control of a two-layered adjudicational infrastructure.38 For the longest time, the AB and its evident role as authoritative High Court of the WTO were praised, and the ensuing legal predictability and certainty were appreciated. Members put their money where their mouths were: they used the system extensively, possibly too much so. An example of that overuse is the dispute between two economic partners and military allies over a product (large civil aircraft) only they are capable of producing. All efforts to rationalize ex post facto this counterintuitive use of a multilateral system for a purely bilateral matter between friends (such as “writing now, through the jurisprudence of the AB, the rules of the game for the three possible future competitors”) have yet to convince that the Airbus–Boeing saga has been an appropriate use of the WTO dispute settlement mechanism. As the reports of the AB became ever longer (from mere dozens of pages initially to hundreds currently), the support of the United States became ever weaker: initially mainly because of the well-documented refusal of the AB to accept that “zeroing” had been grandfathered (the wording certainly does not show this, whereas the record would seem to support the US claim) and other trade remedies jurisprudence,39 later The United States was allowed to keep the far-reaching consequences for GATT violations (provided for in section 301), by internalizing them into the counter-measures provision of Article 22 DSU (suspension of concession, cross-retaliations). For the EU and others, this was acceptable because these far-reaching trade sanctions (usable, in the real world, only by trade powers such as the United States, the EU, or China) were conditional upon exhausting the WTO DSM, i.e. after independent adjudicators had examined the validity of both the original claim and of the proportionality of the counter-measures requested (Article 21, 23 DSU). The quasi-automatic approval mechanism (reverse consensus) was the United States’ guarantee that those violating their trade interests were not in a position to block the lawful exercise of US pressure through the withdrawing of concessions. 39 The main frustration with that jurisprudence is rooted in the interpretation of Article 17:6 Anti-Dumping Agreement and “Zeroing.” For the latter see the reports of the panels that refused to follow the Appellate Body line of reasoning. See also Davey (2009, 469) and 38

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because of the alleged hubris of an AB that many viewed (and treated) as World Trade Court. The AB’s self-confidence was reminiscent of the ECJ or the US Supreme Court. It did not help that the language used was occasionally schoolmasterly, chiding both panels and members as if they were somewhat recalcitrant pupils. It also did not help that the AB had almost never not something to correct (even if that had no consequences for the outcome), creating a strong incentive for litigators and principals to appeal: the current appeals rate of approximately 70% is much higher than in almost any other system of judicial review. This did not sit well with the USTR: most US AB members were replaced after one term, thereby weakening the US influence on the AB rather than strengthening it. In 2016, the Obama administration, whose experience with Supreme Court nominations were an ironic mirrorimage of its own tactics in Geneva, prevented consensus for the renewal of a sitting (Korean) AB member. [O]n 11 May 2016, the DSB Chair had been informed by [the US’] ­delegation that it would be unable to support Mr Chang’s reappointment. Shortly thereafter, this delegation publicized its reasons for its ­opposition to Mr Chang’s reappointment. Subsequently, AB members other than Mr Chang, in a letter signed by the AB Chair, expressed concerns about the  public statement of reasons given for opposition to Mr Chang’s ­reappointment. (WT/AB/27, Annex 4) In a letter to the Chairman of the Dispute Settlement Body (DSB), AB Members stated that they were “concerned about the accuracy of some of those reasons and, in particular, about the risks they may carry for the trust that WTO Members place in the independence and impartiality of AB members, on which the dispute settlement system depends” (WT/ AB/27, Annex 4).

With the inauguration of the forty-fifth US president and his new USTR Robert Lighthizer, the relationship between the AB and its onetime

Matsushita et al. (2017, 390). See also the statement of the US representative in the WTO voicing “systemic concerns with what it sees as an overly judicially activist Appellate Body that seeks to fill gaps in WTO agreements, which in turn creates new obligations for members and reinterprets what has already been agreed to … [T]he Appellate Body opines on issues not raised in the appeal and creates jurisprudence with no input from members – largely abandoning deference to members in the context of trade remedy investigations” (Inside US Trade’s World Trade Online, “Appellate Body, China NME Fights to Dominate WTO Dispute Settlement Debate in 2018,” December 26, 2017, https://insidetrade.com/daily-news/appellate-body-china-nme-fights-dominate-wtodispute-settlement-debate-2018 (last accessed October 1, 2018).

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mentor has reached a new low: since 2017, the United States refuses to agree to any appointment to the AB. Recently, the United States has linked this position to the continuing service of former AB members pursuant to Rule 15 of the Working Procedures for Appellate Review, which entered into force in 1996 as part of the Working Procedures for Appellate Review (WT/AB/WP/1). Adopted on the basis of Article 17.9 of the DSU and not contested by the membership (only India had voiced some concern but did not follow up in light of the quasi-universal approval by the most important users of the system, including the United States), Rule 15 of the Working Procedures for Appellate Review has been applied in 16 instances since 1996. It reads, “A person who ceases to be a Member of the AB may, with the authorization of the AB and upon notification to the DSB, complete the disposition of any appeal to which that person was assigned while a Member, and that person shall, for that purpose only, be deemed to continue to be a Member of the AB” (WT/AB/WP/6 para. 15). Three vacancies could not be replaced due to the blocking of the appointment process, so the AB decided to allocate several major cases (DS316/RW, DS353/RW, DS486, DS490/496, DS472/497) to an AB member “to deal with the unprecedented workload of appeals, and to preserve the rights of participants and third participants in pending appeals.”40 As a consequence, the United States now refuses any appointments on the basis of what it perceives as illegal overstaying of former AB members. Remarkably, the United States now refers to AB reports as “reports” (and not “AB reports”) if and when former AB members participate in drafting the report pursuant to Rule 15. It is no exaggeration to state that the United States now treats the AB as a usurper of powers and as operating without proper mandate as a rogue judicial juggernaut. The main points of US frustration include, but are not limited to, “disregard of the 90-day deadline for appeals (USTR 2018e, 24), … issuing advisory opinions on issues not necessary to resolve a dispute,41 … review of fact

Letter of the Appellate Body Chair to the Chair of the DSB, Ref.: usb/ih (AB-2), November 24, 2017. 41 USTR Policy Agenda 2018, pp. 26–27: “… [T]here are numerous occasions when a panel or the Appellate Body has made unnecessary findings or rendered ‘advisory opinions.’” Increasingly, the United States has noted that the Appellate Body is reaching issues not necessary to resolve the dispute, which contributes to delays in concluding an appeal. In one egregious instance, the United States noted that more than two-thirds of the Appellate Body’s analysis – 46 pages – was in the nature of obiter dicta (ABR, Argentina – Financial Services, paras. 343–347). 40

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and review of a Member’s law de novo42 … and allegedly illegal claims that its reports are entitled to be treated as precedent” (USTR 2018e, 28). Despite the US rhetoric and its hostile actions, the United States continues to use the WTO DSM actively; the USTR highlights its use in his recent report (USTR 2018e, 19). China was not alone when it expressed confusion about the fact that “on one hand, the US is demanding that the WTO dispute settlement system to continue operating ‘as normal’ as it did in this dispute [China – Anti-Dumping and Countervailing Duty Measures on Broiler Products from the United States], and on the other hand, … is actively working to undermine the system by blocking the selection process for vacancies of the AB.”43 However, the United States declined on February 28, 2018, to support a proposal sponsored by 63 WTO members to begin filling three vacancies in the WTO AB.44 The view of the membership is that, despite real or perceived shortcomings of the AB and its jurisprudence, the WTO DSM “is a global public good” (EU Statement at the Heads of Delegation, Buenos Aires 2017). The tension between the United States and all other actors with regard to the DSM is of a magnitude that could bring an end to the WTO before any meaningful WTO reform has taken place. The dispute has received an added dimension due to the dispute between the United States and several countries regarding tariffs on steel and aluminium. The United States claims are based on its protection of its vital security interests pursuant to Section 232 of the Trade Expansion Act of 1962 (and on

USTR Policy Agenda 2018, pp.  27–28: “The United States has also noted with concern the Appellate Body’s review of the meaning of Member’s domestic law that is being challenged. In a WTO dispute, the key fact to be proven is what a Member’s challenged measure does (or means), and the law to be interpreted and applied are the provisions of the WTO agreements. But the Appellate Body consistently asserts that it can review the meaning of a Member’s domestic measure as a matter of law rather than acknowledging that it is a matter of fact and thus not a subject for Appellate Body review. Furthermore, when the Appellate Body reviews the meaning of a Member’s domestic measure, it does not provide any deference to a panel’s findings of fact.” 43 See Inside US Trade’s World Trade Online, “China Jabs US for Using WTO Dispute Settlement As It Complies in Poultry Fight,” February 28, 2018, https://insidetrade.com/ daily-news/china-jabs-us-using-wto-dispute-settlement-it-complies-poultry-fight (last accessed October 1, 2018). 44 Ibid. 42

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Article XXI of the GATT),45 which provide the US executive branch with broad authority to limit imports for foreign policy reasons. Those affected by these measures claim that the United States takes, once again, illegal safeguard measures (Hahn 2019). The director general of the WTO has advised in public against bringing a complaint because the system would be endangered by inviting an adjudicative body to declare the US measure as being WTO-incompatible.46 The short-term fixes for a resolution of the slow-motion elimination of an operational AB include the exceptional use the majority voting system provided for as Plan B in the WTO-Agreement (WTO-A) and the use of the arbitration clause of Article 25 DSU. In that case, a significant subgroup of WTO members would have to agree on a roster of arbitrators consisting of all living AB members. This would only be a worthwhile effort if a critical mass of WTO members would commit to such an exercise. Such a critical mass would be reached if “Argentina, Australia, Brazil, Chile, China, Colombia, Costa Rica, Ecuador, El Salvador, the European Union, Guatemala, Honduras, Hong Kong, China; Kazakhstan, Korea, Mexico, New Zealand, Nicaragua, Norway, Pakistan, Panama, Paraguay, Peru, the Russian Federation, Singapore, Switzerland; the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu; Turkey, Ukraine, Uruguay and Viet Nam,” who took several joint initiatives to end the blockade of appointments (WT/DSB/W/609), would commit to such use of Article 25 DSU. However, these efforts would be just temporary fixes: A WTO without the United States and a WTO dispute settlement without the United States are highly undesirable, and so is a dispute settlement mechanism without impartiality, kow-towed into submission. Some of the US reproaches are disingenuous: the role of any appeals body is to give guidance to those applying the laws and the adjudicators

On March 8, 2018, the US president issued two presidential proclamations. One is Adjusting Imports of Steel into the United States (www.whitehouse.gov/presidentialactions/presidential-proclamation-adjusting-imports-steel-united-states/; see  the modified version of March 22, 2018, www.whitehouse.gov/presidential-actions/­ presidential-proclamation-adjusting-imports-steel-united-states-2/. The other is Adjusting Imports of Aluminum into the United States, www.whitehouse.gov/­presidentialactions/presidential-proclamation-adjusting-imports-aluminum-united-states/ (emphasis added) (last accessed October 2, 2018). 46 Inside U.S. Trade, December 6, 2018: “Azevêdo: Challenging U.S. 232 tariffs at WTO a ‘risky’ strategy,” https://insidetrade.com/inside-us-trade/azevêdo-challenging-us-232-tariffswto-risky-strategy. 45

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of first instance. In US – Stainless Steel (Mexico) (WT/DS344), the AB stated that its prior adopted reports had a very high degree of authority, not unlike decisions of court of last instance in civil law jurisdictions, where precedent in a technical sense does equally not exist.47 The very purpose of an appeals system is to homogenize adjudicative practice, making results more predictable. Hence, the suggestion of the AB that not following its jurisprudence is incompatible with the structure of the DSU is stating the obvious. Similarly, the independence of AB members is crucial to its credibility and function. Therefore, rewarding obedient jurisprudence and sanctioning judicial independence would bring an end to an independent adjudicative function in the WTO.48 Other concerns are relatively easy to satisfy. The alleged disregard for the 90-day deadline would seem almost a non-issue. It has rarely happened and only in cases in which the workload of the AB and its secretariat rendered timely resolution impossible. The United States’ main concern derives from the fact the AB changed its practice in the last eight years to request an extension when the 90-day deadline became impossible

Paras. 158–62: “It is well settled that Appellate Body reports are not binding, except with respect to resolving the particular dispute between the parties. This, however, does not mean that subsequent panels are free to disregard the legal interpretations and the ratio decidendi contained in previous Appellate Body reports that have been adopted by the DSB. Dispute settlement practice demonstrates that WTO Members attach significance to reasoning provided in previous panel and Appellate Body reports. Adopted panel and Appellate Body reports are often cited by parties in support of legal arguments in dispute settlement proceedings, and are relied upon by panels and the Appellate Body in subsequent disputes. In addition, when enacting or modifying laws and national regulations pertaining to international trade matters, WTO Members take into account the legal interpretation of the covered agreements developed in adopted panel and Appellate Body reports. Thus, the legal interpretation embodied in adopted panel and Appellate Body reports becomes part and parcel of the acquis of the WTO dispute settlement system. Ensuring “security and predictability” in the dispute settlement system implies that, absent cogent reasons, an adjudicatory body will resolve the same legal question in the same way in a subsequent case. In the hierarchical structure contemplated in the DSU, panels and the Appellate Body have distinct roles to play … The Panel’s failure to follow previously adopted Appellate Body reports addressing the same issues undermines the development of a coherent and predictable body of jurisprudence clarifying Members’ rights and obligations under the covered agreements as contemplated under the DSU. We are deeply concerned about the Panel’s decision to depart from well-established Appellate Body jurisprudence clarifying the interpretation of the same legal issues. The Panel’s approach has serious implications for the proper functioning of the WTO dispute settlement system.” 48 The proposal by the EU to limit the tenure of judges to one extended term would require a modification of the DSU. 47

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to abide by. The prior practice could be endorsed by a DSB decision or a treaty modification. The same would apply to Rule 15 of the Working Procedures for Appellate Review. It is an appropriate provision, solidly based on the DSU. However, the concern that such a provision should be authorized by the membership can be accommodated speedily through an endorsement by the members in the DSB. The tendency of the AB to write long decisions on aspects of the law that are not relevant for the resolution of the case could be addressed by determining a maximum (or recommended) length of submissions and reports. It could also be addressed by giving the AB remand authority, which would avoid its straying into the territory of the panels. The latter would seem to require a treaty modification. Concerns that could possibly be addressed by the General Council or the Ministerial Conference would be the AB’s judicial treatment of domestic law, or the refusal to read Article 17.6 ADA as deferring more to Investigating Authorities. It seems quite possible, if not likely, that there will be a period of time during which the AB is an empty vessel without skipper and crew. One can imagine a scenario where, ahead of the re-launch of the AB, the DSB could clearly express what changes of the status quo would be wanted by the membership without endangering the independence of the AB. In fact, a Canadian proposal submitted and coordinated with several partners at a mini-Ministerial (“Strengthening and modernizing the WTO”) proposing the following actions to address systemic and procedural practices of the AB would seem in order (emphasis added): narrowing the scope for “advisory opinions” by clarifying that the primary objective of the dispute settlement system is the settlement of specific disputes and that only findings that are necessary to achieve this objective are required; focusing appellate review on legal issues by clarifying the standard of review to be applied by the AB to panels, especially with regard to factual findings and those related to the operation of domestic law; promoting a more robust adjudicative dialogue by allowing for the expression of minority views in panel and AB reports and reiterating that interpretations adopted by the panel and AB apply only to the disputes in which they are adopted; and developing guidance related to consultations with parties when the AB is unable to meet its deadline.

All of these proposals would be achievable without formally changing the DSU. This would indicate that at least some of the United States’ concerns

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are more atmospheric than substantial and thus hopefully easier to solve that the thorny substantive issues touched upon above.

6.8 Conclusions The WTO has been a success. It was mostly a derivate, the inherited success of the contracting parties of GATT between 1948 and 1993, and, in fairness, that of the dispute settlement mechanism to a certain degree, and in particular the first years of the first Beeby-Ehlermann-FelicianoLacarte-Matsushita AB. While the current crisis of the WTO seems to be mainly about the AB, its alleged hubris and lack of understanding of the difficulties investigating authorities face, the pertinent complaints are (in substance) easy to address. Because so much emotional baggage has developed over time, it is likely that there will be a period with no functioning AB so that a relaunch can take place. This chapter tried to show the absolute minimum of substantive progress that needs to accompany an AB relaunch compromise. Without these points, there will be no WTO, no DSM and no AB. Save planet-shattering events, the United States will remain (for the foreseeable future) too important to imagine a relevant WTO without it. Therefore, the short list of issues presented here needs to be addressed to allow the WTO to finally create its own success story. What has not been addressed are the reforms that ought to happen once survival has been assured. There is more than enough to do, even when focusing only on trade issues (as one should): climate change; food security; diminishing social coherence, not the least due to grotesquely large and increasing gaps between the top 1% income earners and the rest of the population (and, as a consequence, the decline of trust in the state, parties, societal leaders, including experts); mass migration; a data-centered world, where information has become one of the more valuable modes of payment; artificial intelligence. All of these issues are changing the realities on the ground and will do so even more in the future. The role of the state is experiencing a renaissance, not just in Russia and China but elsewhere, too. “The right to regulate,” mentioned in passing, e.g. in the preamble of GATS, has become a term used frequently by advanced economies in their investment protection agreements. But a discussion of what the most relevant topics should be for a WTO saved from implosion will have to be postponed for another day and another paper.

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References Acheson, D. 1969. Present at the Creation, My Years in the State Department. New York: W. Norton. Alford, R. P. 2006. “Reflections on US – Zeroing: A Study in Judicial Overreaching by the WTO Appellate Body,” Columbia Journal of Transnational Law 45:196–220. Anderson, R. D. and A. C. Müller. 2017. “The Revised WTO Agreement on Government Procurement (GPA): Key Design Features and Significance for Global Trade and Development,” WTO Staff Working Papers ERSD-2017-04. Bacchus, J. 2017. “The Case for a WTO Climate Waiver,” Centre for International Governance Innovation. Special Report published November 2, 2017. www.cigionline.org/publications/case-wto-climate-waiver   2018. “The Content of a WTO Climate Waiver,” Centre for International Governance Innovation. CIGI Papers No. 204 published December 4, 2018. www.cigionline.org/publications/content-wto-climate-waiver Bellmann, C. 2014. “The Bali Agreement: Implications for Development and the WTO,” International Development Policy [Online], 5.2. http://journals.openedition.org/poldev/1744, last accessed November 12, 2018. Bungenberg, M., M. Hahn, C. Herrmann and T. Müller-Ibold. (Eds.) 2018. The Future of Trade Defence Instruments: Global Policy Trends and Legal Challenges. European Yearbook of International Economic Law. Switzerland: Springer. China’s Position Paper on WTO Reform, published November 29, 2018. Condon, B. J. and T. Sinha. 2014. “The Role of International Economic Law in Addressing Climate Change,” In: Connecting to Global Markets – Challenges and Opportunities: Case Studies Presented by WTO Chair-holders. Geneva: WTO. Davey, W. J. 2009. “The Limits of Judicial Processes,” In: D. Bethlehem, D. McRae, R. Neufeld and I. Van Damme (Eds.), Oxford Handbook of International Trade Law. Oxford: Oxford University Press, pp. 460–80. Dawar, K. 2017. “The Government Procurement Agreement, the Most-Favored Nation Principle, and Regional Trade Agreements,” In: A. Georgopoulos, B. Hoekman and P. C. Mavroidis (Eds.), The Internationalization of Govern­ ment Procurement Regulation. Oxford: Oxford University Press, pp. 111–39. European Commission. 2018. COM(2018) 561 final. 36th Annual Reports from the Commission to the Council and the European Parliament on the EU’s Anti-Dumping, Anti-Subsidy and Safeguard activities, July 31, 2018. https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2018:0561: FIN:EN:PDF, last accessed December 8, 2018.   2018. L 181/39-83. Commission Implementing Regulation 2018/1013 of July 17, 2018 imposing provisional safeguard measures with regard to imports of certain steel products, July 18, 2018. https://eur-lex.europa.eu/legal-content/EN/TXT/ PDF/?uri=CELEX:32018R1013&from=EN, last accessed October 23, 2018.

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PART II Trade Policy and Trade-Related Concerns

7 Reconceiving Trade Agreements for Social Inclusion gregory shaffer 7.1 Introduction With the election of President Donald Trump in the United States and the rise of neo-nationalist parties in Europe, the new trade policy mantra is that trade must be made more inclusive. At the World Trade Organization (WTO), its secretariat entitled the 2016 WTO Public Forum “Inclusive Trade.” In 2017, the WTO and International Labor Organization (ILO) issued a joint report called “Investing in Skills for Inclusive Trade.” Social inclusion is the trade community’s new refrain. But how is it to be achieved? This chapter’s thesis is that the traditional approach of calling for complementary domestic policy in parallel with trade liberalization is no longer sufficient, and that trade agreements should be designed, directly and indirectly, to better enable and accommodate domestic policy choices over social and tax policy. Otherwise the multilateral system risks collapse, with dire results. The chapter proposes particular ways that this can be done. The traditional trade policy approach comprises two steps. In the first step, countries sign international trade agreements to combat protectionist pressures and thereby mutually enhance national welfare. In the second step, countries, recognizing that trade creates losers as well as winners, support those harmed through domestic social policy. Northern European countries are often viewed as models. Through liberalized trade, they maximize social welfare, and through social policy they ensure domestic fairness, providing social welfare and active job retooling and adjustment policies. This two-step model is now in question because of structural forces. These structural forces empower capital against labor, on the one hand, and capital against government, on the other. Because technological change enables capital to invest and produce more efficiently abroad, it can threaten to move elsewhere if domestic labor insists on higher wages and better working conditions. Similarly, capital now plays governments 157

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off each other, threatening to invest elsewhere if taxes on capital are not reduced and if subsidies to capital are not enhanced. Capital’s increased leverage threatens to erode governments’ ability to fund social protection and active educational and employment policies, while undermining labor’s ability to bargain collectively. The result is rising inequality within countries around the world (Milanović 2016). If governments are unable to coordinate efforts to overcome collective action problems and enable social policy experimentation, then further trade liberalization will only exacerbate the crisis in trade governance’s legitimacy. As a result, the current multilateral system is under the greatest challenge since it was created after the devastation of the Great Depression and World War II. This chapter is organized in four parts. Part 1 characterizes the fundamental purposes of the WTO and trade agreements, which should be viewed as much broader than trade liberalization. Part 2 presents the major challenges now facing the trade system. Part 3 summarizes critical developments in economic globalization and trade in response to technological change since the WTO was created in 1995, namely, the development of global value chains (GVCs). Part 4 contends that trade agreements, in response, must be designed around and conditioned upon social policy commitments. They should include, or be conditioned upon, agreements that cover: (1) coordinated tax policy to combat harmful tax competition, tax avoidance, and tax evasion; (2) domestic social security and job retraining, supported by trade adjustment commitments; (3) labor protection; (4) protections against social dumping; and (5) accommodation of industrial policy experimentation for development. It will not be an easy process to reconceive trade agreements to better ensure social inclusion through these means, but the current system otherwise could unravel.

7.2  Purposes of the WTO and Trade Agreements Before we address how trade agreements might be reimagined and reshaped in light of rising income and wealth inequality, political contestation over trade, stagnant wages, and insecure employment in the United States and Europe, we need to clarify what are and should be the purposes of the WTO and trade agreements. To characterize the purpose of the WTO solely as the narrow goal of free trade is mistaken. The core purposes of the WTO rather are fourfold: first, to create a basic framework of rules for ongoing cooperation, planning, and deliberation; second, to enhance standards of living; third, to address the externalities of domestic

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measures; and fourth, to provide for an independent, neutral, third-party decision-maker to resolve disputes regarding the rules’ implementation. These goals are inter-related and should be advanced in a mutually supportive manner. First, the WTO provides a multilateral forum for the creation, revision, and monitoring of compliance with rules for international trade. Social cooperation, economic coordination, and business planning take place through a basic institutional framework of rules. Rules and institutions are basic to society. If the international realm is not to be anarchic, giving rise to conflict and potential violence, then rules and institutions are needed. Second, and more specifically, trade agreements create rules that can increase standards of living because trade liberalization enables a more efficient use of domestic and global resources. Trade liberalization is not an end in itself, however, but rather a means. The preamble to the Agreement Establishing the WTO specifies that WTO members’ aim is “raising standards of living, ensuring full employment . . ., and expanding the production of and trade in goods and services, while allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development.” It stresses that this should be done “in a manner consistent with [members’] respective needs and concerns at different levels of development.” These needs include protecting the basic social contract within countries, and thus the rules should enable, and not constrain, countries’ abilities to address distributional, developmental, and social welfare concerns. Third, these rules and institutions help countries address the externalities of their behavior on others. Each country’s protectionist policies to address its view of its “respective needs” has impacts on others. The predecessor to the WTO, the General Agreement on Tariffs and Trade (GATT), was created in large part out of concerns over tit-for-tat retaliatory protectionist policies in the 1930s that arguably contributed to the deepening of the Great Depression and that were conducive to the rise of extremist political parties that led to World War II (Irwin 2011). Fourth, the WTO creates a mechanism for institutionalized dispute settlement so that political disputes over the implementation and interpretation of agreements are resolved through a neutral third-party legal institution. Opportunistic, self-serving interpretations of rules are thereby constrained, disagreements turned over to a third party, and uncertainties clarified. Legal decision-making is not uncontentious or autonomous from politics because rules are always subject to multiple

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interpretations, and WTO judges’ decisions have political effects and are shaped by political contexts (Shaffer et al. 2017). WTO adjudicatory processes must respond to political and social developments or they will be subject to legitimacy challenges. Yet, the process of third-party decisionmaking is comparatively better at ensuring ongoing cooperation than the alternative of foregoing it. Losing sight of the trading system’s broader goals can put the overall system at risk.

7.3  Main Challenges to the System Laws, as rules of the game, always reflect political choices that inevitably have distributive effects. There is no such thing as a neutral rule because there are always winners and losers from a rule’s application. A  world without rules is a chaotic one, however, and so rules must be laid down. They may be bargained around or ignored, but they also structure outcomes. In the context of trade, economic theory has long acknowledged that there are winners and losers. But more recently, distributive issues have become salient. In the United States, for example, wages stagnated for most Americans, job tenure became precarious, and the share of US wealth held by the top 1% of Americans rose to over 40%, which is more than the bottom 90% of Americans combined (Saez and Zucman 2014). At the same time, a rising middle class in China and a handful of other developing countries have greatly benefited from trade and gained the most from economic globalization so that global inequality among countries has decreased (Milanović 2016). Nonetheless, economic globalization, especially of capital, has led to increasing inequality within countries, threatening domestic social stability and international cooperation and peace. Internal and external policy are thus entwined. The main challenges for the existing trade system in light of globalization are threefold: (1) challenges to the fiscal state and thus the state’s capacity to implement social policy, (2) concerns over social dumping, and (3) the need for flexibility when experimenting in developmental policy.1 The first reflects changes in the relation between global capital and the state; the second, the relation between global capital and labor; and the third, the relation of international rules and national development policy. These challenges are captured in the work of the economist Dani Rodrik (1997, 2011, 2017).

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First, liberalized trade will only be supported politically – and should only be supported ethically – if the gains from trade are inclusively shared. When trade contributes to increased inequality within states, precarious job security, and the erosion of domestic social institutions, something must be done, even if (in fact) trade is not the primary culprit. The simple recipe that the gains from trade must compensate the losers is never implemented and, in any case, fails to address broader systemic concerns regarding social ordering and the legitimation of capitalism through state institutions. To support social inclusion, the state needs revenue, and states increasingly risk going into ever greater indebtedness to finance existing commitments. In a world in which capital is mobile, when states consider raising taxes on it, they risk losing investment and thus revenue, and so the state is squeezed. Taxes are rather applied to labor and consumption, exacerbating wealth and income inequality. Trade policy thus implicates tax policy, and their interdependence needs to be addressed in a coordinated manner. Some contend that the two-step model has not failed. Others fear loading too much into trade agreements and thus prefer to rely on a two-step model. Yet the empirical evidence shows that redistribution is not occurring, that inequality within countries has risen to the highest level since the 1930s (Piketty 2014), and that trade is an important cause of economic harm to communities that depended on high-wage manufacturing jobs (Autor et al. 2013). Politically, trade is frequently blamed by political leaders, labor unions, and other social actors for harm to US workers. Thus, for those who understand the importance of trade for overall national welfare, something must be done to preserve the overall system by ensuring that trade’s benefits are broadly and fairly spread. Second, trade places products produced under different standards in competition with each other. At times, lower wages and standards simply reflect lower productivity, but at others, they reflect labor exploitation. Within federal countries, such as the United States, or customs unions, such as the European Union, a basic floor is created that all producers must meet in terms of labor rights, environmental protection, and other regulations. Investors are thus less able to threaten to move elsewhere to constrain regulation, although this has become a greater problem in the EU with its expansion in membership (especially to the East), and it remains an issue in the United States as states compete to attract capital by lowering standards and granting massive tax incentives. In comparison, the concerns are greater at the global level, are not addressed in the WTO agreements, and are only weakly addressed in other trade agreements.

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As economies integrate so that trade affects larger numbers of workers, and as technological advances enable the offshoring of ever more jobs, a larger swathe of the US and European population is affected. The WTO agreements provide some adjustment protection from trade effects in the form of anti-dumping, countervailing duty, and safeguard law. These WTO agreements address only indirectly the core issue of maintaining the broader social compact within a country, and in particular the plight of workers in relation to capital. Third, although the WTO recognizes that the rules must respect members’ “respective needs” and thus one size does not fit all, the WTO takes some industrial policy options off the table, which Dani Rodrik (2011) and other economists (Chang 2002) have criticized for limiting options for development. There is not one way for a country to develop, and no single person or organization has an answer. Thus, experimentation is required. Some rules are needed because of externality problems (as noted in the first part of the chapter), but WTO rules generally reflect the interests of more powerful WTO members (such as the United States and the EU) that have limited some industrial policy options for less industrialized countries.

7.4  The Rise of Global Supply Chains and the Response of the TPP Globalization intensified in the 2000s with the transport and communication revolutions. As Richard Baldwin (2016) writes, revolutions in transport and information and communication technologies led to the unbundling of production. This “great unbundling” catalyzed new trade in the tasks comprising the production of a final good so that the actual traded good included manufacturing and services from multiple countries. Trade thus was re-conceptualized as “trading tasks” in the making of products, in contrast to trading products (Grossman and Rossi-Hansberg 2008). Such trade in tasks put a broader array of jobs in global competition. Economists have long contended that technological change is a much more important cause of job insecurity and job loss than trade, and that remains the predominant position (WTO 2017: 9). Furthermore, trade economics and trade law casebooks point to the discrepancy between public attitudes toward technology and trade through parables that depict technology and trade effects as separable. In one famous parable, an entrepreneur declares that he has found a way to transform wheat into

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cars, thereby significantly lowering the cost of production, decreasing the cost of cars for consumers, and thus increasing standards of living (Pauwelyn et al. 2016: 12–13). A competitor discovers, however, that the purported production facilities are in fact empty and that the lower cost production comes from trading domestically produced wheat for foreignproduced cars. The discovery leads to public outcry, and the entrepreneur falls from public acclaim to disgrace. The implicit moral is that trade and technology have the same beneficial effects and should be embraced equally. Trade is different than technology, however, in at least three ways, as Rodrik (2011: 59–60) points out. First, trade involves competition with products produced in ways that can violate national norms and social bargains (such as regarding labor rights) so that people view trade differently than technological change. Second, while consumers generally gain from both trade and technological advances, one can plausibly argue that those adversely affected by trade – i.e. low-skilled, poorly educated workers – are more systematically targeted, while “the adverse effects of new technology hit different groups over time . . . so that most, if not all people are better off over the long run.” When policy choices create risks that are not randomly allocated but rather repeatedly hit specific groups, it is unfair. Third, technological change is not self-limiting in its impact, unlike trade where, as trade is liberalized, there are diminishing returns for national welfare while the adverse effects on particular groups increase. The overall gains of moving to 0% tariffs in the United States are now estimated to be in the tenths of 1% of US gross domestic product (GDP). Moreover, whatever one’s view of trade and technology, the two are intricately linked. Technological change catalyzed the unbundling of production among countries, stimulating greater competition among producers through offshoring. Companies that do not offshore production are pressed to reduce labor costs through technological innovation to stay competitive. As a result, employment in an increasing number of “tasks” is less secure, and an increasing number of jobs risk being offshored or replaced by technology at any time. Trade economists trumpeted technology-induced changes in the nature of trade as the GVC revolution (Baldwin 2016). They promoted GVCs as the path of development for the developing world, and they viewed WTO rules as obsolete. Many thus supported a web of new bilateral and multilateral trade agreements that would facilitate more efficient GVC operation. The agreements were to include commitments to low and preferably 0% tariffs; efficient, transparent, and low-cost customs

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administration to get parts quickly across borders; investment protection; enhanced intellectual property protection; liberalization of services (including visas for temporary entry of business persons); harmonization and mutual recognition of regulatory standards to eliminate non-tariff barriers to trade; and competition norms to address abuses where GVCs operate. Conflict over expanding the WTO’s mandate to address two of these areas – investment law and competition law – helped trigger the collapse of the WTO ministerial meeting in Cancun in 2003. After that, negotiations over GVC-related issues were discontinued in the WTO and migrated to bilateral and multilateral trade agreements, with the United States often taking the lead. The most famous (or infamous) of the ensuing agreements was the Trans-Pacific Partnership (TPP), which could be viewed as a mechanism to support United States–dominated GVCs. As a consequence, agreements like the TPP would further facilitate the offshoring of tasks, thereby further favoring capital over labor regarding employment terms, and capital over government regarding state taxation and subsidization.

7.5  Reconceiving Trade Agreements: Moving beyond the TPP The combination of the aftershocks of the 2007–2008 financial crisis, rising inequality, feelings of inequity, shifts in global economic power, and new mega-regional trade negotiations facilitating GVCs created political upheaval in the United States and Europe, culminating in the election of US President Trump, the vote for Brexit, and the rise of neo-nationalist parties across Europe. To preserve international institutions and the core purposes they serve, it is incumbent to reconceive trade agreements to serve people and societies more inclusively.

7.5.1  Organizing Principle First, we need to rethink the organizing principle of trade agreements in relation to the discrete purposes set forth in the first part of this chapter. That principle should be to enhance social and individual capacity in support of human flourishing. From that principle, trade agreements should be assessed not only in terms of their impact on aggregate national and global GDP (the gains from trade) but also in terms of their distributional effects and their implications for social solidarity and social stability. Liberalized trade policy is not an end in itself but a means to enhance human and social capacity and flourishing. If this organizing principle

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is not advanced, the discrete purposes of the global system discussed in part 1 of this chapter will be at risk. When trade flows threaten to undermine the social contract within countries, new thinking on trade law and policy is required.

7.5.2  Tax, Trade, and Inequality Tax policy becomes more directly linked with trade policy when globalization processes constrain governments’ fiscal choices. For example, to attract investment, governments have reduced taxes on corporate income earned within their borders. In parallel, investors and other high net worth individuals have taken advantage of tax arbitrage opportunities to allocate income to low-tax jurisdictions through creative lawyering, use of tax havens, and tax secrecy laws that prohibit cooperation with public authorities. The Tax Justice Network estimates that “by 2010 some US$21 to US$31 trillion of the world’s financial wealth was invested by … virtually tax-free methods through the offshore system,” one “which exploits the legal fiction that corporations are individual and separate legal persons, even if they are owned and centrally controlled within a corporate group” (Picciotto 2017). This tax competition and use of tax havens undermines a main source of revenue for modern welfare states, so that states are less able to provide social security and job retraining to benefit those adversely affected by economic globalization. This problem is particularly severe for developing countries (Cobham and Jansky 2017). The dynamics regarding tax policies create political pressure for trade protectionism. If political support is to be maintained for a reasonably open trading system supported by an international institution that facilitates economic cooperation, harmful tax competition must be curtailed. Such an effort demands multilateral coordination. If the United States, the EU, and other major economies work together, they could use trade policy as leverage to constrain harmful tax competition, avoidance, and evasion. Because capital exercises increased political clout within countries and because capital plays countries against each other, this coordination has become difficult. There are signs of progress through the OECD’s and G20’s creation of an action plan and package of measures to prevent base erosion and profit-shifting (BEPS) strategies by multinational companies (OECD 2013). This project has been expanded to include around 96 countries through an inclusive framework that requires countries to commit to implement a comprehensive package and pay an annual fee (OECD 2017).

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Yet, the effectiveness of BEPS has been questionable (Brauner 2016). Even larger losses of revenue come from tax evasion and avoidance by high net worth individuals (Alstadsaeter et al. 2017). The United States and EU have taken some independent measures to address these challenges. For example, the EU adopted the Anti-Tax Avoidance Directive in 2016, which aims to create a minimum level of protection against corporate tax avoidance throughout the EU (E.U. 2016). The United States, in parallel, adopted the Foreign Account Tax Compliance Act (FATCA), following which the US Treasury negotiated international agreements to share information and crack down on tax evasion (FATCA 2010). The 2017 Tax Cuts and Jobs Act contains additional tax avoidance measures. In addition, OECD countries created a Global Forum Working Group on Effective Exchange of Information that, in turn, created model tax information exchange agreements (TIEAs) under which countries agree to cooperate in criminal and civil tax investigations upon request.2 Yet tax havens continue to flourish, holding trillions of dollars offshore (Zucman 2013). One response is to condition trade liberalization on tax policy reform to strengthen governments’ ability to provide social welfare. Structurally, states must overcome collective action problems and coordinate if they are to combat harmful tax competition effectively and protect state tax sovereignty. Enhanced domestic social welfare policies are not rendered impossible by globalization, but they will be facilitated if harmful tax competition is constrained and state tax sovereignty increased through inter-state coordination. Tax policy could be incorporated directly or by reference into trade agreements, or trade agreements could be conditioned on separately negotiated international tax agreements. The resulting tax agreements could be incorporated by reference into trade agreements. There is precedent for this latter approach in WTO agreements, which incorporate by reference export credit subsidy rules negotiated in the OECD (in the WTO Agreement on Subsidies and Countervailing Measures), and regulatory standards developed through international standard-setting organizations (in the WTO Agreement on Technical Barriers to Trade and the Agreement on Sanitary and Phytosanitary Measures). WTO tribunals also make reference to other international treaty obligations in interpreting and applying WTO rules. Some member countries have extended the scope of their existing TIEAs to cover the automatic and/or spontaneous exchange of information.

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International cooperation as presented above represents a first best option. Given the track record of its failures to adequately address the problems of harmful tax competition, and tax avoidance, the fallback option is constructive unilateral action to preserve the tax base where possible (Avi-Yonah 2016). Such unilateral action can in turn potentially catalyze international coordination.

7.5.3  Safeguarding Policy Space for Complementary Domestic Social Policies There is considerable need for complementary domestic policies to offset the risks of economic globalization and rapid technological change. Without complementary domestic policies, support for neo-nationalist parties should continue to rise, representing a new form of tribalism with racialized dimensions that could unravel the existing international institutional order, as well as domestic ones. Domestic social policies are needed whether trade, technology, or both in combination cause increased job insecurity and income inequality. It is beside the point if workers lose their jobs because of trade from China, because of robots, or because of a turn to robots in light of global competition. Adjustment policies are needed. And since it is politically easier to blame trade involving foreigners than technology, these policies are needed to protect the international trade legal order itself. At a minimum, they will need to address issues of social security and labor flexibility in response to economic globalization and technological change.

7.5.3.1 Social Security Industrialized states created social welfare programs after World War II that provided social security to citizens. They varied in what they provided, with European countries being much more generous than the United States, although they all provided significant benefits to the vulnerable. Social security programs need to be revamped, however, if a relatively open trading system is to be sustained. Countries vary in their preferences, but they need policy space to provide basic health care, some form of basic guaranteed income (including but not limited to retirement and disability income), housing, child support, public education, and job training. One option is to condition trade liberalization on the development and retention of such social programs. The anti-government turn of the Tea Party and the Republican Party in the United States make this

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politically difficult at this time, but, in that case, it seems prudent to check further trade liberalization. Otherwise, trade liberal policies can further empower neo-nationalists deploying anti-elite rhetoric. It is a vicious spiral. The spiral must be reversed if states are to retain the policy space to pursue social security programs while maintaining a cooperative trade legal order.

7.5.3.2 Job Flexicurity Meaningful employment is critical for individual self-worth and a sense of belonging in society. The term flexicurity was first developed in Denmark and then taken up by the European Union for labor policy in a globalized world. Flexicurity policies aim to combine labor market flexibility, lifelong learning, active labor market policy, and social security (Wilthagen and Tros 2004; Council Secretariant 2008). Flexibility is required to ease economic adjustment and enhance labor accountability. Lifelong learning facilitates job transitions by enhancing individual capacity. Active labor market policies provide the unemployed with rights, complemented by duties. They include job centers, training schemes, and job subsidies. Social security ensures basic income support during employment transitions. Long-term employment is increasingly vulnerable in a globalized world characterized by rapid technological change. The era for lifetime employment with a single employer is largely gone. Given the increased risks of employment shocks for an increasing number of workers, support for trade liberal policies should be conditioned on the development of job flexicurity policies. 7.5.3.3  Trade Adjustment Policies Traditional trade adjustment mechanisms provide some job retraining and social security that can form part of a broader flexicurity policy package. In themselves, they are radically insufficient, partly because of the broader links between trade and technology-induced change, but they nonetheless demonstrate how adjustment policies can be linked to trade agreements. Traditionally, trade adjustment policies have been a matter solely of domestic concern. The United States has had programs since 1962. The problem with these programs has been twofold. First, the programs are narrow in their focus, and they have been far from sufficient in addressing the increased precariousness of work. Second, there is nothing that guarantees that a future legislature will not curtail or eliminate the benefits. As a result, the lack of adequate adjustment policies spur backlash against trade, putting trade agreements in jeopardy.

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To ensure ongoing support for an open trading system, a commitment to redistribute the gains from trade could be incorporated into trade agreements themselves. In this way, governments would make commitments more credible not only to workers but to their trading partners as well, which otherwise would be concerned about trade restrictions. This commitment could be structured in different ways. Tim Meyer (2017) proposes that trade agreements include an economic development chapter that provides for three kinds of obligations: (1) a fiscal obligation on countries to enact substantive policies to redistribute the gains from trade domestically (this obligation could be indexed to losses from liberalized trade that the government identifies and reports); (2) an obligation to report compliance with this obligation to an economic development committee of experts created under the agreement, which would independently gather data on the impacts of trade within the country; and (3) a dispute settlement mechanism to enforce the commitment, which could lead to the suspension of trade concessions. In complement, they could be accompanied by a small financial transaction tax on the value of currency or securities sales (say less than 0.1%) to help fund these policies (Garcia and Meyer 2017). Human rights treaties commonly create committees to which members must report, on the basis of which the committee makes recommendations. Because states would likely not bring claims against each other, one can also imagine private enforcement mechanisms, such as through a petition process (as under the Inter-American Convention of Human Rights). Even if such private mechanisms may not be adopted, the mere creation of reporting requirements can spur the preparation of shadow reports by labor organizations and civil society organizations to keep governments accountable, which can play into domestic politics. The core idea is that trade agreements will be sustainable only if states commit to distribute economic gains broadly. If the benefits from trade are not so distributed, then a country would breach commitments to its citizens (regarding the sharing of the benefits) and to its trading partners (concerned about denial of market access because of protectionist pressures). In other words, such provisions would enhance the credibility of state commitments internally and externally. Otherwise, by subsequently reducing trade adjustment assistance, a country could undercut both the domestic bargain that led to ratification of the trade agreement and the international bargain itself. This type of provision would not be sufficient because the challenges of job security involve much more than trade. Nonetheless, domestic

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commitments to trade adjustment are commonly made in connection with trade negotiations, and countries have a broader interest to monitor that these commitments are met to avoid undermining the agreements. In the process, such provisions would provide enhanced leverage to affected groups, such as labor, within the country.

7.5.3.4  Labor Clauses In federal and regional jurisdictions, governments agree to minimum labor standards, coupled with protection of workers’ freedom of association and right to collective bargaining, to curtail pressure to lower standards to attract investment. Labor clauses are controversial in trade agreements, however, because of the vast differences in labor productivity and levels of development among countries and because they can be used by protectionist interests in advanced industrial economies to block developing country imports, in turn harming workers in those countries. Mechanisms are thus needed to ensure neutral third-party review of labor commitments, which in turn provide leverage to domestic labor. The TPP went further than previous agreements in creating minimum labor standards. TPP members agreed to protect the four fundamental labor standards in the 1998 ILO Declaration on Fundamental Principles and Rights at Work (protection of freedom of association and collective bargaining, elimination of discrimination, prohibition of forced labor, and elimination of child labor), establish a minimum wage, set caps on working hours, and enforce occupational health and safety standards.3 The agreement also incorporated dispute settlement that could give rise to sanctions. In addition, the United States signed side letters with Vietnam, Malaysia, and Brunei that created additional labor obligations, including reforms that would have to be implemented before the TPP went into effect. In the case of Vietnam, the United States could suspend its commitment to cut tariffs if it found that Vietnam did not comply with its labor commitments. The bargaining leverage thus flipped because Vietnam would have to sue the United States for unfairly suspending tariff concessions, rather than the United States having to sue Vietnam for its lack of enforcement of the labor commitments. One can imagine further provisions. For example, the agreement could have required the enforcement of the eight fundamental ILO conventions, which go into greater detail and indeed set international The TPP only requires states to have the listed rights; it says nothing about how, or at what level, those rights are set (Cimino-Isaacs 2016).

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standards concerning the protection of the freedom of association, rights to organize and collective bargaining, abolition of forced labor, child labor, non-discrimination, and equal remuneration (ETUC 2017).4 Nonetheless, the TPP’s provisions provide a baseline that can be adapted to protect against social dumping more broadly, to which we turn next.

7.5.4  Reconceiving Negotiations as over Market Access and Policy Space Trade negotiations traditionally involve reciprocal bargaining to increase market access. In this way, they ratchet up trade liberalization over time. Yet, democratic governments are interested in more than just one-way trade liberalization; they are also concerned about policy space, and thus negotiations should also involve reciprocal bargains over policy space to ensure democratic legitimacy and responsiveness. Rodrik (2011, 2017) has been a leading advocate of a complementary focus on the need for policy space from a conceptual perspective to address distributional and development concerns. What we need is complementary legal analysis regarding how this can be designed and implemented. This chapter advances a way to do so.

7.5.4.1  Existing Mechanisms for Ensuring Policy Space Although the WTO is often criticized for foreclosing policy space, WTO rules in fact incorporate mechanisms for negotiating and safeguarding policy space. First, most developing country members set their tariffs at much lower levels than their bound rates, and some have many tariff lines that are not bound. In these cases, they retain the option to increase tariffs on goods in targeted sectors as part of their development policy, including to support infant industries. Even when applied tariffs are bound at low levels, Article XXXVIII of the GATT permits members to modify their schedules every three years by negotiating with other WTO members which have a “principal supplying interest” in the product. When agreement fails, a WTO member can unilaterally modify its tariff schedule, and the principal supplier may then withdraw “substantially equivalent concessions” to retain a reciprocal balance. Second, Article XIX of the GATT and the WTO Agreement on Safeguards provide that, when an increase in imports causes or threatens See ETUC 2017 (calling for a requirement of ratification and implementation of the eight ILO Core Labour Standards, as well as ILO conventions and instruments, such as on work safety).

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to cause “serious injury” to a domestic industry, a WTO member may impose safeguards through raising tariffs or applying quotas. In practice, it takes three years to litigate a safeguards case, thus providing a long period for a country to facilitate adjustment. Third, WTO rules permit countries to increase tariffs to offset dumping and to countervail subsidies. In practice, these provisions make little economic sense from the perspective of competition policy and aggregate national welfare. Rather, they are best viewed as political safeguards to address import surges and thus maintain overall support for trade liberalization (Sykes and Cooper 1998). These measures are easier to impose because the injury threshold is lower than for safeguards, and measures can be targeted at imports from particular countries that matter. Fourth, Article XX of the GATT creates a general exception permitting countries to restrict exports where “necessary to protect public morals” as long as their measures do not “constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction of international trade.” The WTO Appellate Body (2014) recognized the application of this defense for an EU ban on the importation of seal products in response to and in reflection of public morals regarding animal welfare. Arguably, restrictions on imports of goods produced in violation of human rights might also be permitted on public morals grounds. In short, from the perspective of policy space, it is a mistake to assert that current WTO rules foreclose policy space. Nonetheless, the WTO system can address social and developmental concerns more directly and transparently. Because bilateral and multilateral trade agreements curtail policy space much more than the WTO, policy space mechanisms can be incorporated into them as well, especially when they are between countries at vastly different levels of development.

7.5.4.2  Negotiating over Policy Space between the Global North and Global South One can envisage a new form of bargaining between developed and developing countries that involves negotiations over policy space as well as over market access. The negotiations would involve the provision of greater policy space for developed countries to uphold the social contract by protecting labor against social dumping, on the one hand, and greater policy space for developing countries to adopt experimental industrial policies to move up the value-added production chain, on the other hand.

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The problem with policies to protect policy space is that they can impose significant externalities on outsiders. These externalities can be subject to bargaining, however, as is the case with any rule, including those focused on market access. The challenge is to operationalize the concept of negotiating over policy space through new legal provisions to foster democratic legitimacy and development policy experimentation while limiting the risks of protectionist abuse. (i) Safeguards to protect against social dumping. The real underlying problem from a social policy perspective is not unfair trade as viewed through the traditional WTO lens of product dumping, because anti-dumping procedures largely involve accounting ploys to show ­differences in pricing that may be entirely justifiable economically and thus not unfair. The real underlying concern should be social dumping of products – ­produced under exploitative wages and labor conditions – that sell for less than domestically produced products and thus lead to concerns over wage suppression and reductions of labor protections in the global North. These policies can undermine the social contract and trigger political contestation against trade. If provisions to safeguard against social dumping are to be incorporated into trade agreements, they should be subject to strict procedural, substantive, and injury requirements in order to combat abuse. Many of the provisions could simply take and build upon the current WTO safeguards and anti-dumping regimes. Indeed, the procedural and injury criteria could largely mirror existing anti-dumping law. For example, the injury determination could be the same as set forth in Articles 3 and 4 of the current WTO Antidumping Agreement, which requires the showing of a “material injury,” or threat thereof, to a “domestic industry.” These provisions have been subject to substantial WTO jurisprudence. The procedural criteria also could mirror or build on those of the current anti-dumping regime, such as Articles 5 (Initiation and Subsequent Investigation), 6 (Evidence), 11 (Duration), 12 (Public Notice and Explanation of Determinations), and 13 (Judicial Review). Most important, due process rights would have to be provided to affected parties, including exporters, importers, organized labor, and other social groups. The agreement could include an analogue to Article 15 providing that “special regard” should be given to developing countries in light of their distinct “situations.” As under current Article 15, “constructive remedies” could be explored. Such remedies could directly target the source of concern in the exporting country through measures to enhance labor protections and their enforcement. Compliance with the agreement could be

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overseen by a committee (as with all WTO agreements), and representatives of the ILO could be granted observer (or official) status within it. The first challenge with implementing this proposal is to specify when violations of labor norms occur so that a country may impose tariffs as a social safeguard. The criteria chosen would build from experience with existing labor chapters in trade agreements, including the TPP. A country deciding to impose duties would need to show violations of agreed norms. The list of labor norms would include freedom of association and collective bargaining, elimination of discrimination, prohibition of forced labor, elimination of child labor, enforcement of occupational health and safety standards, and establishment of maximum working hours and a minimum wage.5 A second challenge is obtaining evidence establishing labor rights violations. This can and has been done. Indeed, the United States prevailed on this issue in its challenge of Guatemala’s labor practices under the Central America Free Trade Agreement (CAFTA 2017). To gather evidence of labor rights violations, governments can work with labor and civil society organizations, and recognize and incorporate evidence from ILO reports on country practices, as the United States did in the Guatemala case. A key difference between this proposal and the text interpreted in the CAFTA case is that the petitioner bringing the domestic social safeguard action need not prove a causal link between the labor rights violations and increased imports, which is extremely difficult to do given the number of potential causal factors that can explain trade patterns. Rather, a petitioner only needs to prove that the labor rights violations occurred and that the imports in that sector caused a material injury to an industry producing a like product. A third challenge is to determine the amount of injury caused by the imports and thus the amount of duties imposed. This determination should be much less of a challenge than under the current anti-dumping regime because it could be linked to the existing safeguards regime. The WTO anti-dumping agreement provides detailed provisions for the calculation of anti-dumping duties based on a comparison of product prices in the country of production and the importing country to determine dumping margins. The result is high transaction costs for all sides, including for the administrative authority. Accounting for the price differential The minimum wage would have to be set near the market clearing rate, which will vary not only by country but also within a country. Countries should thus have discretion in setting a minimum wage, which may vary within each one in light of differing labor market conditions.

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caused by social dumping, in contrast, would not be necessary. In the case of a social safeguard, duties could be limited to the amount of the injury caused by the imports, as is done currently under the WTO Safeguard Agreement. Calculating such an amount would be more transparent and not involve the manipulation of pricing data, thus reducing administrative costs for firms and administrative agencies. In addition, the amount of duties would be lower than under current WTO anti-dumping rules, where they can be imposed up to the amount of the calculated dumping margin regardless of the amount of injury caused. Subject to these procedural, substantive, and injury requirements, a country could impose tariffs as a social safeguard. Overall, such a system would shift leverage to the importing state to protect its social contract, in contrast to current trade agreements with labor clauses that only provide the ability to bring a claim against the party violating the labor clause. To counter abuse, the targeted country could bring a claim of non-compliance before the WTO dispute settlement system, just as under the existing WTO anti-dumping and safeguards regimes. In practice, as under the anti-dumping and safeguards regimes, the initiation of the investigation would trigger negotiations between the party subject to the investigation and the investigating authority. In this case, however, the negotiations would transparently address the issue of labor rights violations, potentially leading to agreements to enhance labor protections and thus more directly benefit the exporting country’s workers. In contrast, under the current system, the investigator works more like a cartel enforcer who gathers pricing information from foreign traders and then, under a threat of sanctions, presses them to raise prices and reduce output. If they do so, then the foreign traders capture quota rents in the form of oligopolistic pricing to the detriment of consumers. Under the current system, there is no guarantee that the price increases will be captured by workers, as opposed to capital, and indeed there is evidence that capital primarily benefits. If current anti-dumping law remains a parallel procedure, then there would be rules against double counting, just as there are rules when anti-dumping and countervailing duty investigations are conducted. Alternatively, provisions on social dumping could be integrated into the current anti-dumping or safeguards regime. The EU has made the first gesture in this respect by amending its anti-dumping law to account for international labor and environmental standards (European Commission 2017). Such a social safeguard agreement would be subject to abuse, just as is the case with the current anti-dumping and safeguards regimes.

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However, there is no reason to believe that it would be subject to greater abuse, especially if the injury determination remains the same. The existing anti-dumping regime is largely driven by well-organized corporate interests. This alternative would have the advantage of focusing attention on, responding to, and spurring negotiations over the impact of labor rights violations. Labor and civil society organizations would be granted access to the process so that workers could benefit more directly from negotiated settlements. Such a social safeguard regime would address more directly the distributive issues within countries that threaten to undercut the existing trade legal order. (ii) Industrial policy space for developing countries. There is more than one way to catalyze economic development, and considerable pragmatic policy experimentation is needed because no one knows in advance what works. This is particularly the case given the vastly differing contexts that countries face. Rodrik (2011) and others critique WTO rules for taking many industrial policy options off the table for developing countries. Industrial policy experimentation could be expressly authorized by amending existing WTO agreements, which already provide a framework for such authorization. Developing countries could demand such enhanced policy space for development initiatives in return for provisions authorizing social safeguards measures, in each case subject to legal discipline. Because the industrial policy of one country has externalities for others, criteria need to be specified as part of a bargain. In the case of industrial policy, rules could be set forth in a separate chapter, or in a revision of the Agreement on Subsidies and Countervailing Measures (SCM Agreement). They would include general principles, substantive criteria, time limits, and reporting and transparency obligations. The general principle would be that the plans must aim to increase productivity, and not to compensate for low productivity, and that they must set forth clear criteria for success so that they can be evaluated (Haussman, Rodrik, and Sabel 2008). The WTO SCM Agreement (1994) initially provided exceptions pursuant to which three types of subsidies would not be actionable: subsidies for research; subsidies providing assistance to disadvantaged regions; and subsidies for adaptation of facilities to meet environmental requirements, provided in each case they meet certain criteria. Those provisions have lapsed, but they could be revamped and updated to include industrial policies for development. Under a revamped SCM Agreement, special authorization for industrial policy experimentation could be limited to developing countries that meet defined World Bank criteria in terms of per capita income subject to

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industry competitiveness criteria. The criteria could build from national programs under the existing Generalized System of Preferences (GSP) that provide for preferential tariff treatment of developing country imports, subject to the denial of benefits once an industry becomes competitive. Under the EU’s GSP program, for example, once countries become listed as highor upper-middle-income economies (using World Bank criteria based on per capita income) for three consecutive years, they cease to benefit from the program (United Nations Conference on Trade and Development 2016). Lower-income countries lose GSP preferences for their highly competitive export sectors. Analogous criteria could define beneficiary countries and sectors entitled to benefit from developmental policy initiatives. To the extent that their policies cause material injury to a domestic industry in an importing country, that country could still impose countervailing duties, as under the current SCM agreement. Policies that fail to meet the agreedupon criteria would also be subject to traditional trade dispute settlement under the WTO Dispute Settlement Understanding. Time limits should be agreed so that ineffective programs are abandoned and replaced. The WTO Agreement on Safeguards (1994) provides an example of imposing time limits. Under it, a safeguard measure may be maintained without being subject to a withdrawal of concessions for three years. Similarly, such an industrial policy measure could be limited to a set number of years without being subject to retaliation, provided it met the agreed-upon criteria and the country complied with the other obligations relating to it. The country adopting such a measure would have to report its program. The SCM Agreement already requires that members notify their subsidies each year to the WTO Committee on Subsidies and Countervailing Measures. However, the record of industrial subsidies notification is poor, with over half of WTO members not notifying to the Committee (Shaffer et al. 2015). China’s failures have particularly irked the United States, which has proposed sanctions against countries that fail to notify, such as a suspension of certain WTO benefits (WTO Council for Trade in Goods 2017). In these cases, a country’s failure to report its obligations could trigger a suspension of benefits, including use of the policy until compliance occurs. Such a sanction could incentivize reporting in ways that the current SCM Agreement does not. Transparency and reporting are public goods. They are important not only for trade relations but also for domestic governance to limit rentseeking. They reduce information asymmetries, enabling firms, citizens, and trading partners to know what governments are doing. In particular,

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domestic stakeholders must be able to monitor and hold experimental industrial policy programs accountable. Otherwise, the results of experiments would not be known, and the risks of cronyism would increase. (iii) Feasibility. Negotiating these provisions will not be easy. Trade negotiations never are. Developing countries are wary of granting power to developed countries to block imports on social dumping grounds. Developed countries are suspicious of granting any legal authorization for emerging economy industrial policies. Thus, some may question the feasibility of these proposals, yet they can be done. This chapter shows how new trade law provisions can be structured to combat abuse so that they will be subject to no more (and arguably much less) abuse than current WTO rules on unfair trade, such as anti-dumping rules. The difficulties faced should be compared with the real-life alternative of existing challenges to the trading system. These issues should be debated head-on so that the underlying social and development issues are addressed transparently and not glossed over. A multilateral institution such as the WTO provides an important forum for doing so. Negotiations can advance in parallel in multilateral and bilateral forums. The conceptualization of trade negotiations in all forums should address policy space concerns explicitly.

7.6 Conclusion These are politically challenging times. They present severe risks as well as opportunities. The impacts of trade and rapid technological change on income inequality and the security of work have become politically salient issues in the United States and Europe. They have led to the rise of nativist political parties that threaten to upset the institutional framework for international relations. The outcome could be dire. It is time to put forward proposals that reconceive and redesign trade agreements so that they directly address adverse impacts on the working and middle classes. This chapter sets forth concrete options for ensuring that the benefits from trade are more broadly spread and that those harmed are adequately supported so that they may live meaningful, secure working lives. Some may dismiss these ideas as old and impractical because the problem of social dumping has been intensely debated before. Yet, it is the old, ensconced idea to leave social and redistributive policy solely to the domestic sphere while liberalizing trade and constraining states’ policy space through trade agreements that threatens to undermine domestic social solidarity and, as a result, the international trading

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system itself. If the trade legal order constrains the ability of governments to develop policies in support of broadbased social inclusion and individual and social flourishing, then it risks collapsing from its very success in promoting liberalized trade. Lawyers and economists provided the intellectual constructs and designs for the existing trade order. Will they do the same for its redesign, possibly to save it from itself?

References Alstadsæter, A., N. Johannesen, and G. Zucman. 2017. “Tax Evasion and Inequality, No. w23772,” National Bureau of Economic Research, www.nber.org/papers/w23772, accessed April 1, 2018. Autor, D., D. Dorn, and G. Hanson. 2013. “The China Syndrome: Local Labor Market Effects of Import Competition in the United States,” American Economic Review 103(6):2121–68. Avi-Yonah, R.S. 2016 “Constructive Unilateralism: U.S. Leadership and International Taxation,” International Tax Journal 42(2):17–24. Baldwin, R. 2016. The Great Convergence: Information Technology and the New Globalization. Cambridge, MA: Harvard University Press. Brauner, Y. 2016. “Treaties in the Aftermath of BEPS,” Brooklyn Journal of International Law 41(3):973–1041. CAFTA. 2017. “In the Matter of Guatemala – Issues Relating to Obligations under Article 16.2.1(a) of CAFTA-DR (Final Panel Report),” www.trade.gov/industry/tas/Guatemala%20%20%E2%80%93%20Obligations%20Under%20 Article%2016-2-1(a)%20of%20the%20CAFTA-DR%20%20June%2014%20 2017.pdf, accessed on April 1, 2018. Chang, H. J. 2002. Kicking Away the Ladder. London: Anthem Press. Cimino-Isaacs, C. 2016. “Labor Standards in the TPP.” Assessing the Trans-Pacific Partnership. Peterson Institute for International Economics 41–65. Cobham, A. and P. Jansky. 2017. “Global Distribution of Revenue Loss from Tax Avoidance: Re-estimation and Country Results,” WIDER Working Paper 2017/55, www.wider.unu.edu/publication/global-distribution-revenue-losstax-avoidance, accessed April 1, 2018. Council Secretariat of the European Union. 2008. “Implementation of the Common Principles of Flexicurity within the Framework of the 2008–2010 Round of the Lisbon Strategy,” http://ec.europa.eu/social/main.jsp?catId=102/, accessed April 1, 2018. European Commission. 2017. “European Commission Fact Sheet: The EU Is Changing Its Anti-dumping Anti-Subsidy Legislation to Address State Induced Market Distortions,” October 4, http://europa.eu/rapid/pressrelease_MEMO-17-3703_en.htm, accessed January 12, 2018.

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European Trade Union Confederation. 2017. “ETUC Resolution for an EU Progressive Trade and Investment Policy,” June 16, www.etuc.org/documents/ etuc-resolution-eu-progressive-trade-and-investment-policy-adoptedexecutive-committee#, accessed April 1, 2018. European Union Council Directive 2016/1164. 2016. “Laying Down Rules against Tax Avoidance Practices That Directly Affect the Functioning of the Internal Market,” Official Journal of the European Union, L 193. Foreign Account Tax Compliance Act (FATCA), 26 U.S.C. §§ 1471-1474. Garcia, F. and T. Meyer. 2017. “Restoring Trade’s Social Contract,” Michigan Law Review Online 116(78):78–100. Grossman, G. and E. Rossi-Hansberg. 2008. “Trading Tasks: A Simple Theory of Offshoring,” American Economic Review 98(5):1978–97. Haussman, R. et al. 2008. “Reconfiguring Industrial Policy: A Framework with an Application to South Africa,” HKS Working Paper No. RWP08-031. Irwin, D. 2011. Peddling Protectionism: Smoot-Hawley and the Great Depression. Princeton, NJ: Princeton University Press. Meyer, T. 2017. “Saving the Political Consensus in Favor of Free Trade,” Vanderbilt Law Review 70(3):985–1026. Milanović, B. 2016. Inequality: A New Approach for the Age of Globalization. Cambridge, MA: Harvard University Press. OECD. 2017. Background Brief – Inclusive Framework on BEPS, Paris, France: OECD Publishing.  2013. Action Plan on Base Erosion and Profit Shifting. Paris, France: OECD Publishing. Pauwelyn, J. H. B. et al. 2016. International Trade Law. New York: Wolters Kluwer. Picciotto, S. 2017. “The Deconstruction of Offshore,” In: H. Klug and S. Engle Merry (Eds.), The New Legal Realism: Studying Law Globally. New York: Cambridge University Press. Piketty, T. 2014. Capital in the Twenty-First Century. Cambridge, MA: Harvard University Press. Rodrik, D. 1997. Has Globalization Gone Too Far. New York, NY: Columbia University Press.  2011. The Globalization Paradox: Democracy and the Future of the World Economy. New York: W. W. Norton and Company.  2017. Straight Talk on Trade: Ideas for a Sane World Economy. Princeton, NJ: Princeton University Press. Saez, E. and G. Zucman. 2014. “Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data,” National Bureau of Economic Research Working Paper 20625. Shaffer, G., M. Elsig, and S. Puig. 2017. “The Law and Politics of WTO Dispute Settlement,” In: W. Sandholtz and C. Whytock (Eds.), The Research

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Handbook on The Politics of International Law. Northampton, MA: Edward Elgar Publishing, pp. 269–306. Shaffer, G. et al. 2015. “Can Informal Law Discipline Subsidies,” International Economics and Law Journal 18(2):711–41. Sykes, A. O. and R. N. Cooper. 1998. “Anti-dumping and Antitrust: What Problems Does Each Address,” In: S. M. Collins and R. Z Lawrence (Eds.), Brookings Trade Forum. Washington, DC: Brooking Institution Press. United Nations Conference on Trade and Development. 2016. “GSP Handbook on the Scheme of the European Union UNCTAD/ITCD/TSB/MISC.25/Rev.4,” http://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=1470, accessed April 1, 2018. Wilthagen, T. and F. H. Tros. 2004 “The Concept of Flexicurity: A New Approach to Regulation Employment and Labour Market,” European Review of Labour and Research 10(2):166–86. WTO Agreement on Safeguards, Article 8, April 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1869 U.N.T.S. 154. WTO Agreement on Subsidies and Countervailing Measures, Article 8.2, April 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1869 U.N.T.S. 14. WTO Appellate Body Report. 2014. “European Communities – Measures Prohibiting the Importation and Marketing of Seal Products,” WTO Doc. WT/DS400/AB/R, WT/DS401/AB/R, adopted June 18, 2014. WTO Council for Trade in Goods. 2017. “Procedures to Enhance Transparency and Strengthen Notification Requirements Under WTO Agreements,” World Trade Organization JOB/GC/148, October 30, 2017. WTO International Labor Office. 2017. “Investing in Skills for Inclusive Trade,” www.wto.org/english/res_e/booksp_e/investinsskills_e.pdf, accessed October 13, 2017. World Trade Organization. 2016. “WTO Public Forum 2016,” www.wto.org/ english/forums_e/public forum16_e/public_forum16_e.html, accessed October 13, 2017. Zucman, G. 2013 “The Missing Wealth of Nations: Are Europe and the US Net Debtors or Net Creditors?” The Quarterly Journal of Economics 128(3):1321–64.

8 Our Alarming Climate Crisis Demands Border Adjustments Now john odell 8.1 Introduction 1 The global climate crisis is now an emergency. Concentrations of atmospheric greenhouse gases have continued rising at record rates, and climate damage is intensifying around the planet. The 2015 pledges that governments made as part of the historic Paris agreement, even if all were implemented, fell far short of what is needed to stabilize the climate. Then, in 2017, the Trump administration threw US national policy into reverse gear. The need for a much more effective policy response is extremely urgent. While efforts at multilateral cooperation should continue, it is now too late to delay multilateral and unilateral trade measures any longer. It is time for each country that imposes positive net taxes on fossil fuel use at home to extend the same treatment to all goods the country imports, unilaterally if necessary. It should set a default carbon surcharge on an imported product equal to net fossil energy taxes (taxes minus subsidies) applied on a competing home good throughout its supply chain. The government should deduct from this surcharge for a given shipment to the extent that costs due to carbon energy taxes – or other measures that are comparable in effectiveness in reducing greenhouse gas ­emissions – have already been paid on the imported good in any jurisdiction throughout its own supply chain. All exports from countries where carbon dioxide (CO2) emissions per capita are low should be exempt from An earlier version of this chapter was published by the International Centre for Trade and Sustainable Development. I am grateful for helpful suggestions and reactions to earlier drafts by Arthur Appleton, Thomas Brewer, Aaron Cosbey, Thomas Cottier, Panagiotis Delimatsis, Octavio Fernández-Amador, Joseph Francois, Christian Häberli, Bernard Hoekman, Henrik Horn, Ingrid Jegou, Nicolas Lamp, Keith Maskus, Petros Mavroides, Ricardo Meléndez-Ortiz, Jean-Frédéric Morin, Maria Panezi, Joost Pauwelyn, David Runnalls, Mark Sanctuary, Gregory Shaffer, Paul Watkinson, and anonymous referees. None of them is responsible for any errors.

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these trade measures. The goal is to help people in high-polluting countries make their national mitigation policies more effective. This chapter sketches a preliminary illustration of such a policy. An eventual complete plan should satisfy three principles. First, border carbon adjustments (BCAs) should aim for consistency with World Trade Organization (WTO) rules. Second, the measures should impose the smallest possible additional transaction costs on domestic and international trade. Third, these border adjustments should exempt all exports from the dozens of poor and middle-income countries whose per capita CO2 emissions are low. The chapter concludes by addressing several possible objections. Responding to an obvious one: paradoxically, trade itself in the long-term needs carefully limited trade restrictions like these in the short term.

8.2  What Is at Stake The global climate crisis is an extraordinary challenge to all peoples. It worsens many other problems, including illness, economic development, government deficits, refugee pressures, and international conflict. And the climate crisis has now reached alarming proportions. Scientists report that Greenland and Antarctica are melting faster than anticipated. Sea levels are rising and waters are warming. Between 1980 and 2014, the world had already experienced a quadrupling of destructive extreme climate events (World Energy Council 2015). In 2017 alone, extreme flooding in South Asia killed more than 1,000 people and affected more than 40 million (Crunden 2017). Biodiversity is declining rapidly. The Great Barrier Reef is dying. World populations of vertebrate species collapsed by 58% between 1970 and 2012 because of human pressures, including climate change (Ripple et al. 2017, supplemental file 1). Vicious climate cycles are intensifying, possibly moving closer to sudden changes that would permanently overwhelm societies’ capacity to adapt. All this has been due to global warming of 1°C. Initial pledges to the historic 2015 Paris Agreement, even if all were fully implemented, will fall far short of achieving the parties’ own declared goal to stop global warming well below 2°C – and even farther short of their more ambitious 1.5°C goal (Climate Interactive 2017a). In 2015 and 2016, greenhouse gas (GHG) concentrations in the atmosphere increased still further, and at record speeds, and in 2017 they rose again (USNOAA 2017; Gillis 2017). That year, new global CO2 emissions from fossil fuel combustion and industrial activity began to rise again for the first time in

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four years (Peters et al. 2017). Between 470 million and 760 million people live on coastal territory that is highly likely to be inundated by 2100 if our present emissions trajectory continues (Climate Central 2015). One in six species could go extinct (Urban 2015). Yet even the European Union (EU), a world leader, is on pace to miss its Paris emission targets (Plumer 2017). A much more effective policy response is not only needed – it is extremely urgent. While efforts at multilateral cooperation should continue, it is now too late to delay unilateral and multilateral trade measures any longer. A major obstacle to bending that trajectory is domestic political resistance in high-polluting countries. Most notably, the United States is responsible for a greater share of historical GHG accumulations than any other country, and Americans are still emitting the second largest quantity of new CO2 pollution each year. Per capita CO2 emissions in the United States are double those in China and almost ten times those in India (see Table 8.1). A number of other countries also emit high carbon pollution per person.2 On top of all this, in 2017 US President Donald Trump even began attempting to reverse mitigation steps already taken, and to cut funding for clean energy innovation and international climate cooperation. In June 2017, Trump announced his intention to withdraw the US from the Paris Agreement (Trump 2017). While some American states and cities are making welcome efforts, these contributions, if all implemented, can fulfil only about 20–36% of the US Paris pledge (Climate Interactive 2017b), which President Barack Obama conceded was insufficient to solve the problem. On the other hand, virtually all the world’s industrial countries, as well as others, impose domestic taxes on fossil energy use. These energy taxes raise the prices of fossil fuels and thus discourage their combustion, even though many taxes were applied originally for other reasons and are not optimal for climate goals. It is widely believed that taxes can be one of the most cost-effective means to reduce these fuels’ harmful health and environmental side effects. It is time for each country that imposes positive net taxes on fossil fuel use at home (taxes minus subsidies) to extend the same treatment to all These standard data refer to emissions arising from each country’s territory. If instead we ask what measurement of emissions should be attributed to a population as consumers, including emissions embodied in their imports and excluding those embodied in their exports, we find, for 2011, that emissions attributable to the EU, Japan, and the US were higher, and those due to Russian and especially Chinese consumption were lower, than their territorial emissions (Fernández-Amador et al. 2016, Table 2).

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goods it imports, unilaterally if necessary. It should set a default border carbon adjustment (BCA) or surcharge on an imported product equal to net carbon energy taxes imposed on the like or competing home good in any jurisdictions along its supply chain. The government should reduce this default surcharge for a particular shipment to the extent that costs due to net carbon energy taxes, or other measures that are comparable in effectiveness in reducing GHG emissions, have already been paid on the imported good in any jurisdiction along its own supply chain. All exports from countries where CO2 emissions per capita are low should be exempt from these BCAs.3 The focused goal of this proposal is to help citizens in highly polluting countries, whose mitigation effort is lagging the most, to improve their national policies. The proximate targets of these BCAs are not whole nation-states but actors inside their domestic politics. It is well known that even in democracies, policies favored by majorities can be distorted or blocked entirely by small minorities’ well-financed lobbying, especially in certain political institutions. In the United States, for example, a minority has twice blocked the US Congress from enacting national carbon pricing. Majorities of the US public have favored greater protection from global warming for some years. In 2016, 62% of even Donald Trump voters said they favor either taxing or regulating, or both, the pollution that causes global warming. Only 20% of Trump voters favor neither (Yale Program on Climate Change Communication, February 2017). Politicians, non-profits, scientists, prominent business leaders, health organizations, faith leaders, military leaders, celebrities, and media commentators have been campaigning for more serious climate action in many countries. Dozens of global businesses have called for a strong Paris agreement and pledged increased steps to reduce their carbon footprints or increase green finance. Yet few major exporting firms in highly polluting countries are prioritizing lobbying in their capitals for more effective national mitigation. New barriers in their major foreign markets that hit, or even threaten to hit, their exports will give these exporters, including farmers, a powerful incentive to join the climate campaign calling for more effective marketoriented abatement policies. Their joining would amplify the campaigns’ influence enormously. While some firms will not lobby for carbon pricing, the many multinational and other firms that are already spending and Several different but related proposals have been published (McAusland and Najjar 2015; Kemp 2016; Chang 2017).

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planning to reduce their emissions could benefit from legislation requiring their competitors to follow them. The process would be analogous to the way negotiated trade liberalization was accomplished in domestic politics: exporters lobbied in favor of opening the home market in general as an indirect means of opening foreign markets for themselves. Major shifts in domestic politics would correct this malfunctioning of political institutions and accelerate effective policy responses. This chapter sketches a preliminary proposal to stimulate debate and research to develop a more complete plan. The ultimate design should satisfy three principles. First, the new border adjustments should aim for consistency with WTO rules. Second, the measures should be administered to impose the smallest possible additional transaction costs on domestic and international trade and, when possible, administered to expand incentives for decarbonization. Third, these carbon surcharges should not fall upon exports of the dozens of poor and middle-income countries whose carbon emissions per capita are low, many of whom nevertheless are already suffering the most powerful harms from climate change – certainly not as long as more affluent peoples who emit far greater pollution per person are failing to do their part to curb the problem.

8.3  An Illustrative Policy Sketch All countries that impose positive net taxes on fossil fuel use should now extend BCAs to all their imports in magnitudes equal to the net taxation of carbon energy applied during the production of like or competing home goods throughout their supply chains across all jurisdictions. Net taxation means taxes collected on fossil fuel use minus subsidies provided to the same fuels through tax expenditures and budgetary transfers. Any country where producer support exceeds carbon energy taxation should not add BCAs. All import surcharges should be reduced to fully reflect costs of net carbon energy taxes already paid during the production of the imported product throughout its own supply chain. Since not all fossil energy taxes reduce GHG to the same degree, the BCA design should weight each energy tax in proportion as it reduces emissions, both when recognizing the tax burden on a home good and when calculating the BCA deduction for the import. Likewise, importing countries should reduce BCAs to the extent that it can be shown that costs due to mitigation measures besides net taxation, such as regulations, have already been paid on the shipment in any jurisdiction, provided these other measures

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are comparable in effectiveness in reducing GHG emissions to those of the importing country.4 BCAs so designed equal zero on all imports that reflect mitigation that is equally or more stringent than that of the importing country. But in high-polluting countries where mitigation is less stringent, these BCAs create new incentives for raising net carbon energy taxation or other mitigation policies. As the latter governments strengthen their policies, they reduce the BCAs facing their exports and discourage the fuel combustion that is the main human driver of the climate crisis and is thus harming their own people. To illustrate this plan in part, some relevant data are already available. The Organisation for Economic Co-operation and Development (OECD) reports energy taxation in 41 countries (OECD 2015) – the 34 OECD member states plus Argentina, Brazil, People’s Republic of China, India, Indonesia, Russian Federation, and South Africa. These countries together accounted for about 84% of global carbon emissions from energy use in 2009. Using uniform methods, the study records the taxes each country imposes on the use of energy from coal and peat, oil and oil products, natural gas, and biofuels and waste. (The proposed BCAs should, unlike this report, account for net taxes on fossil fuels only.) Energy use in the major categories of transport, heating and processes, and electricity generation are covered. Taxes levied on electricity consumption are shown as effective taxes on the fuels used to generate the electricity. The study incorporates tax expenditures including any offsetting tax rebates, credits, and concessionary value-added tax (VAT) rates the country applies in favor of each fuel. Thus, it reflects net taxation, except that it omits fossil fuel subsidies in the form of budgetary transfers. It was also not able to include prices paid for emission permits in jurisdictions covered by emission trading systems, or the implicit carbon prices added to goods by regulations such as renewable electricity standards. For present purposes, the study shows that the overall, economy-wide level of energy taxation varies widely across the 41 countries. Among the highest national tax rates are those of Switzerland, the Scandinavians, the United Kingdom, France, Italy, Spain, Austria, and Germany. Moderate taxers include Japan, New Zealand, Republic of Korea, Poland, Turkey, and Australia. The lowest rates are found in Canada, the United States, Mexico, China, India, Russia, Brazil, and Indonesia (Table 8.1). Many previous proposals set domestic taxes and border adjustments proportional to the goods’ carbon footprints rather than net energy taxes paid. The advantages of each design are discussed below under possible objections.

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Table 8.1 CO2 and energy tax rate per country Energy Tax Rate

CO2 per Capita 2014 Total CO2 2015

Territorial Euros per Metric Tons Emissions in Ton of CO2 per Capita Million Tons CO2 Emissions Country 45.4 34.2 25.2 23.4 23.3 22.1 19.5 17.4

91.0 45.0 102.0 33.0 177.0 9.1 600.5 10.0

United States Oman Australia Canada Estonia (EU28) Kazakhstan Turkmenistan Palau

16.5 15.4 15.4 15.1 14.8 14.4 12.5 12.3

5’413.6 63.0 399.7 557.0 20.0 235.0 91.0 0.2

93.64 4.83 19.55 7.72 25.70

Iceland Venezuela, RB Bulgaria (EU28) Denmark (EU28) Andorra Slovak Rep (EU28) Malta (EU28) Antigua and Barbuda Seychelles Cyprus (EU28) Italy (EU28) Serbia (EU28) World mean Iraq Spain (EU28) Ukraine

Euros per Territorial Ton of CO2 Metric Tons Emissions in per Capita Million Tons CO2 Emissions 6.1 6.0 5.9 5.9 5.8 5.7 5.5 5.4

3.4 175.0 48.0 26.0 0.5 34.0 2.5 0.5

5.4 5.3 5.3 5.3 5.0 5.0 5.0 5.0

0.7 6.9 361.4 45.0 172.0 273.0 202.0

76.00

81.70 33.58

75.88

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Qatar Trinidad and Tobago Kuwait Bahrain United Arab Emirates Brunei Darussalam Saudi Arabia Luxembourg (EU28)

Energy Tax Rate

11.9 11.6 10.3 9.9 9.5 9.5 9.3 9.2 9.2 9.0 8.9 8.7 8.3 8.3 8.0 7.9 7.7 7.5 7.5 7.4 7.15 7.1 6.9

1’617.3 592.2 55.0 162.0 1’237.3

0.01 26.47

44.0 96.0 54.0 462.2 798.3 44.0 100.0 647.5 249.0 72.0 36.0 315.8 10’357.1 37.0

93.25 31.55

45.0 67.0

87.98 37.41

13.86 58.26 60.18 45.63

73.33 31.33 25.50 3.40 77.13

57.86

Argentina Chile Equatorial Guinea France (EU28) Sweden (EU28) Thailand Barbados Turkey Lithuania (EU28) Hungary (EU28) Lebanon Portugal (EU28) St. Kitts and Nevis Switzerland Croatia (EU28) Nauru Azerbaijan Mexico Algeria Macedonia, FYR Suriname Latvia (EU28) Montenegro

4.7 4.7 4.7 4.6 4.6 4.6 4.5 4.5 4.4 4.3 4.3 4.3 4.3 4.3 4.0 4.0 3.9 3.9 3.7 3.6 3.6 3.5 3.5

194.0 81.0 6.4 339.9 43.0 312.0 1.5 386.3 13.0 46.0 23.0 51.0 0.3 40.0 18.0 0.1 38.0 472.0 150.0 8.2 2.2 7.3 2.2

29.92 15.73 61.12 78.56

38.91 35.39 47.75 107.28

2.80

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Russian Federation Korea, Rep. Singapore Netherlands (EU28) Japan OECD mean Norway Czech Republic (EU28) Libya South Africa Germany (EU28) Finland (EU28) Belgium (EU28) Iran, Islamic Rep. Malaysia Israel New Zealand Poland (EU28) China Ireland (EU28) OECD median Mongolia Austria (EU28)

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Table 8.1 (cont.) CO2 per Capita 2014 Total CO2 2015

Country

Energy Tax Rate

CO2 per Capita 2014 Total CO2 2015

Euros per Territorial Ton of CO2 Metric Tons Emissions in per Capita Million Tons CO2 Emissions Country 6.7 6.5 6.4

61.0 416.8 48.0

6.3 6.2 6.2 6.2

3.3 22.0 76.0 14.0

Ecuador Gabon World median Brazil Guyana

2.8 2.8 2.8 2.6 2.6

44.0 5.0 514.9 2.0

73.23

67.99 68.32

0.62

Euros per Territorial Ton of CO2 Metric Tons Emissions in per Capita Million Tons CO2 Emissions

Romania (EU28) Mauritius Uzbekistan

3.5 3.4 3.4

75.0 4.3 109.0

Maldives Botswana Cuba Jordan

3.3 3.2 3.0 3.0

1.1 6.2 41.0 26.0

Mauritania Benin Congo, Rep. Kiribati Sao Tome and Principe

0.7 0.6 0.6 0.6 0.6

2.7 5.9 2.6 0.1 0.1

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Belarus UK (EU28) Hong Kong SAR, China Bahamas, The Bosnia-Herzegovina Greece (EU28) Slovenia (EU28)

Energy Tax Rate

2.6 2.6 2.4 2.4 2.3 2.3 2.3 2.1 2.0 2.0 2.0 1.9 1.9 1.9 1.9 1.9 1.8 1.8 1.8 1.7 1.7 1.6 1.6

8.1 32.0 219.0 7.6 0.3 11.0 0.4 23.0 4.9 60.0 7.9 5.6 21.0 0.1 0.1 0.2 99.0 537.2 184.0 2’274.3 63.0 8.0 9.9

0.00 3.12

Senegal Tajikistan Vanuatu Nigeria Bangladesh Cote d’Ivoire Ghana Timor-Leste Cambodia Myanmar Solomon Islands Togo Afghanistan Lao PDR Cameroon Sudan Kenya Gambia, The Zambia Mozambique Nepal Haiti Liberia

0.6 0.6 0.6 0.5 0.5 0.5 0.5 0.4 0.4 0.4 0.4 0.4 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.2

8.8 3.6 0.1 104.0 77.0 10.0 15.0 0.5 6.0 14.0 0.2 2.3 23.0 2.3 7.2 16.0 14.0 0.5 4.1 4.2 6.9 2.5 1.0

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Jamaica Tunisia Egypt, Arab Rep. Georgia Grenada Panama St. Lucia Dominican Republic Albania Peru Uruguay Armenia Bolivia Dominica Marshall Islands St. Vincent-Grenadines Colombia Indonesia Viet Nam India Morocco Costa Rica Kyrgyz Republic

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Table 8.1 (cont.) CO2 per Capita 2014 Total CO2 2015

Country

CO2 per Capita 2014 Total CO2 2015

Euros per Territorial Ton of CO2 Metric Tons Emissions in per Capita Million Tons CO2 Emissions Country 1.6 1.6 1.6 1.4 1.4 1.4 1.3 1.3 1.3 1.2 1.2 1.2 1.1 1.1

3.0 37.0 0.5 0.2 5.0 33.0 0.9 1.8 14.0 2.8 0.2 9.5 113.0

Comoros Tanzania Guinea Burkina Faso Sierra Leone Guinea-Bissau Madagascar Uganda South Sudan Ethiopia Niger Malawi Rwanda Central African Rep.

Energy Tax Rate

Euros per Territorial Ton of CO2 Metric Tons Emissions in per Capita Million Tons CO2 Emissions 0.2 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

0.2 12.0 2.3 3.1 1.2 0.3 3.4 5.1 1.5 11.0 2.1 1.3 0.8 0.3

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Korea, DPR Namibia Syrian Arab Republic Belize Micronesia, Fed. Sts. Moldova Angola Bhutan Fiji Guatemala Lesotho Liechtenstein Honduras Philippines

Energy Tax Rate

1.1 1.0 1.0 1.0 0.9 0.9 0.9 0.9 0.9 0.9 0.8 0.8 0.8 0.8

0.2 6.6 0.3 0.0 0.5 171.0 5.2 17.0 1.2 26.0 0.6 4.8 6.6 17.0

Mali Somalia Chad Congo, Dem. Rep. Burundi Cook Islands Eritrea Niue Holy See Monaco Palestine San Marino

0.1 0.0 0.0 0.0 0.0

1.0 0.6 0.6 2.6 0.3 0.1 0.7 0.0

Notes: Shading denotes exempt as de minimus. EU status (“EU28”) would apply to EU member states and their overseas territories where EU customs rules apply. Sources: CO2 per capita: Oak Ridge National Laborary, United States, via data.worldbank.org/indicator/EN.ATM.CO2E.PC?page=4; CO2 total: Boden et al. 2016; UNFCCC 2016; BP 2016; via www.globalcarbonatlas.org/en/CO2-emissions; Energy tax rate: OECD, Taxing Energy Use 2015, Annex B, and OECD, Taxing Energy Use: A Graphical Analysis 2013, annex B.

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Tonga El Salvador Samoa Tuvalu Cabo Verde Pakistan Paraguay Sri Lanka Swaziland Yemen, Rep. Djibouti Nicaragua Papua New Guinea Zimbabwe

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The OECD has also assembled an inventory of support measures provided for fossil fuels (OECD 2018), defined as tax expenditures and budgetary transfers. This database currently covers the same countries plus Colombia and Latvia. While it is a major contribution, this database currently does not report either national total values of support or any direct comparisons of total support across countries. Additional research is needed to produce comparable data on net fossil energy taxation in all high-emitting countries. Suppose BCAs exempted all exports from countries whose CO2 emissions per capita, defined as a five-year moving average, are lower than those of the median OECD country in 2014, which was 7.15 metric tons per capita. Suppose the policy also exempted all states whose aggregate CO2 emissions are de minimus, say, less than 10 metric tons per year, on efficiency grounds. Countries whose exports are exempt should have the right to impose BCAs on their imports under the same rules, on climate and fairness grounds. However, if the exempt country has extremely low net carbon taxation (like Brazil and Indonesia, for example), these rules mean its maximum BCAs after deductions would also tend to be close to zero. For this illustration, Table 8.1 shows available data on recent economywide levels of energy taxation (counting biofuels and waste) in Euros per ton of CO2 emissions, for each of the 41 countries, plus levels of CO2 emissions per capita and total CO2 emissions for all countries. Gray shading marks those countries that would be exempt as de minimus. Today, 35 countries emit more than 7.15 tons of CO2 per capita, and two of those would be exempt as de minimus. Among the 33 high-emitting countries whose exports would not be exempt are Canada, China, the Russian Federation, and the United States, which all have extremely low rates of net energy taxation and include three of the world’s four largest emitters of total new CO2. Also covered are Persian Gulf oil producers and emitters of relatively large total amounts in Europe, Australia, South Korea, Japan, Malaysia, and South Africa. The OECD does not yet report data on economy-wide energy taxation for 14 of these 33 countries. One hundred sixty-one of 199 parties to the United Nations Framework Convention on Climate Change (UNFCCC) would be exempt due to either the per capita threshold, the de minimus rule, or both. Among the exempt low emitters per capita, the largest total CO2 emissions in 2015 came from (in descending order of total emissions) India, Indonesia, Brazil, Mexico, the United Kingdom, Turkey, Italy, France, and Thailand.

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A complete plan for such a major policy change, of course, needs to consider and set many additional details to make it as optimal as feasible.5 For example, the exemption defined over per capita emissions might be developed into a more sensitive index combining that measure with indicators of capability such as per capita income. Second, how large a perverse incentive would this widespread exemption create for exporters in lightly taxed countries, who now would face BCAs, to move the final production stage to exempt countries, then export from there to escape the BCAs? Research should estimate the magnitudes of this perverse incentive in relation to economic and policy conditions that may offset it, and study ways to diminish it. Some economic research finds that more effective mitigation makes some industries more, rather than less, competitive. Also offsetting this incentive are costs of moving and the fact that all exempt countries, as parties to the Paris agreement, also have committed to moving away from carbon. The exemption might be limited to value added in exempt countries. Transshipment would also need to be controlled with rules of origin, which are familiar to governments from their free-trade areas. Third, for efficiency, the policy might exempt all imports that have paid less net carbon taxation than the competing home product by only a small magnitude. Fourth, member states of customs unions will need to decide whether a common regional BCA is needed. Fifth, to achieve faster decarbonization, exports from the many countries whose current pollution levels are below the OECD median but above the world median, 2.8 tons per capita, might become subject to BCAs automatically at the end of each decade unless the country’s CO2 emissions per capita have fallen by, say, 20% during that decade. In this set are countries with relatively large total emissions, such as France, Italy, Mexico, Turkey, and the United Kingdom. China’s emissions today are only slightly above the OECD per capita median. Other variants of obligations graduated according to relative capabilities can easily be imagined. The policy could also provide that any exempt country whose five-year-average emissions per capita rose and remained above the threshold for three years would automatically lose its exemption. World carbon emissions must fall to net zero and probably below net zero to keep warming from exceeding the temperature limits that all these states have endorsed. Thus, all parties to the Paris agreement pledged to

Cosbey et al. (2012) provides a comprehensive though now partially dated review of policy design options.

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seek low-carbon, climate-resilient development in the future. All agreed that developing countries should receive financial and technical assistance to facilitate this development. Thus, sixth, donor countries should consider using their BCA revenue to help fund this assistance. Using revenue this way would also strengthen the case that the measures do not violate WTO law. Finally, if a set of countries agreed to enact border adjustments using rules common to all members of the set, they would likely enhance the measures’ economic efficiency and legal sustainability while avoiding possible disputes among themselves. Governments whose economies are highly dependent on the United States or China are also more likely to generate the domestic political support needed to enact these BCAs if they act as members of a major global coalition including the EU. But all should prepare to immediately implement unilateral measures consistent with WTO rules if multilateral negotiations fail to produce agreement or delay action by more than two years.

8.4  WTO Compatibility These new trade measures will achieve the most if they satisfy the rules of the WTO.6 While the WTO has not ruled on BCAs, a number of legal experts have identified ways BCAs could be designed to agree with the rules of the global trade arbiter (Horn and Mavroides 2011; Pauwelyn 2012; Hillman 2013). Designing the new surcharge as an internal measure, triggered not by the act of importation but by the entry of the imported good into the domestic economy as it leaves customs, might make it eligible under General Agreement on Tariffs and Trade (GATT), Article III (national treatment), possibly without resorting to Article XX, provided the border tax adjustment (BTA) does not treat imports less favorably than domestic goods (Pauwelyn 2012; Grossman et al. 2013). But providing exemptions by national origin (the per capita threshold and the de minimus provision) may violate GATT, Article I (non-discrimination). Should a challenge under Article I or III of the GATT prevail, Article XX, section g, of the GATT provides an exception for trade measures relating to the conservation of exhaustible natural resources. The WTO It has been argued that enacting a law that later must be changed because of an adverse legal ruling also can have significant effects on transnational norms and the behavior of companies, legislators, regulators, and judges (Shaffer and Bodansky 2012). Also many proposals to make WTO rules greener have been proposed.

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has approved measures that restrict trade, citing Article XX, and has ruled that clean air is an exhaustible natural resource. Respondents can add that these BCAs are intended to protect human lives and health, a value privileged in Article XX, section b, of the GATT and given great deference by WTO judges, even if respondents do not claim the XX(b) exception itself, which sets a higher bar. To qualify under Article XX, the BCA must not have been applied in a manner that constitutes a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, and it cannot be a disguised restriction on international trade. To avoid a ruling of arbitrary or unjustifiable discrimination, BCAs should recognize that countries use regulations as well as energy taxation to promote decarbonization. If exporting countries apply regulations that are comparable in effectiveness in reducing GHG emissions to those of the importing country, the BCA likely will need to be reduced to that extent (US-Shrimp, WTO Appellate Body Report AB-2001-4). Thus, the importing country should notify any company and country whose exports are likely to be subject to carbon surcharges that they have the right to demonstrate that the BCA should be reduced to the extent that costs due to net carbon energy taxes, or other mitigation measures comparable in effectiveness to those of the importing country, have already been paid on the shipment in any jurisdiction. Importing countries should offer to negotiate multilaterally or bilaterally with exporting countries to reach agreement on modalities for accomplishing these demonstrations efficiently through due process. Exempting goods from all exporting countries with low emissions, as defined by an objective standard, is neither arbitrary nor unjustifiable discrimination. This threshold is rationally and strongly related to the climate policy objective. It reasonably and properly treats countries differently where the same conditions do not prevail – countries most of whose people have far less responsibility for the climate crisis and much weaker capabilities to address it. WTO jurisprudence to date also suggests that restrictive trade measures whose applications are balanced or proportional (i.e. they respect legitimate interests in both liberalized trade and an environment or health objective) can qualify under Article XX (Kaufmann and Weber 2011; Vranes 2016). This BCA design is balanced and not disproportionate. On the one side, these carefully tailored measures will be less restrictive than many possible trade actions. On the other side, all countries agreed that effective climate action is imperative in 1992 when the UNFCCC was

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established. This convention also established the agreed-to principle that the parties have “common but differentiated responsibilities and respective capabilities.”7 In Paris, on November 30, 2015, the largest number of heads of state and government ever assembled in the same place on a single day jointly urged a final end to years of delay for the sake of all their peoples. Setting the definition of low-emitter at the current OECD median emissions level also is reasonably balanced. Setting it higher would show too little respect for the urgent, globally recognized need for faster mitigation, and setting it lower would infringe on trade and economic development to a greater degree. To avoid a ruling of disguised protectionism, the BCAs should not function in practice to predominantly favor home over foreign products. If internal carbon taxes fluctuate significantly, corresponding import charges should rise or fall accordingly. Leaders also should not advocate these BCAs as means of protecting national jobs or business. Instead they should promote them as steps to advance the worldwide effort to conserve human health, life, and natural resources by reducing GHG emissions. A standing WTO body, such as its Committee on Trade and Environment, should periodically review all such approved trade measures to increase transparency and public trust. After enough countries act unilaterally or in sets, trading and investing firms will object to yet another spaghetti bowl of diverse BCAs. They will have incentives to press capitals to negotiate multilateral rules that will reduce their compliance costs. Eventually these BCAs might be repealed.

8.5  Administration to Minimize Transaction Costs and Incentivize Decarbonization If every exporting firm of high-emitting countries were required to calculate the included carbon taxes of every export shipment, transaction costs would be huge and counter-productive. An alternative method entailing lower transaction costs might reasonably approximate an ideal system for the purpose of this proposal.8 In stage one, the importing government would set a default surcharge on a given import good, equal to While WTO judges are not allowed to enforce any treaty besides GATT and WTO agreements, they have taken into account evidence like the UNFCCC and Paris agreements in interpreting Article XX’s meaning for a given case. 8 Inspired by parts of McAusland and Najjar (2015), which proposes a destination-based carbon footprint tax on all goods sold, regardless of origin. 7

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the weighted average net fossil energy tax collected on the production and sale of the like domestic good. In stage two, this government would authorize its customs authorities to reduce the value of the BCA on a given shipment to the extent that the importer presents valid documentation showing that costs due to weighted carbon energy taxes, or other measures comparable in effectiveness in reducing GHG emissions, have already been paid in other jurisdictions during the goods’ production and transport. As an illustration for stage one, suppose the importing country produces and imports small electric motors. A VAT reporting system is already operating in many countries. The government could simply amend its VAT regulations, if necessary, to require the seller at each stage in the supply chain to report the carbon energy tax paid at that stage. The authorities could sum the energy tax payments reported along the chain to reach a total value for a given final shipment of motors, weighting the taxes by abatement effectiveness, and compute the average energy tax embedded in final prices of all domestic motors shipped in the country during a base period. For stage two, additional research should explore ways to reduce transaction costs in the processes whereby importers of goods from covered countries could document energy taxes already paid. Research by the staff of multilateral organizations such as OECD, the United Nations Conference on Trade and Development, the United Nations Environment Program, and the World Bank could help streamline this process. This effort could include negotiations among all trading countries to agree on common reporting standards and mutual recognition of other states’ certificates. More difficult, perhaps, would be official agreement on ways to recognize, in addition, the carbon prices producers pay through purchases of traded emission permits in different jurisdictions to allow deducting costs due to these spreading but diverse cap-and-trade schemes from BCAs. Perhaps more difficult still would be reaching official agreement on legally enforceable ways to establish implicit carbon prices added to goods by heterogeneous regulations like renewable electricity standards. In any case, importing governments should offer every importer a fair opportunity to make a case for deductions for the costs of any measures that the importer considers comparable in GHG effectiveness. As a concrete illustration, suppose Japan produces and imports small electric motors. Table 8.1 shows that the net energy tax in Japan (according to available partial data) is about Euros 37 per ton. Suppose Norway .

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exports motors to Japan. Norway’s exports are not exempt from BCAs. Norway’s net energy tax rate is about Euros 93 per ton. These nationalaverage rates do not show the tax collected on any individual product, and more research is needed to flesh out at least some test cases. But if tax rates on motors are proportional to national rates, it seems likely that when Japanese importers present documentation in stage two, Japan’s BCA on Norwegian motors would be zero; it appears these motors have been subject to much more stringent mitigation than Japanese motors. Exports from Russia, China, the United States, and Canada are also not exempt from BCAs, and their energy tax rates are dramatically lower, in the United States, about Euros 5 per ton. Motor imports from these countries probably would face substantial BCAs in Japan (and the EU) until those exporting countries increase their mitigation to levels at least equivalent to those of Japan (and the EU). Tax rates of the Czech Republic and South Korea (also among the 33 covered countries) are somewhat lower than Japan’s but might fall within the range of a difference judged too small to recognize in the proposed regulations in Japan.

8.6  Other Major Objections and Questions Other major objections and questions can be anticipated. Would it be better to implement a uniform global carbon tax, or for governments to enact new taxes on all consumption regardless of goods’ national origins in proportion to carbon footprints, or to calculate at least border adjustments in terms of imports’ carbon footprints? Many of these expert ideas might in fact have proved more optimal than the present proposal if politicians had implemented them. But every additional year the world loses waiting for politicians to do the optimal thing, the closer the world is to climate catastrophe, whose costs, especially for the most vulnerable, surely will exceed by many times any theoretical efficiency losses from implementing a third-best but legal, carefully designed remedy now. Furthermore, BCAs calculated over carbon footprints would likely be less effective in mitigating global emissions. While that method would give exporters incentives to reduce their emissions, it would not directly increase incentives for governments in high-polluting countries to improve national policies.9 The tax-based approach, incorporating a credit for taxes by the exporting country, does create such a government incentive. Many global emissions result from production and transport, Sanctuary (2018) provides theoretical support for a BCA design like that proposed here.

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not for export but for home consumption, of non-tradeables as well as tradeables. These behind-the-border emissions are especially great in continental economies like the United States, China, and Russia. The proposed approach would reach behind-the-border emissions as well, and thus would likely result in larger cuts in the global total. In a WTO tribunal, a complainant might argue that imposing a larger surcharge on shipment A than on shipment B when the two have equivalent carbon content, because of lax policies where shipment A was made, is inconsistent with the environmental objective. Respondents could reply that, on the contrary, targeting home government policies is even more effective for that objective. But should WTO judges nevertheless find the proposed BCA to be inconsistent with GATT, governments could consider falling back to carbon footprint BCAs. Why not add equivalent rebates on goods exported to countries with low carbon taxation to match the adjustments on imports from the same countries? Critics would argue that export rebates are designed more to promote exports than to mitigate climate change, and such export rebates may be illegal under the WTO Subsidies Agreement (Chang 2017).10 Why would a larger country respond to a trade restriction imposed on it by a smaller trading country? Here the first target is not the highpolluting country as a whole but actors in its domestic politics to induce them to increase internal pressure for policy change. But, of course, the larger the combined market of states that impose BCAs, the greater the likely impact. Some worry that once legislatures start considering BCAs, actual measures will turn out to be protectionist. If so, the WTO will likely authorize retaliation. Facing retaliation, for instance by the United States, such governments might well bring their measures into compliance. Many may fear that Washington, in particular, could retaliate with new barriers on countries applying BCAs and disregard a WTO ruling that it is not entitled to retaliate.11 In the United States, however, proposed

Expert opinion on this issue is not unanimous. For instance, it has also been argued that with a destination-based VAT and flexible exchange rates, omitting a border tax adjustment for exports would be equivalent to a tax on imports (McAusland and Najjar 2015, 42, citing Feldstein and Krugman 1990). 11 Böhringer and Rutherford (2017) uses the possibility of US retaliation to argue against new carbon tariffs by others. But this study was not designed to address the present proposal exactly, and the paper’s relevance is reduced by its simplifying assumption that the US is a unitary actor with no domestic politics that might be influenced. 10

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illegal retaliation would generate significant opposition. Illegal retaliation could subject US exporters to penalties abroad. New import barriers would increase the costs of globally integrated manufacturers like makers of autos and electronics, as well as giant retailers like Walmart and Target, and could damage international financial investments. A retaliation proposal itself would give business leaders even stronger incentives to join the carbon-pricing movement instead. Others will object that widespread, complex documentation requirements, even if they economize on transaction costs, will still add costs to international business compared with the status quo. These costs will be trivial compared with the added costs from unmitigated climate change that are already borne and likely to multiply dramatically. This unique climate crisis is the most serious threat of the century not only to our environment but also to our world economy, according to the International Monetary Fund (Hance 2013). Climate catastrophe will reduce productivity of workers, fields, and fisheries further; destroy more property, including seaports and airports near coastlines; and disrupt production and international transport further. Trade and business as we know them will not continue on a planet that has been roasted, toasted, fried, and grilled, as Christine Lagarde (Managing Director at IMF) put it (Hance 2013). Paradoxically, trade itself in the long-term needs carefully limited trade restrictions like these in the short term. Finally, policy-makers should compare the likely benefits and costs of this proposal with the risk of allowing the Paris regime to become a dead letter. If carbon-taxers defend Paris by imposing a tangible cost on free-riding, they will increase the odds that all other parties will stay the course. If a US retaliation scenario did unfold completely, it would certainly be negative for the world trade system in the medium term. Even then, however, the lasting harm to commerce might be limited if all BCAs and retaliatory measures were removed after a few years. In contrast, suppose the carbon-taxers do nothing to defend the Paris regime against aggressive defection by the leading historical polluter. Why will other parties then not also fail to implement their Paris pledges, which were collectively inadequate already, not to mention failing to improve their contributions in future decades? Those governments will face domestic demands to drag their feet. Critics will ask: why should we undertake costly mitigation if richer people in other countries are going to pollute the clean atmospheric space we save? What will be the costs for our world’s population over coming decades of allowing the Paris regime to become irrelevant?

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8.7  Too Late for Further Delay The global climate crisis is now an emergency: it is far too alarming to continue postponing legal unilateral or multilateral BCAs. If not this plan, what is a better alternative for overcoming the democratic deficit and accelerating mitigation in high-polluting countries? Multilateral agreements on climate and trade would be ideal, excellent proposals for improvement have been made, and efforts should continue. But decades of this work have failed to generate a global consensus that is sufficiently effective for climate stability. Recent UNFCCC and WTO negotiations offer no reason to expect an acceleration of their pace. In fact, we face the opposite: the United States has announced its withdrawal from Paris and thrown national policy into reverse gear. In addition, pressure is building in many countries for trade restrictions of some kind (Bacchus 2017, 2). Those alternatives could prove more restrictive and harmful to international institutions than the ones proposed here. More experts should step to the front of this parade and try to shape these coming trade measures while time remains. Interested research organizations should cooperate to develop this sketch into a more complete plan. Carbon-pricing advocates in underperforming high-polluting countries need a little help from their friends. With that help, advocates for the global common interest will stand a much better chance in domestic politics. These BCAs alone will not be enough to preserve a liveable world. But major improvements in net fossil energy taxation and complementary measures in highly polluting nations would be a historic turning point in the fight against climate change and might save the Paris agreement.

References Bacchus, J. 2017. The Case for a WTO Climate Waiver. Waterloo, Canada: Centre for International Governance Innovation. Boden, T. A., Marland, G. and R. J. Andres. 2016. “Global, Regional, and National Fossil-Fuel CO2 Emissions,” Carbon Dioxide Information Analysis Center, Oak Ridge National Laboratory, U.S. Department of Energy, Oak Ridge, TN. doi:10.3334/CDIAC/00001_V2016. cdiac.ornl.gov/trends/emis/meth_ reg.html. Böhringer, C. and T. F. Rutherford. August 2017. “US Withdrawal from the Paris Agreement: Economic Implications of Carbon-Tariff Conflicts,” Discussion Paper 17-89. Harvard Project on Climate Agreements, Kennedy School of Government. www.belfercenter.org/publication/ harvard-project-climate-agreements-discussion-paper-series/roundup.

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BP. 2016. “Statistical Review of World Energy,” www.bp.com/en/global/corporate/ energy-economics.html. Chang, B. 2017. “A Proposal for a Multilateral Border Carbon Adjustment That Is Consistent with International Trade Law,” Opinion Series. Geneva: International Centre for Trade and Sustainable Development. www.ictsd.org/ opinion/a-proposal-for-a-multilateral-border-carbon-adjustment-schemethat-is-consistent. Climate Central. 2015. “Mapping Choices: Carbon, Climate, and Rising Seas, Our Global Legacy,” sealevel.climatecentral.org/research/reports/mappingchoices-carbon-­climate-and-rising-seas-our-global-legacy. Climate Interactive. 2017a. “Climate Scoreboard.” www.climateinteractive.org/ programs/scoreboard/, accessed August 1, 2017.   2017b. “US Subnational Climate Action.” www.climateinteractive.org/­programs/ us-subnational-climate-action/, accessed August 1, 2017. Cosbey, A., Droege, S., Fischer, C., Reinaud, J., Stephenson, J., Weischer, L. and P. Wooders. 2012. “A Guide for the Concerned: Guidance on the Elaboration and Implementation of Border Carbon Adjustment,” Policy Report 2012/11/20. Stockholm: ENTWINED. www.entwined.se. Crunden, E. A. 2017. “Texas Isn’t Alone: South Asia Is Also Suffering the Horrors of Climate Change,” Think Progress. https://thinkprogress.org/texas-south-asiaclimate-change-fe2c744f725a/, accessed June 30, 2018. Feldstein, M. and P. Krugman. 1990. “International Trade Effects of Valueadded Taxation,” In: A. Razin and J. Slemrod (Eds.), Taxation in the Global Economy. Chicago: University of Chicago Press. Fernández-Amador, O., Francois, J. and P. Tomberger. 2016. “Carbon Dioxide Emissions and International Trade at the Turn of the Millennium,” Ecological Economics 125:14–26. Gillis, J. 2017. “Carbon in Atmosphere Is Rising, Even as Emissions Stabilize,” New York Times, 26 June. Grossman, G., Henrik, H. and P. Mavroidis. 2013. “National Treatment,” In: H. Horn and P. Mavroidis (Eds.), Legal and Economic Principles of World Trade Law. Cambridge: Cambridge University Press. Hance, J. 2013. “Head of IMF: Climate Change Is ‘the Greatest Economic Challenge of the 21st Century.’” Mongabay, February 6, 2013. https://news.mongabay.com/2013/02/head-of-imf-climate-change-is-thegreatest-economic-challenge-of-the-21st-century/. Hillman, J. 2013. Changing Climate for Carbon Taxes: Who’s Afraid of the WTO? Climate and Energy Paper Series. Washington, DC: German Marshall Fund of the United States. Horn, H. and P. C. Mavroidis. 2011. “To B(TA) or Not to B(TA)? On the Legality and Desirability of Border Tax Adjustments from a Trade Perspective,” The World Economy 34 (11): 1911–37.

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Kaufmann, C. and R. H. Weber. 2011. “Carbon-related Border Tax Adjustment: Mitigating Climate Change or Restricting International Trade?” World Trade Review 10(4):497–525. Kemp, L. 2016. “US-proofing the Paris Climate Agreement,” Climate Policy 17(1):86–101. McAusland, C. and N. Najjar. 2015. “Carbon Footprint Taxes,” Environmental Resource Economics 61: 37–70. OECD. 2013. “Taxing Energy Use: A Graphical Analysis.” http://dx.doi.org/ 10.1787/9789264183933-en.   2015. “Taxing Energy Use 2015: OECD and Selected Partner Economies,” Paris: OECD Publishing. http://dx.doi.org/10.1787/9789264232334-en.   2018. “OECD Companion to the Inventory of Support Measures for Fossil Fuels 2018,” Paris: OECD Publishing. https://doi.org/10.1787/9789264286061-en. Pauwelyn, J. 2012. “Carbon Leakage Measures and Border Tax Adjustments under WTO Law,” In: D. Prévost and G. Van Calster (Eds.), Research Handbook on Environment, Health, and the WTO. Cheltenham: Edward Elgar, pp. 448–506. Peters, G. P., Le Quéré, C., Andrew, R. M., Canadell, J. G., Friedlingstein, P., Ilyina, T., Jackson, R. B., Joos, F., Korsbakken, J. I., McKinley, G. A., Sitch, S. and P. Tans. 2017. “Towards Real-time Verification of CO2 Emissions,” Nature Climate Change 7:848–50. https://doi.org/10.1038/s41558-017-0013-9. Plumer, B. 2017. “At Bonn Climate Talks, Stakes Get Higher in Gamble on Planet’s Future,” New York Times, November 18. Ripple, W. J., Wolf, C., Newsome, T. M., Galetti, G., Alamgir, M., Crist, E., Mahmoud, M. I., Laurance, W. F. and 15,364 signatories from 184 countries. 2017. “World Scientists’ Warning to Humanity: A Second Notice,” BioScience, bix125, https://doi.org/10.1093/biosci/bix125. Sanctuary, M. 2018. “Border Carbon Adjustments and Unilateral Incentives to Regulate the Climate,” Review of International Economics 26(4):826–51. http://dx.doi.org/10.1111/roie.12344. Shaffer, G. and D. Bodansky. 2012. “Transnationalism, Unilateralism, and International Law,” Transnational Environmental Law 1(1):31–41. https://doi.org/10.1017/S2047102511000033. Trump, D. J. 2017. “Statement by President Trump on the Paris Climate Accord,” White House. Speech. www.whitehouse.gov/briefings-statements/­statementpresident-trump-paris-climate-accord/, accessed January 16, 2018. United Nations Framework Convention on Climate Change. 2016. “National Inventory Submissions 2016. United Nations Framework Convention on Climate Change,” unfccc.int/national_reports/annex_i_ghg_inventories/ national_inventories_submissions/items/9492.php, accessed June 1, 2016. USNOAA. 2017. “Monthly Mean CO2 Concentrations at Mauna Loa,” ftp://aftp.cmdl.noaa.gov/products/trends/co2/co2_mm_mlo.txt.

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Urban, M. C. 2015. “Accelerating Extinction Risk from Climate Change,” Science 348 (6234): 571–73. doi:10.1126/science.aaa4984. Vranes, E. 2016. “Carbon Taxes, PPMs and the GATT,” In: P. Delimatsis (Ed.), Research Handbook on Climate Change and Trade Law. Cheltenham and Northampton: Edward Elgar Publishing. World Energy Council. 2015. “The Road to Resilience: Managing and Financing Extreme Weather Risks,” Financing Resilient Energy Infrastructure Series. www.worldenergy.org/publications/2015/the-road-to-resilience-managingand-financing-extreme-weather-risk/. World Trade Organization. 2001. “United States – Import Prohibition of Certain Shrimp and Shrimp Products. Recourse to Article 21.5 of the DSU by Malaysia”, AB-2001-4. WT/DS58/AB/RW. Yale Program on Climate Change Communication. 2017. “Trump Voters and Global Warming,” http://climatecommunication.yale.edu/publications/ trump-voters-global-warming/.

9 The Multilateralization of PTAs’ Environmental Clauses Scenarios for the Future?

jean-frédéric morin, clara brandi, and axel berger 9.1 Introduction As part of the trend to establish deeper trade agreements (Dür et al. 2014), recent preferential trade agreements (PTAs) now incorporate an increasing number of environmental provisions (Morin et al. 2018). Several recent PTAs devote an entire chapter to environmental protection and address a broad range of environmental issues, such as endangered species, climate change, hazardous waste, and fisheries. Some of these clauses are even more specific and restrictive than those found in multilateral environmental agreements (MEAs). The WTO approach to environmental protection looks outdated (OECD 2007) in comparison with PTAs and their ambitious environmental clauses. Several analysts consider PTAs as laboratories where negotiators can experiment and promote new provision before eventually cementing them at the multilateral level if they become consensual (Baldwin and Low 2009). The concept of multilateralization refers to the adoption of an agreement that incorporates provisions already found in some PTAs.1 The multilateralization of environmental provisions can take the form of a fully fledged multilateral agreement that includes all World Trade Organization (WTO) members or a multilateral agreement among several WTO members.

Unlike other studies (Pauwelyn 2009; Morin 2009; Baldwin, Evenett, and Low 2009), this chapter does not consider the following to be examples of multilateralization: the geographical expansion of existing PTAs, the creation of mega-regional PTAs, the duplication of certain provisions in a large number of PTAs, the establishment of customary international rules by repeated PTA practice, the citation of PTA clauses in multilateral tribunals and the prohibition of discrimination toward third parties via PTAs.

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The multilateralization of PTA environmental clauses would enable the WTO to catch up with legal developments that have been tested at the PTA level. The multilateralization of PTA environmental clauses appears unlikely given the current political and institutional stalemate at the WTO. Clarifying the interplay between trade and the environment was part of the original negotiation mandate of the 2001 WTO’s Doha Development Agenda.2 However, this WTO program has still stalled.3 A recent WTO study states that the inclusion of PTA environmental provisions in WTO agreements would “go beyond the current WTO mandate” (Monteiro 2016). Nevertheless, further reflection on the multilateralization of PTA environmental clauses is necessary. We believe that multilateralization would make a positive contribution to environmental governance in various ways. First, justifications for including environmental clauses in PTAs remain valid at the multilateral level, for example, avoiding unnecessary trade restrictions on environmental regulations, leveling the playing field with countries that have lax regulations, promoting greater trade in environmental goods and services, and using strategic linkages to advance international environmental law (George 2014; Morin et al. 2018). Perhaps more important, a multilateral forum such as the WTO would be more appropriate than PTAs when it comes to protecting the global commons and taking developing countries’ concerns better into account. The WTO also provides a more suitable framework than PTAs for addressing the fragmentation of international laws and promoting synergies between trade law and MEAs. Last but not least, multilateralized environmental rules and disciplines would be subject to the WTO’s stringent dispute settlement procedure, which could enhance enforcement. Against this background, several studies explore the potential multilateralization of PTA environmental clauses (OECD 2007; Chaytor 2009; Anuradha 2011; Gehring et al. 2013; Draper et al. 2017). Many of these studies suggest that multilateralization at the WTO would generate opposition in developing countries. The latter might consider environmental clauses as a disguised means of “green protectionism” (Draper et al. 2017: ii). However, See www.wto.org/english/tratop_e/envir_e/envir_negotiations_e.htm (accessed December 21, 2017). 3 The WTO made limited progress on the second aspect of the environment-related Doha negotiation mandate, namely, the compatibility of WTO agreements and MEAs. There has been some progress regarding the Environmental Goods Agreement (EGA), a multilateral agreement of 46 WTO members under the auspices of the WTO, but negotiations are stalled at the moment. 2

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not all developing countries are opposed to linkages between trade and the environment. Some developing countries are even front-runners in the drive to include certain types of environmental provisions in their PTAs. For example, Peru and Columbia are pioneers in the move to introduce provisions related to genetic resources in PTAs (Morin and Gauquelin 2016). Therefore, the relevant question is not so much whether developing countries would support the inclusion of environmental clauses in a future WTO agreement but rather what specific types of environmental provisions are likely to be supported by a substantial number of key countries. To tackle this research question and identify the environmental clauses that are most likely to be multilateralized, this chapter compares the results of different multilateralization scenarios. In a discussion about the usefulness of scenarios in scientific research, Van Notten et al. distinguish “between descriptive scenarios that explore possible futures, and normative scenarios that describe probable or preferable futures” (2003: 429). The scenarios presented in this chapter belong to the first category. This chapter does not aim to establish which scenario is most likely to occur or to determine the most desirable scenario for the multilateralization of environmental clauses. This chapter is more modest and describes possible multilateral agreements that incorporate some of the environmental clauses currently found in PTAs. The objective of this descriptive exercise is exploratory (Notten et al. 2003: 426). By considering different possible futures, scenarios can be used as a reflective tool to stimulate discussions on current practices and the likely content of future multilateral agreements. The scenarios identify possible multilateral agreements by drawing from the TRade and ENvironment Database (TREND) (Morin et al. 2018).4 The most recent version of TREND covers 286 different environmental clauses found in 689 trade agreements signed between 1947 and 2016.5 These environmental provisions include commitments relating to the domestic level of environmental protection, exceptions to trade commitments for environmental purposes, obligations regarding transparency and public participation in environmental policymaking, commitments to provide assistance to developing countries More information and the full codebook are available at www.trend.ulaval.ca. The TREND data has been used to visualize the uptake of environmental provisions in PTAs; see TRENDanalytics.info. 5 Most agreements included in TREND were drawn from the DESTA project (Dür, Baccini, and Elsig 2014). 4

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on environmental matters, specific prescriptions on particular environmental issues, and references to MEAs. In the next section, we argue that the environmental clauses in some PTAs are sufficiently frequent and convergent to make their multilateralization plausible. The third section of the chapter describes five possible multilateral agreements, each based on a different multilateralization scenario. The fourth section compares the fictional agreements and identifies a possible common ground agreement. The conclusion discusses the challenges of multilateralizing PTAs.

9.2  The Convergence of (Some) PTA Environmental Clauses The proliferation of comprehensive PTAs has renewed the debate on the articulation between regionalism and multilateralism (Baldwin 2014: 5). In the 1990s, this debate primarily looked at the effect of tariff discrimination on trade flows. PTAs were presented either as building blocks for multilateralism if they created additional trade or as stumbling blocks if they diverted trade from one country to another. However, new questions arise because, compared with former PTAs, recent PTAs provide much greater economic integration and address an increasing number of regulatory issues (Dür, Baccini, and Elsig 2014; Horn, Mavroidis, and Sapir 2010). The debate on how regionalism affects multilateralism is shifting from issues related to tariff discrimination to focus on the diffusion of specific regulatory provisions. A widespread assumption now found in the literature – and adopted in this chapter – is that the most broadly diffused regulatory provisions within the global PTA network are also the most likely candidates for multilateralization in the future.6 Conversely, clauses that are sporadic or compete with alternative regulatory models are less likely to be multilateralized. As Peter Hall notes, “[T]he principal factors affecting policy at time-1 is policy at time-0” (1993: 277). Although this assumption is rarely challenged, there are reasons why convergence does not automatically have to lead to multilateralization. For example, a number of recent studies have argued that a dense network of bilateral agreements could function as a polycentric system of law and would reduce the need for a centralized multilateral approach. Rather than being a second-best option, a polycentric system of law could be more flexible, adaptive, innovative, and resilient than a multilateral agreement (Morin and Gagné 2007; Schill 2009; Pauwelyn 2014; Morin, Pauwelyn, and Hollway 2017). The WTO (2011) also argues that many new issue areas are less likely to be discriminatory in nature, which reduces the need to establish multilateral rules.

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Based on this assumption, a number of studies assess the potential multilateralization of PTA clauses (Baldwin and Low 2009; Lejárraga 2014). For example, Miroudot, Sauvage, and Sudreau argue that the degree of commonality in service liberalization commitments “suggests that multilateralising regional trade agreements (RTAs) is achievable” (2010: 6). Herman suggests that the similarity of some e-commerce provisions means that they could “become building blocks for the multilateral trading system” (2010: 4). Kotschwar considers that the increasing similarity in investment provisions is “a positive harbinger for an eventual multilateral investment regime” (2009: 399). Yet Berger and Liu (2017) point to significant residual variation between the G20 countries in terms of their approaches to investment protection, which raises doubts about the prospects of a multilateral investment agreement. Likewise, Morin (2009) suggests that the lack of convergence between different intellectual property provisions in PTAs limits their potential impact on multilateral intellectual property agreements. In the area of environmental protection, some PTA clauses are widely diffused, which gives them greater potential for multilateralization. Every PTA concluded in the last 25 years has at least one environmental provision. As indicated in Figure 9.1, the average number of environmental clauses found per agreement has increased steadily. According to TREND, the average was only two in 1947 but rose to 75 in 2016. The record for the PTA with the highest number of environmental provisions is frequently broken. The most recent was on February 4, 2016, with the 125

Number of Norms

100 75 50 25 0 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 Year Maximum norm numbers

Average norm numbers

Minimum norm numbers

Figure 9.1  Number of environmental provisions per trade agreement (moving average ± 2 years).

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signature of the Trans-Pacific Partnership (TPP), for which TREND registered 137 different types of environmental clauses. The general trend in PTA negotiations is to copy and paste existing clauses (Allee and Elsig, forthcoming, International Studies Quarterly). Similarly, most environmental provisions are duplicated from earlier PTAs (Morin et al. 2017). Of the 137 different types of environmental clauses included in the TPP, only two were unprecedented (on the prevention of environmentally harmful subsidies). The remaining 135 clauses were reproduced from pre-existing PTAs. Another recent example is the 2016 Comprehensive Economic and Trade Agreement between the European Union (EU) and Canada. It has 116 environmental clauses but includes only one innovation (the exclusion of water from its scope). As a result of this duplication practice, 59 specific environmental provisions can now be found in more than 50 PTAs and 20 provisions in more than 100 PTAs. Several governments have their own template agreement. In general, they reproduce the PTA clauses found in their earlier agreements. Yet negotiators also learn from the experience of other countries. When drafting a PTA, they may include clauses that were initially designed by third parties. This can lead to a global convergence of PTAs. For example, recent European agreements have integrated some features from US agreements, such as stricter enforcement rules of domestic environmental law, environmental safeguards on investment matters, and enhanced protection on regulatory sovereignty (Morin and Rochette 2017). An increasing number of Asian countries have also included in their PTAs provisions relating to climate change and initially designed by the EU (Morin et al. 2016). Some environmental provisions have not been broadly diffused in the PTA network (Draper et al. 2017; Bruhn et al. 2018; Morin and GauthierNadeau 2017). For example, the common but differentiated responsibility principle and the obligation to ratify the Kyoto Protocol are found only in EU trade agreements. Similarly, only US trade agreements allow for the suspension of trade concessions when a country does not provide monetary compensation after failing to comply with its own environmental laws (Morin and Rochette 2017). Data obtained from TREND indicate that 56 types of environmental provisions are found in five or less trade agreements (Figure 9.2). Several factors explain why some PTA provisions are more widely adopted than others (Bruhn et al. 2018). The most important factor is the date when the environmental provision is first introduced. The earlier

the multilateralization of ptas’ environmental clauses 213 Number of trade agreements

300

200

100

0

Environmental provisions

Figure 9.2  Number of occurrences for each of the 286 types of environmental provisions documented in TREND.

the provisions are introduced, the more likely they are to be adopted by other PTAs. The older the provisions, the more time they have to generate a network effect and influence the entire PTA system on a structural level (Morin et al. 2017: 387). Figure 9.3 provides a heat map showing the overlap in environmental norms between trade agreements on a chronological basis (along the x and y axes). The light gray shading in the top left and bottom right corners is associated with higher Jaccard distance measures, suggesting a disparity

Similarity between agreements 1.00 0.75 0.50 0.25 0.00

Figure 9.3  Heat mapping of the similarity of trade agreements, by year.

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between older and more recent agreements.7 The darker gray shading in the bottom left corner reveals that some of the oldest PTAs had very few environmental provisions. The top right corner is the most interesting for the purpose of this study. Although recent agreements have adopted more and more environment provisions, the actual design of these environmental provisions remains quite dissimilar. This observation largely results from the fact that, in the context of a rapid increase in the average number of environmental provision per agreement, the diffusion of some environmental provisions is counterweighed by the introduction of unprecedented provisions. To sum up, the diffusion of environmental clauses varies considerably. Some are widely diffused, while others have very limited diffusion. This is a key factor for assessing the potential of PTA environmental clauses in terms of multilateralization. Indeed, the question is not whether recent PTAs converge but whether a set of clauses has been diffused sufficiently widely to make multilateralization feasible. This question remains, even when some clauses have not been widely accepted and are unlikely to be included in a multilateral agreement.

9.3  Multilateralization Scenarios This section presents five ideal types of multilateral agreements, each resulting from a different hypothetical scenario. The first, which is the most intuitive and perhaps the most naïve scenario, involves a future multilateral agreement that brings together the most frequent clauses found in the PTA population. The second scenario anticipates that provisions, which have been adopted at least once by several countries, will find sufficient support for multilateralization. The third scenario predicts that increasingly popular clauses will generate sufficient momentum for multilateralization. The fourth scenario expects powerful countries to impose their joint preferences and duplicate clauses from their own PTAs in a multilateral agreement. The last scenario forecasts that clauses found in PTAs with a large membership will be deemed the most appropriate for a multilateral agreement. The five scenarios generate five multilateral agreements, each of which is made up of a particular selection out of 239 candidate environmental The Jaccard distance measures the dissimilarity between the environmental provisions in trade agreements.

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provisions.8 This pool of 239 provisions is drawn directly from the 286 types of clauses documented in TREND. In our analysis, we excluded 13 types of environmental clauses because they were too vague, for example, the requirement to implement an unspecified environmental agreement other than the 20 MEAs identified in TREND. We also merged six pairs of clauses because of their similarity, for example, the commitment to use an unspecified market-based instrument and the commitment to use a specific market-based instrument for environmental protection. Finally, we excluded 28 types of environmental provisions that are already found in WTO multilateral agreements. It would be pointless to argue that the exception to trade commitments for a domestic measure necessary to protect plants or animals is sufficiently diffused to be multilateralized because this exception can already be found in the General Agreement on Tariffs and Trade (GATT) of 1947. We made the arbitrary assumption that any future multilateral agreement would include 43 of the 239 remaining environmental provisions. This assumption is based on the fact that PTAs signed in the last five years (from January 1, 2012, to December 31, 2016) include, on average, 43 environmental provisions.9 The fictional 43-clause agreements resulting from the five multilateralization scenarios are described below.

9.3.1  The Routine Scenario The Routine Scenario combines the most frequent PTA environmental provisions. This scenario assumes that the same factors that drive the diffusion of certain environmental clauses in the PTA network also promote them at the multilateral level. In particular, when it comes to negotiating environmental clauses, countries with well-established routines and standard operating procedures will insist on duplicating clauses from their earlier agreements. These countries are also likely to be supported by their trade partners who have already endorsed these clauses. In comparison with other multilateralization scenarios, the Routine Scenario would bring several benefits to WTO members. It would offer Note that scenario analysis does not assess the likelihood that the respective scenarios will occur. As mentioned above, it explores different scenarios to encourage debate with regard to the environmental content of future multilateral agreements. 9 The Appropriate Agreement has 44 provisions because the provisions at the forty-third and forty-fourth position have an equal score. 8

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low transaction and management costs for the negotiation and implementation of the multilateral agreement, respectively. It would also allow trade negotiators to reduce risk and uncertainty by building on clauses that have been tried and tested. With the Routine Agreement, we simply selected the 43 most frequent clauses from the 239 clauses with the potential for multilateralization. The most frequent clause occurred 156 times and concerns the commitment to cooperate further on environmental matters. The forty-third most frequent clause – and thus the last to be included in the Routine Agreement – is a statement that environmental protection and trade are mutually supportive (44 occurrences). Several of the most frequent environmental clauses are exceptions to trade commitments. Many exceptions were excluded from the Routine Agreement because they already appear in a WTO agreement. Nevertheless, some of the most frequent environmental clauses would be new to the WTO. In particular, 124 PTAs include a general exception for measures “related to environmental protection.” This wording is broader than the one featured in GATT, Article XX(b) for the protection of plants and animals, and in Article XX(g) for measures “related to the conservation of exhaustible natural resources.” The exceptions provided in GATT Article XX paragraphs (b) and (g) have already been the focus of several trade disputes. Therefore, broadening Article XX to include any environmental measure would have major implications.

9.3.2  The Consensual Scenario Some of the provisions in the Routine Agreement may have been endorsed by only a few countries. For example, this could be the case for clauses promoted by a small group of countries that have signed ­several bilateral PTAs among themselves. However, considering the political process of multilateral negotiations and the procedural norm for ­consensus-based decision-making at the WTO, a clause that is found in several PTAs but is endorsed by only a few countries has little chance of being multilateralized. Hence, the Consensual Scenario considers the number of countries that have previously endorsed a particular clause – even sporadically – rather than the number of agreements that include this clause. This scenario expects that a multilateral agreement would bring together clauses that have been accepted, at least once, by a large number of countries.

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To build the Consensual Agreement, we combined the 43 clauses that were adopted by the most countries.10 The most widely accepted clause, supported by 179 countries, concerns a restriction on the trade of hazardous waste. The forty-third most widely accepted clause, supported by 118 countries, calls for further cooperation on the specific issue of desertification. Some of the most widely accepted provisions relate to specific environmental issues. In addition to hazardous waste and desertification, clauses found in the Consensual Agreement address issues as diverse as fisheries, energy efficiency, forest conservation, ocean protection, contaminated land, the ozone layer, and biodiversity. This issue-specific approach, which is increasingly common in PTA environmental chapters, is still absent from WTO agreements. Multilateralizing these clauses would be a significant development.

9.3.3  The Trendy Scenario A clause could be duplicated in several PTAs and endorsed by several countries simply because it was introduced a while ago and has had time to spread gradually. For this reason, the two previous scenarios introduce bias in favor of older provisions. In contrast, the Trendy Scenario assumes that the increasingly popular clauses are more likely to be multilateralized in the future because countries are more inclined to promote them at present. These clauses address issues that are perceived as being increasingly important. The momentum generated by their current popularity may facilitate their inclusion in a multilateral agreement. To identify the contours of the Trendy Agreement, we consider the change in the diffusion rate of each clause over the last 20  years. We started by calculating the percentage of PTAs signed between 1997 and 2006 that included the given clause. Then we looked at the percentage of PTAs that included the same clause in the following decade, from 2007 to 2016. The Trendy Agreement included the 43 clauses for which the rate of diffusion had increased the most. The trendiest environmental clause appears to be the general obligation to exchange information related to the environment. It is included in 14% of the PTAs signed between 1997 and 2006. The percentage rises to 53% for the 2007–2016 period (an increase of 39 percentage points). The Some PTA clauses have been accepted by more than 164 countries, which exceeds the current WTO membership (164 members). Nevertheless, given the scale and expansion of WTO membership, we did not limit our analysis to current WTO members.

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second trendiest environmental clause is the prohibition to encourage investment by relaxing environmental measures. It is included in 11% of PTAs signed between 1997 and 2006 and in nearly 50% of all PTAs signed between 2007 and 2016 (an increase of 38 percentage points). Several other provisions in the Trendy Agreement have become increasingly frequent because they address environmental issues that recently gained in prominence. The clause calling parties to reduce greenhouse gas emissions increased by 23 percentage points and the clause calling parties to share the benefits generated by the use of genetic resources gained 17 percentage points. However, these trendy provisions remain politically sensitive and are likely to meet with opposition from some powerful WTO members.

9.3.4  The Power Game Scenario Despite the fact that the WTO operates on the basis of consensus, not all countries have an equal influence over multilateral negotiations. This fact is considered in the Power Game Scenario. It predicts that powerful countries will take advantage of their market size and normative power to ensure that their preferred clauses are included in a multilateral agreement. Previous studies have already established that the PTAs drawn up by the two most influential actors in the trade regime, namely, the United States and the EU, are often used as models by other countries when they are drafting their own PTAs (Jetschke and Lenz 2013; Allee and Elsig, forthcoming). However, the United States and the EU do not promote the same set of environmental clauses in their respective PTAs (Morin and Rochette 2017). As Hoekman and Winters rightly remark, “the accretion of two different groups of supporters around two different models − say a US and a EU model − could make the final multilateral step … less rather than more likely” (2009: 239). The Power Game Scenario predicts that the United States and the EU will avoid this deadlock situation by promoting clauses that they have both previously endorsed. In the Power Game Scenario, for each potential clause, we multiply the percentage of its uptake in US agreements by the percentage of uptake in EU agreements. If a clause is found in all US agreements (100%) but in none of the EU agreements (0%), the score is 0. The 43 provisions with the highest score are those that are most likely to be jointly supported by the United States and the EU. Two groups of provisions in the Power Game Agreement are particularly worthy of note. First, the agreement includes a number of clauses related

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to scientific cooperation, such as commitments to conduct joint environmental monitoring, scientific research, as well as environmental impact assessments (of the trade agreement). Second, the Power Game Scenario would lead to the adoption of clauses that aim to level the playing field in terms of trade competition. They include provisions that call for a high level of environmental protection in domestic law to harmonize certain environmental measures and to effectively enforce environmental regulations. These clauses are typical of the PTAs signed by either the United States or the EU with developing countries.11 They reflect the interest of the United States and the EU to level the playing field among trading partners in order to prevent other countries from taking advantage of low environmental standards and their inadequate implementation.

9.3.5  The Appropriate Scenario The last fictional agreement results from the Appropriate Scenario. It is a compilation of clauses typically included in PTAs with a large membership. The literature on the rational design of international treaties argues that the number of parties is likely to have an influence on the agreement’s scope as well as on its degree of centralization, control, and flexibility (Koremenos, Lipson, and Snida 2001: 797). Thus, it is reasonable to expect that the distinctive characteristics of PTAs with a large membership will also be deemed appropriate for a multilateral agreement.12 Previous studies have already established that PTAs with a large membership exhibit specific features when it comes to dealing with environmental issues. Morin et al. (2018) have found that the more parties that are involved in a PTA, the more likely it is to include several environmental clauses. Hollway et al. (2018) have observed that PTAs with a large membership are also more likely to innovate and design environmental clauses that are unprecedented in the trade regime. Bruhn et al. (2018) have further established that environmental clauses that are first introduced in a PTA with a large membership are more likely to be included in subsequent agreements. To determine which clauses to include in the Appropriate Agreement, we identified the two agreements involving the highest number of parties For a discussion of the role of environmental provisions from the perspective of emerging economies, see Berger et al. (2017). 12 For this reason, Helble (2017) considers that “several chapters of the TPP can become blueprints for ongoing and upcoming negotiations at the multilateral level.” 11

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and considered each of the 239 candidate clauses in turn. We then added together the number of parties that were signatory to both agreements. This technique was adopted in order to reduce the risk of including a clause in the Appropriate Agreement simply because it was featured in a single large-membership agreement, such as the Cotonou Agreement between the EU and African, Caribbean, and Pacific countries. At the same time, we wanted to avoid having to factor in the number of PTAs that include the clause and its diffusion in low-membership agreements. Several provisions covered by the Appropriate Agreement address developing countries’ concerns, for example, with regard to commitments to providing technical assistance to other parties, funding mechanisms for capacity building, and assistance to non-state actors. Another distinctive feature of the Appropriate Agreement is the inclusion of several provisions that promote greater coherence between environmental policy and other policy areas, such as mining, tourism, social issues, rural development, urban planning, transport, energy, and human health. Overall, the Appropriate Agreement seems to adopt a broad holistic approach when it comes to considering the interplay between trade and the environment.

9.4  Analyzing the Scenarios The five ideal-type scenarios make different assumptions about the underlying dynamics of multilateralization. Therefore, they generate different outcomes; i.e. the content of the resulting multilateral agreements varies. In this section, we take our analysis a step further and compare the similarity of the five ideal multilateral agreements. We compare their content on the basis of two statistical approaches, the Jaccard index and the Kendall rank correlation. We also explore the common ground between the five different scenarios outlined above in order to identify their commonalities and analyze the characteristics of a Common Ground Agreement.

9.4.1  Comparing the Scenarios As a first step to compare our five scenarios, we use the Jaccard ­coefficient measure to calculate the similarity (or distance) between sample sets.13 In our case, it is used to measure the similarity between two ideal-type agreements in terms of the number of identical provisions they share. The The Jaccard coefficient measure is defined as the size of the intersection divided by the union of the sample sets: J(X,Y) = |X∩Y| / |X∪Y|. The Jaccard distance is obtained by subtracting the Jaccard coefficient from 1.

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value 0.6

Trendy

0.4 0.2

Consensual

0.0

Routine Routine

Consensual

Trendy

Powergame Appropriate

Figure 9.4  Jaccard distance between the five ideal-type agreements.

results appear in Figure 9.4. The darker the area, the more similar the two agreements are. The most similar agreements have a value of 0; dissimilar agreements have a value of 1. In addition to the Jaccard coefficient measure, we use the Kendall rank correlation coefficient to compare the different scenarios. While the Jaccard coefficient measure considers only the presence or absence of each provision in the five ideal typical 43-clause agreements, the Kendall rank correlation measures the similarity in terms of the order of the 239 candidate clauses.14 When clauses have a similar rank, the Kendall rank coefficient is high (up to 1). When the order of the clauses in two scenarios is dissimilar, the Kendall rank coefficient is low (down to −1). The results appear in Figure 9.5. Appropriate Powergame

value 0.8

Trendy

0.6 Consensual

0.4

Routine Routine

Consensual

Trendy

Powergame Appropriate

Figure 9.5  Kendall rank correlation between the five ideal-type agreements. Thus, for the Kendall rank correlation, we computed the entire set of 239 clauses.

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The comparison of the five ideal-type scenarios using the Jaccard coefficient measure or the Kendall rank correlation produced some interesting results. Regardless of the comparative method used, the Appropriate Agreement (which concerns clauses typically included in PTAs with a large membership) and the Consensual Agreement (which concerns clauses adopted by a large number of countries) appear to include quite similar environmental provisions. This similarity undoubtedly results from the fact that, by definition, large multilateral agreements include many parties. Using the Jaccard coefficient measure and, to a lesser extent, the Kendall rank correlation, the Power Game Agreement (which focuses on the provisions negotiated by powerful countries) and the Routine Scenario (which includes the most frequent environmental provisions across all PTAs) also appear to be quite similar. This can be explained by the fact that the EU and the United States are not only the most powerful negotiating partners; they are also prolific and have negotiated numerous PTAs. The Jaccard coefficient measure also reveals the similarity between the Trendy Scenario (which focuses on the provisions with the fastest growing diffusion rates) and the Routine Scenario. This similarity probably results from the fact that a huge number of PTAs have been signed in recent years. The comparative analysis also points to dissimilarities. The Appropriate and the Trendy Agreements are the least similar pair of agreements (using the Jaccard coefficient measure or the Kendall rank correlation). This dissimilarity could be because most large-N agreements, including the series of Lomé Agreements between the EU and African, Caribbean, and Pacific countries, was signed more than 15 years ago. In addition, the dissimilarities between the Power Game and the Consensual Agreements, and between the Power Game and the Appropriate Agreements, suggest that the clauses typically included in EU and US agreements differ from those typically found in PTAs with a large membership, which include many developing countries. However, there is some overlap between the Power Game Agreement and other ideal-type agreements, which suggests that there might be a window of opportunity for multilateralization.

9.4.2  Merging the Scenarios: The Common Ground Agreement The five ideal-type scenarios investigated in Section 9.3 describe different possible future outcomes. Each scenario is based on a different

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hypothetical causal driver, which determines the outcome. However, real-life policy-making processes do not follow mono-causal pathways. For this reason, we have combined the five scenarios to create a Common Ground Agreement.15 The Common Ground Agreement takes into account the messiness and the multiplicity of the causal factors that drive policymaking processes in the real world. The Common Ground Agreement was achieved in four steps. First, for each mono-causal scenario described in Section 9.3, the clauses were given a score corresponding to their ranking. Second, the scores were normalized between 0 and 1 to level the different scenarios. This was necessary because a number of clauses had equal ranking in some scenarios. Third, we combined the five different scores obtained for each clause, giving equal weight to the five scenarios. Finally, we selected the 43 clauses with the lowest cumulative score. We assumed that a multilateral agreement on trade-related aspects of environmental governance would include around 43 clauses, as explained in Section 9.3. Table 9.1 presents the resulting Common Ground Agreement. Instead of ordering the 43 environmental clauses according to their scores, Table 9.1 presents them in their general order of appearance in PTAs. This presentation illustrates what a WTO agreement on the trade-related aspects of environmental protection might look like if WTO members decided to go beyond the 28 existing environmental provisions included in WTO multilateral agreements. The Common Ground Agreement contains a range of environmental provisions that could potentially provide a common basis for the multilateralization of environmental norms. Like the Routine Agreement, it includes norms that occur frequently, for example, the general commitment to cooperate on environmental matters, the commitment to share environmental information, and recognition of the states’ regulatory sovereignty on environmental policies. The Common Ground Agreement borrows several issue-specific measures from the Consensual Agreement, such as those on hazardous waste, fisheries, energy efficiency, and forest and marine pollution. It also includes norms on climate change, including energy efficiency, renewable energy, and greenhouse gas emissions, which also appear in the Trendy Agreement. In line with the Power Game

15

We do not perceive the Common Ground Agreement as the ultimate or most likely agreement, but we include it here for illustrative purposes.

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Table 9.1 The 43 clauses of the Common Ground Agreement General principles 1

The parties have the right to establish their own levels of environmental protection.

0.94

2

The parties recognize the mutual support that exists between environmental and trade policies.

1.34

Domestic level of protection 3 4 5 6 7 8 9

The parties agree that they shall not use environmental laws for protectionist purposes. Parties shall not encourage trade by reducing the levels of environmental protection. Parties shall not encourage investment by reducing the levels of environmental protection. Each party shall ensure that its laws provide for high levels of environmental protection. Each party shall strive to continue to improve its environmental laws. Each party shall take account of scientific information in environmental policy-making. A party shall not fail to effectively enforce its environmental laws.

1.89 1.34 1.01 1.32 1.05 1.79 1.13

Promotion of environmental protection 10 11 12 13

Each party shall promote: • Public awareness by ensuring that information is available to stakeholders; • The development of voluntary environmental measures; • The development of market-based incentives; and • Trade of environmental goods and services.

0.59 0.48 1.81 0.82

Inter-state environmental cooperation 14

15 16 17

The parties shall cooperate in the field of environmental protection. Cooperation shall include: • Technical and scientific cooperation programmes; • Development of strategies for conducting environmental impact assessment; • Systems of information on the state of the environment;

0.02 0.13 0.44 0.08

the multilateralization of ptas’ environmental clauses 225 18 19 20

• Procedures for harmonizing technical environmental regulations; and • Coordination with respect to multilateral negotiations on environmental issues. To achieve this cooperation, representatives of the parties should meet regularly.

1.09 0.18 0.78

Specific environmental issues 21 22 23 24 25 26 27 28 29 30 31

Cooperation shall focus on: • The control and prevention of marine pollution; • The protection of forests; • The conservation of fishery resources; • The development of parks, reserves, and controlled areas; • The promotion of renewable energy production; • The promotion of energy efficiency; • The reduction of greenhouse gas emissions; • The general issue of climate change; • The reduction of atmospheric pollution; • The management of domestic waste; and • The management of hazardous waste.

0.70 1.04 0.70 1.53 0.55 0.63 1.78 1.76 1.58 1.43 0.40

Policy coherence 32

33 34 35 36 37

Parties shall incorporate environmental considerations in any policy measure. Each party shall endeavor to improve coherence between environmental policies and: • Energy policies; • Mining policies; • Tourism policies; • Social security policies; and • Transport policies

0.61

0.96 1.92 1.68 1.32 1.10

Assistance to developing countries 38 39 40

• Developed countries shall provide capacity building to developing country parties. • The parties shall encourage the transfer of environmental technologies. • The parties shall make funds available to implement this agreement.

0.26 1.92 1.40

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Table 9.1 (cont.) Implementation 41 42 43

• Each party shall designate a contact point for the implementation of this agreement. • The parties shall engage the public in activities undertaken to implement this agreement. • The parties shall resolve any dispute that may arise through consultations.

1.30 0.89 0.88

Agreement, the Common Ground Agreement contains several provisions that aim to level the playing field between parties by ensuring that they maintain a high level of protection, refrain from using environmental policy for trade purposes, and effectively enforce their domestic laws. Finally, the Common Ground Agreement shares similar features with the Appropriate Agreement, for example, norms relating to policy coherence between environmental protection and other issues, including trade, tourism, and transport. Overall, the provisions in the Common Ground Agreement address the concerns of different types of countries, including developed and developing countries. The Common Ground Agreement is not merely a combination of different interests. It actually constitutes the area where the different idealtype scenarios overlap. Indeed, 19 of its 43 clauses can be found in the five ideal-type agreements identified in Section 9.3. Only three clauses in the Common Ground Agreement are featured in just two ideal-type agreements. This suggests that most provisions in the Common Ground Agreement would face little to no opposition if they were introduced in the WTO context. In light of the current stalemate in the WTO and in particular its consensus-based negotiation process, one could assume that the potential multilateralization of environmental issues in the global trade regime would mainly be plausible for provisions that are less precise and less restrictive and would thus be less costly for WTO members. On the one hand, the Common Ground Agreement does indeed include a number of general and rather vague provisions such as clauses that establish mechanisms for cooperation among the contracting parties. In addition, a number of provisions are intended to cree or preserve the policy space for regulation in the interest of the environment and can thus be considered as non-costly.

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On the other hand, and perhaps most surprisingly, the Common Ground Agreement also includes a number of provisions related to specific environmental issues. These provisions address issues as diverse as hazardous waste, fisheries, domestic waste, marine pollution, forest conservation, atmospheric pollution, and renewable energy. As indicated above, multilateralizing these provisions would constitute significant progress at the interface between trade and the environment. The Common Ground Agreement also includes provisions that are intended to improve the level of implementation of domestic environmental laws – that are well-developed on paper in several countries but are often not adequately implemented – and improve the level of domestic enforcement. Such obligations can entail substantial costs, in particular for developing countries. In terms of enforcement, the multilateralization of environmental provisions would have strong implications both from a legal and a political perspective. In most PTAs, environmental provisions are not subject to stringent dispute settlement, and the partner countries typically opt for consultative approaches to settle potential disputes. This would change due to the incorporation of environmental provisions in the WTO that includes a binding dispute settlement mechanism. From a legal point of view, this is important because dispute settlement proceedings can help to concretize and operationalize the meaning of environmental provisions. From a political point of view, subjecting environmental provisions to a more stringent dispute settlement ­processes could help to improve the compatibility of the trade and environmental regimes. The Common Ground Agreement includes many provisions that address the interaction between the environment and non-­environmental issues, such as energy policies, social issues, transport, tourism, and mining. These provisions might be among the least trade-related environmental provisions found in PTAs. Nevertheless, their high frequency and widespread distribution suggest that they might be strong candidates for multilateralization. Another surprising feature of the Common Ground Agreement is the absence of provisions referring to MEAs. A number of prominent PTAs require parties to ratify or implement specific MEAs, such as the Convention on Biological Diversity, the Ramsar Convention on Wetlands, and the Montreal Protocol on Substances that Deplete the Ozone Layer. Some well-known PTAs, including North American Free Trade Agreement (NAFTA), also list MEAs that should prevail in the

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event of incompatibility with trade commitments. Yet these PTAs do not appear to refer to the same MEAs. The United States and the EU, in particular, refer to different sets of MEAs in their respective PTAs. The former privilege agreements on endangered species and the latter on climate change and biosecurity (Morin and Bialais 2018). As a result of this divergence, references to MEAs are absent from the Common Ground Agreement. This absence is a sticking point given that the portion of the 2001 Doha Agenda related to the environment specially mandated negotiations on “the relationship between existing WTO rules and specific trade obligation[s] set out in multilateral environmental agreements” as well as “procedure[s] for regular information exchange between MEA secretariats and the relevant WTO committees.” The analysis presented in this chapter, which is based on previous PTA experience, suggests that WTO members were not prepared to move forward in this direction. However, they might be ready to progress in areas unforeseen by the Doha Declaration.

9.5 Conclusion Environmental provisions are increasingly common features of modern trade agreements. Given the ever-increasing demands to improve the coherence of the trade regime with regard to climate and other environmental issues, it seems appropriate to consider the possible multilateralization of environmental clauses. In this context, this chapter has explored several different scenarios with a view to identifying the norms that are most likely to be multilateralized in the WTO rulebook. The five scenarios and their underlying causal mechanisms assessed in this chapter are all ideal types that are unlikely to occur in real life. However, their comparison offers insights into how the multilateral trade system might move forward. Despite the heterogeneity of PTA environmental provisions, the Common Ground Agreement reveals that they do share common features. This suggests that it might be feasible to multilateralize PTA environmental clauses. At the same time, further analysis of the multilateralization of environmental provisions is required. Indeed, few studies identify which environmental clauses are the most important ones to multilateralize. The literature is just starting to assess the trade and environmental impacts of environmental clauses (Baghdadi et al. 2013; Martínez-Zarzoso and Oueslati 2016; Bastiaens and Postnikov 2017).

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As noted in an Organisation for Economic Cooperation and Development (OECD) report, “[T]ransparency and exchanges of experience are important to ensure that progress on environmental matters in RTAs eventually feeds into the multilateral trading system” (OECD 2007: 11). Information sharing via seminars; workshops; and online datasets such as DESTA, TREND Analytics, and RTA Exchange constitutes a first step in this direction. This chapter aims to contribute by envisioning different scenarios of multilateralization. The next step is to assess and compare the impact of these various scenarios.

References Allee, T. and Elsig, M. forthcoming. “Are the Contents of International Treaties Copied-and-Pasted? Evidence from Preferential Trade Agreements,” International Studies Quarterly. Anuradha, R. V. 2011. “Environment,” In: J.P. Chauffour and J.C. Maur. (Eds.), Preferential Trade Agreement Policies for Development: A Handbook. Washington, DC: World Bank Publications, pp. 407–25. Baghdadi, L., L. Martinez-Zarzoso, and H. Zitouna. 2013. “Are RTA Agreements with Environmental Provisions Reducing Emissions?” Journal of International Economics 90(2): 378–90. Baldwin, R. 2014. Multilateralising 21st Century Regionalism. Paris: OECD Conference Center. Baldwin, R., S. J. Evenett, and P. Low. 2009. “Beyond Tariffs: Multilateralising Non-Tariff RTA Commitments,” In: R. Baldwin and P. Low (Eds), Multilateralising Regionalism: Challenges for the Global Trading System. Cambridge: Cambridge University Press, pp. 79–141. Baldwin, R. and P. Low. 2009. Multilateralising Regionalism: Challenges for the Global Trading System. Cambridge: Cambridge University Press. Bastiaens, I. and E. Postnikov. 2017. “Greening Up: The Effects of Environmental Standards in EU and US Trade Agreements,” Environmental Politics 26(5):1–23. Berger, A., C. Brandi, D. Bruhn, and M. Chi. 2017. Towards ‘Greening’ Trade? Tracking Environmental Provisions in the Preferential Trade Agreements of Emerging Markets. Bonn: German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE). Berger, A. and W. H. Liu. 2017. “Can the G20 Serve as a Launchpad for a Multilateral Investment Agreement?” Paper presented at the conference Is a Multilateral Investment Treaty Needed? World Trade Institute (WTI), Bern. Chaytor, B. 2009. Environmental Issues in Economic Partnership Agreements. Geneva: ICTSD.

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the multilateralization of ptas’ environmental clauses 231 Lejárraga, I. 2014. “Deep Provisions in Regional Trade Agreements: How Multilateral-friendly? An Overview of OECD Findings,” OECD Trade Policy Papers 168, Paris: OECD Publishing. Available at http://dx.doi.org/10.1787/5jxvgfn4bjf0-en. Martínez-Zarzoso, I. and W. Oueslati. 2016. “Are Deep and Comprehensive Regional Trade Agreements Helping to Reduce Air Pollution?” CEGE Discussion Papers. Miroudot, S., J. Sauvage, and M. Sudreau. 2010. “Multilateralising Regionalism: How Preferential Are Services Commitments in Regional Trade Agreements?” OECD Trade Policy Working Papers 106. Monteiro, J. A. 2016. Typology of Environment-Related Provisions in Regional Trade Agreements. Geneva: WTO. Morin, J.-F. 2009. “Multilateralizing TRIPs-Plus Agreements: Is the US Strategy a Failure?” The Journal of World Intellectual Property 12(3):175–97. Morin, J.-F. and C. Bialais. 2018. “Strengthening Multilateral Environmental Governance Through Bilateral Trade Deals.” CIGI Policy Brief 123. Morin, J.-F., D. Bluemer, C. Brandi, and A. Berger. 2019. “Kick-starting diffusion: Explaining the varying frequency of PTA’s environmental clauses by their initial conditions.” Unpublished manuscript. Morin, J.-F., A. Dür, and L. Lechner. 2018. “Mapping the Trade and Environment Nexus: Insights from a New Dataset,” Global Environmental Politics 18(1):122–39. Morin, J.-F. and G. Gagné. 2007. “What Can Best Explain the Prevalence of Bilateralism in the Investment Regime?” International Journal of Political Economy 36(1):53–74. Morin, J.-F. and M. Gauquelin. 2016. “Trade Agreements as Vectors for the Nagoya Protocol’s Implementation,” CIGI Paper 115. Morin, J.-F. and R. Gauthier-Nadeau. 2017. “Environmental Gems in Trade Agreements: Little Known Clauses for Progressive Trade Agreements,” CIGI Paper. Morin, J.-F. and S. Jinnah. 2018. “The Untapped Potential of Preferential Trade Agreements for Climate Governance,” Environmental Politics 27(3):541–65. Morin, J.-F., N. Michaud, and C. Bialais. 2016. “Trade Negotiations and Climate Governance: The EU As a Pioneer, but Not (yet) a Leader,” IDDRI Issue Brief 10:16. Morin, J.-F., J. Pauwelyn, and J. Hollway. 2017. “The Trade Regime as a Complex Adaptive System: Exploration and Exploitation of Environmental Norms in Trade Agreements,” Journal of International Economic Law 20(2):365–90.

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10 The Trend to More and Stricter Non-Trade Issues in Preferential Trade Agreements lisa lechner 10.1 Introduction On September 17, 2016, thousands of people marched in the streets of four Austrian and seven German cities to protest against the planned Transatlantic Trade and Investment Partnership (TTIP), a preferential trade agreement (PTA) between the European Union (EU) and the United States, and the Comprehensive Economic and Trade Agreement (CETA), a trade deal between the EU and Canada (ORF 2016, Standard 2016). Beyond anti-globalization sentiments, people fear that free trade might lower social and environmental standards. Increasingly, non-trade issues (NTIs) – namely civil, political, social, environmental, and security standards – are incorporated into PTAs. Sixty-two percent of the 162 PTAs signed between 1945 and 1989, and 81% of the 654 post-1990 PTAs, include at least one clause on NTIs.1 Public interest on these issues increases, which is likely to result in an even stronger weight given to social, ecological, and political issues in preferential trade agreements. Thus, the regulation of NTIs via PTAs becomes an increasingly important challenge for trade policy-makers. Already now, but even more so in the future, the approval of trade agreements is going to depend not only on how these agreements regulate trade in goods and services but also to what degree they succeed in protecting human rights, labor standards, security issues, and the environment. Using a novel dataset that covers 262 data points on NTIs in 644 PTAs, this chapter shows three major trends of NTIs in trade deals: first, the NTIs agenda is broadening with ever more aspects included in trade agreements (Lechner 2016). Modern PTAs move beyond clauses on

Author’s data assessment.

1

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national security, a general call on environmental protection and labor rights. Instead, these progressive agreements cover aspects ranging from gender to the right to belief, waste management, and the fight against terrorism. Second, the style of regulating such issues converges. No longer are there different approaches to deal with NTIs in PTAs. Now, the gold standards seem to be the installation of a court system dealing with potential NTI violation and combining this with a formalized dialogue between policy-makers and domestic stakeholders on NTIs. Third, developing countries have been catching up and increasingly commit to NTIs. Beyond North–South PTAs, South–South PTAs cover more NTIs. It seems that even countries that were (once) reluctant to adopt NTI clauses have now internalized NTIs. Overall, PTAs cover four sets of issues: civil and political rights (CPRs), economic and social rights (ESRs), environmental protection (EP), and security issues. These issues mask multiple aspects. CPRs range from human dignity to the right to political participation, the right to free movement, women’s and children’s rights, minority protection, and the rule of law. ESRs include the right to work, rights at work, right to education, right to development, and right to health. Right at work stands for the right to collective bargaining, the elimination of all forms of forced and compulsory labor, the effective abolition of child labor, the elimination of discrimination with respect to employment and occupation, minimum wage, and the right to leisure. EP includes the care of natural resources (water, soil, forest), reducing waste and air pollution, and protecting wildlife and game. Security issues comprise the fight against drug trafficking, money laundering, and terrorism. Scholars examined these four issues in separate studies and drew some links between them. Yet a direct comparison of all four issues is missing. Though CPRs as well as security aspects have the longest tradition in preferential trade agreements, the academic discussion started with ESRs and EP issues. At the beginning, scholars emphasized tensions between trade and worker rights as well as trade and environmental protection (Bhagwati 2000, 2002; Bhagwati and Srinivasan 1996; Bhagwati and Hudec 1996; Esty 2001; Krugman 1997; Limão 2007). Whereas EP faded into the background, authors focused on ESRs in various publications. Kim (2012) and Postnikov (2014) assessed the impact of labor standards in PTAs on protection levels. Hafner-Burton (2009) as well as Spilker and Böhmelt (2012) posed a similar research question

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but used the term human rights to cover CPRs as well as ESRs. Research on the oldest issue in PTAs, namely, security (Holsti 1986), has happened only recently. Aggarwal and Govella (2013) assess in various case studies how countries from different regions link security issues and trade. Sprecher et al. (2006) argue that military alliance commitments in PTAs could help settle disputes. All these scholarly works improve our understanding of the trade and … debate. Still, we lack direct comparisons of the four issues. Assessing the four areas of non-trade issues in preferential trade agreements side by side is likely to improve our understanding of international relations. Directly comparing the non-trade issues in PTAs allows us to draw lessons about which country pairs cooperate in what issues and when. A more comprehensive view on NTIs in PTAs allows gaining insights not only at the dyad level but also from a monadic, country-level perspective. Doing so is likely to improve our knowledge on the foreign policy objectives of governments: which country has committed to what issue in the past and who is likely to push for what NTI in future trade agreements. With this chapter I introduce a novel dataset that should help answer these questions. To my knowledge, the largest and most comprehensive dataset covers the institutional designs of non-trade issues, namely, CPRs, ESRs, EP, and security issues, in 644 PTAs signed between 1945 and 2016. All countries in the world signed at least one of these 644 PTAs, with Mongolia being the last country to enter a trade deal.2 This enables the identification of geographic and time patterns of NTIs in PTAs. In the following, I first explain how I measure the design of NTIs in PTAs. Next, by dint of descriptive analysis, I show three trends toward more and stricter NTIs in trade deals. Finally, I summarize and draw future scenarios of ecological, human, social, and security aspects in trade agreements.

10.2  How to Measure the Design of NTIs in PTAs Countries not only commit to different issues but also vary in ambition when doing so. Some PTAs include a wide range of CPRs; others cover only one aspect (e.g. right to vote). Some PTAs call for monetary The PTA between Japan and Mongolia entered into force on June 7, 2016.

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sanctions in case of ESRs violation; others abstain from enforcement. Some PTAs establish regular meetings with domestic actors (e.g. academics, business, non-governmental organizations [NGOs], trade unions) to discuss environmental protection; others exclude third actors in these debates. Yet quantitative research merely differentiated between hard and soft law and disregarded the varying degree of legalization of non-trade issues in PTAs. As the examples illustrate, NTI designs are far more complex than the trichotomous index of no, soft, and hard law. By coding 262 data points in each of the 644 post-1945 PTAs, my dataset is more nuanced. The aim of the dataset is to capture the degree of legalization, which builds upon three dimensions: obligation, delegation, and precision (Abbott et al. 2000). Obligation defines the bindingness of NTIs, delegation defines the extent to which third actors may participate in the monitoring and enforcement process, and precision captures how precisely an issue is defined. A higher degree of obligation, delegation, and precision means stronger commitments, greater ambitions, and higher potential compliance costs. Hill (2010), who controls for the selection process, finds variation in compliance due to variation in precision levels. Whereas the Convention against Torture and other Cruel, Inhuman or Degrading Treatment or Punishment (CAT) and the International Covenant on Civil and Political Rights (ICCPR) have a negative impact on human rights compliance, the Committee on the Elimination of Discrimination against Women (CEDAW) had a positive effect on women’s rights compliance. These findings suggest a closer look at treaties’ specific features. Precision and/or the cost of compliance might explain this difference in compliance. According to Hill (2010), a higher precision level and lower costs for compliance explain why the CEDAW led to an improvement of the protection level of women’s rights. Koremenos and Hong (2010) claim that the imprecision of the international human rights treaties is a rational, purposive response to the recurrent cooperation problems faced by states negotiating such agreements. The authors conclude that, due to the lack of precision (meaning ambiguously defined rules), one should not expect improvements on human rights by the signatory parties. A general tone among legal scholars is that precision yields more effective international institutions (Franck 1990). In PTAs, human rights or EP rules are precise if they move beyond a general call for their protection and narrow

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the issue down to targetable aspects. The following two quotes show different degrees of precision. Instead of calling merely for a general increase in protection levels, such as the Chile–China PTA, the US– Colombia PTA offers a more precise definition of what environmental protection means. Preamble of the Chile–China PTA: Recognizing that this Agreement should be implemented with a view toward … promoting sustainable development in a manner consistent with environmental protection and conservation. Definition of environmental law under Article 18.14 of the US–Colombia PTA: (a) the prevention, abatement, or control of the release, discharge, or emission of pollutants or environmental contaminants; (b) the control of environmentally hazardous or toxic chemicals, substances, materials, and wastes, and the dissemination of information related thereto; or (c) the protection or conservation of wild flora or fauna, including endangered species, their habitat, and specially protected natural areas.

Whereas Chile and China may wonder which environmental policy they should target to promote sustainable development, Colombia and the United States face clear guidelines about achieving greater protection levels. Beyond precision, Mitchell and Hensel (2007) as well as Skjaerseth (1998) find that environmental standards are more effective if they are binding in their nature. “International treaties and regimes have value if, and only if they cause people to do things that they would not otherwise do” (Mitchell 1994, p. 3). Scholars used the term high obligation or hard law for such binding rules. Hafner-Burton (2009) shows that hard human rights clauses in trade agreements lead to compliance. This has been revisited by Spilker and Böhmelt (2012), who show that the positive effect decreases if one accounts for the selection process of human rights clauses in PTAs. In any case, soft law was ineffective and had hardly any impact on state behavior. Whereas the Latvia–Bulgaria PTA, for instance, reads much weaker in terms of obligation, the Canada–Korea agreement is rather strict. The latter states that parties have the obligation to protect labor rights and calls for monetary assessment if they fail to do so (see Chapter 18 of the Canada–Korea PTA). Latvia–Bulgaria, in contrast, reads as follows:

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lisa lechner Article 1 of the Latvia–Bulgaria PTA: The objectives of the present Agreement are: (a) to promote through the expansion of mutual trade … and thus to foster … and employment conditions.

Canada and Korea are likely to feel greater pressure to comply with the economic and social standards written in their trade agreement than would Latvia and Bulgaria. Another dimension of the institutional design that may explain compliance or non-compliance is delegation (Hawkins et al. 2008). Delegation is hence another tool of states to “tie their hands” and is prone to reduce the risk of defection (Greif et al. 1994). In the context of the International Monetary Fund (IMF), it has been shown that the delegation of monitoring tasks leads to more credible commitments to repay loans (Stone 2012). The Aarhus Convention, which was adopted in 1998, is the first multilateral environmental agreement that delegates monitoring processes to members of the public. This led to a much greater compliance level relative to other environmental treaties (Kravchenko 2007). Bartels (2004) notes that the creation of committees, wherein citizens, NGOs, or/and trade unions participate, increases the chance of policy change under EU PTAs. States incorporate delegation clauses concerning NTIs in PTAs more and more often. The EU–Central America Agreement and the EU–Chile PTA foresee regular meetings with NGOs that are allowed to ­participate in the monitoring and consulting process of CPRs. Also, the Canada–Colombia and US–Guatemala PTAs – among others – ­incorporate trade unions in the enforcement process. Several treaties (e.g. US–Korea, EU–Georgia, EU–Vietnam, Canada–Jordan) delegate rulings on environmental protection issues and labor rights to domestic courts. This seems to be especially important for the monitoring process. With more eyes, the involvement of trade unions, NGOs, ­citizens, business, or any other stakeholders that are interested in upholding the protection levels is likely to increase transparency and uncover inconsistencies with standards in PTAs. In short, more delegation signals greater ambitions. Figure 10.1 summarizes the codebook. Due to the varying nature across issues, the total number of data points varies. Seventy-eight variables define the mode of legalization of CPRs, 73 of ESRs, 65 of EP, and 46 of security issues.

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Mode of legalization index Obligation

Delegation

high

Precision

Who monitors

Conditionality

high

External actors

low

Internal actors Who files disputes

High general obligation

high

Individuals

low

Member states

high

Determinate rules (specific NTIs)

Who decides on disputes

High specific obligation Hortorary obligation with recommendations

low

high

Independent tribunals Ad-hoc panel Member state representatives

low

Conciliation

Who implements decisions high Domestic courts

Hortorary obligation

Broad areas of discretion (general NTIs)

International courts low

No enforcement

low

Figure 10.1  Summary of the codebook: Mode of legalization of NTIs in PTAs.

10.3  Three Trends to More and Stricter NTIs in PTAs After introducing the coding scheme of NTIs in PTAs, I move on to descriptive analysis and show three trends to more and stricter NTIs in PTAs.

10.3.1  Broadening the NTI Agenda Even though we see many NTIs in PTAs, all aspects have not been included right away in PTAs. Over time, however, all four issues increased in scope (see Figure 10.2). Whereas agreements signed in the 1970s cover under 20% of all coded aspects, modern PTAs cover 62% of the coded CPR, 78% of the coded ESR, 65% of the coded EP-, and 79% of the coded security aspects. In the following, I present detailed information on when particular aspects popped up and diffused for each NTI area.

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Percentage of coded aspects covered

80

60

40

20

esr

ep

cpr

2013

2008

2003

1998

1993

1988

1983

1978

1973

1968

1963

1958

1953

1948

0

security

Figure 10.2  Evolvement in scope of NTIs.

I start with the progression of CPRs aspects. Figure 10.3 shows that a general call to protect human rights has a long tradition. In the 1980s, democracy promotion, the rule of law, and the right to belief started to be part of trade agreement texts. The percentage of PTAs covering these aspects seem to be decreasing since 2005. The next generation of civil and political rights encompasses anti–human trafficking, women’s rights, minority protection, and children’s rights. Only recently did PTAs begin to cover good governance and food security. Examining Figure 10.4 shows that development, the right to health, and social protection are among the oldest aspects of economic and social rights. Legal texts of the Economic Community especially covered various social standards. Similarly, the founding members of the European

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Percentage of PTAs covering aspect

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good governance

food security

anti human trafficking

women rights

democracy

human rights (gen.)

children rights

rule of law

minority protection

right tofree belief

Figure 10.3  Evolvement of civil and political rights aspects in PTAs.

Free Trade Association (EFTA) covered social protection standards. In the early 1990s and with the conclusion of the North American Free Trade Agreement (NAFTA), labor rights became increasingly incorporated in PTAs. More trade deals started to refer to the prohibition of forced labor, the right to unionize and bargain, equal opportunity at work, and health and safety at work. New aspects in the ESRs category are the right to work, the call for migrant worker protection, minimum pay, and working time regulations. Figure 10.5 reveals that already in the early 1960s, countries committed, beyond the general call to save our environment, to the protection of

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development right to work right of migrant worker minimum wage right at work (general) equal opportunity at work prohibition of child labor prohibition of forced labor

2013

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right to education right to health working time regulation right of migrant worker right to unionize health and safety at work social protection

Figure 10.4  Evolvement of economic and social rights aspects in PTAs.

wildlife. In the late 1970s, a new wave of environmental protection commitment began. Protecting forests, regulating waste, reduction in contamination, regulating chemical waste, clean water, and climate change entered the sphere of economic agreements. Only in recent years, however, did countries start to commit to sustainable fisheries. Similar to ESRs, the range of ecological standards keeps widening.

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Percentage of PTAs covering aspect

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climate change

regulating game

protecting minerals

anti–contamination

regulating waste

clean water

wildlife protection

protecting forests

regulating chemical waste

environmental protection (gen.)

Figure 10.5  Evolvement of environmental protection aspects in PTAs.

Figure 10.6 shows the development of security issues. During the 1970s, the protection of national security seems to have been the major concern of countries. In the 1990s, trade deals increasingly called for the fight against corruption and drug trafficking. This is probably due to the fall of communisms and the rise in PTAs between country pairs with varying

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national security

anti−corruption

anti−drug trafficking

anti−terror

2013

2008

2003

1998

1993

1988

1983

1978

1973

1968

1963

1958

1953

1948

0

Figure 10.6  Evolvement of security aspects in PTAs.

political systems. In 2001, especially after 9/11, one can see a jump in terms of clauses dealing with the fight against terrorism.

10.3.2  Convergence in Commitment Style The previous section presented the broadening in scope. This section deals with the increase in commitment levels. However, the definition of what a high commitment level is varies. Broadly speaking, the design of non-trade issues in PTAs can be classified as two types: the enforcement approach, where countries commit to a set of juridical procedures that push for compliance with NTIs in PTAs, and the empowerment approach, where countries hold conversations on these issues with domestic actors

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(e.g. business, trade unions, non-governmental actors) and create capacity building mechanisms. The main idea of the enforcement approach is to set up a juridical system that polices compliance with NTIs. Three components characterize the ambition of such a juridical system: the degree of obligation, the degree of monitoring, and the extent to which NTI violators can be prosecuted. Obligation, the first component, can range from a purely promotional clause (weak obligation) to a hard sanctioning mechanism (strong obligation). With regard to monitoring, countries either conduct the assessment themselves or delegate it to an independent body. Prosecution is stronger if (1) not only states, but also individuals, can file disputes; (2) independent courts deal with the aspect; and (3) courts have the power to sanction violators. Empowerment is different from enforcement. The idea is to encourage participation of local stakeholders in NTIs and build capacity to facilitate compliance with NTIs. In this case, PTAs call for dialogue and cooperation with domestic groups and provide financial and technical assistance to authorities. I use 10 data points for each issue to calculate the enforcement index and 9 data points to arrive at an empowerment index.3 Instead of simply aggregating these data points, I use latent trait analysis (Bartholomew et al., 2011; Rasch, 1980), which inductively assigns weights to individual data points and creates a weighted sum.4 This data shows that, over time, the commitment level increased with regard to both the empowerment and the enforcement approach. Civil and political rights were the first to become stricter in PTAs. However, CPRs and security issues have slowed down in terms of both empowerment and enforcement. In contrast, the commitment level of ESRs as well as EP issues has been accelerating since the early 1990s.

The data points for the enforcement index, all coded with zero (no) and one (yes) are the following: sanctioning, obligation, assessment by state, assessment by independent body, individuals can file disputes, states can file disputes, state have veto on decision over dispute, domestic courts decide disputes, international courts decide disputes, no court decides dispute. The data points for the empowerment index, again all coded with zero (no) and one (yes) are the following: call for cooperation, call for dialog, institutionalization of dialog, consultation of international organizations, consultation of non-governmental organizations (NGOs), consultation of business, consultation of the public, consultation of academia, monetary and technical assistance. 4 Note that weights are higher for data points with fewer ones than for data points with more ones. 3

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Table 10.1 Number of PTAs with high enforcement and/or empowerment indices Number of PTAs with Strong Enforcement

Empowerment

ESR

7 (i.a. US)

EP

60 (i.a. Taiwan, New Zealand) 8 (i.a. EU with Balkan States) 0

38 (i.a. Marshall Islands, New Zealand, Australia) 0

CPR

Security issues

44 (i.a. EU, most African countries) 43 (i.a. Israel, Palau, Western Sahara, Eritrea, Laos)

Enforcement and Empowerment 21 (i.a. Canada, EU)

10 (i.a. EU, Canada, US) 28 (i.a. EU, African Union) 35 (i.a. EU)

Table 10.1 shows the number of post-1990 PTAs with strong enforcement and/or strong empowerment indices. Whereas countries focus on enforcement for EP, empowerment dominates for ESRs, CPRs, and clearly for security issues. The high enforcement index for EP might be because this is the most modern NTI in PTAs that increased starkly after the entry into force of NAFTA, wherein the enforcement approach dominates. However, the most recent trade agreements signed by Canada, the EU, and the United States have enforcement and empowerment elements included. Also, for ESRs, countries frequently choose a hybrid approach. Security clauses seem to be mainly of the empowerment type. Here, the fear of sovereignty loss might explain the absence of enforceable measures. Similarly, enforcement is scarce for CPRs. Solely the EU and members of the African Union use both, enforcement and empowerment, to deal with CPRs. Also interesting is the fact that those countries that initially focused on enforcement (e.g. the United States) start to include empowerment aspects and countries that originally favored empowerment (e.g. the EU) start to pick up on the enforcement index. Figure 10.7 shows this trend

the trend to more and stricter non-trade issues initially empowerment approach

247

initially enforcement approach

Commitment level

0.6

0.4

0.2

1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

0.0

empowerment

empowerment

enforcement

enforcement

Figure 10.7  Convergence of enforcement and empowerment approach.

and suggests that the juridification process of NTIs in PTAs is accompanied by a movement toward – at least on paper – an intensified dialogue with domestic stakeholders.

10.3.3  The Catch-Up of Developing Countries Although industrialized countries pushed for both, the broadening in scope and the increase in commitment level, developing countries have been catching up. Figure 10.8 shows this trend. The y axis presents the mode of legalization index of each NTI area. Again, latent trait analysis allows us to aggregate the data points shown in Figure 10.8 to one index. Figure 10.8 indicates the following pattern: first, the North–South PTAs were the first to include NTIs. Industrialized countries seem to have a special interest in holding their less developed treaty partners accountable for NTIs. Then, North–North PTAs followed the trend, suggesting that industrialized countries simply stuck to the commitments

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EP

ESR

Security issues

0.8

0.6

0.4

Mode of Legalization

0.2

0.0

0.8

0.6

0.4

0.2

SouthSouth

NorthNorth

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2013

2008

2003

1998

1993

1988

1983

1978

1973

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0.0

NorthSouth

Figure 10.8  Development of NTIs over time.

that they demanded from developing countries in previous agreements. Finally, South–South PTAs started to include stricter NTIs. Now, they cover security issues as strong as North–South trade deals. Also, for ESRs and EP, the commitment levels approximate. In contrast, South–South PTAs seem to move away from North–North and North–South PTAs concerning CPRs standards.

10.4 Conclusion To conclude, I summarize the main results of the descriptive analysis, offer some suggestions for future research, and draw future scenarios on NTIs in PTAs.

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10.4.1  Summary of Trends The aim of this chapter is to map the NTIs landscape in PTAs. The large collection of 262 data points in 644 PTAs reveals three major trends. First, NTIs broaden in scope. Whereas early trade deals covered exclusively national security, democracy, development, and a general call to protect the environment, modern PTAs are far more nuanced and deal with as many as 15 aspects per NTI area. Second, PTAs converge in terms of the commitment style. No longer are there PTAs with either an enforcement approach or an empowerment approach. Instead, progressive treaties include both commitment types. Third, developing countries increasingly commit to NTIs. This is not only the case if they sign PTAs with industrialized countries but also if they sign agreements among themselves.

10.4.2  Future Research These findings suggest that an investigation of the variance in NTIs in trade deals is relevant. The increasing complexity of PTAs is likely to teach us about foreign policy objectives and strategies of countries. This helps us to understand why countries cooperate more in some issues than in others. Scholars could investigate to what degree countries pursue foreign policy strategies by means of NTIs in PTAs. In this context, an interesting aspect would be to ask when countries hold back from including a particular issue that they used in previous trade deals. Also, one could assess customized foreign policy strategies: From whom does the EU require most concessions and from whom does it require the least? Why does China include environmental protection issues in some agreements but exclude them from others? Can external events trigger an upgrade in NTIs in PTAs? Did countries include more fight against terrorism clauses after terror attacks? The new dataset enables the examination of NTIs’ consequences on business, state, trade union, and NGO activity. Which clauses trigger domestic policy change and which fail to do so? Going even deeper, one could study the optimum institutional design for compliance: Is it enough to have precise provisions, or do clauses need to be written in a strict manner to induce an improvement in human rights or environmental protection? How effective are delegation mechanisms?

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10.4.3  Likely Future Scenarios The trend in the data clearly shows an increase in the importance of NTIs in PTAs. Environmental provisions especially seem to have grown at an accelerated rate in recent years. Increasing awareness of climate change issues by African and Asian countries may result in an even stronger average commitment level of EP in PTAs. Similarly, but at a slower pace, ESRs seem to have become more important in regulating international trade relations. In the future, security issues in trade deals may gain in popularity. Politicians increasingly emphasize security threats and revert to nationalism, which might be soon reflected in trade agreement texts. With more developing countries committing to NTIs, I would also expect development aspects to become more important. NGOs, trade unions, and the general public require stronger and stricter NTIs in PTAs. We might see increases in commitment levels. Another future scenario resulting from an increased general interest in fair trade and awareness of NTIs in PTAs might be that NGOs, trade unions, and individuals increasingly file disputes on the basis of human rights violation or the failure of environmental protection. There is only one case on labor rights violation under a PTA, but this might change in the future. In a nutshell, the proliferation of NTIs in PTAs is likely to continue. Societal pressure is prone to push this process even further, and the political, social, and ecological weight of PTAs will remain heavy for years to come.

References Abbott, K. W., Keohane, R. O., Moravcsik, A., Slaughter, A.-M. and D. Snidal. 2000. “The Concept of Legalization,” International Organization 54(3): 40119. Aggarwal, V. K. and K. Govella. 2013. Linking Trade and Security: Evolving Institutions and Strategies in Asia, Europe, and the United States. New York: Springer. Bartels, L. 2004. “A Legal Analysis of Human Rights Clauses in the European Union’s Euro-Mediterranean Association Agreements,” Mediterranean Politics 9(3): 368–95. Bartholomew, D. J., Knott, M. and I. Moustaki. 2011. Latent Variable Models and Factor Analysis: A Unified Approach. New York: Wiley. Bhagwati, J. 2000. “On Thinking Clearly about the Linkage between Trade and the Environment,” Environment and Development Economics 5(4): 485–96.   2002. “Afterword: The Question of Linkage,” The American Journal of International Law 96(1): 126–34.

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Bhagwati, J. and T. N. Srinivasan. 1996. “Trade and the Environment: Does Environmental Diversity Detract from the Case for Free Trade?” In: Bhagwati, J. N. and Hudec, R. E. (Eds.), Fair Trade and Harmonization: Prerequisites for Free Trade? Cambridge, MA: MIT Press. Esty, D. C. 2001. “Bridging the Trade-Environment Divide,” The Journal of Economic Perspectives 15(3): 113–30. Franck, T. M. 1990. The Power of Legitimacy among Nations. New York: Oxford University Press. Greif, A., Milgrom, P. and B. R. Weingast. 1994. “Coordination, Commitment, and Enforcement: The Case of the Merchant Guild,” Journal of Political Economy 102(4):745–76. Hafner-Burton, E. M. 2009. Forced to Be Good: Why Trade Agreements Boost Human Rights. Ithaca, NY: Cornell University Press. Hawkins, D. G., Nielson, D. L. and M. J. Tierney. 2008. Delegation and Agency in International Organizations. New York: Cambridge University Press. Hill, D. W. 2010. “Estimating the Effects of Human Rights Treaties on State Behaviour,” Journal of Politics 72(4):1161–76. Holsti, K. J. 1986. “Politics in Command: Foreign Trade as National Security Policy,” International Organization 40(3):643–71. Kim, M. 2012. “Ex Ante Due Diligence: Formation of PTAs and Protection of Labour Rights,” International Studies Quarterly 56(4):704–19. Koremenos, B. and M. H. Hong. 2010. “The Rational Design of Human Rights Agreements.” APSA 2010 Annual Meeting Paper. Kravchenko, S. 2007. “The Aarhus Convention and Innovations in Compliance with Multilateral Environmental Agreements,” Journal of International Environmental Law and Policy 18(1):2–50. Krugman, P. 1997. “What Should Trade Negotiators Negotiate About?” Journal of Economic Literature 35(1):113–20. Lechner, L. 2016. “The Domestic Battle over the Design of Non-Trade Issues in Preferential Trade Agreements,” Review of International Political Economy 23(5):840–71. Limão, N. 2007. “Are Preferential Trade Agreements with Non-trade Objectives a Stumbling Block for Multilateral Liberalization?” Review of Economic Studies 74(3):821–55. Mitchell, R. B. 1994. “Regime Design Matters: Intentional Oil Pollution and Treaty Compliance,” International Organization 48(3):425–58. Mitchell, S. M. and P.  R. Hensel. 2007. “International Institutions and Compliance with Agreements,” American Journal of Political Science 51(4):721–37. ORF. (2016). “Demo gegen CETA und TTIP auch in Innsbruck,” https://tirol.orf.at/ news/stories/2797222/.

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Postnikov, E. 2014. “The Design of Social Standards in EU and US Preferential Trade Agreements,” In: Deese, D. A. (Ed.), Handbook of the International Political Economy of Trade. Cheltenham: Edward Elgar Publishing, pp. 531–49. Rasch, G. 1980. Probabilistic Models for Some Intelligence and Attainment Tests. Chicago: University of Chicago Press. Skjaerseth, J. B. 1998. “The Making and Implementation of North Sea Commitments: The Politics of Environmental Participation,” In: Victor, D., Raustiala, K. and Skolnikoff, E. B. (Eds.), The Implementation and Effectiveness of International Environmental Commitments. Cambridge: MIT Press. Spilker, G. and T. Böhmelt. 2012. “The Impact of Preferential Trade Agreements on Governmental Repression Revisited,” The Review of International Organizations 8(3):343–61. Sprecher, C., Krause, V. and K. L. Powers. 2006. “Dispute Initiation and Alliance Obligations in Regional Economic Institutions,” Journal of Peace Research 43(4):453–71. Standard. 2016. “Tausende protestierten gegen CETA und TTIP,” https:// derstandard.at/2000044524696/Grossdemos-gegenCETA-und-TTIP-amSamstag. Stone, R. W. 2012. Lending Credibility: The International Monetary Fund and the Post-Communist Transition. Princeton, NJ: Princeton University Press.

PART III Development Angles

11 The Trade-Migration Nexus from a Multilevel Perspective flavia jurje and sandra lavenex 11.1 Introduction International migration is a relative newcomer on the “trade and” agenda and has hitherto received relatively little attention in trade and migration studies alike. True, international rules regarding the mobility of persons have remained hesitant and limited, at least at the multilateral level. The 1995 General Agreement on Trade in Services (GATS) of the World Trade Organisation (WTO) only introduced limited provisions regarding the mobility of highly skilled workers and managers, mainly within multinational companies. However, the inclusion of labour migration as one essential mode of cross-border trade in services, so-called “mode 4” in GATS, opened the agenda for more far-reaching developments at the level of regional and bilateral preferential trade agreements (PTAs). As we will show, this deepening of the trade-migration nexus is intricately linked to power shifts in the global economy and the rise of regionalism. Emerging countries such as China and India have been key in moving the standard of mobility norms beyond the status quo in their bilateral PTAs. Their demand for exporting labour through the means of service trade has met the interest of labour-importing countries, in particular Japan and to some extent South Korea, to bring in foreign workers without opening up traditional immigration channels. At the regional level, the desire to deepen market integration and the liberalization of trade in services have converged in a momentum to ease the mobility of persons, leading to a varied pattern of trade-related mobility norms across regional economic communities worldwide. These regional and bilateral deals have effectively shifted the norm of traderelated mobility provisions beyond the multilateral status quo, thereby raising the bar for future trade negotiations. For the international trade regime in 2025 – as projected in this collective volume – this means that, in combination with the ongoing power transitions, the trade-related 255

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mobility agenda is likely to expand beyond what the former sponsors of the GATS agreement, the European Union (EU) and the United States, originally intended.

11.2  Migration’s Entry onto the Multilateral Trade Agenda Migration is not a usual subject dealt with in connection with commercial policy. While regional economic communities like the EU and the Economic Community of West African States (ECOWAS) have included the free movement of labour from the start in market integration efforts (Lavenex et al. 2016), at the multilateral level, migration entered the trade agenda with the opening up of service markets. The delivery of a service is often not separable from the physical presence of the person providing it (Sapir 1999: 52). Hence, GATS included the mobility of natural persons as one of four modes of trans-border trade in services: electronic commerce, when a service moves electronically from one to another country (mode 1); movement of the consumer, when a person goes to another country to consume a service (mode 2); movement of juridical persons or a commercial presence, when a firm moves to another country to establish a presence (mode 3); and the movement of the service provider, when a natural person delivers a service in another country (mode 4). The inclusion of labour mobility in the GATS treaty was not self-­ evident (see Lavenex and Jurje 2015). When the industrial nations, and above all the United States, decided to raise services in the Uruguay Round in the mid-1980s, they faced opposition from the developing countries. Most developing countries are traders at the margin and are not competitive in those sectors which interest the North (especially finance and telecommunications). Liberalization of their markets was perceived as hindering the development of their own service industries. Because export of labour was initially not tackled by the multilateral negotiations, developing countries with labour surplus requested the inclusion of this factor in the negotiations, calling for ‘symmetrical’ commitments (Ghosh 1997: 57ff). The second round of negotiations (1989–90) was then dominated by the clash of interests between developed and developing countries on how to address labour mobility. The Western lobby, particularly the European Services Forum and the US Coalition of Service Industries, had persuaded their trade officials that certain provisions in domestic immigration laws constituted barriers to trade, inhibiting mobility within multinationals (Lavenex 2006; Panizzon 2010). This led developed countries to favour

the trade-migration nexus from a multilevel perspective 257

a limited liberalization of temporary labour, primarily within multinational companies. Developing countries, in contrast, argued for a broader liberalization. A group of eight countries (Argentina, Columbia, Cuba, Egypt, India, Mexico, Pakistan and Peru) presented a proposal which foresaw the (temporary) ‘cross-border movement of personnel covering unskilled, semi-skilled and skilled labour’ (Art. 1(3)1), ‘without arbitrary distinction relating to skills or position in corporate hierarchies’ (Art. 2(3)) and without infringing on national immigration, residence or citizenship laws (Art. 1(4)). This proposal not only extended the range of workers falling under the Agreement but also suggested allowing ‘firms providing services for which access has been granted under the Framework to recruit personnel from the source, among countries signatory, which is economically most advantageous’ (Art. 3(1)), thus introducing free competition over the production factor ‘labour’. The result of GATS was an open compromise reached one year after the conclusion of the Uruguay Round in July 1995. Accordingly, ‘Members may negotiate specific commitments applying to the movement of all categories of natural persons supplying services’. This includes both service suppliers who are employed by a foreign or national firm, and independent workers. While the Treaty thus adopted the open formulation favoured by the developing countries (regardless of skills and hierarchical position), the actual scope of liberalisation was left, however, to the members’ own commitments laid down in GATS schedules. This legal framework still determines the multilateral level of commitments in mode 4. In the Doha Round, labour mobility continued to be high on developing countries’ agenda, and for some emerging markets such as India it still constitutes ‘one of the most offensive interest’ in trade negotiations, in terms of looking to gain improved access to the markets of the trading partners and a removal of regulatory barriers (Interview Indian Government Official, New Delhi, 2014). In 2008, developing countries formed another coalition in the WTO submitting a ‘Plurilateral request on services’1 calling for wider commitments for contractual service suppliers (CSSs) and independent professionals (IPs), categories delinked from

Requesting members were Argentina, Brazil, Chile, China, Colombia, the Dominican Republic, Egypt, Guatemala, India, Mexico, Morocco, Pakistan, Peru, Thailand and Uruguay; target members were Australia, Canada, the European Community, Iceland, Japan, New Zealand, Norway, Switzerland and the United States.

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commercial presence, as well as for the removal of economic needs tests (ENTs).2 Statement papers submitted by India, and backed by Mexico, further requested broader sectoral coverage and market diversification, longer periods of stay, elimination of quota restrictions, removal of the wage parity clause and introduction of GATS visas or a business travel card to facilitate mobility (Interview Indian Diplomat, Geneva, 2013). As no progress has been achieved in the Doha negotiations, multilateral commitments on mode 4 are still governed by the 1995 GATS Agreement. The actual level of market access for mode 4 reached under the GATS is very limited, following a positive listing approach and favouring the highly skilled (Dawson 2013). According to an analysis of the Organisation for Economic Co-operation and Development (OECD), 240 out of 328 entries relate to executives, managers and specialists, and 135 strictly to intra-corporate transferees (ICTs). Yet only about 17 per cent of all horizontal entries cover lower-skilled personnel, and just a few countries have allowed some forms of restricted entry to ‘other level’ (OECD 2002: 31). In other words, the largest share of commitments in mode 4 relates to ICTs (43%), followed by business visitors, which account for 24% of all entries (UNESCAP 2014), categories which are both linked to commercial presence. Table 11.1 gives an overview of these categories, differentiating between highly skilled and other persons, and between categories that are linked to commercial presence, i.e. investment abroad – ‘mode 3’, and categories unlinked from commercial presence. The bold entries reflect those categories for which the traditional trade hegemons (i.e. the United States and the EU) have entered most commitments. The general limits of labour mobility under GATS are fixed in the Annex on Movement of Natural Persons. Its first paragraph states that commitments under this mode relate only to temporary admission of foreigners, and the fourth paragraph contains a safeguard which will not ‘prevent a Member from applying measures to regulate the entry of natural persons into, or their temporary stay in, its territory, including those measures necessary to protection the integrity of, and to ensure the orderly movement of natural persons across its borders, provided that such measures are not applied in such a manner as to nullify or impair the benefits accruing to any Member under the terms of a specific commitment’. An economic needs test means that those entering the country must provide evidence that there is an ‘economic need’ for their service which is not being met by domestic suppliers.

2

the trade-migration nexus from a multilevel perspective 259 Table 11.1 Categories of service suppliers GATS Mode 4 Highly Skilled Related to commercial presence Independent from commercial presence

Non–Highly Skilled

Intra-corporate transferees (ICTs) Trainees Business visitors (BVs) Traders/investors Self-employed/independent professionals Contractual service suppliers3 (CCSs)

Source: Compiled by the authors.

Notwithstanding these limitations, GATS does have an important impact on national immigration systems. It seeks to ease domestic ­regulations hindering the international mobility of service providers, such as visa requirement procedures, labour market regulations and working permits, regulations defining foreigners’ ability to work in individual areas, numerical quotas, licensing and qualification requirements, residency requirements and non-eligibility under subsidy schemes and discrimination on mandatory social insurance systems (for example, denial of pension entitlements). Restrictions affecting the mobility of family members also fall under the scope of the treaty and may be captured either under the general horizontal or in specific sectoral commitments (WTO 1998: 11ff).

11.3  The Trade-Migration Nexus in Regional Economic Communities Mobility provisions have also entered the trade agenda of regional economic integration frameworks. In some regions, such as the EU or ECOWAS, the free movement of labour was addressed from the onset, as part of these organisations’ market integration projects. Within Southern Common Market (MERCOSUR), labour mobility has been embraced as a basic freedom with the adoption of the Treaty of Asunción in 1991 (Mármora 2010), while the agenda on services trade and mobility of skilled professionals developed in parallel. In other regions, labour mobility has been introduced mainly in conjunction with the liberalization of

CSSs can encompass highly skilled but also lower-skilled persons, such as technicians, installers and care workers.

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service trade. This is the case notably for the free trade area established by the North American Free Trade Agreement (NAFTA) and within the Association of the Southeast Asian Nations (ASEAN). In the following, we discuss the trade-mobility interlink across these latter economic communities, where trade liberalization has played a major role in triggering openings for labour mobility.

11.3.1 NAFTA NAFTA facilitates movement of selected categories of workers for limited periods of stay among the member states. The agreement was signed in 1994 by Mexico, Canada and the United States. Chapter 16 of the agreement establishes procedures for the temporary entry of business people, covering similar categories as provided for by GATS. These include business visitors (admitted for up to 6 months in the United States and Canada, 1 year in Mexico), traders and investors carrying out trade in goods or services, and providing advice for investment (duration of stay 2 years, renewable indefinitely if they maintain their status within the enterprise in the United States, 1 up to additional 2 years in Canada, 1 up to additional 4 years in Mexico), ICTs (with a duration of stay of 3–7 years, depending on managerial level in Canada, 1–3 years up to 5–7 years in the United States, and 1 up to 4 years in Mexico) and professionals with a minimum of a baccalaureate degree working in specific sectors.4 Contrary to GATS, however, these business people are not limited to services and may include persons engaged in activities related to agriculture or manufacturing. It should be mentioned that until 2004, professionals from Mexico entering the United States under NAFTA were limited to 5,500 per year. Since 2004, a special Treaty NAFTA (TN) non-immigrant visa category has been created for all professionals who possess certification of employment which is initially valid for 1 year but may be renewed indefinitely provided that there is no intention of pursuing full-time employment. TN visa holders receive temporary residence and spouses and children under the age of 21 who are accompanying TN visa holders can receive a derivative visa. This does not grant working rights but allows studying. Commitments under the NAFTA Treaty are binding for member states and subject to dispute settlement mechanisms. However, concerning a refusal to grant temporary entry, dispute settlement provisions can be NAFTA Treaty, Appendix 1603.D.1.

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invoked only for matters that involve a pattern of practice and once the natural person has already exhausted the available administrative remedies (Nielson 2002). Overall, NAFTA provisions for temporary entry eliminated or reduced some of the hurdles related to labour certifications, work permits, or numerical restrictions. While the system has introduced elements of harmonization for business mobility, transparency and faster processing of applications, it is also sometimes considered rigid, and especially difficult to expand its coverage to other categories of people, particularly lowerskilled workers.

11.3.2 ASEAN A second region in which labour mobility has been addressed ­exclusively from the trade angle is Southeast Asia. Mobility of ­service providers was not part of the original declaration establishing ASEAN; however, it has become an important topic with the adoption of the 1995 ASEAN Framework Agreement on Services (AFAS), ­developments evolving relatively at the same time with the WTO/GATS mobility agenda. Members agreed that ‘there shall be a freer flow of capital, skilled labour and professionals among Member States’ (AFAS Art. 4). In 2012, Members signed the Agreement on Movement of Natural Persons (AMNP) that basically incorporates all mode 4 commitments initially included in the AFAS and came into force in June 2016, after its domestic ratification by all ASEAN members. To this add the mutual recognition arrangements (MRAs) that further promote the mobility of selected skilled professionals. Aspects related to migrant workers’ rights are covered in a regional declaration signed by ASEAN leaders in 2007. Most of the commitments inscribed in AFAS and subsequently in the AMNP cover mainly highly skilled professionals in the commercial sector. Similarly to the WTO/GATS commitments, these categories refer to the alleged ICTs (duration of stay in a member country initially of 2 or 3 years, with the possibility of extension to a maximum stay of 10 years in Malaysia) and business visitors (BVs; allowed for 30 up to 120 days, which may be extended up to a total duration of stay of 1 year in the Philippines). Only Vietnam, Cambodia and the Philippines have inscribed provisions on CSSs, which are service providers de-linked from any commercial establishment, moving as employees of a foreign company that would fulfil a contract with a host country client, for a limited duration of stay

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(e.g. a maximum of 90 days in Vietnam and up to 5 years in Cambodia) and subject to education and experience requirements. In 2006, ASEAN citizens received the right to enter and travel within the region for a two-week period visa-free. Intra-regional mobility is also promoted via MRAs for professional services, currently covering engineering, accounting, architecture, surveying, nursing, dental and medical practitioners, and tourism. Implementation is nevertheless pending for most professions because an MRA does not grant automatic recognition among members (Interviews Policy Expert ASEAN Secretariat, Jakarta 2014). In practice, trade-related labour mobility is seen as only facilitating the movement of professionals, managers, and qualified staff under the intra-corporate transferee category (Nikomborirak and Supunnavadee 2013; ILO/ADB 2015; Manning and Bhatnagar 2004), the other categories being generally conditioned upon a number of domestic regulations, including numerical quotas and ENTs together with pre-employment requirements (health clearances, security clearances, and personal and professional references), surcharges fees5 and technological transfer conditions. While commitments on mobility inscribed in AFAS are binding, it should also be noted that ASEAN is an intergovernmental organization without an independent body responsible for monitoring implementation and enforcement (Nikomborirak and Jitdumrong 2013) and the dispute settlement mechanism available within ASEAN has not yet been invoked (Ahn 2016). Wider mobility commitments have been achieved in extra-regional PTAs, or bilaterally in individual PTAs concluded by ASEAN members. A prominent example is the ASEAN-Australia-New Zealand PTA. The agreement delineates several categories of service suppliers, including CSSs and independent professionals, and natural persons de-linked from commercial presence. Australia even grants full working rights to family members for those service suppliers staying abroad from more than 12 months. The most developed economies in the region have engaged in bilateral PTAs, moving beyond the ASEAN status quo. Notably, Singapore has concluded trade agreements encompassing generous mode For example, the Indonesian government is requesting a so-called ‘compensation fee’ of USD 100/month per expatriate employee to offset the costs of training Indonesians (Interview Indonesian Trade Union Expert, Jakarta 2014). Some of these measures, e.g. technological transfer or compensation fees for investing in domestic education, are justified as part of broader developing policies employed by those countries.

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4 commitments with industrialized countries such as the United States, the EU, New Zealand, Korea and Japan but also with developing economies, including India and China. The far-reaching US-Singapore PTA has even made visa concessions, allowing Singaporean professionals to enter the United States under a specific visa (H1-B1) without any labour market tests. CSSs and a number of professional service providers were liberalized in the PTAs with Korea and Japan. Similarly, these categories delinked from commercial presence were included in the agreements signed by Singapore with India and China. Other bilateral agreements covering CSSs and specific independent professions (e.g. cooks, instructors, care workers, etc.) are the ones concluded by the Philippine, Thailand and Malaysia with Japan (also Malaysia with New Zealand, Australia, Korea, India and China). More bilateral PTAs are currently under negotiations, including some launched by the EU with Vietnam, Malaysia and Thailand (Interview Trade Diplomat, EU Delegation to Indonesia, Jakarta, 2014). In sum, intra-ASEAN movement of natural persons has sought to deepen regional economic integration, and a series of steps have been completed to achieve this goal, notably the developments within AFAS/ MNP and the conclusion of various MRAs. Many obstacles still need to be overcome in order to achieve greater regional mobility. Commitments undertaken by members so far have been mostly attached to investment and commercial establishments. In various instances, ENTs or numerical quotas restrict mobility of professionals, and domestic regulations prevail when it comes to accreditation. Reasons are often associated with regulatory heterogeneity across countries in the region, problematic institutional capacity and lack of enforcement mechanisms, which adds to the overall apprehension of member states in taking comprehensive binding commitments (Interviews Indonesian Government Officials, Jakarta, 2014). In contrast, much more has been achieved extra-regionally. Various external PTAs have broader and deeper chapters on mobility of natural people, facilitating the movement of labour at different skill levels as well as for categories detached from investment and commercial establishments.

11.3.3 MERCOSUR As pointed out above, within MERCOSUR, labour mobility has gradually evolved, and it is now embraced as a basic freedom attached to citizenship (Mármora 2010). The liberalization of internal mobility linked to trade has developed in parallel to two other processes. First, MERCOSUR’s initial Treaty of Asunción (1991) stated that the free movement of factors

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of production (including labour mobility) is one of the main objectives of the Common Market. The Common Market Group introduced a tripartite Working Group No. 10 composed of representatives of labour ministries, unions and employers’ associations to deal with labour migration and employment issues (Interview Argentinian Government Official, Buenos Aires, 2014). The second process of free movement promotion was launched with the Residence Agreement signed in 2002 (Ceriani 2015). This agreement entered into force in 2009 and grants MERCOSUR citizens, as well as nationals of Bolivia and Chile, the right to work and live within the territory of the state parties provided that they have no criminal record within the past five years (Interview Argentinian Government Official, Buenos Aires, 2014). Not least is the third process, the trade-related mobility agenda started in 1998, when the Council of the Common Market approved the inclusion of a specific provision on the movement of ­service providers under the Protocol of Montevideo on Trade in Services. The last (­seventh) round of services liberalization was concluded by MERCOSUR members in 2009 and covered temporary mobility of several categories of service providers, such as independent professionals, graduate trainees, contractual service suppliers, ICTs, BVs and technicians (Interview Argentinian Government Official, Buenos Aires, 2014). The services liberalization process exceeds current commitments under GATS, covering more categories of persons who are allowed for longer periods of stay (e.g. ICTs, independent professionals, CSSs admitted initially for 1–2 years, permit renewable in all countries and indefinitely in Argentina if the working contract or service supplied is ongoing; BVs admitted for 180 days and possibility to receive a permanent residence in Brazil if investment exceeds USD 30,000). In short, mobility within MERCOSUR and the associated countries has become, at least formally, a very liberal regime, comparable to the EU free movement model. Nevertheless, the level of legalization is relatively weak, and, without independent monitoring and legal enforcement mechanisms, implementation is patchy. The process of services liberalization would add another dimension to mobility of selected service providers and business people, aiming to facilitate their movement in a relatively short time frame.

11.4  Expanding the Status Quo through Bilateral PTAs The proliferation of bilateral PTAs yields some dynamics in mode 4 commitments and, at this level, there are also commitments on semi-skilled or lower-skilled migrants (Hufbauer et al. 2012). Countries have been

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PERCENTAGE OF FTAS CONTAINING MOBILITY PROVISIONS

using PTAs as a way of either exporting or importing labour. Typically, countries able to make such strategic use of PTAs for mobility purposes have market leverage and are either emerging or developed economies. The countries which have contributed most to the expansion of outward mobility norms are India and China, which, since the institutionalization of the trade-mobility nexus in the GATS agreement, have been pushing for more ambitious mode 4 provisions in their trade negotiations. At the WTO level, the Doha Round has not allowed for further progress in this respect, but these countries have been very active bilaterally, concluding PTAs with extensive mobility provisions both with Western and other Asian trading partners. On the receiving end, the countries that have made most use of PTAs to attract foreign migrants are also in Asia: Japan and South Korea. These two countries have opened up diverse and more far-reaching admission commitments on mode 4 to their trading partners. On the one hand, the pursuit of immigration needs through trade venues provides a way to circumvent restrictive immigration policies and public opinion. On the other hand, the clustering of these commitments in Asia also reflects the increasing integration of developing economies in global markets and the growth in South-South trade and investment relations (IOM 2008). Figure 11.1 offers an overview of the mode 4 commitments inserted in the PTAs concluded by the two emerging markets, India and China, as well as the two receiving economies, Japan and to a lesser extent South Korea.

100 90 80 70 60 50 40 30 20 10 0

PTAs and mode 4 provisions

India (4)

China (13)

Japan (14)

S Korea (14)

Intra Corporate Transferees

Business Visitors

Investors/Traders

Contractual Service Suppliers

Independent Professionals

Installers

Figure 11.1  Mobility-related provisions in bilateral PTAs: India, China, Japan and South Korea. Source: Authors’ calculations based on primary data coded from FTAs.

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11.4.1  Demandeurs on Mode 4: India and China India has concluded four PTAs so far covering trade in services, with Singapore (2005), Korea (2010), Malaysia and Japan (2011). All these PTAs cover sub-categories of service suppliers de-linked from commercial interests, including for CSSs and independent professionals, categories that appear in almost all agreements. There is no mention of ENTs or quota restrictions, and generally the requirements with regard to visa and duration of stay are clearly outlined. Another development is related to mobility and working rights for families (spouses, dependents) of service providers. India’s trading partners have offered similar commitments, in some cases even a better outcome. For example, in the PTA with Japan, the duration of stay for independent professionals and CSSs coming from India is initially one or three years, with the possibility of renewal, while India offered to the Japanese independent professionals and CSSs a maximum period of one year. Japan has further liberalized services to independent professionals coming from India in particular sectors, covering nurse practitioners, yoga or English language instructors, cooks, etc. For China, GATS mode 4 commitments represent principal offensive interests when negotiating bilateral trade agreements. In fact, China has concluded to date 13 PTAs which have chapters on services and mobility of services providers, some with well-established OECD economies, such as Australia, New Zealand, and Switzerland. Besides covering substantial commitments for the categories de-linked from commercial establishments, these PTAs also encompass mobility and work rights for families. The China-Australia PTA is particularly relevant, with Australia granting China ‘guaranteed access’ for a quota of up to 1800 CSSs annually in certain occupations, along with up to 5000 visas issued annually for a ‘Work and Holiday’ arrangement. Also, the two countries have committed to expeditious and transparent immigration procedures and cooperation on mutual skill recognition. Finally, a memorandum of understanding allowing for investment facilitation arrangements (IFAs) gives Chineseowned companies registered in Australia engaged in large infrastructure projects (over USD 150 million capital expenditure) the possibility of bringing Chinese workers (not necessary highly skilled) for the duration of the projects (Lavenex and Jurje 2017). Not least, China’s trade relations with ASEAN countries reflect as well the importance of labour mobility. For instance, the Trade in Services Agreement concluded under the Framework Agreement on Comprehensive Economic Cooperation between China and the ASEAN provides for improved market access and

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national treatment for select service suppliers with the objective of facilitating greater investment in the region.

11.4.2  Receiving Economies: Japan and South Korea Japan and South Korea are countries which have been using PTAs as a tool to bring in skilled and semi-skilled necessary labour. Traditionally known as a closed host country, Japan has decided to include labour mobility provisions in PTAs for those sectors with labour shortages. This includes opening up sectors to semi-skilled labour and to categories de-linked from commercial interests such as independent professionals or CSSs. The example of the mobility of Asian nurses and caretakers liberalized through trade is a case in point: the Japan-Philippines PTA (2008) was the first agreement to include labour mobility provisions, allowing the admission of Filipino nurses into the Japanese market. Further PTAs concluded with other Asian countries such as Thailand, Indonesia and India also contain such provisions, with nurses being trained to develop language and additional professional skills in programs sponsored by Japan (Interview Indonesian Government Official, Jakarta 2014). Linking trade with labour mobility clearly reflects Japan’s economic strategy to fill labour shortages by bypassing highly restrictive domestic immigration law. South Korea represents another destination economy for labour mobility. The Korean government has implemented both low and highly skilled immigration policies. It has designed the so-called Employment Permit System, allowing mobility for low-skilled workers from 16 countries currently, most from Southeast Asia, in sectors suffering from labour shortages such as construction, agriculture, and manufacturing; for the latter, an important share of skilled professionals comes through GATS commitments (Interview South Korean Government Official, Seoul, 2015). In its PTAs covering labour mobility, besides intra-corporate transferees and business visitors, Korea has further granted market access for CSSs (in about 70 per cent of all PTAs) and independent professionals (in about 50 per cent of the agreements concluded). In particular, the agreements concluded with the ASEAN bloc, but also with individual members such as Vietnam, Singapore, India and China, all have commitments for CSSs and some for independent professionals. The PTA concluded with India (2010) is considered the most comprehensive agreement on mode 4 signed with a developing country and was the first to grant access to independent professionals (Interview South Korean Government Official, Seoul, 2015).

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In addition, important mode 4 concessions have also been granted to countries outside Asia, such as Peru, Colombia and Chile, which cover mobility rights including for family members of the main applicants. In sum, mobility linked to trade represents an important channel in the flow of labour, especially among Asian countries. The analysis has revealed that the countries with the most comprehensive mode 4 ­commitments in PTAs or under GATS are, on the one hand, those with an export interest, in particular India and China for their IT professionals and CSSs, respectively. On the other hand are countries with domestic labour shortages and import needs, but whose unilateral intake is limited by restrictive immigration systems, including Japan and South Korea. The trade venue has thus become an alternative policy instrument – although still limited in scope – to liberalize labour mobility. Liberalization following classical immigration laws and their sensitivity for the states’ understanding of sovereignty would probably have met much more resistance domestically.

11.5  Projecting towards 2025 Notwithstanding the worldwide diffusion of restrictive immigration discourses, our analysis suggests that the trade-mobility agenda will further expand in the future. Ongoing developments within both the trade and labour migration arenas point towards the continuation and evolution of this nexus at the multilateral, regional and bilateral levels.

11.5.1  Global Level At the global level, the ongoing negotiations of the Trade in Services Agreement (TiSA), launched in 2013 and currently engaging 23 members of WTO, trigger debate on the movement of natural persons from the trade angle. The Annex on the Movement of Natural Persons aims to facilitate the mobility of certain categories of people such as BVs, intra-corporate transferees, investors and professionals. With the lead of mainly the EU, Canada, New Zealand, Australia and Turkey, the discussions tackle also sensitive issues (especially for the developed economies) such as the elimination of ENTs and opening up of service sectors which were not covered by the GATS commitments, including for some professional services (Interview South Korean Government Official, Seoul, 2015). Nonetheless, the formal rounds of negotiations are currently on hold, especially given the unclear position of the United States vis-à-vis the agreement, also

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regarding labour mobility; however, informal consultations among members are under way (Government of Canada, 2017).6 From the migration side, the global arena has seen a revival with the adoption of the New York Declaration for Refugees and Migrants at the UN Summit in 2016, and consequently the preparation of a Global Compact for Migration (GCM) which was adopted by most UN member states by the end of 2018. The so-called ‘Zero Draft’ of the GCM released in February 2018 makes direct reference to the trade-migration interlinkage, particularly by encouraging members to use trade agreements in order to achieve broader recognition of skills, qualifications and competences of migrants (GCM Zero Draft 2018: 207). At the same time, trade agreements are considered to be important instruments through which states should ensure the portability of social security entitlements and benefits, including pensions and medical and life insurance (GCM Zero Draft 2018: 23).

11.5.2  Regional Level Further developments are taking place at the regional level as well. Here, besides ongoing policy advancements with the labour mobility agenda of the particular regional integration units, some other prominent examples are given by broader initiatives to promote human mobility, such as the proposal of the Asia-Pacific Economic Cooperation (APEC) economies in 2016 to create a labour mobility gramework for this wider region. The overarching goal of the framework is to support APEC member economies in achieving efficient and effective labour mobility through a shared vision of the opportunities and challenges associated with the global movement of workers, including the increasing number of women involved in labour mobility. Part of the broader APEC agenda on regional economic integration and connectivity plan devised for 2015–2025,8 labour mobility and the movement of students are issues, next to free trade, financial inclusion and the development of SMEs, which occupy a central role in the discussions. A direct link between cross-border mobility and services competitiveness has been made by the APEC leaders, which are endorsing ‘people-to-people

For details, see www.international.gc.ca/trade-agreements-accords-commerciaux/topicsdomaines/services/tisa-acs.aspx?lang=eng#a. 7 The full text is available at https://refugeesmigrants.un.org/sites/default/files/180205_ gcm_zero_draft_final.pdf. 8 Details are available at https://apec.org/Meeting-Papers/Leaders-Declarations/2014/2014_ aelm/2014_aelm_annexd. 6

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connectivity’ and are working towards the implementation of mobility policies in the coming years. Another forum where labour mobility is addressed across wider regions is the Asia-Europe Meeting (ASEM), with its recent proposal for an Asia-Europe Connectivity Vision 2025 (ERIA 20169). Part of the Vision 2025, discussions on enhancing mobility have also evolved around the service chapters of the trade agreements signed between the EU and ASEM countries. For future debates, policies that aim at further promoting mobility between the two regions are sought to focus on reducing barriers to mobility encountered in states’ practices, such as visa-issuing procedures, labour market tests, numerical quotas or national language requirements. Furthermore, the recognition of skills and education qualifications are also addressed in the context of services trade.

11.5.3  Bilateral Level Future bilateral PTAs are also likely to go further in expanding labour mobility provisions. Clear indications for this are the ongoing negotiations of PTAs between emerging markets and developed economies, for example, the India-EU PTA or China’s demands in future trade deals. India has been negotiating with the EU on the conclusion of a PTA since 2007 and commitments on mode 4 have been and remain India’s main offensive interest in trade negotiations. Although negotiations are not concluded, the EU has been willing to offer commitments that go well beyond what it has given so far on mode 4. The clearest manifestation is the offer of national quotas per EU member state on the admission of CSSs and independent professionals, i.e. categories of persons not related to commercial interests and not necessarily highly skilled. Furthermore, under the influence of the main lobby in mode 4 matters, the National Association of Software and Services Companies (NASSCOM), Indian negotiators have advanced, apart from the claim to eliminate numerical quotas, the ambitious demand for an EU-wide work permit or visa being offered to service providers (Interviews Indian Government Official and NASSCOM representative, New Delhi, 2014). Clearly, this would be a major benefit for Indian companies based in one member state who want to expand their services to other member states without being obliged to open other commercial presences, for instance, in

The report is available at www.eria.org/publications/key_reports/asia-europe-­connectivityvision-2025.html.

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the information technology (IT) business. While particularly attractive at the junction between modes 3 and 4, an EU-wide work permit would also be advantageous for CSSs and independent professionals. Other items on the agenda are the introduction of a specialized visa for the mobility of service providers (for example, in NAFTA), transparent and clear methods for recognition of qualifications, and flexibility regarding the wage parity condition and labour standards. To date, it is not clear when the deal between the EU and India will be struck; however, if negotiations resume and Indian demands on mode 4 are accepted, the treaty would a major innovation for trade-mobility regulations, without precedent for the EU. In the case of China, labour mobility has become a priority in all its trade agreements, with Chinese officials consistently demanding broader mode 4 provisions in ongoing negotiations or revisions of already concluded treaties. A case in point is the discussions around updating and expanding the PTA signed with Switzerland, with China formulating demands on widening the commitments offered by Switzerland on labour mobility (Interview Swiss Government Official, 2017). China’s growing market power is likely to play a substantial role in backing such requests in any future PTAs.

11.6 Conclusions The trade-migration nexus has evolved since the 1995 multilateral GATS agreement. It entered the regional level within several economic integration projects, and particularly in ASEAN and NAFTA where labour mobility liberalization went hand-in-hand with services trade liberalization. The trade-migration nexus has seen a further expansion at the bilateral level, where mobility provisions in PTAs have seen an incremental widening, primarily as an outcome of requests from emerging economies such as India and China and of the demand of countries which were unable to meet labour shortages due to restrictive immigration systems, such as Japan and South Korea. The trade arena provided an opportunity within which both labour-exporting emerging countries and countries in need of foreign labour could address their needs relatively shielded from politicized immigration debates. While mode 4 provisions have shown initially a propensity for the mobility of highly skilled workers within multinational companies, they have since come to include liberalization achieved for independent professionals and CSSs, as well as the commitments taken towards social rights, visa facilitation and working entitlements in some agreements promoted by developing countries that would have otherwise probably not

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entered the trade venue. Notwithstanding the diffusion and intensification of restrictive immigration discourses around the world, the trade arena has gradually carved out a depoliticized, market-oriented channel for labour flows. The growing importance of the service sector in the global economy is likely to sustain this nexus between trade and migration policies in future trade deals – at the global, regional and bilateral levels.

References Ahn, D. 2016. The Legal and Economic Analysis of the WTO/FTA System. Singapore: World Scientific Publishing. Ceriani, P. 2015. “Improving Migrants’ Rights in Times of Crisis: Migration Policy in Argentina Since 2003,” In: D. Acosta Arcarazo and A. Wiesbrok (Eds.), Global Migration: Old Assumptions, New Dynamics. Santa Barbara, CA: Praeger. Dawson, L. R. 2013. “Labour Mobility and the WTO: The Limits of GATS Mode 4,” International Migration 51 (1):1–23. Ghosh, B. 1997. Gains from Global Linkages. Trade in Services and Movement of Persons. London and New York: Macmillan, in association with International Organization for Migration (IOM). Hufbauer, G. C., Bradford Jensen, J. and S. Stephenson. 2012. “Framework for the International Services Agreement,” Policy Brief of the Peterson Institute for International Economics 12 (10). International Labour Organization (ILO) and ADB. 2015. ASEAN Community 2015: Managing Integration for Better Jobs and Shared Prosperity. Bangkok: ILO and ADB. www.adb.org/sites/default/files/publication/42818/aseancommunity-2015-managing-integration.pdf. International Organisation for Migration (IOM). 2008. World Migration: Managing Labour Mobility in the evolving Global Economy, IOM World Migration Report Series, https://publications.iom.int/system/files/pdf/wmr_1.pdf. Lavenex, S. 2006. “The Competition State and the Multilateral Liberalization of Skilled Migration,” In: M. P. Smith and A. Favell (Eds.), The Human Face of Global Mobility, International Highly Skilled Migration in Europe, North America and the Asia-Pacific. New Brunswick, NJ: Transaction Publishers. Lavenex, S. and F. Jurje. 2015. “The Migration-Trade Nexus: Migration Provisions in Trade Agreements,” In: L. Talani and S. Mc Mahon (Eds.), Handbook of International Political Economy of Migration. Cheltenham and Northampton: Edward Elgar.   2017. “EU/US Migration Policy towards Emerging Countries: Regulatory Power Reversed?,” The European Foreign Affairs Review 22, Special Issue: 157–76. Lavenex, S., Jurje, F., Givens, T. and R. Buchanan. 2016. “Regional Migration Governance,” In: T. Börzel and T. Risse (Eds.), Oxford Handbook of Regional Integration. Oxford: Oxford University Press.

the trade-migration nexus from a multilevel perspective 273 Manning, C. and P. Bhatnagar. 2004. “Liberalizing and Facilitating the Movement of Individual Service Providers under AFAS: Implications for Labour and Immigration Policies and Procedures in ASEAN,” REPSF Project 02/004 final report, online at http://aadcp2.org/file/02-004-FinalMainReportOnly_ ApendixNotIncluded.pdf. Mármora, L. 2010. “Modelos de Gobernabilidad Migratoria. La Perspectiva Política en América del Sur,” Revista Interdisciplinar da Mobilidade Humana 18(35):71–92. Nielson, J. 2002. “Current Regimes for Temporary Movement of Service Providers Labour Mobility in Regional Trade Agreements.” Joint WTO ‐ World Bank Symposium on Movement of Natural Persons (Mode 4) Under the GATS. Nikomborirak, D. and S. Jitdumrong. 2013. “ASEAN Trade in Services,” In: S. B. Das et al. (Eds.), ASEAN Economic Community. A Work in Progress. Singapore: ADB and Institute of Southeast Asian Studies. OECD, Trade Directorate. 2002. Working Party of the Trade Committee: Service Providers on the Move: A Closer Look at Labour Mobility and the GATS. TD/TC/WP(2001)26/final. Panizzon, M. 2010. “Trade and Labor Migration, GATS Mode 4 and Migration Agreements,” Friedrich-Ebert-Stiftung, Dialogue on Globalization Occasional Paper, N 47, Geneva. Sapir, A. 1999. “The General Agreement on Trade in Services. From 1994 to the Year 2000,” Journal of World Trade 33(1):51–66. UNESCAP. 2014. Regional Integration and Labour Mobility. Linking Trade, Migration and Development. Studies in Trade and Investment 81. Online at: www.unescap.org/sites/default/files/publications/STESCAP2688_No81.pdf. WTO. 1998. Council for Trade in Services, Presence of Natural Persons (Mode 4), Background Note by the Secretariat, S/C/W/75of8.12.1998.

List of Interviews Interview Permanent Mission of Indian to the WTO, Geneva, February 2013. Interview Federation of Indian Chambers of Commerce and Industry (FICCI), New Delhi, India, January 2014. Interview Ministry of Commerce and Industry, Department of Commerce, New Delhi, India, January 2014. Interview ASEAN Secretariat, AEC Department, Jakarta, Indonesia, June 2014. Interview Ministry of Manpower and Transmigration, Jakarta, Indonesia, June 2014. Interview Ministry of Trade Indonesia, Services division, Jakarta, June 2014. Interview Expert IOM Buenos Aires and Regional Office for South America, Buenos Aires, July 21, 2014. Interview Ministry of Labour, Buenos Aires, July 23, 2014. Interview University of Lanus, Buenos Aires, July 22, 2014.

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Interview National Direction for Migration, Buenos Aires, July 22, 2014. Interview Ministry of Development, Industry and Foreign Trade, Brasilia July 29, 2014. Interview Ministry of Trade, Services Division, Jakarta, Indonesia, October 2014. Interview Ministry of Trade and Industry Singapore, September 2015. Interview Ministry of Trade, Industry, and Energy, South Korea, Seoul, 2015. Interview Academic Expert, Beijing, September 2015. Interview ILO Experts, Beijing, September 2015. Interview IOM Experts, Beijing, September 2015. Interview Policy Expert, Beijing, September 2015. Interview Government Official, Switzerland 2017.

12 TRIPS Implementation in Developing Countries Likely Scenarios to 2025

omar serrano and mira burri 12.1 Introduction This chapter sketches future scenarios of the implementation of the Agreement on Trade Related Intellectual Property Rights (TRIPS) in developing countries by looking at past experience and current trends and by comparing historical and cross-country patterns. The chapter focuses on the three largest emerging economies – Brazil, India, and China (BIC) – because they bear the highest potential to shape the intellectual property (IP) regime. Through international contestation, domestic implementation, and even novel rule-making, these countries have been able to ensure that some flexibility in the implementation of TRIPS remains. Their domestic policies and coalition-building efforts have been followed by many other developing countries. BIC have taken different paths in the implementation of TRIPS. Brazil and India have contested a strict application of the agreement and sought ways of using its flexibilities – what is known in the literature as a minimalist approach. In contrast, China has, despite having faced continuous accusations of intellectual property violation, followed a more rigorous domestic interpretation of TRIPS that is in line with the agenda pursued by industrialized countries and often refered to as a maximalist approach.1 In addition to these differences at the meta-level, there are others that reflect the economic, social, and cultural specifities of each BIC country and their political economies, which shape Maximalist and minimalist policies have to do with the trade-offs involved in IP policies, in particular, the conflicting objectives of creating and using/disseminating knowledge (Shadlen 2005). A crucial aspect that affects choices has to do with the extent to which policy-makers believe that restricting access to knowledge is a precondition to innovation and improving economic welfare (what is known as a maximalist approach to IP) or, on the contrary (a minimalist understanding), if they believe that the exclusion from knowledge is an obstacle to innovation, cultural flourishing, and economic development (Haunss and Shadlen 2009).

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their domestic and international positions on IP. There are also a number of commonalities that have to do with the rising economic and political importance of BIC and specifically for the area of IP policy, with their transition into innovation engines and into being actual beneficiaries of a strong IP regime, which may also prompt a shift in the, at least so far, minimalist approach. Against this backdrop and taking into account the performance of BIC on the international stage, it is a valid and interesting question to ask whether we can now predict the trajectories of their future TRIPS implementation. If we can answer this question in the positive, we can pose another one with regard to the likely scenarios that we can sketch up to 2025. This chapter seeks to answer both questions by evaluating the approaches in the IP domain followed by BIC so far. We will show that the approaches of the three countries toward TRIPS are not devoid of contradictions because they have supported the agreement in some areas while challenging it in others. There is one aspect of crucial importance to BIC and other developing countries and that is the area of the intersection between IP and public health that has had repercussions for the treatment of pharmaceutical patents. This area is particularly interesting because India and Brazil have been proactive there and have engaged as alternative rule-makers (Serrano and Burri 2017). Another important area in which BIC have been active and have brought about new rules is the domain of access and benefit-sharing (ABS) of genetic resources and related traditional knowledge. The shift from rule-taking to rule-making that BIC have undergone with regard to TRIPS has taken place through multilateral negotiations at the TRIPS Council and via domestic practice. Both of these mechanisms are explored in detail in this chapter. The most notable example of multilateral negotiations are efforts by BIC on ABS policies through a homologation of TRIPS and the Nagoya Protocol. With regard to domestic practice, the contested TRIPS negotiations left gaps that are subject to interpretation, as argued by Okediji (2004). The interpretation of IP norms through domestic practice, especially but not only in cases when such practice leads to disputes at the WTO and to favorable appellate body decisions, may solidify the agreement by filling such gaps and making the requirements more or less stringent, depending on the public interest at stake. A good example of this contestation is the complaint filed by the United States in 2000 that challenged the legality of local working requirements by Brazil under

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TRIPS – something that we discuss in more detail below. New global rules may also evolve through domestic interpretation of TRIPS if they diffuse to other developing countries. The most notable example of this is Section 3(d) of the 2005 Indian Patent Act, which sets stricter limits to secondary patents and has been widely copied by other emerging and developing countries with serious repercussions for pharmaceutical companies and public health policies, as we show below. The chapter is structured as follows. The first section provides a brief overview of the main features of the IP regime and how BIC and other developing countries have attempted to adapt TRIPS. This is followed by a detailed evaluation of the approaches taken toward TRIPS in each one of BIC and their impact in other developing economies. The third section draws some lessons from these previous experiences to suggest what the likely positions of BIC will be on TRIPS implementation up to 2025. Some concluding thoughts are offered in the last section.

12.2  Features of the IP Regime and Adaptation by Emerging Economies to TRIPS IP rights have become a disputed issue between industrialized and developing countries ever since US leadership and concerted efforts with the European Union (EU), Japan, and Canada brought about the conclusion of TRIPS in 1995 under the umbrella of the World Trade Organization (WTO). The agreement codified a set of binding international rules, including on patents, trademarks, and copyrights (Correa 2000; Sell 1995). Strong resistance from developing countries led by Brazil and India during the negotiations left room for interpretation, what is known as TRIPS flexibilities. These offer some opportunities for developing countries to resist the maximalist IP agenda furthered by industrialized countries, which sets high standards of protection in all areas of IP protection, limits users’ rights, seeks effective enforceability in both civil and criminal matters, and the favors installment of domestic institutions to ensure this (Krizic and Serrano 2017). Many developing countries have considered that, in some cases, such enhanced IP protection can be detrimental to development and have attempted to secure exceptions on the basis of distinct public interest concerns, such as public health and access to knowledge – subscribing to the so-called minimalist approach. After all, it should be kept in mind that developing countries only acquiesced to TRIPS because of

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the pressures of the WTO as a single undertaking and bargains linking IP protection to improved market access for textiles and agriculture (Deere Birkbeck 2008). After TRIPS, India and Brazil have continued to lead coalitions of developing countries with the aim of limiting and calibrating the impact of the changes brought about by TRIPS (Serrano and Burri 2017). Global public health is among the few areas where emerging countries have taken a major role in interpreting TRIPS and shaping IP rules by promoting limits to pharmaceutical patents. These efforts have been followed and supported by other developing countries. While this issue may appear narrow in scope, in fact, pharmaceutical patents have great economic significance for industrialized countries and have mobilized lobbyists, both domestically and internationally, in driving the expansion of the IP regime. Pharmaceuticals, together with audiovisuals and information technology (IT), have indeed been one of the main sectors pushing for the establishment of TRIPS during the Uruguay Round. Pharmaceutical patents can thus be seen as a focal point of wider debates about the underlying question of whether patents, as the hardest IP form created to protect inventions and promote innovation, are potentially detrimental for development or not. TRIPS offered transition periods for emerging countries, often up to 10 years, as in the case of India, so that the full effects of the agreement were not immediately perceived or felt on the ground. Once the transition was over, however, bureaucratic actors in India and Brazil realized the enormous costs that came with the agreement. This was particularly the case with regard to pharmaceutical drugs. The threat posed by a full TRIPS implementation to the survival of Brazil’s HIV/AIDS program and India’s vast generics industry mobilized domestic and international stakeholders in seeking a more flexible interpretation of IP norms. Brazil and India have been also especially successful in these endeavors. They have made use of, among other things, compulsory licensing; enacted domestic legislation limiting patents, such as domestic working requirements and setting limits to secondary patents; and launched agendas on development issues, such as access to medicines, promoting the linkage between human rights and health, protection of traditional knowledge, and access to biological resources (Kapczynski 2008). These initiatives have been furthered in venues including the WTO but also through other channels offered by the World Intellectual Property Organization (WIPO), the World Health Organization (WHO), and the Convention on Biological Diversity (CBD), among others. The 2001 Doha Declaration

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on TRIPS and Public Health2 and the 2005 launch of the Development Agenda at WIPO stand out as significant achievements. China has taken a different path. The country “has been reluctant to press for a structural reform of IP regulation in the WTO, despite lending its support to developing countries when the negotiations over the Decision on Implementation of Paragraph 6 of the Doha Declaration were under way” (Chan 2010, 115). The reason for this has to do with China’s long quest to join the WTO, which gave the United States and the EU significant leverage. It took China 15 years to attain WTO membership, and the country was not granted the developing countries’ grace period for implementing TRIPS. Besides making use of WTO-entry negotiations, the United States and EU have sought to modify China’s approach toward IP through bilateral cooperation in the area of IP legislation and enforcement, such as the EU-China IP dialogue launched in 2004 and the US-China IP Cooperation Dialogue set up in 2013. Due to these pressures and the fact that the country remains the prime target of IP violations complaints, China has taken a subdued position in meetings of the TRIPS Council. However, it has supported public health concerns of other developing and emerging countries. More recently, China has taken a more activist approach with regard to ABS. It has also launched a deep reform of the China Drug Administration (CDA), which has allowed it to negotiate with patent holders to reduce the price of pharmaceutical drugs in the country. Rather than making use of TRIPS flexibilities to reduce the rising costs of its healthcare system, as other developing and emerging economies have done, China has taken advantage of its market power to do so; it is now the world’s second largest consumer of medicines.3 In sum, the establishment of TRIPS was largely resisted by developing countries, which, under the leadership of Brazil and India, have sought to The 2001 Declaration on the TRIPS Agreement and Public Health (WT/MIN(01)/DEC/2) affirmed that the TRIPS Agreement “can and should be interpreted and implemented in a manner supportive of WTO Members’ rights to protect public health and, in particular, to promote access to medicines for all” (para. 4). The Doha Declaration went on to reaffirm the key flexibilities available under the TRIPS Agreement, such as the power of WTO Members “to grant compulsory licences and the freedom to determine the grounds upon which such licences are granted,” as well as “the right to determine what constitutes a national emergency or other circumstances of extreme urgency” (para. 3, lit. b and c). The Doha Declaration also addressed the constraints on exports set out in Article 31(f) TRIPS and instructed the Council for TRIPS “to find an expeditious solution to this problem” (para. 6). 3 The Economist (2018) “Swallowing bitter pills: China is sprucing up its pharma sector,” August 30, 2018. 2

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weaken it or at least to keep its flexible implementation. Brazil and India have taken advantage of the fragmentation present in the IP regime. The proliferation of forums and the multiplication of transnational networks have helped them preserve flexibilities (Morin et al. 2018). Thus, minimalist approaches have been sought not just at the TRIPS/WTO but also at the WIPO. The latter, as part of the Development Agenda, has established committees and divisions that, alongside the traditional structure, explore emerging and unconventional issues (Netanel 2009). Other international forums where IP and, in particular, patent-related issues have been discussed include public health, human rights, biological diversity, food and agriculture, climate change, and indigenous knowledge. These efforts have been supported by different types of transnational networks, including non-governmental organizations (NGOs) and other types of activists, generic producers, academics, and civil servants (Sell and Prakash 2004; Matthews 2011; Morin et al. 2018). The next section looks in detail at the discrete policies followed by Brazil, India, and China when implementing TRIPS. These policies provide valuable lessons about the opportunities and challenges faced by emerging and developing countries when implementing TRIPS and clues for likely scenarios by 2025.

12.3  TRIPS Implementation in Brazil, India, and China Emerging and developing countries face dilemmas when tailoring their approaches to TRIPS implementation. On the one hand are the costs of having a stronger IP regime – some relate to administrative costs stemming from building patent offices, providing for specialized personnel, and proper patent application procedures; others relate to the effects of stronger IP rights, such as the already mentioned costs of pharmaceutical patents for public health programs. On the other hand, developing and emerging countries feel substantial domestic and international pressure to adopt measures and institutions of strong IP protection. International pressure by industrialized countries often occurs through bilateral dialogues, capacity-building programs, and bilateral and macro-regional trade agreements that seek to limit flexible TRIPS interpretations and increase existing standards of protection in time, scope, and enforceability. Domestic pressure stems from economic sectors that are highly innovative and seek to capture the rents that arise from the temporary monopolies granted by patents. Other sources of

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domestic pressure can come from multinational corporations, mostly from developed countries, seeking to protect the economic gains derived from their technological lead. Overall, it may be hard for most developing countries to resist maximalist IP policies. Large emerging economies like BIC have nevertheless been in a better position to do so for a number of reasons including to possessing larger market power and resources for capacity-building. Large diasporas from which to draw knowledge and expertise also often translate into better staffed and trained bureaucracies and wide-ranging transnational networks. Well-staffed and -trained bureaucracies, as well as stronger courts, can better face legal challenges raised by patent holders. In addition, in order to take advantage of TRIPS flexibilities such as compulsory licensing,4 developing countries need to be able to produce domestically the pharmaceutical drug in question. Few developing countries have these capacities, which explains why most of them have followed and supported the flexibilities practiced by large emerging economies with regard to the TRIPS agreement. This again justifies our selection of countries and the focus of this chapter on BIC.

12.3.1 Brazil Brazil’s implementation of the TRIPS has been mainly shaped by the costs borne by its highly successful and politically sensitive public health system. Deriving from activist networks from as early as the 1960s, known as the Sanitary Movement (Movimento Sanitário), the right to health was enshrined in the 1988 constitution that ended military rule in the country (Souza 2007). Since the movement was a crucial part of the coalition leading to democratization, the establishment and maintenance of a public and universal health system (Sistema Único de Saúde) has been a non-negotiable issue for any Brazilian government since then. A strict The 2001 Declaration on the TRIPS Agreement and Public Health (WT/MIN(01)/DEC/2) affirmed that the TRIPS Agreement “can and should be interpreted and implemented in a manner supportive of WTO Members’ rights to protect public health and, in particular, to promote access to medicines for all” (para. 4). The Doha Declaration went on to reaffirm the key flexibilities available under the TRIPS Agreement, such as the power of WTO Members “to grant compulsory licences and the freedom to determine the grounds upon which such licences are granted,” as well as “the right to determine what constitutes a national emergency or other circumstances of extreme urgency” (para. 3, lit. b and c). The Doha Declaration also addressed the constraints on exports set out in Article 31(f) TRIPS and instructed the Council for TRIPS “to find an expeditious solution to this problem” (para. 6).

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implementation of TRIPS and a large HIV-AIDS epidemic threatened to bankrupt this program given the high costs of patented anti-retroviral drugs. This explains why Brazil took a leading role in pushing for a flexible implementation of TRIPS. Together with India, which was driven by different motives, it became the leading voice of the developing world to ensure that a minimalist approach to IP endured, despite the coordinated efforts by industrialized countries for a strict application of TRIPS. International and domestic pressures have challenged this approach, leading to interbureaucratic strife and blockages of flexibilities-seeking legislation at the Brazilian Congress. This pressure has done little, however, to influence Brazil’s positions in multilateral forums, positions that have remained remarkably consistent. Besides the relevant domestic incentives mentioned earlier, this approach on the international scene derives in part from having one of the best-staffed and most professional foreign ministries (known as Itamaraty) among developing and emerging economies. While the Health Ministry has been a crucial actor ensuring flexible interpretations of TRIPS and enacting domestic policies, the Brazilian patent office (INPI) has followed the opposite approach and subscribed to strong IP protection. This has translated into bureaucratic infighting, which reached a high mark when INPI sued the health surveillance agency of the Health Ministry (ANVISA) at the Constitutional Court. INPI’s modernization in the 1990s in terms of resources and expertise led to strong bilateral exchanges with leading patent offices from industrialized countries – the United States, those in the EU, and Japan, known as the Trilateral offices – and this explains a culture of expanding patents. The most important domestic efforts, which reflect Brazil’s aim to keep a flexible implementation of TRIPS, have been the prior consent norm and local working requirements. ANVISA, through prior consent, has been given a veto right over pharmaceutical patents given by INPI (thus explaining the constitutional fight between the two). Brazil has also made use of so-called local working requirements that allow the issuance of compulsory licenses for patented goods that are not produced locally after a certain time (usually 3 years) after the granting of the patent. Brazil made apt use of this provision as a means to force US pharmaceutical companies to reduce the price of certain medicines. For this reason, in 2000, the United States filed a complaint at the WTO challenging the legality of local working requirements under TRIPS. The case was settled but revealed the possibilities of using the gray legal zone of the local working requirement as a balancing mechanism within TRIPS (Mercurio and Tyagi 2010).

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Among Brazil’s most relevant international initiatives to preserve TRIPS flexibilities was the launching in 2004, together with Argentina, of a development agenda at WIPO. The WIPO Development Agenda went beyond curbing the effects of strong IP and aimed at ensuring that development considerations form an integral part of WIPO’s work, therewith challenging the pro-IP dynamics of WIPO and the strong impact of industrialized countries (Christopher 2006). Brazil pursued in parallel similar initiatives in other forums such as the WHO, United Nations High Commissioner for Refugees, United Nations Development Program, and the United Nations Environment Program. In particular, Brazil made good use of the existing normative debates (Sell and Prakash 2004) on the harmful effects of TRIPS on development and public health (Wade 2003). It also used its central position within MERCOSUR to torpedo the US-led Free Trade Area of the Americas initiative and to block the TRIPS-plus provisions that had been included in the draft agreement (Carranza 2004). Brazil also took a leading position in the joint effort to codify ABS legislation both at CBD, which culminated in the Nagoya Protocol, and at WIPO through the Working Group on ABS. As previously mentioned, however, Brazil has also adopted strong patent legislation that goes well beyond the minimal requirements of TRIPS, which reflects its domestic cleavages. Brazilian policy-makers have been divided between those in favor of developmentalist policies and those favoring more liberal positions (Montero 2014). The economic importance of FDI in Brazil and the dominance of transnational corporations in the Brazilian pharmaceutical industry granted the latter significant influence in the Brazilian Congress. For this reason, maximalist IP legislation gets passed in Congress in spite of Brazil’s strong minimalist positions at multilateral forums. These domestic contradictions can also be observed on ABS policies. Itamaraty and the Environmental Ministry have been robust supporters of the codification of ABS and its inclusion in the IP system, in part because these efforts have largely taken place within CDB, which was adopted during the Rio Earth Summit in 1992 (Muzaka and Serrano 2019). Opposition to these policies has come from unexpected quarters. Some activists in Brazil have claimed that the commodification of genetic resources as envisaged by CBD goes against the traditions of many indigenous groups and thus have blocked efforts to codify ABS. The agro-business lobby, a very influential actor in the Brazilian Congress, has also opposed ABS codification. For these reasons, Brazil has at times expressed concerns about the negative effects that may occur

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from benefit-sharing policies and has so far failed to ratify the Nagoya Protocol, despite having played an important role in the efforts to codify ABS at CBD and WIPO.

12.3.2 India The implementation of TRIPS in India was contested, in particular with regard to patents and to a large extent due to the powerful Indian generic drug industry. India had been one of the most vocal challengers to the TRIPS during the Uruguay round negotiations and managed to secure a 10-year transition to implement the agreement, as well as guarantees on compulsory licensing. Nonetheless, India was the first country taken to court under TRIPS because it had failed to fulfill its obligations during the transition period and secure proper patent applications, and the United States could successfully prove that (Ganesan 2015)5. TRIPS posed a challenge to the survival of the Indian thriving generic drug industry and triggered mobilization and opposition to stronger patenting requirements from domestic and international actors. NGOs such as Doctors Without Borders and the Third World Network supported the Indian state in various ways. The process of applying the agreement itself was complex, involving multiple state and non-state actors and various amendments to the Indian patent law in 1995, 1999, and 2002 culminating with the 2005 Indian Patent Act (Shaffer et al. 2015). These changes were significant because India had tailored its colonial-era IP laws to further its development needs through its 1970 Patents Act (Drahos 2010). India proved adept at using TRIPS flexibilities to protect its developmentalist policies, in particular its generic drug industry and the protection of traditional knowledge (Oke 2015; Unni 2012). At the international level, India has supported minimalist positions at WIPO regarding the reform of the Patent Cooperation Treaty and in negotiations on the Substantive Patent Law Treaty. At the TRIPS Council, India, together with Brazil, has been a leading voice endorsing the use of flexibilities available under the agreement. India was one of the most active WTO members advocating for additional exceptions and limitations to patent protection, especially in the process that led to the 2001

WTO Appellate Body Report, India – Patent Protection for Pharmaceutical and Agricultural Chemical Products, WT/DS50/AB/R, December 19, 1997.

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Doha Declaration on the TRIPS Agreement and Public Health, the 2003 WTO decision on public health, and the 2005 amendments to TRIPS.6 Beyond this international activism, India has also become a major player in IP disputes through its domestic practices. Other emerging and developing countries have copied India’s adaptation of TRIPS, which has tested the limits of the flexibilities included in the agreement. Notable examples of these domestic legal innovations are: Section 3(d) of the 2005 Patent Act, which limits secondary patents; the Right to Information Act passed in October 2005; and the use of public interest litigation, by which NGOs, individuals, and other institutions have gained the right to file public concern lawsuits. Section 3(d) of the Indian Patents Act of 2005 in particular has become known for its potential to dramatically alter the TRIPS agreement given that it redefines what an invention is and it bans patents on both new uses of known substances and new forms of known substances that do not enhance efficacy. Although limits to the subject matter of patents exist in many countries, the scope of Section 3(d) and its expansive exclusion of patents on new forms of known substances is new to patent law (Mueller 2007: 550; Kapczynski 2009: 1590). Another issue besides pharmaceutical patents where India has taken a strong stance has to do with the misappropriation of traditional knowledge, genetic resources, and traditional plant varieties. India has challenged foreign companies’ patents on the grounds that they may be based on pre-existing traditional knowledge and biological material. For this reason, the Indian government has created a digital library of traditional knowledge that aims to provide information to international patent offices and thus pre-empt foreign patenting on the grounds of lack of novelty and ensure that the TRIPS provisions on the protection of plant varieties do not affect farmers’ rights to keep and trade seeds (so-called farmers’ rights as opposed to breeders’ rights). This debate has become particularly salient since the Indian parliament passed the Plant Variety Protection and Farmers’ Rights Act in August 2001. As in Brazil, there has been some domestic opposition to this minimalist stance by actors seeking a stronger IP regime (Kher 2013; Kapoor and Sharma 2015). In particular the Council of Scientific and Industrial Research (CSIR), which has filed most of India’s existing patents, stands out. Since the early 1980s, India has sought to develop a biotechnology industry and has made substantial research and development (R&D) investments. CSIR has been a main beneficiary of these efforts and became domestically See footnote 4.

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one of the strongest voices calling for a stronger patent regime with the alleged aim of promoting innovation. Yet India’s particular domestic constellation makes it hard for this voice to overcome the powerful opposition of the domestic generic drug industry, the alliances that exist with international NGOs that depend on the generic industry for providing low-cost drugs to developing countries, and the proactive Indian courts, together with strong pressure from civil society. For example, when the issue of access to patented medicines was debated at the WTO, the Indian generic producer Cipla strategically campaigned alongside MSF, KEI, Oxfam, and other NGOs, and their partnership enhanced the credibility of rulechangers, both domestically and internationally (Sell and Prakash 2004; Watal and Taubman 2015). Thus, despite some domestic opposition, India remains a bulwark against a strict interpretation of TRIPS.

12.3.3 China The case of China is puzzling for two reasons. On the one hand, China has shown a much more moderate approach toward pursuing TRIPS flexibilities. As a latecomer to the WTO, it was not able to obtain transition periods as other developing and emerging countries and has largely implemented maximalist IP policies at the domestic level, including an impressive revamp of its patent office, the State Intellectual Property Organization (SIPO), which is now one of the leading patent offices in the world (Serrano 2016). SIPO could even soon become the largest patent office globally with the greatest number of patents issued (Reynolds and Sell 2012). On the other hand, China remains the main target of IP violation complaints; it is accused of infringing IP in all its forms (patents, copyrights, and trademarks) and massive counterfeit production. The United States International Trade Commission (USITC) has targeted China on 187 occasions for violations in a large number of sectors (e.g. automotive, electronics, semiconductors, chemicals, and machinery).7 The European Commission for its part claims that European firms have lost one out of every fifth dollar of profits made in China to IP theft (Devonshire et al. 2011). Unlike complaints related to Brazil and India, which have to do with their IP systems, in the case of China, complaints are not due to Chinese legislation but rather due to its enforcement. This is exacerbated by the fact that China has only recently created a modern legal system. Criminal and USITC, IP Infringement Notices for 337 Investigations, available at www.usitc.gov/ secretary/fed_reg_notices/337/.

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procedural laws, domestic contract and law regulations, trademark and patent laws, and laws allowing for private investment all had to be passed after Deng Xiaoping’s reforms in 1978 (Cheung 2009: 66–67). Concerns by industrialized countries also relate to China’s aims of becoming an innovation-based economy and the domestic policies enacted to support this aim. These policies go well beyond IP and include broader industrial tools such as subsidies, forced technology transfer through joint ventures, and even accusations of cyber-spying. These industrial policies have been part of large campaigns such as autonomous innovation; strategic pillar sectors; strategic emerging industries initiatives; and, more recently, the ambitious Made in China 2025 strategy, which seeks to upgrade China’s industrial production and drastically reduce the proportion of imported components in it. At the international level, China has nominally supported agendas seeking flexibilities under TRIPS by other emerging and developing countries but it has not taken an active role, as Brazil and India have done. The only forum where China has assumed a leading role has been with regard to the access to medicines campaign at the WHO. This paradox may be explained by the fact that the organization was headed by a Chinese national (Margaret Chan) from 2012 to 2017. Some important changes have occurred over the past few years, which may suggest the new path that China may be taking toward IP policies. With regard to pharmaceutical patents, China has recognized, as other developing countries have, that it has a stake in ensuring the affordability of pharmaceuticals while generally being cooperative with industrialized countries (Bird and Cahoy 2007). Despite having domestic legislation allowing the use of TRIPS flexibilities, such as compulsory licensing, China has not used any of these tools, which have been considered too aggressive.8 Instead, it has relied on negotiations with patent holders and anti-corruption policies to reduce pharmaceutical prices and clean up its costly and bloated healthcare system. These measures have been possible due to China’s growing healthcare market, at present the world’s most attractive for foreign investors.9 China has also recently created specialized IP courts to address some systematic shortcomings in IP implementation. Three such courts

Author’s interview with a public official from the State Intellectual Property Organization (SIPO), August 13, 2013, Beijing. 9 China Briefing 2018: China’s healthcare reforms underscore market growth. 8

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were established in the major urban centres of Beijing, Shanghai, and Guangzhou in 2014. More recently, four IP tribunals with similar functions to the IP courts have been established in Nanjing, Suzhou, Chengdu, and Wuhan. There are strong domestic incentives to do so because China has become a rising innovator, and lobbying for a stronger enforcement of IP has increased. For example, Chinese patent filings have grown unprecedently in the last decade, becoming higher than those of the United States, EU, and Japan. This has particularly improved IP law implementation on patents where clearly defined rules, enforcement, transparency, and consistency can now be found (Dimitrov 2009). Zhang (2011) shows that, even at the problematic local level, where authorities have often turned a blind eye on infringement, local Chinese firms increasingly ally with Western multinationals and successfully lobby for stronger IP protection (also Kennedy 2005). Overall, we see China following a similar approach to other rapidly industrializing East Asian nations, in particular Japan and South Korea, that shifted from challenging the IP system to becoming its strong supporters. The ongoing trade war between the United States and China, where IP plays a central role, together with grievances from EU member states are related to its industrial policy Made in China 2025; the fact that the United States and the EU are China’s two most important export markets could speed up this process. There remains one area of joint efforts with Brazil and India and that is the protection of genetic resources, traditional knowledge, and folklore. Chinese support includes a proposal to include these matters in the negotiated Substantive Patent Law Treaty at WIPO and taking a leading position at the TRIPS Council for the homologation of TRIPS and the Nagoya Protocol (Muzaka and Serrano 2019).

12.4  Likely Scenarios to 2025 The overview provided above on the ways BIC have implemented TRIPS gives us clues as to their likely evolution toward 2025 and the possibilities other developing countries have to implement TRIPS in flexible ways. However, it remains to be seen whether other emerging and developing countries without the clout of BIC can take advantage of these flexibilities, in particular because some or all of BIC are likely to shift toward stricter IP policies. In other words, the question is whether it is conceivable, and to what extent, that in the absence of BIC support, developing countries can resist industrialized countries’ pressure to enact maximalist IP

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policies. Out of the three, China is the most likely to follow a path similar to that of industrialized countries, with some slight exceptions, such as in the area of ABS. Indeed, to a large extent and despite disputes related to its Made in China 2025 policy, China is already doing so, as the rising number of cases and substantial fines applied by its IP courts prove. Brazil could well follow because the government of Michel Temer has been succeeded by what appears to be another market-friendly administration. President Jair Bolsonaro’s Chicago University–educated chief economic advisor Paulo Guedes is expected to head a super-ministry merging the current planning, finance, and industry ministries and enact just such type of reforms. Brazil also recently submitted an application to join the Organisation for Economic Co-operation and Development (OECD). As a member of this mainly industrialized-country club, it is prone to follow other emerging OECD countries such as Chile, Mexico, and Turkey in supporting maximalist IP policies. This means that India may remain the only large emerging economy that continues to push for keeping flexibilities allowed under TRIPS and setting some limitations to its stringent implementation and enforcement. The failure, despite 16 rounds, to complete negotiations on a trade agreement with the EU launched in 2007, in large part due to India’s reluctance to make concessions on IP, reflects the strength of this position and suggests India may continue to lead the global South on IP issues for some time. India’s aggressive use of Section 3(d), not just on secondary patents as intended but also as a means to invalidate primary patents, as recently documented by Shadlen and Sampat (2018), may have consequences, in particular, if industrialized countries decide to challenge this practice at the WTO. So far, developed economies have not attempted to challenge Section 3(d) given the substantial public pressure that exists on this matter. However, the use of Section 3(d) on primary patents may change their calculations, leading to a shift in strategy. According to a knowledgeable interviewee,10 the chances for a country to successfully challenge India’s use of Section 3(d) at the dispute settlement body of the WTO are high. India’s political economy is also shifting, and some key domestic generic pharmaceutical companies have been acquired by foreign multinationals. The EU could also offer enough market access and investment incentives so that India decides to drop its opposition to IP concessions and open the door to a free-trade agreement. All of this leaves open the possibility for India to change course and abandon its current opposition to maximalist IP policies. Author’s interview with an official of the TRIPS Council, February 10, 2016, Geneva.

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What would a loss of BIC support mean for other emerging and developing countries seeking to preserve TRIPS flexibilities and tending to follow minimalist IP policies? Considering the few cases that have made use of compulsory licensing, e.g. Brazil, India, and Thailand, or that through the threat of applying compulsory licensing obtained price reduction agreements, e.g. Malaysia, Indonesia, Brazil, Zambia, Zimbabwe, and Mozambique (Reichman 2009; Beall and Kuhn 2012), it becomes clear that pharmaceutical companies apply enormous pressure to limit the use of such measures. Market power thus appears to be important for pursuing flexibilities. The case of South Africa suggests a different conclusion. In that case, in 1988, 39 drug makers sued the country for using TRIPS flexibilities on parallel imports. However, the legal effort was dropped in 2001 due to mounting public pressure. This suggests that where activists are able to produce massive and socially embedded campaigns, low market power may not impede implementing policies that make use of TRIPS flexibilities. The issue of pharmaceutical patents will, in all likelihood, remain one of the most contentious aspects of the IP regime. Given that pressure on affordable drugs is rising in industrialized countries too as their populations age, it is possible to envision that a middle point can be reached, at which some of the flexibilities allowed under TRIPS are further pursued. An important factor likely to influence this outcome is whether macroregional agreements such as the Transatlantic Trade and Investment Partnership (TTIP) or the Trans-Pacific Partnership (TPP) are revived in a similar form to their original aims. The current comprehensive and progressive agreement for trans-pacific partnership (CPTPP) has no such limitations, but if the United States decides to re-join, an adapted form of the pact could well push for its inclusion. Both of these proposed macroregional agreements included substantial limits to the use of flexibilities under TRIPS, such as India’s 3 (d). As to the issue of access and benefit-sharing of genetic resources and traditional knowledge, emerging countries have kept a united front and even managed to win over some industrialized countries. This matter is becoming further codified through efforts at WIPO and thus, despite the opposition from the United States and other industrialized countries, it is likely that it will be incorporated into the IP regime sooner or later, Countries such as Norway or Switzerland, have already recognized that the principles espoused by the Nagoya Protocol on ABS are not contrary to the existing IP regime. Thus, this is an issue where emerging and

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developing countries could play a role not only by implementing TRIPS but also by meaningfully contributing to the building of the IP regime. Whether they will be able to include this new subject matter depends on whether and when TRIPS is homologized with the Nagoya Protocol and the codification efforts on ABS currently taking place at WIPO.

12.5 Conclusions This chapter shows that in pursuing flexibilities in their implementation of the TRIPS, the three largest emerging economies of Brazil, India, and China have been able to shape the evolution of the IP regime. The chapter also shows the conditions instead of which these flexibilities have come into being, as well as the substantial changes taking place in these emerging economies that may make it harder for other developing countries to follow. With the exception of India, it seems likely that Brazil and China will give up their minimalist IP agendas and, as a result, the global South could lose crucial support in pursuing TRIPS flexibilities. However, the past two decades have created a strong awareness and large coalitions of activists seeking to preserve these flexibilities, in particular with regard to pharmaceutical patents. Thus, it is possible that other developing countries, despite lacking the economic clout of BIC, are able to pursue at least some of these flexibilities. Whether this is the case also depends on happenings outside the WTO, in particular macro-regional agreements. While these appear to have lost impetus following the election of Donald Trump in the United States, if they were to be revived, they could bring about substantial limits to implement TRIPS flexibilities. Finally, BIC, supported by a large coalition of developing countries, have succeeded in codifying access and benefit-sharing policies related to genetic resources and traditional knowledge at the CBD through the Nagoya Protocol and at the WIPO. It is possible that these efforts will become linked to TRIPS in the future, which would mark a significant milestone in the efforts of countries from the global South to shift from rule-takers to rule-makers.

References Beall, R. and R. Kuhn. 2012. “Trends in Compulsory Licensing of Pharmaceuticals Since the Doha Declaration: A Database Analysis,” PLoS Med 9, (1): e1001154. Bird, R. and D. Cahoy. 2007. “The Emerging BRIC Economies: Lessons from Intellectual Property Negotiation and Enforcement,” Northwestern Journal of Technology and Intellectual Property 5(3):400–21.

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Carranza, M. E. 2004. “Mercosur and the End Game of the FTAA Negotiations: Challenges and Prospects after the Argentine Crisis,” Third World Quarterly 25(2):319–37. Chan, L. H. 2010. China Engages Global Health Governance: Responsible Stakeholder or System-Transformer? Basingstoke: Palgrave Macmillan. Cheung, G. 2009. Intellectual Property Rights in China: Politics of Piracy, Trade and Protection. New York: Routledge. Christopher, May. 2006. World Intellectual Property Organization: Resurgence and the Development Agenda. London: Routledge. Correa, C. M. 2000. Intellectual Property Rights, the WTO and Developing Countries. New York: Zed Books. Deere Birkbeck, C. 2008. The Implementation Game: The TRIPS Agreement and the Global Politics of Intellectual Property Reform in Developing Countries. Oxford: Oxford University Press. Devonshire, C. et al. 2011. Intellectual Property Rights in China (China Briefing). Berlin: Springer. Dimitrov, M. 2009. Piracy and the State: The Politics of Intellectual Property Rights in China. Cambridge: Cambridge University Press. Drahos, P. (2010). The Global Governance of Knowledge: Patent Offices and Their Clients. Cambridge: Cambridge University Press. Ganesan, A. V. 2015. “Negotiating for India,” In: J. Watal and A. Taubman (Eds.), The Making of the TRIPS Agreement. Geneva: World Trade Organization, pp. 211–38. Haunss, S. and K. C. Shadlen. 2009. Politics of Intellectual Property: Contestation Over the Ownership, Use, and Control of Knowledge and Information. Cheltenham: Edward Elgar. Kapczynski, A. 2008. “The Access to Knowledge Mobilization and the New Politics of Intellectual Property,” Yale Law Journal 117:804–85.   2009. “Harmonization and Its Discontents: A Case Study of TRIPS Implementation in India’s Pharmaceutical Sector,” California Law Review 97:1571–649. Kapoor, A. and S. Sharma. 2015. “Intellectual Property Rights in India: Innovation and Competitiveness in the Indian Context,” India’s Innovation and IP Policies Working Paper. Kennedy, S. 2005. The Business of Lobbying in China. Cambridge, MA: Harvard University Press. Kher, R. 2013. “India in the World Patent Order,” In: F. M. Abbott, C. M. Correa and P. Drahos (Eds.), Emerging Markets and the World Patent Order. Cheltenham: Edward Elgar, pp. 183–224. Krizic, I. and O. Serrano. 2017. “Exporting Intellectual Property Rights to Emerging Countries: EU and US Approaches Compared,” European Foreign Affairs Review 22(2):57–75.

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Matthews, D. 2011. Intellectual Property, Human Rights and Development: The Role of NGOs and Social Movements. Cheltenham: Edward Elgar. Mercurio, B. and M. Tyagi. 2010. “Treaty Interpretation in WTO Dispute Settlement: The Outstanding Question of the Legality of Local Working Requirements,” Minnesota Journal of International Law 19:275–326. Montero, A. P. 2014. Brazil: Reversal of Fortune. Oxford: John Wiley & Sons. Morin, J. F. et al. 2018. “Rising Economies in the International Patent Regime: From Rule-breakers to Rule-changers and Rule-makers,” New Political Economy 23(3):255–73. Mueller, J. M. 2007. “The Tiger Awakens: The Tumultuous Transformation of India’s Patent System and the Rise of Indian Pharmaceutical Innovation,” University of Pittsburgh Law Review 68: 491–641. Muzaka, V. and O. Serrano. 2019. “Teaming-Up? China, India and Brazil and the Issue of Benefit-Sharing from Genetic Resource Use.” New Political Economy, doi:10.1080/13563467.2019.1584169. Netanel, N. W. (Ed.) 2009. The WIPO Development Agenda: Global Intellectual Property and Developing Countries. Oxford: Oxford University Press. Oke, E. K. 2015. “Exploring the Flexibilities in TRIPS: Lessons from India’s Pharmaceutical Patent Law,” Commonwealth Law Bulletin 41(1):82–106. Okediji, R. 2004. “Rules of Power in an Age of Law: Process Opportunism and TRIPS Dispute Settlement,” In: C. Kwan and J. Hardigan (Eds.), Handbook of International Trade. Oxford: Blackwell, pp. 42–72. Reichman, J. H. 2009. “Comment: Compulsory Licensing of Patented Pharmaceutical Inventions: Evaluating the Options,” Journal of Law, Medicine and Ethics 37(2):247–63. Reynolds, B. and S. Sell. 2012. “China’s Role in Global Governance – Foreign Exchange and Intellectual Property: A Comparison,” Indiana University Research Center for Chinese Politics and Business Working Paper No. 31. Sell, S. 1995. “Intellectual Property Protection and Antitrust in the Developing World: Crisis, Coercion, and Choice,” International Organization 49(2):315–49. Sell, S. and A. Prakash. 2004. “Using Ideas Strategically: The Contest between Business and NGO Networks in Intellectual Property Rights,” International Studies Quarterly 48:143–75. Serrano, O. 2016. “China and India’s Insertion in the Intellectual Property Rights Regime: Sustaining or Disrupting the Rules?” New Political Economy 21(3):343–64. Serrano, O. and M. Burri. 2017. “Usufruindo das flexibilidades do TRIPS: implementação e difusão dos regimes de licenciamento compulsório no Brasil e na Índia” In: H. Menezes (Ed.), Propriedade Intelectual Inovação Tecnológica e Saúde. Joao Pessoa: Editora UFPB.

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Shadlen, K. C. 2005. “Policy Space for Development in the WTO and Beyond: The Case of Intellectual Property Rights,” Global Development and Environment Institute Working Paper No. 6. Shadlen, K. C. and B. N. Sampat. 2018. “Indian Pharmaceutical Patent Prosecution: The Changing Role of Section 3(d),” PLoS One. ISSN 1932-6203. doi:10.1371/ journal.pone.0194714. Shaffer, G. et al. 2015. “State Transformation and the Role of Lawyers: The WTO, India, and Transnational Legal Ordering,” Law and Society Review 49:595–628. Souza, A. de M. e. 2007. “Defying Globalization: Effective Self-Reliance in Brazil.” In: P. G. Hariss and P. D. Simlon (Eds.). The Global Politics of Aids. Boulder, CO: Lynne Rienner Publishers, pp. 37–62. Unni, V. K. 2012. “Indian Patent Law and TRIPS: Redrawing the Flexibility Framework in the Context of Public Policy and Health,” Pacific McGeorge Global Business and Development Law Journal 25:323–42. Wade, R. H. 2003. “What Strategies Are Viable for Developing Countries Today? The World Trade Organization and the Shrinking of “Development Space”, Review of International Political Economy 10(4): 621–644. Watal, J. and A. Taubman. (Eds.) 2015. The Making of the TRIPS Agreement: Personal Insights form the Uruguay Round Negotiations: Geneva: World Trade Organization. Zhang, Z. 2011. “From Words to Deeds: Explaining China’s (Non) Compliance with the Global Intellectual Property Rights Regime since the Country’s WTO Entry,” PhD Dissertation submitted to the University of Minnesota, August 2011.

13 Investment Promotion and Facilitation for LDCs rodrigo polanco lazo and azernoosh bazrafkan 13.1 Introduction 1 The growing importance of global value chains (GVCs) has implications for the least developed countries (LDCs) that are falling behind and are not able to adapt to the changes in the way trade and investment take place, particularly through preferential trade agreements (PTAs) and international investment agreements (IIAs). Consequently, the United Nations Programme of Action for the LDCs for the Decade 2011–2020 (IPoA) has set as a core objective to diversify the production base and increase productive capacity in LDCs by supporting the initiatives that promote foreign direct investment (FDI) in LDCs (United Nations 2011). In addition, the 2015 Third International Conference on Financing for Development in the Addis Ababa Action Agenda (AAAA) supports programs that foster regional integration that enhance participation and integration of small-scale industrial and other enterprises from LDCs into GVCs and markets (United Nations 2015, 20). FDI constitutes a dominant part of private capital flows to the LDCs. FDI can lead to tangible and intangible benefits, playing a catalytic role in building and strengthening productive capacity and export growth, including developmental objectives such as technology and skills transfer, employment generation, higher wages, and poverty eradication (United Nations Committee for Development Policy [CDP] 2016: 9, 14). While FDI flows to developing countries have risen dramatically in recent years, the total share of FDI to LDCs in global FDI still remains below 2%, reflecting the general trend that the majority of FDI has been concentrated in very few countries (UNCTAD 2016a: 37). Furthermore, An extended version of this chapter was presented at the ECOSOC Forum on Financing for Development. Side Event: Investment Promotion and Facilitation Measures for the LDCs. May 25, 2017, United Nations, New York. We are grateful to Americo Zampetti for his useful comments on a previous version of this chapter.

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many investments in LDCs have focused on resource extraction, which does not fully release the developmental potential of FDI. Thus, it is not only relevant to promote FDI in LDCs in general, but the type of FDI that is beneficial for the host state is also an important consideration. Due to a lack of financial resources and of human capacities, LDCs could be drawn to accept any investment, and not the right type of sustainable and developmental FDI. To attract the right type of FDI, development partners could assist LDCs in both promotion and facilitation of investment policies that contribute to national development objectives (United Nations Conference on the Least Developed Countries: 2011: 14–15). This chapter explores what the development partners of LDCs can do to help those countries to receive more quality and sustainable FDI. For that purpose, the chapter reviews investment promotion and facilitation measures that can be undertaken by foreign investors’ home countries and development agencies. The first section of the chapter frames the content of both investment promotion and investment facilitation activities. The second section parses possible activities that could be undertaken by FDI home countries within their own jurisdiction (direct support), and their feasibility of specifically using the various instruments for promoting FDI to the LDCs. The third section analyzes the measures that development partners could take within the jurisdiction of the FDI host LDCs (indirect support), and the feasibility of using them specifically for the benefit of LDCs. The fourth section of the chapter offers recommendations on how development partners can design and organize a pragmatic initiative of investment promotion and facilitation for the LDCs.

13.2  Framing Investment Promotion and Facilitation Before we turn to how FDI home states and development agencies can contribute to investment promotion and facilitation to attract and retain FDI in LDCs, it is useful to clarify what we understand by the terms investment promotion and investment facilitation, and distinguish both concepts. Investment promotion concerns activities that promote a location as an investment destination. These activities are generally undertaken by prospective host countries (which seek to attract FDI) and thus are countryspecific and competitive in nature. Investment facilitation, on the other hand, involves activities that make it easier for foreign investors to establish or expand their investments as well as to conduct their day-to-day

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business in host countries. Investment facilitation activities are carried out by both FDI home and host countries (UNCTAD 2016b: 4). This chapter departs from the traditional view that mainly focuses on host countries’ measures to attract or facilitate FDI. Rather, we examine which measures home countries can undertake to promote and facilitate sustainable investment in LDCs, either directly or indirectly. However, the use of investment promotion and facilitation mechanisms to support FDI in LDCs is not without political and legal concerns. The main apprehensions in this regard are related to investment facilitation and to the effects of these measures on “competitive neutrality” or commitments undertaken before the World Trade Organization (WTO). While China, Germany, Russia, Brazil, Argentina, and a group of countries called MIKTA (Mexico, Indonesia, South Korea, Turkey, and Australia) have been fostering the discussion of an investment facilitation agreement in the Group of Twenty (G20)2 and eventually at the WTO (Kanth 2017), other countries are more reluctant out of fear of undermining their “right to regulate” and “policy space” with respect to investment in strategic sectors (Kanth 2018a, 2018b). Whether these measures are implemented in the jurisdiction of either the FDI home or the host country, one important consequence of their application is related to how they affect competitive neutrality, defined as “where no entity operating in an economic market is subject to undue competitive advantages or disadvantages” (OECD 2012: 17). In the context of FDI, this largely means whether, and to what extent, “the support that home country governments give to their firms investing abroad distorts competition among outward investors from different countries” (Sauvant et al. 2014: 4). The issue of competitive neutrality could raise concerns if the support given to domestic companies investing in LDCs affects other domestic companies in similar sectors.

13.3  Development Partners Direct Support Several measures could fit into investment promotion and facilitation activities, and the lines between the two categories are at times blurry. This chapter does not frame each measure under these two concepts The G20 is a forum for international economic cooperation and decision-making of the governments from the 20 major economies worldwide, and consists of 19 individual countries – Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Republic of Korea, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom (UK), and the United States – together with the European Union (EU).

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separately. Rather, it makes a distinction between different home country measures (HCMs): the direct and the indirect support of investment outflows by LDCs’ development partners. We consider under direct support those measures that are implemented within the jurisdiction of the FDI home country to support outward FDI (OFDI); under indirect support are those actions by FDI home countries and development agencies to be implemented within the jurisdiction of the FDI host LDCs to support inward FDI (IFDI). We have focused on HCMs mainly from Organisation for Economic Co-operation and Development (OECD) and G20 countries because they represent the large majority of OFDI (UNCTAD 2016a: 6). OFDI to LDCs can be supported through a series of measures taken by home countries that are implemented in their own jurisdiction. These mechanisms include preferential financial programs, fiscal incentives, political risk insurance, project business development and information services, and the overall promotion of sustainable and responsible investment.

13.3.1  Preferential Financing Programs HCMs of OFDI could provide financial measures to stimulate investments in LDCs. Financial measures can include a broad range of instruments, such as grants, loans, improving access to credit, co-financing, equity participation, and venture capital for investment projects. Financial support could be generic or focused on certain activities (e.g. pre-investment and establishment and post-establishment activities). Special support can be tailored to specific sectors (e.g. infrastructure, health) or specific companies, like ventures undertaken by small and medium enterprises (SMEs) from the home country, or jointly with local business partners (Sarmah 2003: 14).

13.3.1.1  Grants Grants are a form of financial support given by the home FDI government that provides firms investing abroad in LDCs with cash or subsidies for certain business costs. Grants are usually employed to support pre-investment activities (such as feasibility studies, market research, and business missions) and establishment and post-establishment activities (such as costs of setting up overseas offices and training of personnel). Eligible expenses covered typically include companies’ own expenses (traveling, accommodation), and third-party expenses like fees paid to consultants, investment bankers, and lawyers (Sauvant et al. 2014: 48).

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When grants are awarded for pre-investment activities, their aim is to help overcome information-related market failures, usually through feasibility studies. A feasibility study is an essential step in the process of creating or developing a company because it aims to prove that a project is technically viable and economically profitable, and it is a prerequisite in the drafting of a business plan. Most HCMs supporting feasibility studies are fully financed, meaning that there is no need to repay the funds. Some are pre-financed, meaning that the funds are repaid to the government if the project is viable (Sauvant et al. 2014: 49). Countries like Germany, Malaysia, Singapore, Canada, Belgium, and China provide grants for preinvestment activities. Grants can also provide financial support to companies to cover establishment and post-establishment expenses, like office rental, salary of a limited number of overseas staff, training costs, and related travel and accommodation expenses. By giving financial support for the costs involved in setting up overseas offices, grants help to reduce initial barriers to market entry faced by home country firms. Training programs include immersion programs in a foreign country, foreign language classes, and executive programs to help employees and managers to cope with cultural differences in a professional context (Sauvant et al. 2014: 51–52). Germany, Singapore, Taiwan, Belgium, and China provide financial support for establishment and post-establishment activities. Unfortunately for the purposes of this chapter, the large majority of measures detected do not have any focus for the LDCs, although some developmental elements could be used to tailor them to support investment in LDCs.

13.3.1.2  Loans Loans are one of the most prevalent financing mechanisms used by home countries to foster OFDI. Several developed countries provide direct loans (either concessional or non-concessional) to home country firms in connection with OFDI, either in domestic or foreign currency (Sauvant et al. 2014: 53). Other related instruments are structured finance and risksharing agreements. Concessional loans are loans extended on terms substantially more generous than market loans, either through interest rates below those available on the market or by grace periods (of up to three years), or a combination of both, which is typically not the case when commercial banks make loans (International Monetary Fund [IMF] 2003: 249). Governments utilize concessional loans as a means of pursuing specific

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national policies, like encouraging investment in certain industries in which the country has a specific strategic interest, or even to encourage SMEs with international competitive advantages or significant growth potential (Sauvant et al. 2014: 56). Countries like Germany, Denmark, China, Japan, South Korea, and Italy offer concessional loans to home country firms. Non-concessional loans are loans offered by home countries at market rates, with conditions identical to those that would be offered by commercial lenders. Even if loan conditions are non-advantageous, home country firms may still derive a financial advantage of these loans – particularly long-term loans for SMEs – because private financial institutions are sometimes reluctant or unable to lend (e.g. in times of economic crisis) (Sauvant et al. 2014: 56). Non-concessional loans are provided notably by the United States and Belgium. Some countries employ a variety of financing instruments depending on the specific needs of each business, going beyond providing straightforward term loans. Structured finance3 encompasses all advanced private and public financial arrangements that serve to efficiently refinance and hedge any profitable economic activity beyond the scope of conventional forms of on–balance sheet securities (debt, bonds, equity) in an effort to lower cost of capital and to mitigate agency costs of market impediments on liquidity (Jobst 2007: 200). Spain, Belgium, and the United States offer structured financing options. However, none of these financing programs is especially directed to OFDI in LDCs. Home FDI countries sometimes opt to co-finance loans with international organizations or private financial institutions through syndication. Using the latter, a government can leverage private capital to finance home country firms’ foreign investments. By bearing some of the lender’s risk of default, the government makes it more likely that financial institutions will extend loans to smaller business enterprises. This type of risksharing arrangement essentially operates as a financial guarantee that

According to the Bank for International Settlements (BIS), structured finance instruments can be defined through three key characteristics: (1) pooling of assets (either cash based or synthetically created); (2) tranching of liabilities that are backed by the asset pool (this property differentiates structured finance from traditional “pass-through” securitizations); (3) delinking of the credit risk of the collateral asset pool from the credit risk of the originator, usually through use of a finite-lived, stand-alone special-purpose vehicle (SPV) (Group of Ten, Committee on the Global Financial System, and Bank for International Settlements 2005: 4).

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improves the likelihood that businesses will be able to access lines of credit for overseas investments (Sauvant et al. 2014: 59). Taiwan, Singapore, and Germany provide this type of access to finance, but few of these arrangements are directed to investment in LDCs.

13.3.1.3  Financial Guarantees Another financing measure that is also rather common is the provision of financial guarantees that improve the access to credit of home countries’ companies. These financial guarantees protect the repayment of the loans to the financial institutions. Italy and Canada offer financial guarantees but, once more, these guarantees are not designed to support OFDI in LDCs in particular. 13.3.1.4  Equity Participation Another type of financial measure includes equity participation by a home country directly or through its development finance institution (DFI) in a home country enterprise or its foreign affiliate who invests abroad. This type of HCM is found in countries and regions like Denmark, the United Kingdom, Belgium, the United States, and Singapore, but in few cases is it specifically directed to LDCs. Recently, China has become the largest investor in LDCs, particularly in fuel- and mineral-exporting LDCs such as Zambia, Democratic Republic of the Congo, and Sudan, through taking a minority share in specific projects in the China-Africa Development Fund (UNCTAD 2011: 11). 13.3.2  Fiscal Incentives Fiscal incentives to OFDI refer to tax incentives that include a reduction in the overall tax burden of home countries’ enterprises investing abroad. Several countries have HCMs in this regard, but none are explicitly directed to LDCs. Following an OECD definition and classification of tax expenditures (OECD 2010: 12), Sauvant et al. have developed a typology of fiscal incentives to OFDI considering five groups of measures: (1) tax exemptions from corporate tax on income earned by foreign subsidiaries, (2) corporate tax relief for enterprises investing in certain economic sectors, (3) fiscal allowances for qualifying activities, (4) tax deferral for qualifying income earned overseas, and (5) tax credits for certain categories of expenditures (Sauvant et al. 2014: 77–86).

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13.3.2.1  Tax Exemptions from Corporate Tax One of the key issues for foreign investors is determining their investment’s optimal legal structure for tax purposes in a host country. According to the OECD, the large majority of its member countries have adopted territorial tax systems (29 of the 35 OECD member countries – around 83%). Under the territorial method, income earned abroad by foreign subsidiaries is wholly or partially exempted from home country taxes with no credit for foreign taxes. Twenty-one countries exempt 100%4 and 8 exempt between 95% and 97% of qualifying foreign dividends received from affiliates abroad.5 However, some OECD member countries with territorial tax systems limit the exemption to affiliates resident in countries with which they have a treaty relationship or that have robust income tax systems. Only six OECD countries currently have a worldwide tax system: Chile, Ireland, Israel, Republic of Korea, Mexico, and the United States (PriceWaterhouseCoopers [PwC] 2013: 11). Under the worldwide method, income earned abroad by foreign subsidiaries is subject to tax by the home country with a credit for income taxes paid abroad (PriceWaterhouseCoopers [PwC] 2013: 1). None of these tax exemptions are directed to investment in LDCs. 13.3.2.2  Corporate Tax Relief Corporate tax rate relief is applied to investment in particular economic sectors, for example, the oil sector in South Korea (Sauvant et al. 2014: 84) or special types of enterprises, for example, companies that carry out global or regional headquarters activities of managing, coordinating, and controlling business activities for a group of companies, in Singapore (Singapore Economic Development Board 2017), or high and new technology enterprises (HNTEs) in China (KPMG 2016). There is no specific system for tax relief for investment taking place in LDCs. 13.3.2.3  Fiscal Allowances for Qualifying Activities A related type of fiscal incentives to OFDI are mechanisms providing temporary relief of taxes, together with support for certain qualifying activities. Since 2010, Singapore offers a progressively enhanced scheme

Australia, Austria, Canada, Czech Republic, Denmark, Estonia, Finland, Greece, Hungary, Iceland, Latvia, Luxembourg, Netherlands, New Zealand, Poland, Portugal, Slovakia, Spain, Sweden, Turkey, and United Kingdom. 5 Belgium, France, Germany, Italy, Japan, Norway, Slovenia, and Switzerland. 4

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providing a capped stamp duty relief for qualifying mergers and acquisitions (M&As) completed between April 1, 2010, and March 31, 2020. These schemes are not directed especially to promote or facilitate investment in LDCs.6

13.3.2.4  Tax Deferral In countries with worldwide tax methods, other financial mechanisms are found to reduce the tax burden on OFDI: tax deferrals and tax credits. Tax deferral allows that income from foreign subsidiaries to be taxed only when the controlling shareholders in the home country receive dividends or other income distribution from their foreign stocks. One of the prime examples is the United States, where the income of foreign corporations controlled by US shareholders is not subject to taxation in the United States when it is earned, only when it is received by the shareholders (Sauvant et al. 2014: 85). 13.3.2.5  Tax Credits In the case of foreign tax credits, the country of residence of the parent firm allows a credit for the amount of foreign taxes paid by a foreign affiliate on the income out of which dividends are paid (called underlying taxes) against its own income tax if certain conditions are met. The Republic of Korea and the United States employ such schemes; however, none of these mechanisms are directed to promote FDI in LDCs. 13.3.3  Risk Management Tools, Including Political Risk Insurance From the foreign investor’s perspective, political risks (mainly adverse regulatory activity followed by breach of contract and transfer or convertibility restrictions) count as a main constraint together with limited infrastructure capacity and limited access to qualified staff. For example, between 2010 and 2013, political risk was ranked at the top of the most important constraints for FDI in developing countries (including

In fact, to qualify for the M&A scheme, the acquiring company must merely acquire ordinary shares in a target company, whether directly or indirectly, that results in the acquiring company holding at least 20% ordinary shareholding in the target company (if the acquiring company’s original shareholding in the target company was less than 20%); or more than 50% ordinary shareholding in the target company (if the acquiring company’s original shareholding in the target company was 50% or less) (Inland Revenue Authority of Singapore 2016).

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LDCs) in a survey made by the World Bank’s Multilateral Investment Guarantee Agency (MIGA) and the Economist Intelligence Unit (EUI) of foreign investors’ views on the major constraints for foreign investment (Multilateral Investment Guarantee Agency [MIGA] 2014: 7). It also ranks prominently in the World Bank’s TCdata360 database, which updates that information for more recent years (World Bank Group 2017b). LDCs are also among the most fragile countries with low incomes confronting severe structural impediments to sustainable development. They are highly vulnerable to economic and environmental shocks and have low levels of human assets (United Nations Committee for Development Policy 2018). This implies that many LDCs are prone to ongoing political unrest, armed revolt, and/or threat of terrorism, which can impose great risks for foreign investors. Thus, political risk insurance (PRI) – for which the payment of a premium is required – provides insurance for war damage, political violence, and forced abandonment of assets abroad by home country investors. PRI also covers other risks that are associated with investing in LDCs, such as expropriation, currency convertibility, funds-transfer restrictions and the suspension of remittances. Demand for PRI is increasing from investors interested in LDCs that are beginning to encourage FDI, such as Myanmar (Multilateral Investment Guarantee Agency [MIGA] 2013: 42). PRI is provided at three different levels. On the international level, institutions such as the World Bank Group’s MIGA provide PRI. On the national level, home countries of FDI sometimes offer PRI. There are also private insurance companies that mitigate the political risks associated with investing in LDCs.

13.3.3.1  International Political Risk Insurance: MIGA MIGA undertakes a wide range of activities that are of immediate relevance to FDI and LDCs, typically in the framework of activities geared to differently defined groups of countries. Thus, one of MIGA’s priorities is to encourage FDI in the world’s poorest economies by providing PRI to investors engaging in developing countries, including the least developed among them. One group of firms that is particularly sensitive to political risk are SMEs. MIGA helps the SME sector in emerging economies in two ways: directly, by providing PRI at discounted premiums to foreign investors who wish to invest in SMEs involved in finance, agribusiness, manufacturing, and services, and indirectly, by providing PRI to financial institutions that will then lend to SMEs through local affiliates. This program is

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of special relevance to LDCs because FDI there, especially in manufacturing and services, is more likely to flow into smaller enterprises. MIGA also places a strategic focus on investments in 36 conflictaffected and fragile economies, 24 of which were LDCs at the beginning of 2014.

13.3.3.2  National Political Risk Insurance Most OECD countries have national agencies that provide domestic companies with export credit and PRI, a phenomenon that started in the late 1950s when the Federal Republic of Germany, Japan, and the United States started offering insurance programs to foreign investors against non-commercial risks (Parra 2012: 12–13). The largest among these agencies include OPIC (United States), NEXI (Japan), SINOSURE (China), ONDD (Belgium), EDC (Canada), ECGD (Britain), EFIC (Australia), and SERV (Switzerland).7 Other countries have delegated the management of their investment guarantee schemes to private companies. That is the case in Germany, which has appointed a consortium formed by PriceWaterhouseCoopers (PwC) and Euler Hermes Aktiengesellschaft (PricewaterhouseCoopers 2015), and France, which uses Compagnie Française d’Assurance pour le Commerce Extérieur (COFACE), a private company providing insurance coverage on behalf of the French government. These insurance schemes can include requirements aimed to ensure that the guaranteed FDI fulfill sustainable and developmental objectives of the host country. For example, OPIC ensures that OPICsupported projects are environmentally and socially sustainable; respect human rights, including workers’ rights; and encourage positive host country development effects (OPIC 2017). Some of the PRI also has a regional focus, such as China–Latin American and Caribbean Countries Cooperation Plan (2015–2019) (Ministry of Foreign Affairs of the People’s Republic of China 2016). 13.3.3.3  Private Risk Insurance The private market covers both export, or trade credit, and investment insurance. Private risk insurance distinguishes itself from national or multilateral insurers because the insurance is available on a commercial The large majority of these agencies are members of the Berne Union, an association of export credit and investment insurance industries worldwide, including both public and private companies. Berne Union, “Berne Union Members” (Berne Union) https://www.berneunion.org/Members, accessed May 6, 2019.

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basis without a lengthy negotiation period, but it is also without sustainable development requirements (e.g. on environmental, labor, and human rights issues) (Hobér and Fellenbaum 2015: 1540–41). However, foreign companies in LDCs have largely not used private risk insurance because the elevated risk in many LDCs has meant that only a few political risk insurers are ready to underwrite investments in these countries, with a prohibitively high cost (World Economic Forum 2014: 11).

13.3.4  Project-Business Development, Feasibility, and Information Services Information provision and technical assistance can help overcome market imperfections. In particular, gaps in information and knowledge are addressed through advisory services that provide information on the macroeconomic circumstances and legal framework, the political environment, business opportunities, and sectoral conditions in prospective host countries. Indeed, advisory services are the most widespread support measures that donors provide in order to encourage donor company investment in developing countries (OECD and WTO 2015a: 230, Figure 8.4). This type of support includes several services, for example: (1) dissemination of investment opportunities, (2) educational services, (3) investment missions, (4) match-making services, and (5) feasibility studies. Yet these mechanisms are not tailored for OFDI in LDCs.

13.3.4.1  Dissemination of Investment Opportunities Development agencies and home states often help to disseminate information about investment climate and potential investment opportunities. Basic information that is provided through databases, publications and reports includes information about the economic climate and regulatory environment of potential host countries, industry data, host country legislation, and investment opportunities. For example, the Cotonou Agreement (between African, Caribbean, and Pacific countries and the EU) and the ASEAN Investment Agreement both include provisions concerning FDI promotion activities such as exchange of information. Potential outward investors visit websites of their home countries because these provide information and resources, including HCMs, useful to invest abroad. This information is often provided via investment promotion agencies (IPAs) in the home country (Sauvant et al. 2014: 33).

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One way of expanding the outreach of investment promotion activities is to involve embassies and consulates overseas. For that reason, UNCTAD has launched a special program to help train developing country diplomatic staff in investment promotion and investor targeting (UNCTAD 2001b: 35), Israel (UNCTAD 2001b: 9, Box 2), Russia (Russian Investment Agency 2017), and France (Ministère de l’Europe et des Affaires étrangères 2017) are doing this directly.

13.3.4.2  Educational Services Another form of support involves educational services such as the organization of seminars, conferences, and other training events related to OFDI to LDCs. The Chinese Investment Promotion Agency (CIPA) (Ministry of Commerce Public Services of China 2017) and the Chilean export agency, PROCHILE, provide such activities (PRO-CHILE 2017). 13.3.4.3  Investment Missions The organization of missions to potential host countries is another important service for outward investors. The primary object of missions is establishing and maintaining contacts with governments and entrepreneurs in host countries; their objectives also include briefings, informational sessions, and site visits. While it is a common service in OECD countries, only a few governments offer missions exclusively for outward investors only (e.g. Spain organizes “investors’ missions”) (ICEX España Exportación e Inversiones 2017). In the majority of these countries, investment missions take place together with trade missions (e.g. Canada) (Foreign Affairs Trade and Development Canada Government of Canada 2018) or economic and business missions, like in Belgium, organized by the Belgian Agency for Foreign Trade (Agence pour le commerce éxterieur 2010); Japan, organized by Japan External Trade Organization (JETRO 2017); and Russia, organized by the Ministry for Economic Development of the Russian Federation (Sauvant et al. 2014: 36–37). 13.3.4.4  Match-Making Services Another category of information support consists of match-making services. These services typically include the identification of potential partners, the preparation of informational notes on the legal and economic characteristics of host countries, the initial approach of partners by the organizing institutions, and the establishment of contacts between investors and the local investors. Facilitating business contacts or sponsoring

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matching programs are particularly important for SMEs who lack the resources to conduct a wide search of unconventional FDI locations (UNCTAD 2001a: 9, 22, 26). Denmark provided match-making services from 1993 to 2011, but in 2014 it decided to discontinue the program due to the limited impact on employment and sustainable growth in the selected countries, and a potential incompatibility with the EU state aid rules (Jonsdottir 2009: 56; Ministry of Foreign Affairs Denmark 2014).

13.3.4.5  Feasibility Studies Other support services to encourage OFDI include advice and consulting, for example, by providing feasibility studies, which may include organizational and production plans, economic or financial models, rationales for the choice of a particular technology or equipment, etc. The United Kingdom and Spain offer such services (Sauvant et al. 2014: 50), as does Russia (Russian Investment Agency 2017). 13.3.5  Promoting Sustainable and Responsible Investment Home countries and development agencies could make the abovementioned outward investment promotion and facilitation measures in LDCs conditional upon investors’ compliance with certain criteria of sustainable and responsible investment. The focus thus shifts from merely promoting additional FDI to promoting sustainable and responsible investment. These criteria can consider different sustainable dimensions, including, among others, economic aspects (e.g. technology transfer, research and development), environmental aspects (e.g. sustainable use of natural resources, or climate protection), social aspects (e.g. assurance of safe working conditions; respect for human, gender, and indigenous rights), and governance aspects (e.g. transparency and corruption). Existing instruments can be used to promote this type of FDI in LDCs. For example, some international financial institutions (IFIs) have an independent recourse mechanism that responds to complaints from communities affected by projects funded by IFIs, e.g. World Bank’s Inspection Panel (The World Bank 2017). Home countries could refer to existing international principles when it comes to implementation of measures promoting sustainable and responsible investment, notably in topics such as corruption and corporate social responsibility (CSR). With respect to human rights, employment, environment, combating bribery, consumer interests, and taxation, non-binding Guidelines for Multilateral Enterprises of the OECD could be used regarding the

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compliance with home state’s national laws by the foreign investor, together with disclosure recommendations as outlined in the OECD Principles of Corporate Governance, and applying good governance practices to combat bribery and corruption, such as those outlined in the OECD Anti-Bribery Convention. Home countries of FDI could focus their support to OFDI on projects that have positive development impacts on the host country, meet certain CSR standards, or provide environmental and social impact assessment (Sauvant and Mallampally 2015: 6, 11). For example, the Dutch government has made adherence to the OECD Guidelines for Multinational Enterprises mandatory for every company receiving official development assistance (ODA) funding (OECD and WTO 2015a: 232). Germany’s Investment Corporation, Deutsche Investitions- und Entwicklungsgesellschaft (DEG), is placing growing emphasis on assisting investments in Africa, including in sub-Saharan Africa (KFW 2017). The United States’ OPIC has been strengthening its focus on FDI in the developing countries most in need of increased investment and transfer of technology. It also requires that a project meets the worker’s right standards of the International Labor Organization (OPIC 2017). Similarly, the Japan Bank for International Cooperation conducts a review of environmental and social conditions when deciding on funding and conducts monitoring and follow-up after the decision has been made (Japan Bank for International Cooperation [JBIC] 2017). Although CSR instruments are largely of a voluntary nature, home countries could also include them both in IIAs and in domestic laws. In fact, some IIAs concluded in the past decade include provisions on CSR, although these references are still relatively limited. From this group, IIAs concluded mainly by Canada,8 Brazil,9 and Colombia,10 also include commitments of the contracting parties to encourage enterprises operating

See: Canada–Côte d’Ivoire BIT (2014), Art. 15; Canada–Mali BIT (2014), Art. 15; Canada– Senegal BIT (2014), Art. 16; Canada–Korea FTA (2014), Art. 8.16; Canada–Serbia BIT (2014), Art. 16; Canada–Nigeria BIT (2014), Art. 16; Cameroon–Canada BIT (2014), Art. 15; Canada–Honduras FTA (2013), Art. 10.16; Benin–Canada BIT (2013), Art. 16; Canada– Panama FTA (2010), Art. 9.17; Canada–Colombia FTA (2008), Art. 816; Canada–Peru FTA (2008), Art. 810. 9 Six cooperation and facilitation investment agreements (CFIAs), concluded by Brazil in the past two years with Angola, Mozambique, Malawi, Chile, Colombia, and Mexico, the Brazil-Peru Economic and Trade Expansion Agreement (2016). 10 Colombia–France BIT (2014), Art. 11; Pacific Alliance Protocol (2014), Art. 10.30; Colombia–Panama FTA (2013), Art. 14.15; and Colombia–Costa Rica FTA (2013), Art. 12.9. 8

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within a country’s territory or jurisdiction to voluntarily incorporate internationally recognized CSR standards. These obligations are only best efforts, and therefore it would be difficult to initiate a claim on this basis if their national companies do not abide by CSR principles that are supported by the home state.11

13.4  Development Partners Indirect Support OFDI to LDCs can also be supported through a series of measures taken by home countries, but they are implemented in the jurisdiction of the host country. These mechanisms include support for improving the investment climate, support to strengthen investment promotion agencies, support for the private sector in the host country, and support for the negotiation of IIAs.

13.4.1  Improving the Investment Climate Promotion of FDI to LDCs could be fostered by enhancing good governance in the host country, promoting the rule of law and legal certainty, reducing corruption, and increasing coherence and transparency in investment policies that contribute to national development objectives. All these elements contribute to improving the so-called investment climate. Development agencies and several OFDI home states already provide many forms of support to assess and improve the investment climate in developing countries and their ability to attract FDI. This is an important activity of the World Bank Group, which includes the Doing Business Project that ranks countries based on how easy and cost effective their regulatory and legal framework is for foreign investors (World Bank Group 2017a). In addition, to help countries improve their business environment, the World Bank’s Investment Climate Assessments identify key constraints to investment and growth in a country, as well as areas for reform, on the basis of perceptions of entrepreneurs and firm performance in the country and their links to quantitative data These provisions are also found in the failed TPP (2016), Art. 9.17. Similarly, the Singapore–US FTA (2008), Art. 18.9 refers to “principles of corporate stewardship”; the SADC Investment Protocol (2006), Art. 10, refers to “corporate responsibility” but in the sense that foreign investors shall abide by the laws, regulations, administrative guidelines, and policies of the host state.

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collected through enterprise surveys. The World Bank Group’s Facility for Investment Climate Advisory Services also funds and supports advisory projects to improve the investment climate. Home countries’ development assistance agencies contribute to private sector development in LDCs through different methods. For example, the United Kingdom’s DFID, which has helped in Sierra Leone to improve public debt management. This assistance in turn has contributed to lower inflation and easier access to affordable finance for the private sector (OECD and WTO 2015: 221). Improving transparency and information available to investors regarding the relevant investment conditions and procedures is a basic feature of any investment policy framework at the domestic level.12 The transparency principle extends also to efficient administrative procedures and enhanced predictability of the policy environment through consultation procedures for all stakeholders.13 Another specific way to promote investment is liberalizing the laws governing the entry, protection, and treatment of foreign investment. Hence, improving the legal and regulatory framework of host countries could also be achieved through cutting red tape and through the simplification or reform of administrative procedures for investment admission or establishment, for example, application for permits, business taxation, visa and working permits for business persons, and improving transparency in licensing process, among others (Economisti Associati 2014: 17–22; OECD 2015). However, this liberalization should be done carefully, and in sectors that are important not only for economic purposes but also for sustainable development, which are usually those where most restrictions tend to apply in both national and international investment policies (Zhan 2016: 3).

13.4.2  Strengthening LDCs’ Investment Promotion Agencies Improving the business climate and providing a transparent regulatory environment are necessary but often not sufficient conditions to attract sustainable FDI. Information failures pose serious obstacles to increasing FDI, including by leading to inaccurate risk assessments. Potential investors lack information, time, and capacity to consider all existing investment opportunities. Targeted information dissemination is crucial to Principle II G20 Principles; Article 1 WTO’s Trade Facilitation Agreement. Principle IV G20 Principles; Articles 2 and 5 WTO’s Trade Facilitation Agreement.

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attract both large transnational corporations and also SMEs with limited capacity to gather business intelligence and market information in more remote and less well-known investment locations. IPAs provide opportunities to close the information gap encountered by potential investors. IPAs, as one-stop shops, can also contribute to improving the regulatory framework for investment (United Nations Conference on the Least Developed Countries: 2011: 46) by identifying and eliminating unintended barriers to sustainable FDI, rendering after-investment services, facilitating private-public partnerships (United Nations Conference on the Least Developed Countries: 2011: 22), and preventing and managing conflicts between investors and host countries. While many LDCs have established IPAs for promoting and facilitating FDI, they do not have the level of information that is required to promote foreign investment, with information often incomplete, outdated, or only found in the local language, something that can be easily tested by navigating the webpages of those agencies (United Nations General Assembly 2014: 8). For example, certain LDCs’ IPAs have published their domestic legislation with regard to the treatment of foreign investment (investment code) but remain silent on the signed IIAs, such as Cambodia.14 Some countries have their IIAs almost exclusively published in their native language, like the case of Afghanistan,15 Sudan,16 and Yemen,17 and it was not possible to find the IIAs through their governmental websites but through their treaty partners. A wide range of African countries do not make all their IIAs available to the public (even if they are in force). This happens with countries such as Benin,18 Burkina Faso,19 Democratic Republic

Cambodia, www.cambodiainvestment.gov.kh, accessed January 15, 2018. The 2006 Afghanistan–Iran BIT could be retrieved through Iran http://rc.majlis.ir/fa/ law/show/97998, accessed January 15, 2018. 16 The 1997 China–Sudan could be retrieved through China http://tfs.mofcom.gov.cn/ aarticle/h/aw/201002/20100206778963.html, accessed January 15, 2018. 17 The 1998 China–Yemen BIT through China http://tfs.mofcom.gov.cn/aarticle/h/ at/201002/20100206778924.html, accessed March 15, 2018. 18 The 2008 Benin–Kuwait BIT could be retrieved through Kuwait www.mof.gov.kw/ TaxationFAQ/AgreementViewer.aspx?pdfpath=Benin//231fd9d9-be1e-49ff-9c4f26c19578e320.pdf, accessed January 15, 2018. 19 The 1998 Burkina Faso–Malaysia BIT could be retrieved through Malaysia www.miti.gov.my/miti/resources/auto%20download%20images/5567e096dbcdd.pdf, accessed January 15, 2018. 14 15

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of Congo, 20 Djibouti, 21 Equatorial Guinea, 22 Guinea, 23 Madagascar, 24 Malawi, 25 Mauritania, 26 Mozambique, 27 and Zambia.28 Home countries of OFDI could support IPAs in LDCs directly or through existing organizations such as the World Association of Investment Promotion Agencies (WAIPA). They can also follow the example of other development partners that often provide assistance to IPAs. For example, the MIGA Indochina project, a technical assistance program financed by the Japanese Trust Fund, seeks to improve The 2000 Democratic Republic of the Congo–Ukraine BIT could be retrieved through Ukraine http://arbitration.kiev.ua/uploads/kucher/16.%20Congo%20-%20UKR.pdf, accessed January 15, 2018. 21 The 2003 Djibouti–India BIT could be retrieved through India www.mea.gov.in/Portal/ LegalTreatiesDoc/DJ03B0335.pdf, accessed on January 15, 2018; the 2009 Djibouti– Kuwait BIT could be retrieved through Kuwait www.mof.gov.kw/TaxationFAQ/ AgreementViewer.aspx?pdfpath=Djibouti//9f7b40a2-99a7-4f3c-bcf3-b05ac31d2335.pdf. 22 The 2015 Equatorial Guinea–Ukraine BIT could be retrieved through Ukraine http://​ arbitration.kiev.ua/uploads/kucher/23.%20Equatorial%20G%20-%20UKR.pdf, and the 2005 China–Equatorial Guinea could be retrieved through China http:// tfs.mofcom.gov.cn/aarticle/h/aw/201002/20100206785036.html, both accessed January 15, 2018. 23 The 1996 Guinea–Malaysia BIT could be retrieved through Malaysia www.miti.gov.my/ miti/resources/auto%20download%20images/5567e070248a5.pdf, the 1996 Guinea– Serbia BIT through Serbia http://bpp.uzzpro.gov.rs/Register.aspx?oznaka=85426&Aspx AutoDetectCookieSupport=1, both accessed January 15, 2018. 24 The 1966 Madagascar–Norway BIT could be retrieved through Norway www.regjeringen.no/​ contentassets/9eff7ce978ce467e818235693c4fcfcf/madagaskar.pdf, accessed January 15, 2018. 25 The 1995 Malawi–Taiwan BIT could be retrieved through Taiwan http://no06.mofa.gov.tw/ mofatreatys/IndexE.aspx?tyeffectivedate=&tysigneddate=&tysubject_c=promotion+​ investment& tysubject_e=promotion+investment& tycountr y_c=& tycountr y_ e=&ParentSortPage=frmGrd_CurPage!!1**frmGrd_SortColumn!!**frmGrd_SortDir!!&, accessed March 15, 2018. 26 The 2008 Mauritania–Spain BIT could be retrieved through Spain www.congreso.es/ portal/page/portal/Congreso/PopUpCGI?CMD=VERLST&BASE=pu10&FMT=PU WTX DTS.fmt&DOCS=1-1&DOCOR DER=LIFO&QUERY=%28BOCG-10-CGA-411.CODI.%29#%28P%C3%A1gina1%29, the 1988 Mauritania–Romania BIT could be retrieved through Romania www.cdep.ro/pls/legis/legis_pck.htp_act_text?idt=10993, both accessed January 15, 2018. 27 The 2001 China–Mozambique BIT could be retrieved through China www.fdi.gov.cn/​ 1800000121_39_2387_0_7.html, the 1998 Algeria–Mozambique BIT through Algeria www.droit-afrique.com/upload/doc/algerie/Algerie-Convention-investissementMozambique.pdf, both accessed January 15, 2018. 28 The 2015 Mauritius–Zambia BIT could be retrieved through Mauritius www.investmauritius.com/downloads/ippa.aspx, the 2003 Italy–Zambia BIT could be retrieved through Italy www.gazzettaufficiale.it/atto/serie_generale/caricaDettaglioAtto/ originario?atto.dataPubblicazioneGazzetta=2004-07-22&atto.codiceRedazionale=004G0213. both accessed January 15, 2018. 20

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investment flows into two LDCs: Cambodia and Lao People’s Democratic Republic by enhancing host governments’ abilities to attract and service investors (Multilateral Investment Guarantee Agency [MIGA] 2000: 44).

13.4.3  Support Private Sector in the Host Country Much development cooperation deals with private sector development (OECD and WTO 2015b: chap.  8). However, collaboration is not only limited to financial and technical support. Home countries could also contribute to facilitating the transfer of technology by fostering linkages between domestic and host country firms, especially with support initiatives that empower the SMEs in LDCs. Their domestic private sector can benefit by entering into business relationships supplying inputs to these new market entrants (backward linkages) or processing a foreign investor’s products (forward linkages). Through subcontracting systems between a foreign firm and local subcontractors who supply components, spare parts, or semi-finished goods to the foreign firm, extra jobs are created ultimately, and additional economic activity is encouraged (KurtishiKastrati 2013: 28–29). For example, the Technology Partnership Initiative in the UK has put special emphasis on the development of environmentfriendly technologies in Ethiopia and Uganda. In France, the Centre de coopération internationale en recherche agronomique pour le développement (CIRAD) undertakes research activities on genetic resources, food, nutrition technologies, and biotechnology with research and development (R&D) institutions in LDCs (CIRAD 2017).

13.4.4  Support LDCs in Investment-Related Negotiations With respect to support in the negotiation of IIA, closer collaboration between home and host country agencies is needed to design and renegotiate investment agreements with appropriate safeguards to avoid constraining domestic policies and regulation in the public interest (UN-OHCHR 2011: 7). Least developed countries could also use IIAs to strengthen policy coherence between national and international policies and consistency between investment policies and other policy areas, as well as sustainable development objectives. IIAs focus predominantly on protecting foreign investment in the host country. The language regarding home country promotion of OFDI, if any, does not involve any specific obligations, in contrast to the specific binding obligations laid down for the treatment of IFDI by host countries.

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Therefore, IIAs could be designed to provide active measures through provisions calling for the mutual encouragement of investment in the contracting countries. Treaty provisions could be tailored to the needs of the participating parties and specifically reflect the asymmetries between countries. While adopting an approach of gradual liberalization and built-in flexibility, IIAs also need institutional monitoring mechanisms. A related policy area is that of CSR, which covers several aspects, including development obligations, sociopolitical obligations, consumer protection, corporate governance, and ethical business standards. The challenge is to balance the promotion and protection of liberalized market conditions for investors with the need to pursue development policies.

13.5  Conclusions: Possible Future Scenarios to Foster FDI in LDCs The current scheme of HCMs demonstrates that these measures are common among OECD and G20 countries, but in order to promote and facilitate OFDI by their local companies, in general, they are not especially conceived to promote or facilitate investment in LDCs. In order to make HCMs work for LDCs, certain avenues and likely scenarios that assist the customizations of HCMs to promote and facilitate investment in LDCs are discussed below.

13.5.1  Challenges and Opportunities Measures reported in this chapter change rapidly over time. Therefore, it is sometimes difficult to keep track of their implementation. They suffer not only substantial modifications but also changes in the name, duration, or repositories (mostly websites) where they are explained. As much as possible, these measures should be more permanent, or changes should be implemented in a way that is easy to follow. Changing HCMs – as often happens – could play out against investor expectations. Home country agencies often include in the same report all developing countries as one single group, which makes it difficult to find systematic information on HCMs in a particular country, and their effectiveness in the context of the resources devoted for that support. Effective policies directed at LDCs or implemented in those countries should be reported separately from other developing countries or economies in transition.

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The costs (financial and technical support, and capacity building) associated with amending LDCs’ current international investment agreements and/or national investment codes are rather high. Using existing international rules by referring to the Guiding Principles on Business and Human Rights (“Ruggie Principles”) and UNCTAD’s Investment Policy Framework for Sustainable Development (IPFSD) requires minimal complementary adaptations. This in turn lowers the costs and creates wider support for reforming the legal framework that governs foreign investments. Awareness of the existing instruments of investment promotion and facilitation that involve LDCs’ development partners, as well as an assessment of their functioning and effective implementation, is lacking. This is essential to avoid duplication and foster synergies between HCMs. Currently, a robust, evidence-based analytical work to understand the needs and priorities of the LDCs (individually and as a group) as well as the investment-related opportunities and challenges is missing. A detailed mapping and assessment exercise is necessary to provide priority action areas and update them at periodic intervals. This can become an information tool for the governments involved, other stakeholders, and various national and international development finance institutions (OECD and WTO 2015b: 157). Using the experience of existing international institutions can simplify the implementation of HCMs that effectively promote FDI in LDCs, such as WAIPA’s efforts in strengthening the IPAs.

13.5.2  Efficiency and Efficacy of Direct Support If home countries are concerned about the developmental impact of the investments of their investors, they could include a developmental component as an eligibility requirement for financial support of OFDI, as demonstrated by Germany and Belgium for grants/loans or by China and the United States for equity. The effectiveness of financial support to OFDI is not always clear. Monitoring financial sustainability of direct support not only enhances accountability regarding domestic taxpayers, but it also assesses the positive and negative impacts of such intervention in LDCs. Germany’s DEG has developed its own monitoring instrument that looks at financial sustainability of a project, return on equity, and support and developmental effects. It has served as a model for other DFIs, such as PROPARCO (France) and Norfund (Norway) (Biousse and Miyamoto 2014: 17).

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The competition with bigger developing economies for direct support measures can be detrimental to LDCs. Hence, these measures might need to be tailored for LDCs to be effective, for example, offsetting expenses for feasibility studies in LDCs, differentiating PRI in developing countries, and promoting active cross-border coordination and collaboration for investment promotion (with IPAs, embassies, consulates, match-making services, direct provisions of services/information).

13.5.3  Promises and Pitfalls of Indirect Support While competing for capital, LDCs often provide incentive schemes such as tax exemptions or rebates to achieve their developmental objectives. Due to the limited resources and financial constraints of LDCs, it is vital for LDCs to analyze whether a broad or a narrow concession is more beneficial to their economies. If a concession is beneficial, it can bring broad positive effects beyond the first investor to whom they are promised. It is also important that the LDC governments do not provide fiscal incentives that are too generous and thus detrimental to the public interest, such as consumer health, worker safety, and environmental protection, which could create a political or social backlash (United Nations 2015: 17–26). Incentives can also increase corruption, which can have highly adverse effects on the improvement of investment climate efforts (OECD 2015: 19). Thus, HCM incentives that promote FDI for developmental purposes may be preferable to host country incentives to attract FDI because the cost of the incentive is borne by the capital-exporting country rather than the capital-importing country (UNCTAD 2001a: 50). Due to their limited capacity, LDCs are less able to determine what types of FDI they want to attract. In this respect, development partners could assist LDC governments in assessing the environmental, social, and human rights impact of potential large-scale investments. To minimize the risk of bilateral meddling by home countries of FDI, this analytical work could be done preferably through multilateral initiatives (Sauvant and Mallampally 2015: 15). One possible way of attracting international development assistance could be modeled after the mechanisms developed under the WTO, such as the Aid-for-Trade Initiative and the Trade Facilitation Agreement (Sauvant and Hamdani 2015: 3–5; United Nations 2015: 17–26). IPAs of host LDCs are the main designated authorities to provide information to foreign investors, but they often lack necessary content

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that goes beyond providing transparency in the domestic legal framework and international agreements. The technical and financial assistance of development partners could support LDCs in developing more advanced IPA websites that provide online access to more detailed and up-to-date information on their country or region, recent inward investment trends, key economic data (e.g. GDP per capita, inflation), analysis of high potential sectors and associated factor costs, descriptions of specific investment opportunities, and details of the services the agency provides to potential investors (UNCTAD 2001b: 30, Box 8). A database of best practices in the areas of investment law and policies could also help LDCs to learn from peers on smart regulation that encourages investment and safeguards the national interest, such as the World Bank Group’s Global Investment Promotion Best Practices (formerly “benchmarking” exercises). Well-negotiated and fair investment projects, contracts, and agreements are in the long-term interests of all signatories. Development partners could provide, as an international form of legal aid, expert multidisciplinary assistance to governments of LDCs and under-resourced LDCs’ firms, with the aim of helping them in investment-related negotiations and dispute settlement.

13.5.4  The Role of Other Actors South–South cooperation could contribute to the human and productive capacity-building, technical assistance and exchange of best practices relating to investment. Some countries have joined forces through regional cooperation, such as the ASEAN and East African Community, to promote their region to foreign investors. Hence, in addition to home states’ actions from developed countries and development agencies’ assistance, such cooperation could also play an important role in attracting and retaining FDI in LDCs. However, it remains to be seen to what extent such cooperation among potential competitors can actually have an impact on the ability of individual countries to attract FDI (UNCTAD 2001b: 34). As a final note, the role of the private sector in the development of LDCs cannot be disregarded. Thus, public-private partnerships, and a combination of grants and loans by both home countries and host countries, could create business opportunities in sectors and industries that are important for LDCs, such as energy and infrastructure (UNCTAD 2011: 20).

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  2018b. “Large Majority of South Nations Opposed to ‘Investment Facilitation,’” www.livemint.com/Politics/ZcaJq4oeGLusd2Cuigk0iM/India-South-AfricaUS-oppose-G20-draft-on-investment-facil.html, accessed April 21, 2018. KFW. 2017. “Sub-Saharan Africa,” KFW - Bank Aus Verantwortung, www.kfwentwicklungsbank.de/International-financing/KfW-Development-Bank/ Local-presence/Subsahara-Africa/, accessed January 16, 2018. KPMG. 2016. “New ‘Working Guidance of Administrative Measures for Recognition of High and New Technology Enterprise (HNTE)’ Released,” China Tax Alert July 19, 2016, https://assets.kpmg.com/content/dam/kpmg/ pdf/2016/07/china-tax-alert-19.pdf, accessed May 19, 2018. Kurtishi-Kastrati, S. 2013. “The Effects of Foreign Direct Investments for Host Country’s Economy,” European Journal of Interdisciplinary Studies 5(1):26–38. Ministère de l’Europe et des Affaires étrangères. 2017. “Soutenir les entreprises françaises à l’étranger.” France Diplomatie, www.diplomatie.gouv.fr/fr/politiqueetrangere-de-la-france/diplomatie-economique-et-commerce-exterieur/ soutenir-les-entreprises-francaises-a-l-etranger/, accessed January 16, 2018. Ministry of Commerce Public Services of China. 2017. “Investment Project Infor­ mation Database.”, http://project.fdi.gov.cn/1800000091_10000111_8.html, accessed June 6, 2018. Ministry of Foreign Affairs Denmark. 2014. “Danida Business Partnerships.”, http://um.dk/en/danida-en/business/partnerships/. accessed June 6, 2017. Ministry of Foreign Affairs of the People’s Republic of China. 2016. “China’s Policy Paper on Latin America and the Caribbean.” November 24, 2016, www.fmprc.gov.cn/mfa_eng/wjdt_665385/2649_665393/t1418254.shtml, accessed May 16, 2018. Multilateral Investment Guarantee Agency (MIGA). 2000. MIGA Annual Report 2000. Technical Assistance Services, www.miga.org/documents/pp42_60.pdf, accessed June 7, 2018.  2013. World Investment and Political Risk 2012. Washington, DC, www.miga.org/ documents/wipr12.pdf, accessed June 7, 2018.  2014. World Investment and Political Risk 2013. Washington, DC: World Bank, www.miga.org/documents/WIPR13.pdf, accessed June 7, 2018. OECD. 2010. Tax Expenditures in OECD Countries. Paris: Organisation for Economic Co-operation and Development, www.oecd-ilibrary.org/content/ book/9789264076907-en, accessed June 7, 2018.  2012. Competitive Neutrality. Paris: Organisation for Economic Co-operation and Development, www.oecd-ilibrary.org/content/book/9789264178953en, accessed June 7, 2018.   2015. “Policy Framework for Investment,” Policy Framework for Investment, www.oecd.org/investment/toolkit/, accessed June 7, 2018. OECD and WTO. 2015. Aid for Trade at a Glance 2015. Aid for Trade at a Glance. Paris: OECD Publishing, doi.org/10.1787/aid_glance-2015-en. Parra, A. R. 2012. The History of ICSID. Oxford: Oxford University Press.

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PriceWaterhouseCoopers (PwC). 2013. “Evolution of Territorial Tax Systems in the OECD,” April 2, 2013, www.techceocouncil.org/clientuploads/reports/ Report%20on%20Territorial%20Tax%20Systems_20130402b.pdf, accessed January 20, 2018.   2015. “Investment Guarantees of the Federal Republic of Germany,” www.pwc.de/en/ offentliche-unternehmen/investitionsgarantien-des-bundes.html, accessed January 20, 2018. PRO-CHILE. 2017. “Promociona tus productos y servicios en el extranjero,” www.prochile.gob.cl/promociona-tus-productos-y-servicios-en-el-extranjero/, accessed January 16, 2018. Russian Investment Agency. 2017. “Services for Investees,” www.investment-in-​ russia.com/site/en?view=SERVICES-FOR-INVESTEES, accessed January 20, 2018. Sarmah, P. 2003. Home Country Measures and FDI: Implications for Host Country Development. Edited by Centre for Competition, Investment & Economic Regulation (CUTS). Jaipur: CUTS. Sauvant, K. P., P. Economou, K. Gal, S. Lim, and W. P. Wilinski. 2014. “Trends in FDI, Home Country Measures and Competitive Neutrality,” In A. K. Bjorklund (Ed.) Yearbook on International Investment Law & Policy 2012– 2013, New York: Oxford University Press, pp. 3–107. Sauvant, K. P. and P. Mallampally. 2015. “Strengthening Investment Promotion Regimes for Foreign Direct Investment in the Least Developed Countries,” Occasional Policy Papers Series on the Least Developed Countries. 1, New York: United Nations Office of the High Representative for the Least Developed Countries, Landlocked Developing Countries and Small Island Developing States (UN-OHRLLS), pp. 1–32, www.unohrlls.org/custom-content/uploads/2015/​07/Strengthen_Invest_ Promotion_Regimes_FDI_LDCs.pdf, accessed March 20, 2018. Singapore Economic Development Board. 2017. “Incentives for Business & Investments. Investing Business in Singapore,” March 15, 2017, www.edb.gov.sg/ en/how-we-help/incentives-and-schemes.html, accessed November 22, 2018. UNCTAD. 2001a. “Home Country Measures,” UNCTAD Series on Issues in International Investment Agreements, International Investment Agreements: Flexibility for Development. New York, Geneva: United Nations.   2001b. “The World of Investment Promotion at a Glance: A Survey of Investment Promotion Practices,” New York, Geneva: United Nations.   2011. “Foreign Direct Investment in LDCs: Lessons Learned from the Decade 2001–2010 and the Way Forward,” New York, Geneva: United Nations.  2016a. World Investment Report 2016. Investor Nationality: Policy Challenges. World Investment Report 2016. New York, Geneva: United Nations.   2016b. “UNCTAD’s Global Action Menu for Investment Facilitation,” May 31, 2016, http://investmentpolicyhub.unctad.org/Upload/Documents/UNCTAD_ Investment%20Facilitation%20Action%20Menu_3_1.pdf, accessed March 20, 2018.

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United Nations. 2011. “Programme of Action for the Least Developed Countries for the Decade 2011–2020, A/CONF.219/3/Rev.1,” May 23, 2011, http://unohrlls.org/UserFiles/File/IPoA.pdf, accessed March 20, 2018.   2015. “Addis Ababa Action Agenda of the Third International Conference on Financing for Development (Addis Ababa Action Agenda), A/RES/69/313,” August 17, 2015, http://unctad.org/meetings/en/SessionalDocuments/ ares69d313_en.pdf, accessed March 20, 2018. United Nations Committee for Development Policy (CDP). 2016. Report on the Eighteenth Session (March 14–18, 2016). Economic and Social Council Official Records, 2016. Supplement No. 13 E/2016/33. New York: United Nations. United Nations Committee for Development Policy (CDP). 2018. “List of Least Developed Countries,” March 2018. www.un.org/development/desa/dpad/ wp-content/uploads/sites/45/publication/ldc_list.pdf. United Nations Conference on the Least Developed Countries. 2011. “Report of the Fourth United Nations Conference on the Least Developed Countries: Istanbul, Turkey, May 9–13, 2011. A/CONF.219/7,” http://unohrlls.org/ UserFiles/File/A-CONF_219-7%20report%20of%20the%20conference.pdf, accessed March 20, 2018. United Nations General Assembly. 2014. “Strengthening Investment Promotion Regimes for Foreign Direct Investment in the Least Developed Countries. Report of the Secretary-General. A/69/270,” August 7, 2014, http://unohrlls.org/​ custom-content/uploads/2014/09/A69_270-SG-Report-on-FDI-in-LDCs. pdf, accessed March 20, 2018. UN-OHCHR. 2011. “Guiding Principles on Business and Human Rights: Imple­ menting the United Nations ‘Protect, Respect and Remedy’ Framework,” www.ohchr.org/Documents/Publications/GuidingPrinciplesBusinessHR_ EN.pdf, accessed March 20, 2018. The World Bank. 2017. “The Inspection Panel,” http://ewebapps.worldbank.org/ apps/ip/Pages/Home.aspx, accessed March 21, 2018. World Bank Group. 2017a. “Doing Business - Measuring Business Regulations,” www.doingbusiness.org/, accessed January 16, 2018.   2017b. “TCdata360: Risk and Policy Uncertainty,” https://tcdata360.worldbank.org/ subtopics/risk?country=CHE, accessed December 22, 2017. World Economic Forum. 2014. “The Role of the Private Sector in Fragile States: Catalyzing Investment for Security and Development. Global Agenda Council on Fragile States and Conflict Prevention 2013–2014,” www3.weforum.org/ docs/GAC14/WEF_GAC14_FragileStatesConflictPrevention_Report%20.pdf, accessed June 7, 2018. Zhan, J. 2016. “G20 Guiding Principles for Global Investment Policymaking: A Facilitator’s Perspective,” E15 Initiative (blog). December 2016. http://​ e15initiative.org/publications/g20-guiding-principles-for-global-investment-​ policymaking-a-facilitators-perspective/, accessed March 20, 2018.

PART IV Diffusion across Economic Treaties

14 Heading for Divorce? Investment Protection Rules in Free Trade Agreements

wolfgang alschner1 14.1 Introduction For 30 years, investment protection rules and trade disciplines have been faithful companions in preferential trade and investment agreements (PTIAs).2 The match first made in North America only grew stronger over the years as free-trade agreements (FTAs) with investment chapters proliferated globally. It reached new heights in 2009 when the member states of the European Union (EU) decided to phase out a 50-year practice of concluding self-standing bilateral investment treaties (BITs), ceding competence over foreign direct investment matters to the EU in the Treaty of Lisbon. In light of their ever-closer bond, commentators even began to speak of a “convergence” (Alford 2014, Kurtz 2016) or “merging” (Puig 2015) of the trade and investment regime. Now, however, investment protection rules and trade agreements seem to be heading toward a divorce.3 I am grateful to Uttra Gautam and Ayush Ghimire for their excellent research assistance. This research was supported by the Social Sciences and Humanities Research Council of Canada. 2 In the context of this chapter, I refer to PTIAs as free-trade agreements with investment chapters that contain specific investment protection obligations, such as national treatment and compensation for expropriation, rather than hortatory language or liberalization provisions only. These investment chapters are typically enforceable through investorstate dispute settlement, but not necessarily so (see, for example, Canada–United States FTA (1988) or Australia–United States FTA (2004). In contrast, UNCTAD, for instance, distinguishes between BITs and treaties with investment provisions, which include such PTIAs but also comprise trade agreements with hortatory language or investment liberalization only. 3 Note that this chapter focuses on investment protection rules. FTAs may also contain language on investment promotion, facilitation, and liberalization, to which the conclusions drawn in this chapter about a split between trade and investment rules do not apply. See also the concluding section to this chapter. 1

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In May 2017, the Court of Justice of the European Union (CJEU) determined that the common commercial policy of the EU covers all major areas of modern trade agreements apart from investor-state arbitration and portfolio investments, which fall under the shared competence of the EU and its member states. In practice, that means that FTAs with such provisions will have to be ratified by all EU member states, whereas those treaties that do not can benefit from the expedient ratification by the EU institutions alone (Kleimann and Kübek 2017). In response to the CJEU decision, EU Commission President Jean-Claude Juncker has proposed splitting future EU treaties into EU trade agreements and self-standing EU investment protection agreements (EU Commission 2017; von der Burchard 2017; von der Burchard and Hanke 2017). Meanwhile, investment protection has also become a bone of contention in the renegotiation of the North American Free Trade Agreement (NAFTA). United States Trade Representative (USTR) Robert Lighthizer considers investment protection rules enforceable through investor-state dispute settlement (ISDS) as a threat to national sovereignty at home and an unnecessary incentive for the offshoring of American jobs (Lighthizer 2018). Consequently, he wants to exclude such provisions from future trade deals or, as done in the United States–Mexico–Canada Agreement (USMCA), scale them back severely (USTR 2018b). Investment rules in trade agreements have similarly come under fire in parts of Oceania, Southeast Asia, and Latin America. In short, the era of widely proliferating trade agreements with investment protection chapters seems to be coming to a close or, at the very least, is now well past its prime. This chapter empirically assesses the impact of three decades of coexistence between investment and trade rules in PTIAs in order to evaluate whether we should be concerned about their looming split. It revisits the debate on a growing convergence of the investment and trade regimes highlighting that PTIAs are routinely taken as evidence for the increasing interaction between both fields. But to what extent has the inclusion of investment chapters in trade agreements really led to a substantive convergence of both fields? Are investment protection rules somehow normatively different because they are included in a trade agreement? Or, as the United States argued in one investment dispute, are investment chapters “no more than a BIT dropped into a free trade agreement”?4 Answering

The Canadian Cattlemen for Fair Trade v. United States of America, UNCITRAL, Award on Jurisdiction, January 18, 2008, para. 163.

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this question is important because it helps us to evaluate whether the looming divorce will undo a genuine normative convergence or whether the split will merely sever ties that have not been close to begin with. This chapter’s empirical analysis supports the latter conclusion. I systematically assess whether (1) PTIA investment chapters differ from BITs in content and (2) the wider structure of a trade agreement affects the interpretation and application of its investment rules, using NAFTA as a case study. I find no systematic evidence of a genuine convergence either in relation to the content or the interpretation of investment chapters. Three decades of coexistence in PTIAs have not led to a normative transformation of investment protection rules through trade agreements. Consequently, the looming split of investment rules from trade agreements is less problematic than it may seem, formalizing a separation that already exists. This chapter is structured as follows. The first section provides a brief history of the integration of trade and investment rules in PTIAs, and then turns to recent events that foreshadow their looming split. The second section relates these developments to the debate on a convergence between the trade and investment regimes. The third section then evaluates convergence claims empirically by investigating s­ystematic content variation in BITs and investment chapters, and by studying ­references to non-investment chapters in investment arbitration, ­finding no evidence of meaningful interaction between investment protection rules and wider trade agreements. The chapter concludes with the observation that even as the split between investment protection and trade agreements unfolds, we see a growing integration of trade and investment governance when it comes to investment liberalization and facilitation.

14.2  Investment Chapters in Trade Agreements: From Union to Divorce For most of the second half of the twentieth century, investment protection and trade liberalization were regulated through separate instruments. Investment was protected through BITs, while FTAs ­liberalized trade. The integration of both sets of rules only began in earnest 30 years ago with the rise of FTAs with investment chapters (i.e. PTIAs). This section of the chapter first traces the rise and proliferation of PTIAs before reviewing recent developments that have put this union in jeopardy.

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14.2.1  The Inclusion of Investment Protection Rules in Trade Agreements The presence of investment protection rules in trade agreements is not altogether new. Friendship, commerce, and navigation treaties, widely concluded in the nineteenth and early twentieth centuries, already addressed both the liberalization of trade and the protection of foreign property (Walker 1958). Similarly, landmark treaties such as the 1920 Covenant of the League of Nations and the 1948 Havana Charter created governance structures for both trade liberalization and investment protection (Footer 2013). For much of the second half of the twentieth century, however, investment and trade rules were dealt with in separate instruments. On the one hand, regional or bilateral custom unions and FTAs that existed in parallel with the multilateral trade regime of the General Agreement on Tariff and Trade (GATT) and later of the World Trade Organization (WTO) liberalized trade. On the other hand, selfstanding BITs protected foreign investment abroad. The late 1980s then saw the emergence of a new breed of trade agreements that integrated both investment protection and trade concerns in one instrument – the PTIA. The first of such agreements was the Canada– United States Free Trade Agreement (CUSFTA) concluded in 1988.5 In the decade prior to CUSFTA, Canada had pursued a restrictive policy vis-à-vis foreign investment. The 1974 Foreign Investment Review Act (FIRA) placed restrictions on the foreign ownership of Canadian companies, imposed local content requirements, and made the approval of foreign investment subject to a benefit-to-Canada test (O’Sullivan 1980; GATT 1984).6 The Investment Canada Act replaced FIRA in 1985, but restrictions on foreign investment continued, especially in the domain of culture and energy (Raby 1990). Against this backdrop, the United States sought to discipline Canada’s foreign investment policy by integrating investment protection provisions into CUSFTA (Raby 1990). The result was Chapter 16 on investment. Chapter 16 included commitments Several prior FTAs already contained investment chapters, including the Second Lomé Convention (1979), Articles 60–64, and the Third Lomé Convention (1984), Articles 240–247. Yet these chapters did not contain strict investment protection obligations and instead called for the parallel conclusion of BITs for that purpose. 6 The United States challenged part of FIRA before a GATT panel, which found the practice of requiring investors to purchase Canadian goods to be inconsistent with GATT Article III:4. The panel, given its limited jurisdiction to trade-related investment chapters, however, could not address other parts of FIRA. 5

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on national treatment, expropriation, and free transfer of funds, and restricted the use of performance requirements. It thereby marked the first time that comprehensive investment protection disciplines were part of a modern trade agreement. A second historic step followed four years later when Mexico, Canada, and the United States agreed to NAFTA and its investment provisions in Chapter 11. Prior to NAFTA, Mexico had not signed any investment treaties and was a proponent of the so-called Calvo Doctrine, which rejected the notion of an international minimum standard for the treatment of foreign property and instead insisted that foreign investors should be treated just like their domestic counterparts (Daly 1993). Through NAFTA, the United States sought to reverse that policy. To this end, it tabled language closely modeled on its bilateral investment treaties, which not only included investment protection obligations similar to CUSFTA but also called for the enforcement of these disciplines through investor–state arbitration (Cameron and Tomlin 2002). Even though throughout the negotiation, the text of Chapter 11 evolved away from the original US proposal as new provisions, for example, on environmental measures, and new procedures, for example, on authoritative interpretations of NAFTA, were added to the treaty, it retained most of the core investment protection obligations initially proposed and, most important, made them enforceable through ISDS (Price 1993). NAFTA was thus the first FTA with an investment chapter that offered protection equivalent to that of modern BITs. In the 25 years since the conclusion of NAFTA, more than 100 FTAs with investment chapters have been signed that offer similar protection.7 Canada and Mexico began concluding treaties closely modeled on NAFTA with Latin American countries in the late 1990s; from there, NAFTA-like PTIAs spread to Southeast Asia (Alschner, Seiermann, and Skougarevskiy 2017). From 2001 onward, Japan began to conclude economic partnership agreements with investment chapters following

Depending on what is counted, this number varies. UNCTAD reports 379 treaties with investment provisions, other than BITs, in existence in 2017, but this number includes treaties with only hortatory investment language. The Text of Trade Agreements (ToTA) dataset identifies 107 FTAs notified to the WTO by 2017, which contain investment chapters. Yet only 88 of them have content that can be considered equivalent to that of BITs by including specific investment protection obligations. Since not all PTIAs in force have been notified to the WTO, however, the number of BIT-equivalent investment chapters is likely to be higher, closer to 100.

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a similar design (Hamamoto 2011). By 2005, China had signed its first FTA with an investment chapter with Chile and began seeking additional agreements with Pakistan (2006), New Zealand (2008), and Singapore (2008) (Berger 2013). Today, PTIAs form a web that spreads around the globe. The inclusion of investment provisions in FTAs has become so frequent that in the corpus of 448 preferential trade agreements that the WTO was notified of by 2017, more words are devoted to investment chapters than to any other issue area (Alschner, Seiermann, and Skougarevskiy 2018). For most of that period, however, the EU was not a party to the PTIA network. While the EU had signed more trade agreements than any other custom territory (Pauwelyn and Alschner 2015), the protection of foreign investment had remained within the domain of national BIT programs. That changed in 2009 with the conclusion of the EU Lisbon Reform Treaty. The new Treaty on the Functioning of the EU (TFEU) delegated competency over foreign direct investment (FDI) matters to the supranational EU by listing FDI as part of the EU’s common commercial policy in TFEU, Article 207.8 This shift of competency then enabled the EU to join the PTIA network (Reinisch 2013). It concluded negotiations on its first FTA with an investment chapter with Singapore in 2014 using a design more closely inspired by NAFTA than by earlier European BITs (Fontanelli and Bianco 2014). With the joining of the EU, a majority of economies was now part of the global PTIA network that regulated trade liberalization and investment protection through a single treaty instrument.

14.2.2  The Looming Split of Investment Protection Rules from Trade Agreements In 2017, however, the growing integration of investment protection and trade liberalization through PTIAs experienced major disruptions. Investment chapters in trade agreements have come under fire in many economies, from the European Union and the United States to other parts of the globe. While the exact fault lines and policy contexts vary, concerns relating to ISDS are a common denominator in these countries’ and regions’ decisions to rethink the integration of investment protection obligations in trade agreements.

For an account about how inclusion of FDI occurred at “the last minute” of negotiations, see Meunier (2017).

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14.2.2.1  The EU and the CJEU Singapore Decision Rather than inaugurating an era of convergence between trade and investment protection as it first seemed, the EU Lisbon Treaty set in motion what is likely to be a lasting split between both fields. While the TFEU had added FDI to the list of issues falling into the EU’s common commercial policy in TFEU, Article 207(1), it left the exact scope of the EU’s exclusive powers over the negotiation and conclusion of trade agreements ambiguous. Thus, it was not clear whether a trade agreement negotiated by the EU Commission covering diverse areas, from sustainable development to investment protection, enforceable through ISDS emanated from the EU’s exclusive competence and was thus subject to ratification by the EU only, or whether such an agreement included areas that fell into the competence shared between the EU and its member states, making the treaty subject to ratification by both the EU and all its member states. In May 2017, the CJEU resolved that question in its Opinion on the EU– Singapore Free Trade Agreement.9 The CJEU found that wide-reaching policy areas fell under the exclusive competency of the EU, including chapters on trade in services, competition, transportation, and sustainable development. Provisions on the liberalization and protection of FDI were equally within that exclusive competence. In contrast, the CJEU considered portfolio investments and investor–state arbitration to fall under the shared competence of the EU and its member states.10 A treaty including ISDS would thus require the ratification by all EU member states. By itself, the CJEU decision did not mean the end of investment protection rules in EU trade agreements. By the time the decision was rendered, however, ISDS had turned from a technical issue known only in expert circles to a pariah generating massive public opposition. Controversial investment claims, including a dispute brought by Swedish investor Vattenfall against Germany over the country’s phaseout of nuclear energy, had crystalized public opinion against investment protection (Bernasconi-Osterwalder and Hoffmann 2012). This coincided with negotiations between the EU and the United States over a transatlantic trade and investment partnership, which was to include ISDS, sparking further protests (Meunier and Morin 2017). Investment protection rules and ISDS were seen to benefit multinational companies primarily, to curtail the right to regulate of host states, and to CJEU, Opinion 2/15, May 16, 2017, ECLI:EU:C:2017:376. Ibid., para. 305.

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enrich a class of elite lawyers who acted as counsel and arbitrators in investment dispute settlement (Corporate Europe Observatory 2012). In partial response to these concerns, the EU Commission proposed to replace contentious investor–state arbitration with a permanent and, eventually, multilateral investment tribunal system and renegotiated the Comprehensive Economic and Trade Agreement (CETA) with Canada to include the new mechanism (EU Commission 2015; Van Harten 2016). The idea of a permanent investment tribunal only partially assuaged concerns, however, over investment chapters in trade agreements. When the conclusion of CETA, as a mixed agreement, necessitated approval by all EU states, Belgium initially refused to give its consent. For domestic constitutional reasons, all Belgian regional parliaments had to agree to CETA before the country could give its assent, yet the regional parliament in Wallonia refused to do so citing, among others, concerns over CETA’s investment protection rules. After frantic diplomatic efforts and the creation of a Joint Interpretative Instrument, which explained, among other things, that CETA would not prevent signatory states from regulating in the public interest, Wallonia finally agreed to CETA and the agreement was signed in October 2016 (Rankin 2016). Yet the episode showed that, notwithstanding the EU Commission’s efforts to replace arbitration with a permanent investment tribunal, investment protection provisions continued to be perceived as poison pills that could jeopardize the conclusion of larger trade agreements. It was probably with this CETA experience in mind that EU Commission President Juncker proposed to salvage future EU trade deals by splitting them into self-standing trade and investment protection agreements in response to the CJEU EU–Singapore FTA decision (EU Commission 2017; Gáspár-Szilágyi 2017; Lester 2017b). This two-tier system would create a fast track for trade agreements encompassing policy areas falling under the exclusive competence of the EU, which do not require ratification by all members, and a mixed track system concerned with investment protection rules and their enforcement, which fall under the mixed competency and require ratification by the EU and its member states (von der Burchard and Hanke 2017). The Council of the EU, the organ representing EU member states, approved the EU Commission’s approach of concluding separate agreements on May 22, 2018, but also cautioned that investment agreements should be negotiated in parallel with EU FTAs (EU Council 2018). In effect, however, the split between EU FTAs and EU BITs predated the Council of the EU’s conclusion, as the FTA struck earlier between

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Japan and the EU showed. Negotiations over an economic partnership agreement between the EU and Japan had been launched in May 2013. Donald Trump’s election in the United States and his protectionist rhetoric helped to accelerate the talks in 2017, but disagreement persisted over the issue of investment protection. Ironically, it was the EU’s strategy to salvage investment rules in trade agreements by replacing investor–state arbitration with an investment tribunal system that proved unacceptable to Japan because the country preferred the existing ISDS model (Harding 2017). Consequently, investment protection was omitted from the deal, which enabled the parties to reach an agreement in principle in July 2017, and negotiations were finalized in December 2017 (EU Press Release 2017). At the time of this writing, it remains unclear whether or when a self-standing investment agreement will follow. At the same time, the EU seems committed, at least for the time being, to include investment protection provisions in those trade agreements that, due to their wider coverage, require ratification by EU member states in any event. The EU–Mexico Association Agreement, concluded in principle in April 2018, is one such agreement falling under the shared competence of EU member states and the EU. The treaty contains an investment chapter that follows the CETA model and foresees the creation of a standing tribunal for the resolution of disputes between states and investors. In conclusion, 2017 saw major upheavals in the EU’s approach to PTIAs, which are likely to lead to a growing split between investment protection and trade liberalization agreements. Apart from the minority of trade deals that take the form of broader association agreements, the EU seeks to decouple trade treaties from the controversial issue of investment protection, especially after the CJEU’s Singapore decision gave a de facto veto to every EU member state over PTIAs that include ISDS. The EU’s push toward a permanent investment tribunal has disenfranchised partners that prefer a different mechanism for the resolution of investment disputes, thus complicating the inclusion of investment chapters in FTAs further. Given these challenges, trade and investment protection rules are likely to go their separate ways in most future EU agreements.

14.2.2.2  The US Policy Shift and the “America First” Trade Policy A second major policy shift took place in the United States. The election of Donald Trump as US president brought about historic changes in US trade and investment policy. During his campaign, Trump rallied against FTAs that destroy American jobs, denounced NAFTA as the “worst deal

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ever,” and announced his intention to withdraw the United States from the newly negotiated Trans-Pacific Partnership (TPP) Agreement on his first day in office (Trump 2016). The task fell to Robert Lighthizer, the administration’s new USTR, to mold the president’s views into a coherent trade policy starting with the renegotiation of NAFTA. The investment protection aspects of that policy took shape in the second half of 2017. An initial USTR draft letter prepared in March 2017 prior to the confirmation of Lighthizer as USTR still identified the maintenance of an effective ISDS mechanism as one of the NAFTA renegotiation objectives (Lester 2017a). Thus, it closely tracked the negotiation mandate set out in the 2015 Trade Promotion Authority (TPA) legislation, which gives the US administration the power to negotiate trade agreements subject to the ultimate approval of the US Congress.11 However, the NAFTA renegotiation notice ultimately sent to Congress in May 2017 after Lighthizer’s USTR appointment departed from the draft and merely stated that US renegotiation objectives will be consistent with the TPA without mentioning investment protection specifically (Hirschfeld Davis 2017; USTR 2017). By the summer of 2017, it became clear that Lighthizer was more critical of ISDS than his predecessors. In response to questions by the US House of Representatives Ways and Means Committee, Lighthizer cited sovereignty concerns over having international tribunals scrutinizing US laws.12 He expressed skepticism over binding international dispute settlement mechanisms more generally, favorably citing the diplomatic mechanisms of the pre-WTO GATT for their effective dispute resolution (Lighthizer 2017). Potentially motivated by these concerns, USTR floated the idea of a NAFTA ISDS “opt-in” mechanism in August 2017 that would make investment arbitration under NAFTA optional (Davis 2017).

Bipartisan Congressional Trade Priorities and Accountability Act of 2015. In relation to foreign investment protection, Section 102 (4) (F) requires that treaties “provid[e] meaningful procedures for resolving investment disputes” and calls in (G) “to improve mechanisms used to resolve disputes between an investor and a government through [amongst others](i) mechanisms to eliminate frivolous claims and to deter the filing of frivolous claims, (ii) procedures to ensure the efficient selection of arbitrators and the expeditious disposition of claims.” 12 Remarks by USTR Lighthizer, House Ways and Means Committee Hearing, June 22, 2017. In response to Rep.  Lloyd Doggett’s (D-Texas) question on whether ISDS is necessary, Lighthizer stated, “[A]s you suggest, Congressman, I am troubled by the sovereignty issue. I am troubled by the fact that anyone – anyone – can overrule the United States Congress, or the President of the United States, when it’s passed a law. That is troubling to me.” 11

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By mid-October 2017, USTR Lighthizer’s position had hardened further and he increasingly considered investment protection to be incompatible with an “America First” trade policy agenda. Reacting to a business associations’ call to maintain strong investment protection rules in NAFTA (Donnan 2017), Lighthizer countered: “[W]hy is it a good policy for the United States government to encourage investment in Mexico?” (Levy 2017). Investment protection rules and their enforcement began to be framed as incentives for corporate outsourcing and thus became incompatible with Trump’s agenda to bring jobs back to US territory. This policy stance was formalized in the 2018 “America First” Trade Policy Agenda: “We are also determined to avoid provisions [in future treaties] that will encourage outsourcing. If a company decides to build a factory in Mexico – and it has legitimate, market based reasons for doing so – then it should act as the market dictates. But we reject the notion that the U.S. Government should use NAFTA – or any other trade deal – to encourage outsourcing. The point of a trade deal is to create increased opportunities for market efficiency, not to encourage foreign investments that are otherwise not viable” (USTR 2018a). The outcome of the NAFTA renegotiations closely tracked this position. Even though the USMCA, signed in late November 2018, retains an investment chapter (Chapter 14) it omits a general ISDS mechanism. Investor–state dispute resolution is instead relegated to two annexes. The first provides a three-year transition period for legacy and pending ISDS cases under NAFTA, Chapter 11. The second creates a scaled-back ISDS mechanism exclusively between Mexico and the United States that limits claims to expropriation and non-discrimination cases and requires that investors exhaust domestic remedies before accessing international arbitration. ISDS in North America, which thrived under NAFTA, is thus reduced to a shadow of its former self under the USMCA. Through its “America First” trade policy, the Trump administration has effectively reversed the traditional US approach to investment protection. From championing investment protection rules by opening foreign markets to US capital and by binding foreign governments to international standards of protection – key considerations that motivated the launch of the US investment treaty program in the early 1980s – the United States has become a critic of the system it had built, considering investment protection rules and their enforcement as a threat to sovereignty at home and an unwanted incentive for companies to move American jobs abroad. It remains unclear whether the rudimentary ISDS retained in the USMCA is a model for future US agreements or whether it only

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constitutes a concession to US business interests in Mexico, or if future agreements will omit investment protection rules and their enforcement altogether. In both scenarios, however, investment rules will play a greatly reduced role in future US trade agreements.

14.2.2.3  The Split between Trade and Investment Protection in other Parts of the Worlds The EU and the United States are not the only regions eyeing a separation of investment protection rules from trade agreements. Similar debates have been ongoing in other parts of the world throughout 2017, too. In New Zealand, the newly elected government under Prime Minister Jacinda Ardern began its term in office in October 2017 fiercely opposing ISDS in trade agreements (Bermingham 2017). Talks to revive the TPP Agreement in November 2017 almost broke down due to that opposition (Smellie 2017). While New Zealand finally agreed to the renamed Comprehensive and Progressive Transpacific Partnership Agreement (CPTPP), it signed a series of side letters with five of its partner countries to carve out the right of foreign investors to bring investment claims under the CPTPP.13 Furthermore, New Zealand’s trade minister David Parker stated publicly that the government “will oppose including ISDS in any future free trade agreements involving New Zealand” (Fuseworks Media 2018). Growing skepticism about ISDS more generally has also led other states to refrain from concluding BITs or FTAs with investment chapters. South Africa stopped signing new BITs or PTIAs after being sued over its Black Economic Empowerment regulations (Muchlinski 2010). Bolivia, Ecuador, and Venezuela have not only denounced several BITs but have also refrained from signing any new BITs or PTIAs (Sourgens 2013). Again other states have rejected NAFTA-style investment protection chapters from the outset. Brazil only recently ratified its first BITs, which omit ISDS and are geared toward investment facilitation rather than protection (Titi 2016). The custom union MERCOSUR, in which Brazil is a member together with Argentina, Paraguay, and Uruguay, has not included investment chapters enforceable through ISDS in any of the trade agreements it has signed. A recent internal protocol signed by the MERCOSUR countries in April 2017 on Investment Cooperation and Side letters were signed with Australia, Brunei Darussalam, Malaysia, Peru, and Vietnam. See www.mfat.govt.nz/en/trade/free-trade-agreements/free-trade-agreements-­ concluded-but-not-in-force/cptpp/comprehensive-and-progressive-agreement-for-transpacific-partnership-text/#side (accessed November 30, 2017).

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Facilitation equally excludes ISDS and focuses on investment facilitation and promotion instead (Pérez-Aznar and Choes Moraes 2017). Hence, apart from the EU and the United States, other major economies have become or continue to be skeptical about PTIA with ISDS. To be sure, in other parts of the world, PTIAs continue to flourish. The states along South America’s west coast maintain dense networks of FTAs with investment chapters and continue to conclude new agreements. Similarly, East Asian countries continue to be staunch supporters of PTIAs. But even these proponents of FTAs with investment chapters are not wedded to the concept of regulating investment protection and trade liberalization through the same instrument. China, South Korea, and Japan signed a self-standing trilateral investment agreement in 2012. ASEAN is routinely sequencing its treaty practice and prioritizing trade agreements over treaties on investment protection. The China–ASEAN FTA, for instance, was concluded in 2004, but an investment agreement was only added in 2009. Similarly, India and ASEAN concluded an FTA in 2009 but waited until 2014 to sign an investment agreement. Hence, even those countries that consider trade and investment protection as part of the same economic integration agenda do not necessarily include trade liberalization and investment protection rules in the same instrument. In conclusion, the integration of investment protection rules in trade agreements has come under fire since 2017. Major players, such as the EU and the United States, are heading for an outright reversal of the policy to include investment protection chapters enforceable through ISDS in trade agreements. Several other states either continue to oppose such investment protection rules, such as New Zealand or Brazil, or accept the decoupling of investment protection and trade rules, such as ASEAN and China. Given this new state of affairs, the next section discusses what we should make of this looming split between investment protection obligations and trade agreements by linking it to the debate on the convergence between the trade and investment regimes.

14.3  The Trade/Investment Convergence Debate Revisited Over the past decade, scholars have devoted increasing attention to a perceived growing “convergence” or “merging” between the trade and investment regimes (Alford 2014; Broude 2011; Kurtz 2016; Puig 2015). In this section, I will revisit this debate. While the literature has exposed the interconnectedness of trade and investment through (1) law-making in PTIAs and (2) law interpretation and application in litigation, the extent

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to which norms in one field have affected the other still remains elusive. In other words, are trade and investment rules in PTIAs really converging or do they merely coexist? Answering this question is crucial for evaluating whether or not we should be concerned about the looming split between investment protection rules and trade agreements.

14.3.1  Normative Convergence through PTIAs Investment chapters in trade agreements are widely cited as evidence of a convergence between trade and investment law (Alford 2014; Puig 2015; Footer 2013). The narratives underpinning this debate provide little empirical evidence, however, of a genuine normative convergence. The first of these narratives claims that PTIAs align both regimes closer with economic realities. Notwithstanding differences in political economy (DiMascio and Pauwelyn 2008), on a meta-level, both regimes are said to pursue the same goal: the efficient allocation of resources, here, goods and capital, globally (Broude 2014). From a business perspective, trade and investment transactions are increasingly intertwined. According to trade economist Richard Baldwin, twenty-first-century commerce is based on a “trade-investment-service-intellectual property nexus” (Baldwin 2016). Production processes that used to take place within a single factory have become unbundled through modern information technology, giving rise to global value chains that disperse manufacturing across countries or even continents (Baldwin 2016). To thrive, these value chains rely not only on low tariffs but also on a secure investment environment and intellectual property right protection. The ability to address all these concerns in one package certainly makes PTIAs attractive, but could not parallel BITs and FTAs achieve the same goal? For Roger Alford, BITs and FTAs only set an international baseline, whereas PTIAs “give access to an inner circle of rights that are reserved for privileged economic relationships” (Alford 2014). PTIAs, in that reading, are thus more than the sum of an FTA and a BIT. He does not specify, however, what exactly these additional rights or benefits conferred by PTIAs are. A second narrative contends that the “merging” of trade and investment provisions in PTIAs has strengthened the liberalization dimension of the latter. Commentators argue that PTIAs typically combine postestablishment investment protection with pre-establishment liberalization, whereas BITs traditionally focus exclusively on post-establishment (Puig 2015). This then translates into a larger economic effect of PTIAs. An UNCTAD survey study on the impact of investment treaties on

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investment flows concluded that PTIAs lead to greater investment flows than BITs (UNCTAD 2009). Subsequent studies have lent further support to that claim (Berger et al. 2010). Hence, because of their greater focus on liberalization rather than only protection, investment chapters are deemed to be more FDI-enhancing than BITs. It should be noted, however, that many modern BITs provide for pre-establishment national treatment as well (Alschner 2017b). BITs concluded by the United States contained investment liberalization commitments already prior to NAFTA (Alschner 2013). It is thus unclear why such an FDI-enhancing effect should be exclusive to PTIAs absent provisions that are not also found in BITs. The third narrative argues that trade norms have rubbed off on investment provisions in PTIAs, leading to normative innovation in the latter. Freya Baetens, for instance, states that “countries seem more willing to include labour, health and environment-related exceptions into PTIAs, compared to BITs, possibly as a result of the fact that this has been standard practice in trade agreements for a longer period of time” (Baetens 2013). But are trade norms really responsible here? Public policy exceptions were included in (some) BITs well before the first PTIAs were signed (Alschner and Skougarevskiy 2016b). Even if PTIAs were to provide particularly fertile ground for normative crossfertilization between trade and investment, innovation is not necessarily confined to PTIAs. In that vein, Baetens acknowledges that similar policy exceptions have also been included in recent BITs (Baetens 2013). So it remains an open question whether investment chapters somehow developed differently compared to BITs because of their greater exposure to trade rules. In short, the different narratives boil down to the question about whether investment chapters are normatively distinct from BITs due to their inclusion in wider trade agreements. Since the different narratives offer little systematic evidence to substantiate this claim, the penultimate section of this chapter will investigate it empirically. But before doing so, it is important to also consider the second limb of the convergence debate grounded in litigation rather than treaty content.

14.3.2  Normative Convergence through Litigation A second area of normative convergence between investment protection and trade liberalization is litigation (De Brabandere 2013). Disputes with similar facts have been brought before investment tribunals and

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trade panels (Alford 2014; Puig 2015). The North American Softwood Lumber disputes, the Mexican Corn Syrup cases, and claims against Australia’s Plain Cigarette Packaging legislation are cases in point (Antoni and Ewing-Chow 2013; Pauwelyn 2006; Puig 2016). This is not because investment rules are found in trade agreements, however, because investors use both PTIAs (as in the above NAFTA cases) and BITs (as in the above case against Australia) to challenge measures subject to parallel trade disputes. But could investment protection provisions be interpreted and applied differently in litigation because they were included in a trade agreement? Here, existing evidence is scant. Scholarship has focused instead on the interaction between investment and trade jurisprudence more generally. Part of the debate turns on the question of whether it is appropriate to apply normative concepts developed in one field to the other, for example, on the question of non-discrimination (DiMascio and Pauwelyn 2008; Kurtz 2009). Normative interaction between trade and investment tribunals, however, is rare to begin with as Damien Charlotin’s citation analysis suggests: only 46 instances equivalent to 3% of all citations by investment tribunals to non-investment tribunals are directed at WTO case law (Charlotin 2017). These citations emanate from tribunals constituted under both PTIAs and BITs (Kurtz 2009),14 so investment tribunals constituted under PTIAs are not necessarily more willing to cite WTO precedents than those constituted under BITs. In short, it is still unclear if and to what extent investment chapters are applied and interpreted differently from BITs because they are contained in a wider trade agreement.

14.4  Are Investment Chapters More Than a BIT Dropped into an FTA? The above section highlighted that the jury is still out on whether PTIAs have led to a genuine convergence between investment protection and trade rules rather than establishing a mere coexistence between the two. This section conducts an original empirical analysis to determine (1)  whether investment chapters are normatively different from BITs and (2) whether the inclusion of investment chapters in larger FTAs has affected their interpretation and application. The findings from this See, for example, Methanex (NAFTA) and Occidental (Ecuador–United States BIT).

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section support the claim that investment chapters are in fact “no more than a BIT dropped into a free trade agreement”, exhibiting little normative interaction with other parts of a PTIA.

14.4.1  Are Investment Chapters Different from BITs in Content? Whether the choice of treaty instrument – BIT or PTIA – determines the content of investment treaty obligations is more difficult to answer empirically than it may seem. First, there are structural differences between both treaty types that obscure their similar substantive coverage. In PTIAs, investment-related provisions that would be placed together in a BIT are not limited to the investment chapter but are scattered throughout the PTIA. NAFTA, for instance, makes part of its competition chapter (Chapter  15) and financial services chapter (Chapter 14) subject to investor– state arbitration under Chapter 11.15 Parts of NAFTA’s general exceptions and state-to-state dispute settlement provisions also apply to Chapter 11.16 However, the vast majority of PTIA provisions outside these chapters have no relationship to investment protection. As a consequence, one has to be careful not to inflate differences between both agreement types by either including too little (only investment chapters) or too much information (entire PTIAs) into the comparison. Second, aside from picking appropriate comparators, a major challenge in the comparison of self-standing BITs and PTIAs consists of controlling for differences due to third factors. Most BITs were concluded prior to 2000, whereas most PTIAs with investment chapters were signed thereafter.17 In the aggregate, investment chapters are thus more “modern” or “progressive” compared to BITs, even though their content may actually be equivalent to self-standing treaties signed during the same period. Some countries have concluded BITs but no PTIAs, introducing variation in the data that is seemingly linked to the treaty instrument but actually reflects idiosyncrasies of the underlying treaty signatories. Brazil,

See NAFTA, Article 1116(1) and Article 1401(2). See NAFTA, Chapter 21 (except Article 2101) and Article 2004. 17 According to UNCTAD data (https://investmentpolicyhub.unctad.org), the number of yearly concluded BITs peaked in 1996 with 220 treaties. The number of yearly concluded PTIAs, in contrast, only peaked in 2004 with 32 treaties. The percentage of yearly concluded PTIAs in relation to all investment treaties signed climbed from around 5% in the early 1990s to 30% by the mid-2010s, indicating the concurrent decline of new BITs and the increase in new PTIAs. 15 16

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for instance, has recently begun to sign a new generation of BITs with a unique design, but it has not concluded FTAs with investment chapters, limiting its innovations to the BIT sphere (for now). The opposite also occurs as countries introduce innovations in PTIAs that only later make their way into BITs. With the higher profile and greater complexity, PTIA negotiations could be more likely to produce initial innovation than BITs, which typically follow model templates.18 The TPP, for instance, although largely trailing existing practice (Alschner and Skougarevskiy 2016a), introduced new features such as a carve-out from ISDS for tobacco control measures that thus far have not made it into BITs. In addition, PTIAs are also concluded more often by developed states than BITs historically have. When power relations are more even, negotiations become more intense and make departure from the existing practice of either state more likely (Alschner, Seiermann, and Skougarevskiy 2017). Yet, these differences between instruments tend to disappear as innovation spreads from BITs to PTIAs (and vice versa). They only temporarily appear as differences in the data, but they are not confined to their underlying treaty type. In short, one has to be extra careful when comparing content data of BITs and PTIAs. On the one hand, one has to pick appropriate comparators to prevent artificially inflating differences. On the other hand, one has to account for third factors other than the treaty instrument that drive variation between BITs and PTIAs, even if only temporarily. Mindful of these dangers, this subsection will conduct two types of empirical content analysis. First, we will compare the content of BITs and PTIAs in the aggregate to spot norms that are exclusive to either sphere and determine whether they are due to the treaty instrument or to third factors. Second, we will review what is close to a natural experiment: three country pairs have signed BITs followed by PTIAs in quick succession, providing a perfect case study as to whether the choice of instrument affects treaty design content. Starting with the larger quantitative analysis, I use a new dataset, Electronic Database of Investment Treaties (EDIT), to look for systematic and meaningful variation in content between BITs and PTIAs.19 One of the most innovative agreements, for instance, has been NAFTA; see Alschner (2017a). 19 The Electronic Database of Investment Treaties (EDIT) is a project coordinated by the World Trade Institute to compile a machine-readable, full-text database of investment treaties currently in force. Its public release is scheduled for early 2019. 18

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EDIT contains the full text of 308 treaties with investment provisions and 2,963 BITs,20 which are automatically coded across four levels: from level 1 of treaty segments (e.g. protection standards or investor–state dispute settlement) to level 2 of individual clauses (e.g. national treatment or conditions for submitting claims to arbitration); to level 3, which deal with sub-elements of a clause (e.g. compensation for expropriation); and finally to level 4, which maps variation within that sub-clause (e.g. the specific type of compensation mandated). At its most detailed level, it currently investigates content variation across 236 variables (Alschner and Skougarevskiy 2016c). Comparing the investment treaty content in EDIT yields little systematic variation between BITs and PTIAs. All eight treaty segments (level 1) and all 70 clauses (level 2) mapped in EDIT are present in both PTIAs and BITs. Only 12% of level 3 and level 4 elements are associated exclusively with BITs or PTIAs. This variation at the sub-clause level is primarily attributable to the third factors discussed above. Exceptions for tobacco control measures, for instance, are so novel that they are found only in the TPP. Conversely, focal points for investors are established in Brazilian BITs, but, as discussed above, not in PTIAs because Brazil has not signed any FTAs with investment chapters. Other than features idiosyncratic to a handful of BITs or PTIAs, only seven elements are present in more than five BITs and only three in more than 10 BITs, but in no PTIAs. These three sub-clauses present only in BITs are almost exclusively found in agreements concluded prior to 2000 by a small pool of countries. They include (1) a carve-out for special preferences accorded to development finance institutions from most-favoured nation (MFN),21 (2) a limitation on transfer of funds to transfers permitted by the host country’s laws and regulations,22 and (3) a special compensation standard (“fair and equitable compensation”) for expropriation when shareholders are concerned.23 In short, the observable differences between the corpus of BITs and PTIAs are arguably linked to third factors such as time, parties, and context rather than treaty instruments at issue.

Note that EDIT uses UNCTAD meta-data. Hence, it includes not only PTIAs but also agreements other than BITs, even if they contain only hortatory language on investment. 21 See, for example, Swaziland–Taiwan BIT (1998), Article 3(4). 22 See, for example, Indonesia–Ukraine BIT (1996), Article VI(1). 23 See, for example, India–Argentina (1999), Article 5(3). 20

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Table 14.1 (Almost) perfect comparators – BITs and PTIAs signed by the same parties in close succession Canada–Peru BIT (Date of signature; number of articles) PTA investment chapter (Date of signature; number of articles)

November 14, 2006 52 articles May 29, 2008 47 articles

Colombia–Republic of Korea

Peru–Singapore

July 6, 2010 17 articles

February 27, 2003 16 articles

February 21, 2013 28 articles

May 29, 2008 20 articles

In addition, we are fortunate that the investment treaty universe has also provided us with what is close to a natural experiment to understand the content implications of the choice of treaty instruments. Three country pairs have signed BITs that were replaced by a bilateral FTA with an investment chapter within a span of five years or less (Table 14.1). By holding the parties and time (almost) constant, we can thus assess whether the choice of instruments can be linked to differences in treaty content. Comparing these agreements along the EDIT’s 236 level 4 content variables shows that only one content feature is exclusively associated with a treaty type: whereas all three PTIAs allow states to request information from investors for informational or statistical purposes provided that confidential business information is protected,24 none of the BITs in the sample have an equivalent provision. Identical provisions do exist, however, in other BITs such as Article 15 of the United States–Rwanda BIT (2008). With respect to all other features, no systematic variation across all treaty pairs exists. What is more, the commonalities between treaty pairs are greater the closer they are together in terms of timing. The Canada– Peru BIT and investment chapter, which were signed only one and a half years apart, are the most similar agreements of the set, with 87% of features present in both agreements, while the Colombia–Korea and the Peru–Singapore treaties signed three and five years apart, respectively, share only 75% of features. These almost perfect comparators equally suggest that timing is the most important factor determining treaty content 24

See Canada–Peru FTA, Article 8.14; Colombia–Korea FTA, Article 8.14; Peru–Singapore FTA, Article 10.9.

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in a quickly evolving treaty universe. Beyond that, BITs and PTIAs do not seem to differ meaningfully in content. All this is not to say, however, that some clauses are not more likely to appear in one treaty type than another. For instance, survival clauses that extend the application of a treaty for a fixed duration beyond termination are common in BITs, but they are relatively rare in PTIAs. Whereas most PTIAs follow the approach in NAFTA’s Chapter 11, whose provisions will terminate together with the agreement if President Trump makes good on his threat of withdrawal, some PTIAs follow the example of the Canada– Peru FTA, which provides in Article 846 that the agreement’s investment protection obligations will continue to exist for another 15 years after the wider FTA has been terminated. The above analysis did not investigate whether BITs or PTIAs are more prone to innovate. Some type of treaty innovation first appears in BITs (e.g. recent investment facilitation clauses in Brazilian treaties), other innovation first emerges in PTIAs (e.g. tobacco carve-out in TPP). The point of the above comparison has rather been to detect features that are exclusively tied to a type of treaty instrument. No matter where investment protection norms first emerge, they tend to spread to the other agreement type. Hence, the choice of instrument (BIT or PTIA) does not pre-determine the choice of content. The same provisions can be found in both BITs and PTIAs. So why is there no meaningful, systematic difference in content between BITs and PTIAs? Two plausible explanations exist. First, as Freya Baetens put it, “[I]nvestment chapters [often] form a universe of their own, unlinked to the rest of the treaty, because they were drafted by different negotiators than those who devised the chapters on trade” (Baetens 2013). Indeed, in many states, different agencies are responsible for negotiating trade and investment provisions (Skovgaard Poulsen 2015). Given this institutional separation, it is not surprising that investment chapters are more closely influenced by BIT practice than by trade law. Second, states generally strive for consistency in their investment treaty obligations (Alschner and Skougarevskiy 2015). They seek to include the same type of obligations in both BITs and PTIAs to offer predictable protection to their investors, minimize compliance costs stemming from varying commitments, follow treaty models approved by parliament, or all of the above (Alschner and Skougarevskiy 2016d). After the Trade Act of 2002, for instance, which gave US President Bush the authority to negotiate trade and investment agreements subject to final approval by Congress, the United States signed nine FTAs with an investment chapter and two

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BITs whose investment provisions were virtually identical (Alschner, Seiermann, and Skougarevskiy 2017). To conclude, BITs and PTIAs do not differ systematically when it comes to investment protection obligations. The inclusion of investment chapters in trade agreements may thus have integrated trade and investment rules into the same treaty, but beyond such coexistence, it has not triggered a deeper transformation of the investment rules. The choice of the treaty instrument does not pre-determine the content of investment protection obligations.

14.4.2  Does the Wider Trade Agreement Affect the Interpretation and Application of an Investment Chapter? But even if the same provisions are inserted into BITs and investment chapters, their wider treaty context could give rise to differing applications and interpretations. Interpreters of international treaties are required, pursuant to customary law codified in Article 31 of the Vienna Convention on the Law of Treaties, to give meaning to treaty provisions in their context – which includes the wider agreement in which they are integrated. As Freya Baetens stated, “[W]hile investment chapters in PTIAs may be very similar to BITs, the surrounding treaty context may influence their interpretation in ways that are alien to the application of rules in BITs” (Baetens 2013). The investment tribunal in Canadian Cattlemen similarly argued that “NAFTA Chapter Eleven cannot be viewed in isolation but must be considered in light of its larger context – the NAFTA as a whole.”25 Investment provisions of PTIAs have to be read in light of other FTA chapters; otherwise, identical clauses could thus be interpreted and applied differently depending on whether they are located in a BIT or an investment chapter. NAFTA Chapter 11, with its extensive case law, provides an ideal case study to assess to what extent other NAFTA chapters have affected the interpretation and application of its investment protection obligations in the course of dispute settlement. According to the Canadian Cattleman tribunal “[NAFTA Chapter 11] functions as part of a larger agreement that requires analysis of how the different parts of the treaty interrelate in a range of circumstances.”26 In the eyes of the tribunal, this contextual The Canadian Cattlemen for Fair Trade v. United States of America, UNCITRAL, Award on Jurisdiction, January 18. 2008, para. 163. 26 Ibid., para. 164–5. 25

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interpretation is not only mandated by customary international law but by NAFTA itself, which states in Article 102(2) that interpreters “shall interpret and apply the provisions of this Agreement in the light of its objectives set out in paragraph 1.” Among the objectives listed, the drafters included the elimination of barriers to trade, the increase of fair competition, and the protection of intellectual property rights. NAFTA and customary international law thus mandate that NAFTA’s non-investment chapters shade the interpretation and application of NAFTA Chapter 11. In practice, however, tribunals have rarely used NAFTA’s non-­investment obligations to influence the interpretation or application of investment provisions. I have systematically analyzed all investment awards rendered under NAFTA Chapter 11 until October 2017 for ­references to other NAFTA chapters. Out of these cases, I identified 115 references to other NAFTA chapters in 14 different investment disputes.27 As the analysis on the basis of these references below shows, interaction between trade and investment rules for the purpose of interpretation and application has been minimal. The very first NAFTA Chapter 11 award illustrates the opportunities and limits of using other NAFTA chapters to interpret NAFTA Chapter 11. In Metalclad v. Mexico, the wider context of NAFTA played a key role in the tribunal’s award and the subsequent set-aside proceedings.28 In that case, the tribunal had to determine whether Mexico had violated NAFTA Article 1105, the obligation to provide fair and equitable treatment to investments, by denying Metalclad the necessary municipal permits to operate a landfill, even though the permit’s approval had previously been promised

Waste Management, Inc. v. United Mexican States, ICSID Case No. ARB(AF)/00/3; Cargill, Incorporated v. United Mexican States, ICSID Case No. ARB(AF)/05/2; Corn Products International, Inc. v. United Mexican States, ICSID Case No. ARB (AF)/04/1; Detroit International Bridge Company v. Government of Canada, UNCITRAL, PCA Case No. 2012–25; Fireman’s Fund Insurance Company v. The United Mexican States, ICSID Case No. ARB(AF)/02/1; Glamis Gold, Ltd. v. The United States of America, UNCITRAL; Loewen Group, Inc. and Raymond L. Loewen v. United States of America, ICSID Case No. ARB(AF)/98/3; Marvin Roy Feldman v. United Mexican States, ICSID Case No. ARB(AF)/99/1; Mesa Power Group, LLC v. Government of Canada, UNCITRAL, PCA Case No. 2012–17; Metalclad Corporation v. The United Mexican States, ICSID Case No. ARB(AF)/97/1; Methanex Corporation v. United States of America, UNCITRAL; Mobil Investments Canada Inc. and Murphy Oil Corporation v. Canada, ICSID Case No. ARB(AF)/07/4; S.D. Myers, Inc. v. Government of Canada, UNCITRAL; The Canadian Cattlemen for Fair Trade v. United States of America, UNCITRAL. 28 Metalclad Corporation v. The United Mexican States, ICSID Case No. ARB(AF)/97/1. 27

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by the Mexican government.29 The tribunal read NAFTA Article 1105 in its wider NAFTA context. First, it referenced NAFTA Article 102, which calls for an interpretation of NAFTA in the light of the treaty’s objectives that include, among others, transparency and the increase of investment opportunities.30 Second, the tribunal noted the sixth recital of NAFTA’s preamble ensuring a “predictable commercial framework” and Article 1802(1) mandating the prompt publication of laws and regulations. Given that wider treaty context, the tribunal found that Mexico had violated Article 1105 by “fail[ing] to ensure a transparent and predictable framework for Metalclad’s business planning and investment.”31 The Supreme Court of British Columbia disagreed with this interpretation in subsequent set-aside proceedings.32 It found that the “principle of transparency is implemented through the provisions of Chapter 18, not Chapter 11.”33 Consequently, the tribunal was found to have overstepped its mandate by applying a clause that was outside its jurisdiction.34 The Supreme Court of British Columbia set aside the portion of the award that found Mexico to be in violation of NAFTA Article 1105. This stark rebuff of the tribunal’s approach was particularly important because Metalclad had been the first decision rendered under NAFTA Chapter 11. By characterizing the tribunal’s contextual interpretation as an act of extra-jurisdictional application of another NAFTA chapter, the court sent a strong signal to future tribunals not to stray outside the four corners of the investment chapter. This lesson was learned so well that even for the interpretation of the same concept appearing in different parts of the agreement, the wider NAFTA context has proved to be of little significance. In the case Mesa Power v. Canada, the claimant challenged Ontario’s feed-in tariff program on the basis of Chapter 11. In part, the case turned on whether the feed-in tariff measure, as a public purchase of electricity, was carved-out from the scope of Chapter 11 through Article 1108 on government procurement. Several NAFTA chapters refer to the term procurement, and

Metalclad Corporation v. The United Mexican States, ICSID Case No. ARB(AF)/97/1, Award, 30 August 2000. 30 Ibid., para. 70. 31 Ibid., para. 99. 32 Supreme Court of British Columbia, The United Mexican States v. Metalclad Corporation, 2001 BCSC 664. 33 Ibid., para. 71. 34 Ibid., para. 76. 29

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Chapter 10 explicitly deals with government procurement. Yet, the tribunal concluded that, due to differences in background and content, “other Chapters of NAFTA, aside from Chapter 11, provide only limited context and guidance to understand the meaning of the term [procurement].”35 The tribunal thus interpreted Chapter 11 as if it were a universe of its own rather than part of a larger treaty. When it comes to the application of NAFTA, investment tribunals have similarly drawn firm distinctions between the treaty’s trade and investment components. In Canadian Cattlemen v. USA, the claimants sought to bring what was essentially a trade case under NAFTA’s investment protection provisions. Cattle producers of Canadian nationality and located in Canada brought a NAFTA Chapter 11 claim against the United States, which had instituted an import ban on Canadian cattle after a cow in Alberta had been found to carry BSE, a dangerous disease in cattle potentially contagious to humans. The tribunal dismissed the case on the grounds that the claimants were not foreign investors,36 clarifying that the proper avenue for challenging a sanitary measure (governed by NAFTA Chapter 7 on sanitary and phytosanitary measures) was the state-to-state dispute settlement mechanism of Chapter 20.37 Hence, the mere fact that investment provisions were now included in a trade agreement did not mean that pure trade disputes could be channeled through ISDS. At the same time, the tribunal in S.D. Myers v. Canada clarified that a trade measure could be challenged under ISDS when it also violated Chapter 11. It found that, unless explicitly stated or a conflict of norms exists, NAFTA’s chapters on investment and trade coexisted and could apply cumulatively.38 That case concerned an export ban on toxic waste. S.D. Myers, which, through a Canadian subsidiary, collected such waste in Canada for treatment in its US facility, saw its operations disrupted through the ban and brought a claim under Chapter 11. Canada and Mexico (the latter through non-disputing party submissions) asserted that such a claim is curtailed by the presence of NAFTA Chapter 3 on trade in goods and Chapter 12 on trade in services, which instead applied to the

Mesa Power Group, LLC v. Government of Canada, UNCITRAL, PCA Case No. 2012–17, Award, March 24, 2016, para. 417. 36 Canadian Cattlemen v. United States of America, UNCITRAL, Award on Jurisdiction, January 18, 2008, para. 169. 37 Ibid., para. 193. 38 S.D. Myers, Inc. v. Government of Canada, UNCITRAL, Partial Award, November 13, 2000, para. 292–294. 35

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measure, making it, by implication, subject to state-to-state p ­ roceedings only.39 The tribunal rejected their assertion. Like separate treaties, NAFTA Chapters 3, 11, and 12 could apply cumulatively to the same conduct. While this coexistence of NAFTA chapters enables provisions to apply cumulatively, it also strictly separates their enforcement, as is well illustrated in Fireman’s Fund Insurance Company v. Mexico.40 In that case, the claimants alleged that Mexico had expropriated their debentures denominated in dollars when it failed to reciprocate a bailout it had authorized for the repurchase of similar debentures denominated in Mexican pesos. NAFTA regulates investment in financial services in Chapter 14. While allegations of national treatment violations in the realm of financial investment are exclusively subject to inter-state dispute settlement under NAFTA Chapter 20, claims relating to expropriation or transfer of funds can be brought before the investor–state dispute settlement mechanism of NAFTA Chapter 11, which is incorporated by reference into NAFTA Chapter 14 via Article 1401(2). The tribunal therefore dismissed all national treatment and fair and equitable treatment claims on jurisdictional grounds but admitted the remaining expropriation claim.41 That claim was later dismissed on the merits.42 In summary, tribunals have largely sought to isolate the investment provisions from the rest of NAFTA when interpreting and applying Chapter 11. The main exception to this, the Metalclad tribunal, was put back into its place by the subsequent set-aside proceedings. The Canadian court’s partial set-aside sent a strong signal to discourage reliance on other chapters of NAFTA for the interpretation of Chapter 11. Subsequent tribunals were thus reluctant to leave the four corners of the chapter in the course of interpretation and opted for a clearly divided application of trade and investment norms on the basis that NAFTA chapters apply cumulatively as if they were separate agreements. The inclusion of NAFTA’s investment chapter has thus not let to a normative convergence between investment and trade norms in interpretation and application. Instead the norms coexist without meaningful normative interaction.

Ibid., para. 289. Fireman’s Fund Insurance Company v. The United Mexican States, ICSID Case No. ARB(AF)/02/1. 41 Fireman’s Fund Insurance Company v. The United Mexican States, Decision on the Preliminary Question, July 17, 2003, ICSID Case No. ARB(AF)/02/1, para. 112. 42 Fireman’s Fund Insurance Company v. The United Mexican States, ICSID Case No. ARB(AF)/02/1, Award, July 16, 2006, para. 226. 39 40

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14.5  Conclusion: Investment Chapters as a BIT Dropped into an FTA Freya Baetens is right in that “one must be cautious in concluding that PTIAs may bring investment and trade matters closer together merely by virtue of their inclusion in the same treaty” (Baetens 2013). As the above analysis revealed, the meta-narratives of a convergence between trade liberalization and investment protection through the inclusion of investment chapters in trade agreements is not borne out by hard evidence. Even after three decades of companionship, trade and investment rules in PTIAs coexist rather than interdepend. Investment chapters in terms of content, interpretation, and application are “no more than a BIT dropped into a free trade agreement.” This insight has important implications for the looming divorce between investment protection rules and trade agreements. Because there has been little normative integration between the two in PTIA practice, there is little to lose from their looming separation. Their relationship has been marked by coexistence rather than convergence. With their split into distinct instruments, e.g. as EU FTAs and EU BITs, this normative disconnect will only be formalized and rendered more apparent. But it is no cause for concern in itself. Finally, even as investment protection and trade liberalization grow further apart, the larger trade and investment regime may become more intertwined elsewhere. Investment facilitation and liberalization have always been somewhat decoupled from investment protection,43 but they are likely to grow even closer to trade law, and further away from investment protection, in the future. The EU Commission, for instance, plans to retain investment facilitation and liberalization provisions in FTAs even after splitting off the investment protection component (EU Commission 2015). Spurred by the successful conclusion of the Trade Facilitation Agreement, some WTO members have begun to launch talks on investment facilitation. The Friends of Investment Facilitation for Development, a group of 11 developing and least-developed countries, began an informal dialogue on investment facilitation for development

43

Apart from the investment treaties of the United States, Canada, and Japan, which provide market access through pre-establishment commitments, most BITs are concerned exclusively with post-establishment protection from regulatory interference by the host state.

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in April 2017 (ICTSD 2018).44 India has thus far opposed these efforts, seeing them as a back door to revive talks on a multilateral investment protection agreement, but recently India seems more inclined to accept the claim that one is delinked from the other (Mishra 2018).45 Hence, even as the divorce of investment protection and trade agreements is under way, a new match between trade law and investment liberalization and facilitation looms on the horizon.

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15 The Regime Complex for Investment Governance Overlapping Provisions in PTAs and BITs

soo yeon kim and clara lee 15.1 Introduction Why govern investment through trade agreements? Trade and investment are increasingly connected with the intensification of global production and trade along the international supply chain. Governance requires liberalization not only of investment barriers but also a host of trade-related issues that can facilitate the movement of intermediate goods across borders. On its own, the governance of investment has been dominated by bilateral investment treaties (BITs) due to the lack of a multilateral regime (Simmons 2014). BITs flourished from the 1950s onward (Elkins et al. 2006), and, according to the United Nations Conference on Trade and Development (UNCTAD), almost 3,000 BITs have been signed in the period from 1980 to 2016 (UNCTAD 2017). More recently, countries seeking investment commitments that are integrated with market access are increasingly turning toward preferential trade agreements (PTAs). In addition to the BITs, UNCTAD also reports a cumulative 376 treaties with investment provisions (TIPs), of which many are PTAs. In terms of trends, studies have shown that, while the number of new BITS has been on the decline in the early twenty-first century, there has been a rise in the number of PTAs with investment provisions (Miroudot 2011; Poulsen and Aisbett 2013). The governance of investment has lacked a multilateral regime, but trade has been governed by the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO). The history of the multilateral regime indicates increasing attention to the regulation of features of investment activities that are closely related to trade. The GATT’s Uruguay Round negotiations produced the WTO’s Trade-Related Investment Measures (TRIMs) agreement, and investment was also previously covered under Mode 3 of the General Agreement on Trade in 359

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Services (GATS). A similar pattern obtains in the evolution of PTAs. The Canada–US Free Trade Agreement (CUSFTA) of 1987 featured one of the first freestanding investment chapters in a trade agreement. As Mexico joined and CUSFTA become the North American Free Trade Agreement (NAFTA), NAFTA’s investment chapter included the language of BITs and beyond, providing for commitments in the protection and liberalization of investment (Kotschwar 2009, 366). NAFTA’s investor-state dispute settlement (ISDS) was adopted in subsequent US PTAs, most recently in the Trans-Pacific Partnership (TPP) Agreement; however, it also continues to be a controversial negotiating point in other free-trade agreements (FTAs), especially those involving the European Union (EU) and its proposal for an international investment court. This chapter problematizes the overlapping nature of investment governance in which BITs and PTAs encode common commitments toward the protection and liberalization of investment. Our analysis examines the provisions common in PTAs and BITs to generate insights on whether these two types of agreements are largely complementary or substitutable in governing investment activities and balancing the rights and protections of investors and host countries. In doing so, the theoretical framework in this chapter adopts the concept of regime complexity (Alter and Meunier 2009), in which investment is regulated by non-hierarchical agreements that cover common ground. The analytical focus is on issues of overlapping institutional design across PTAs and BITS, and it recognizes that the broader investment regime complex evolves further in the implementation stage with legal precedents set through cases brought to the WTO’s dispute settlement system and the International Court for the Settlement of Investment Disputes (ICSID). This chapter analyzes an original dataset of investment provisions in PTAs and, for BITs, data provided by UNCTAD’s International Investment Agreements (IIA) project. The analysis examines how these two types of international agreements – PTAs and BITs – have co-evolved as the regime complex for governing investment, in terms of institutional design issues such as guiding principles, scope, and enforcement. Our working hypothesis is that these two types of agreements are largely complementary. We advance the argument that PTAs emphasize liberalization of investment in tandem with other trade-related provisions, while BITs were originally designed for the protection of investments and investor rights. The analysis tests this hypothesis through a principal components analysis of provisions in PTAs and BITs. The results show that different provisions load heavily in PTAs and BITs; that is, the

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two types of agreements differ in the prevalence of particular provisions, which may be categorized as protection and/or liberalization. In the next section, we discuss the concept of regime complexity as the theoretical frame for the overlapping nature of investment governance. The chapter then follows with a discussion of the evolution of PTAs and BITs over the past decades, relying in particular on graphic depictions of the global networks of PTAs and BITs. The main empirical analysis focuses on the investment provisions themselves and the degree to which one can observe common or differentiated commitments across PTAs and BITs.

15.2  The Regime Complex for Investment Governance The governance of investment through PTAs and BITs forms a regime complex: “an array of partially overlapping and non-hierarchical institutions governing a particular issue area” (Raustiala and Victor 2004: 279). Within the conceptual framework of a regime complex, PTAs and BITs comprise two of the elemental regimes, clusters of international legal agreements that collectively form the regime complex for governing investment. These agreements overlap in their scope of coverage of investment-related issues, subject matter focusing on the liberalization and protection of investment, and also the times in which they are established. While PTAs and BITs do comprise distinct legal forums, they do overlap in areas such as the settlement of disputes through the ISDS, which has increasingly become common in both types of agreements. These agreements are largely created and maintained by the same actors – states – that negotiate and bargain over institutional design and often stand as complainants or respondents when disputes arise (Muzaka 2011). Consistent with the attributes of a regime complex, there is no agreedupon hierarchy between PTAs and BITs in the resolution of conflict between the rules encoded in these agreements. To date, little research exists on the extent to which the design of these two agreements overlap and are consistent or in conflict with one another. This chapter fills this gap in our understanding of how these agreements manage and regulate investment activities. Beyond the governance of investment, numerous issues of international relations are today also characterized by dense institutional environments, where multiple agreements co-exist and exert authority over matters of governance (Raustiala and Victor 2004). Any one agreement is neither isolated nor entirely distinct from another; rather, they partially

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overlap in scope and purpose with agreements that occupy the same policy space. This phenomenon stands in stark contrast with a single institution or regime monopolizing the provision of rules for a given issue.

15.2.1  International Regime Complexity in Investment Governance The analytical concept of a regime complex as a collective of elemental agreements neatly encapsulates this rising trend in institutional proliferation. “International regime complexity” (Alter and Meunier 2009) advances this concept further with a focus on the international dimension of regime complexes such as investment, in which states are the main actors in the establishment of these agreements. As state-led agreements, international regime complexity captures the overlap along the dimensions of membership and mandate, where the former refers to the formal members that participate in decision-making and the latter refers to the functions and normative frameworks adopted to advance institutional objectives (Hofmann 2009, 2011; Weiffen et al. 2013). The non-hierarchical nature of the agreements also denotes the absence of a central authority that coordinates and adjudicates between competing commitments. Rarely is any agreement subordinate to another, and they jointly occupy the dense policy space and exert influence over international affairs. Thus, the concept of international regime complexity accurately describes the lack of a clear and definitive political authority to preside over an issue. The number of actors and rules are multiplied alongside the proliferation of agreements in regime complexity, presenting both challenges and opportunities for international cooperation. Confusion arises over the interpretation of overlapping and competing obligations, and actors contest for dominance to effect change across international venues (GómezMera 2015; Kelley 2009). On the other hand, there is an expanded set of options and strategies that are available to actors, coupled with the opportunity to strengthen their bargaining position as they join forces with other like-minded states in particular forums to advance their objectives (Alter and Meunier 2009; Carneiro 2014; Gehring and Faude 2013). Regime complexity emerges as actors create new agreements even when existing ones are already in place. The creation of new agreements is costly, but actors nonetheless purposively establish new ones to maneuver with relative ease within the regime (Morse and Keohane 2014; Van de Graaf 2013). Actors can also strive to change the rules of prevailing agreements to suit their policy goals (Helfer 2009; Raustiala and Victor 2004). For instance, actors generate strategic inconsistencies or strategic

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ambiguity about the interpretation of any single obligation or treaty (Hofmann 2009, 2011), resulting in conflicting interpretations that allow actors to legitimately select their preferred one. They also increase policy options, allowing actors to remain and promote policy preferences without leaving the regime altogether (Hofmann et al. 2012). Power politics can also engender the creation of new and overlapping agreements, where smaller and relatively less powerful states jointly create new platforms that allow them to have a larger voice in the international arena (Drezner 2009; Nolte 2011). Regime complexity also fundamentally shapes the behavior of actors as it creates opportunities for them to undertake cross-institutional strategies otherwise not available in integrated regimes. The means by which they promote their agenda across multiple agreements include, but are not limited to, forum shopping, regime shifting, and strategic inconsistencies. Actors may engage in forum shopping, in which actors select the forum that is more suitable for obtaining their desired outcome. For instance, states have often alternated between filing their trade disputes regionally or bilaterally using the PTA or multilaterally using the WTO (Busch 2007; Davis 2009). Regime shifting occurs when actors turn to alternative agreements to fundamentally alter the architecture of global governance (Helfer 2004, 2009), a larger undertaking than simply acquiring a desired outcome. An example of this is developing countries’ decision to regime-shift out of the WTO and into other organizations such as the World Health Organization (WHO) in a bid to revise the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Last, instead of moving around available agreements, actors can generate strategic inconsistencies within those agreements to increase their latitude when choosing which rule to follow (Raustiala and Victor 2004). There is growing interest in analyzing investment agreements such as BITs and PTAs using the regime complexity framework (Bonnitcha et al. 2017; Meunier and Morin 2015), and here we seek to build onto existing scholarship by examining the overlapping design of both types of agreements.

15.3  Governing Investment with PTAs and BITs Figure 15.1 shows the evolution of state participation in BITs and PTAs over time. The bars of this figure capture the number of signatories of these treaties, while the lines track the cumulative numbers of BITs and PTAs that have been signed over the years. BITs are bilateral and PTAs

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may be bilateral and multilateral, so the number of treaties by themselves presents an incomplete picture. Given the numerous multi-member multilateral PTAs in existence, such as the EU and ASEAN FTAs, the number of signatories provides a fuller picture of the regime complex of investment that links states together. Each of the bars in the figure represents the number of states that are signatories to a BIT or PTA: the darker portion represents the number of states that are currently signatories of a BIT, and the lighter portion the number of states that are currently signatories of a PTA. For both BITs and PTAs, the “proliferation” of agreements peaks in the late l990s until about 1998. There is a steep rise in membership in BITs through the 1980s and 1990s. For PTAs, the pattern begins in the 1990s but, unlike for BITs, the twenty-first century sees a consistent trend in memberships in PTAs. In the most recent decade or so, a significant portion of international investment agreements include PTAs with investment provisions.

15.3.1  Longitudinal Patterns in the Formation of BITs and PTAs As Figure 15.1 shows, longitudinal patterns in the adoption of PTAs and BITs worldwide shows growing institutional density, where a complex web of agreements together occupy the policy space. The cumulative numbers of BITs and PTAs shows a continued upward trajectory. The number of BITs saw dramatic increases through the 1990s, and while the numbers continue to grow in this century, the pattern has been tapering off somewhat in recent years. It should be noted that, because BITs are bilateral, the 3,000 or so treaties that make up the BITs include about 15 percent of all possible pairings of countries. This is based on the approximately 200 sovereign countries around the globe today. In contrast, all 160 members of the WTO are signatories of at least one PTA, although the cumulative number of PTAs over the years is far fewer than that of BITs. Nevertheless, the extensive links formed between states by these treaties makes the spaghetti bowl analogy (Bhagwati 1995) often used for trade agreements still applicable for these treaties. States repeatedly conclude many PTAs and BITs with a vast number of countries, resulting in overlapping memberships and rules across agreements. The PTA network is much more dense and concentrated than that of the BITs, in spite of the 3,000 BITs currently in effect. While BITs are bilateral, many PTAs (ASEAN, EU, and others) are multilateral, which greatly multiplies the bilateral links that can be formed between PTA signatories. The early years of BIT adoption was pioneered by a small group of states, primarily the developed Western European states. The first BIT

3000 2000 1000

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1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

Year

Figure 15.1  State participation in BITs and PTAs.

was concluded between Germany and Pakistan; they signed the treaty in 1959 and later ratified it in 1962. Germany then proceeded to conclude more BITs with other states, including Malaysia (signed 1960 and ratified 1963), Greece (signed 1961 and ratified 1963), Togo (signed 1961 and ratified 1964), and Morocco (signed 1960 and ratified 1968), before other Western European states came on board. Most of the BITs concluded in the 1960s through the 1980s were led by Germany, Switzerland, France, Netherlands, United Kingdom, Sweden, and Italy. It was not until the 1990s that we witnessed the rapid proliferation of BITs across different regions, with more than 100 new BITs signed and ratified annually. European states continued to negotiate BITs with developing countries, and the United States, a latecomer in this bilateral arrangement, also started to conclude BITs with others more aggressively. Furthermore, developing countries were also actively concluding BITs among themselves, further tangling the global web of BITs (Elkins et al. 2006). Unlike trade, no multilateral treaty comprehensively oversees the treatment of foreign direct investment (FDI). The historical record is poor on the development of a global investment regime. The most recent initiative for a multilateral agreement on investment (MAI) was not successful, and the WTO Agreement on TRIMs has limited coverage. Instead, the almost 3,000 BITs that have been ratified govern the flow of international investment. BITs express the manner by which foreign investors can enter host countries to do business and delineate the conditions under which they can conduct their operations, transfer their profits, and staff their organization with foreign managerial employees, among many others. They

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have been joined in recent years by a growing number of PTAs with dedicated investment chapters that contribute significantly to the formation and operation of a regime complex. Yet even without a multilateral regime, the investment regime complex consisting of the thousands of BITs that make up a dense network of treaties can be considered “de facto multilateral” (Meunier and Morin 2015; Kim 2015) and a global investment regime (Haftel 2019). The BITs network offers a polycentric form of multilateralism (Muzaka and Bishop 2015; Pauwelyn 2015, 2014; Schill 2009), linked together by provisions for national treatment (NT) and most-favored-nation (MFN) status for investors. Its evolution is marked by largely unsuccessful regime-shifting efforts such as the MAI and most recently the Doha Round negotiations on investment. It has also been characterized by contestation, especially as observed in the conflict over the ISDS system provisions. Conflict over the ISDS provision in the Transatlantic Trade and Investment Partnership (TTIP) negotiations and the EU’s push for an investment arbitration court in its recent FTAs marks the latest stage in the evolution of the investment regime complex.

15.4  Mapping Investment Provisions This section presents the mapping strategies for investment provisions in PTAs and BITs. For PTAs, investment provisions found in PTAs were mapped as an original dataset that employs the coding template developed by Kotschwar (2009), while information regarding investment provisions in BITs were obtained from the mapping project of UNCTAD. Information on the BITs and their ratification dates were obtained from UNCTAD’s Investment Policy Hub. Our dataset of investment commitments in PTAs contributes to the growing interest in mapping or coding PTAs by their provisions and capturing the variation in their qualitative dimensions. Our data compilation contributes to the body of mapping projects on specific PTA provisions, including issues such as dispute settlement (Smith 2000), trade remedies (Kucik and Reinhardt 2008; Kucik 2012; Baccini 2010), and services (Kim and Manger 2016).

15.4.1  Coding Scheme for PTAs For PTAs, investment commitments were mapped over 13 broad categories of provisions. As noted above, the index is calculated on the basis of a coding template for investment provisions in PTAs developed by Kotschwar (2009) for a large-scale coding project for trade

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agreements (Estevadeordal et al. 2009). The coding scheme for investment provisions includes 13 broad categories: 1. Definition of investment. The definition of investment may take the broad asset-based form, which includes both FDI and portfolio investment. A narrower definition of investment takes the enterprise-based form, which covers only the establishment or acquisition of a business. This latter, narrower definition follows the model of GATS, in which investment is covered under Mode 3 of services: commercial presence. 2. Separate investment chapter. This category indicates whether investment commitments function as a stand-alone chapter rather than as part of another chapter on a related issue. 3. Investment commitments in services chapter. This category indicates whether investment provisions are included in the services chapter under Mode 3 (commercial presence). 4. Endeavors without scope. This category indicates whether the trade agreement includes only a general commitment to investment, such as in the preamble, or whether there are specific commitments as found in the first three categories. Categories 1–4, covering (1) the definition of investment, (2) whether the PTA includes a freestanding investment chapter, (3) whether investment commitments are included in the services chapter, and the present category of (4), whether the PTA includes only a general commitment to investment liberalization, are generally known as provisions for sectoral coverage, with each provision capturing a different dimension of investment definition and scope of coverage. 5. Investor-state dispute settlement. This category indicates whether the PTA provides for ISDS. ISDS provisions allow for private economic actors such as firms to directly litigate the government of the host country, in which the investment is located. This delegation to a third-party for arbitration of investment disputes may be directed to ICSID, the United Nations Commission on International Trade Law (UNCITRAL), or other equivalent international venue. 6. MFN and NT. This category indicates whether the PTA provides for positive-list or negative-list (NAFTA-style) bindings in the application of MFN and NT in investment. Positive-list bindings, following the GATS model, lists sectors to be liberalized, while all others remain unbound and not subject to commitments. Negative-list bindings, consistent with the NAFTA model, apply MFN and NT across the board, with exemptions for sectors for which signatories take reservations. 7. Scope of MFN and NT. This category specifies the phases of investment covered by MFN and NT: establishment, acquisition, post-establishment, and resale. For compatibility with the BITs mapping, these four categories were collapsed into two: (1) pre-establishment, covering establishment and acquisition, and (2) postestablishment, covering post-establishment and resale. 8. Investment protection. This category includes provisions for safeguarding of investments. Specifically, the coding scheme identifies specific provisions for “fair and equitable treatment” under the law, free transfer of funds that affect the ability of investors to repatriate profits, and expropriation on non-discriminatory bases and with adequate compensation.

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9. Transfers and payments. The components in this category include restrictions on the transfer of funds in the event of balance of payments difficulties faced by the host country or other reasons. Other reasons may include cases such as restrictions arising out of laws concerning bankruptcy, criminal or penal offenses, or adjudicatory judgments. 10. Performance requirements. This set of provisions concerns the level of restrictions imposed on foreign firms’ activities following investment, such as export and local content usage requirements, transfer of technology, or the obligation to employ exclusive suppliers of goods and services, among others. The level of restrictions ranges high to low: from no prohibitions on performance requirements, with commitments even more limited than the WTO’s TRIMs agreement (0); prohibitions allowed on local content or trade requirements only (1); to prohibitions on local content, trade, and other specified requirements (2). Higher values indicate that the PTA prohibits performance requirements, thus further liberalizing the regulations that govern investment. 11. Senior management/board of directors. These provisions capture the restrictions on the nationality of managers and members of the board and the temporary entry of key personnel. The provisions include whether the PTA allows for the temporary entry of key personnel, and whether a signatory can place restrictions on the hiring of personnel for senior management and/or the board of directors based on nationality. Provisions allow (1) partial nationality restrictions on senior management or both senior management and the board of directors, (2) nationality restrictions for members of the board of directors, or (3) no nationality restrictions for both senior management and the board of directors. 12. Denial of benefits. This category of provisions concerns the rights of thirdparty investors, that is, investors from non-PTA countries, that invest in PTA partner countries. The core issue is whether these third-party investors have the same rights as investors from agreement countries. Strong provisions in this area imply that de facto investor rights are not transferred to investors from non-PTA countries. The provisions for this category range from (1) denial of benefits to third-party investors generally to (2) denial of benefits to third-party investors for specific reasons, such as the absence of diplomatic relations between the denying party and the third-party investor, to (3) denial of benefits only to third parties without substantial business operations in the agreement country. 13. Transparency. These provisions cover the dissemination of information concerning investment regulations. WTO GATS provisions obligate parties to publish all relevant laws and to establish inquiry points for obtaining information. More advanced provisions allow for prior comment: parties are obligated to notify each other of prospective laws and regulations that may affect PTA partners. An additive measure combines (1) provision of inquiry/contact points for information and (2) publication of laws and regulations that follow GATS provisions. Some PTAs include a WTO/GATS-plus provision for prior comment, which requires prior notification of prospective measures concerning investment.

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15.4.2  Coding Scheme for BITs UNCTAD’s IIA Mapping Project classifies BITs according to nine broad categories consistent with the structure of these treaties: 1. Preamble. The preamble contains broad references to the right to regulate, sustainable development, social responsibility (e.g. human rights, labor, health, etc.), and environmental preservation (e.g. climate change, plant or animal life). 2. Scope and definitions. This category covers the definition of investment (e.g. based on asset or enterprise, inclusive of portfolio or otherwise), and the definition of investor (e.g. requirement of substantial business activities and ownership control). It also maps for denial of benefits and the substantive and temporal scope of the treaty. 3. Standard of treatment. The standard of treatment pertains to investment provisions that encompass NT, MFN treatment, fair and equitable treatment, expropriation, transfer of funds, prohibition of performance requirements, entry of key personnel and appointments to senior management. In particular, the provision for NT ensures that foreign investors will be treated in the same manner as domestic investors, while the provision for MFN ensures that foreign investors from the signatory states will be accorded as good treatment as other foreign investors that also enjoy MFN status with the host country. 4. Other clauses. UNCTAD also maps for additional clauses that do not fall neatly in the above categories. Provisions include transparency, as well as right to regulate, sustainable development, social responsibility, and environmental preservation clauses not found in the preamble. 5. Exceptions. Exceptions in BITs allow contracting parties to derogate from treaty obligations, for purposes such as security and public policy. It limits the obligations of host states and protects them from unlimited liability. 6. State-state dispute settlement. It notes whether the BIT provides for dispute settlement between signatory states. 7. ISDS. It notes whether the BIT establishes mechanisms for the settlement of disputes between the host state and covered investors. It also looks at whether there are alternatives to arbitration and the types of forums available. ISDS is a cornerstone provision for BITs, where the opportunity to seek recourse ensures that the assets of investors are well protected. 8. Institutional issues. When institutional mechanisms are provided for, signatory states can hold consultations, set up a joint committee, and engage in technical cooperation. 9. Treaty duration, amendment, and termination. This accounts for the number of years that the BIT remains in force, and if whether the BIT provides for automatic renewal, the option of unilateral termination, option to amend provisions, and guarantee of a “survival” clause where the BIT remains in force after termination.

The following analysis focuses on the overlapping dimensions across the provisions we have mapped in PTAs and the mapping data available from the IIA project. We compare the provisions listed in Table 15.1.

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soo yeon kim and clara lee Table 15.1 PTA and BIT provisions in the analysis Category Definition: FDI only Definition: FDI and portfolio Investment ISDS NT/MFN Pre- and post-establishment NT/MFN Pre-establishment only NT/MFN Post-establishment only Expropriation Fair and equitable treatment Free transfer of funds Transfer of funds (BoP) Transfer of funds (others) Performance requirements Entry of key personnel Senior management Denial of benefits Transparency

15.5 Analysis In analyzing the dimensions of PTAs and BITs in governing investments, this chapter considers the provisions that are common to both and that have been mapped as part of our own and UNCTAD’s respective research efforts. The analysis provides three main views of the common provisions across PTAs and BITs. First, we examine the proportion of PTAs and BITs that have included these provisions. This provides a first look at how the two groups of agreements vary in the range of common provisions. The second part of the analysis provides a principal component analysis to examine the relative importance of the provisions themselves. For each group, the analysis shows which provisions exhibit the most variation across agreements. This analysis provides new insights into the relative importance of certain provisions in determining differences within PTAs and BITs. Finally, we examine the degree of duplication in provisions across PTAs and BITs. Looking at the sequences of PTAs and BITs that have been signed, the analysis shows to what extent the later agreement contains provisions that are also present in the earlier treaty.

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15.5.1  Investment Provisions in PTAs Figure 15.2 shows the proportion of the 317 PTAs included in the analysis that have the provisions in Table 15.1. Especially when compared with the provisions shown in Figure 15.3, investment provisions in PTAs are relatively less developed. Less than half of PTAs contain provisions in areas that they have in common with BITs. It should be noted that the earliest provisions for investment were actually covered under the services chapter, specifically under GATS Mode 3. As the more “modern” PTAs began to include separate investment chapters, these provisions were and are likely to have become more common. Thus, there is likely to be variation over time in coverage of these investment issues. As to the substantive issues, PTAs appear to include provisions for transparency most often. Well over 30% of PTAs include provisions that concern the publication, notification, and prior comment for new investment regulations that partner countries Definition FDI Definition FDI & Portfolio ISDS NT/MFN Pre- & Post-est NT/MFN Pre-est Only NT/MFN Post-est Only Expropriation Fair & Equitable Treatment Free Transfer of Funds Transfer of Funds (BoP) Transfer of Funds (Others) Performance Requirement Entry of Key Personnel Senior Management Denial of Benefits Transparency 0.0

0.4 0.8 0.2 0.6 Proportion of PTAs with Provision

Figure 15.2  Proportion of PTAs with provisions.

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soo yeon kim and clara lee Definition FDI Definition FDI & Portfolio ISDS NT/MFN Pre- & Post-est NT/MFN Pre-est Only NT/MFN Post-est Only Expropriation Fair & Equitable Treatment Free Transfer of Funds Transfer of Funds (BoP) Transfer of Funds (Others) Performance Requirement Entry of Key Personnel Senior Management Denial of Benefits Transparency 0.0

0.4 0.8 0.2 0.6 Proportion of BITs with Provision

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Figure 15.3  Proportion of BITs with provisions.

may enact during the life of the PTA. As for the other provisions, there is some consistency in the proportion of PTAs that do contain them, although those proportions are well below those of transparency measures.

15.5.2  Provisions in BITs As for the provisions in BITs, which are two-party agreements that are devoted solely to investment issues, there is relatively more standardization of provisions. Most BITs define investment in terms of both foreign direct investment (FDI) or FDI and portfolio investment. Most BITs also have strong mechanisms of protection. Provisions for investor-state dispute settlement, expropriation, standards of treatment provisions such as fair and equitable treatment, NT and MFN in the post-establishment phase, and transfer of funds cover protection of investor rights, especially after investment.

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Two important comparisons with the distribution of provisions across PTAs is worth noting. First, well over 20% of PTAs cover both the pre- and post-establishment phases of investment. In particular, coverage of the post-establishment phase is a WTO-plus provision as the current GATS, which covers investment under Mode 3 (commercial presence), and only provides for NT and MFN in the pre-establishment phase. Among the BITs, far fewer agreements cover both pre- and post-establishment phases; rather, most agreements – approximately 80% – provide for NT and MFN in the post-establishment phase only. This indicates that PTAs and BITs may have different specializations in governing investment: PTAs, by emphasizing NT and MFN at both the pre- and post-establishment phases of investment, can serve as both liberalizing and protecting agreements. On the other hand, BITs appear to have a much stronger emphasis on protection because NT and MFN provisions for the post-establishment phase appear with far greater frequency. Second, far fewer BITs contain provisions for transparency. Relative to the inclusion of transparency provisions in PTAs, which appear in well over 30% of the agreements, similar provisions appear in less than 10% of BITs. This corroborates further the possibility that PTAs and BITs perform differentiated governance functions: PTAs appear to emphasize transparency far more frequently than do BITs. To the extent that transparency provisions can contribute to greater liberalization in investment, especially linked to trade, PTAs may well serve as agreements for liberalization of investment as well as protection.

15.5.3  Principal Component Analysis Table 15.2 illustrates the factor loadings for the 1st principal component of the investment provisions found in PTAs and BITs, respectively. PCA weighs more heavily the provisions that explain the largest amount of variance, and we observe that a majority of the investment provisions are positively weighted. This implies that most of the investment provisions have a positive impact on the total variance in the data. Among the four investment provisions that are negatively weighted, three have a negligible factor loading of between −0.1 and 0. The last negatively weighted provision pertains to NT/MFN treatment in the post-establishment phase only. It comes as no surprise that its factor loading exactly mirrors the factor loading for NT/MFN treatment in the pre- and post-establishment phase because they are mutually exclusive. BITs are perceived to be instruments for investment protection, but the investment protection provisions – fair

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Table 15.2 Factor loadings from principal component analysis of PTA and BIT provisions Category Definition: FDI only Definition: FDI and portfolio Investment ISDS NT/MFN pre- and post-establishment NT/MFN pre-establishment only NT/MFN post-establishment only Expropriation Fair and equitable treatment Free transfer of funds Transfer of funds (BoP) Transfer of funds (others) Performance requirements Entry of key personnel Senior management Denial of benefits Transparency

PTA

BIT

0.316 0.372 0.159 0.377 −0.021

−0.040 0.040 −0.008 0.418

0.159 0.392 0.338 0.355 −0.083 0.257 0.324 0.103 0.567 0.329

−0.408 −0.021 −0.029 −0.002 0.155 0.289 0.401 0.195 0.314 0.359 0.348

and equitable treatment, expropriation, ISDS – do not have a significantly large factor loading relative to the rest. This is attributed to the variance in the data, where more than 95% of all BITs incorporate those investment protection provisions.

15.5.4  Joint Memberships in PTAs and BITs We also observe that a fair number of dyads subscribe to both PTAs and BITs, suggesting that such agreements are jointly used to govern international trade and investment. When a dyad concludes both a PTA and BIT, we refer to it as overlapping agreements because two agreements now coexist to administer matters concerning trade and investment between the members of the dyad. The network density (calculated as the total number of dyads that ratified both a PTA and BIT as of 2015 as a percentage of all possible dyads) of such overlap is rather modest at 5%, but it remains significant relative to the dyads that have concluded either a PTA or a BIT. Almost onequarter of all dyads that ratified a PTA (network density of 21%) also ratified a BIT, and more than half of all dyads that ratified a BIT (network density of 9%) also ratified a PTA. This information is summarized in Table 15.3.

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Table 15.3 Network density of PTAs, BITs, and the overlap Network Density PTA BIT PTA and BIT overlap

Density 21% 9% 5%

As with the case for the increasing popularity of PTAs and BITs, overlapping agreements started to become more common starting in the 1990s. The period prior to the 1990s is rather sparsely populated with overlapping agreements, while the period after the 1990s is relatively denser, although not to the extent that we see for the PTA and BIT networks individually.

15.5.5  Overlapping Commitments Although most dyads subscribe to both PTAs and BITs, we find little evidence to suggest duplication and supplementation of investment provisions across agreements. Duplication occurs when pairs of states reproduce similar provisions in subsequent agreements of a comparable nature. In the context of the trade and investment regime complex, this means that dyads that have included an ISDS provision in the first PTA/ BIT they ratify include the same provision in the later PTA/BIT. On the other hand, supplementation happens when pairs of states improve upon their prior agreement by incorporating novel provisions that were not found in older agreements. In such cases, dyads that find those new provisions attractive introduce them in the later PTA/BIT. We examine the extent of duplication and supplementation by looking at the correlation of investment provisions between the PTA and BIT ratified by the same dyad. Table 15.4 provides a graphical overview of the correlation coefficient. A large number of investment provisions have correlation coefficients close to 0, with the exception of the “Transfer of funds (others)” and “Senior management.” Dyads do not seem to care too much about what provisions were already included in older agreements, and they seem to negotiate and craft their new agreements on a relatively clean slate. This claim runs counter to the idea of path dependence, where interests and expectations are already aligned around a set of existing rules and norms, and negotiations and agreement outcomes are likely extensions or adjustments of prior arrangements (Raustiala and Victor 2004).

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Table 15.4 Correlation of investment provisions in overlapping PTAs and BITs Category Definition: FDI only Definition: FDI and portfolio Investment ISDS NT/MFN pre- and post-establishment NT/MFN pre-establishment only NT/MFN post-establishment only Expropriation Fair and equitable treatment Free transfer of funds Transfer of funds (BoP) Transfer of funds (others) Performance requirements Entry of key personnel Senior management Denial of benefits Transparency

Correlation 0.062 −0.003 −0.032 −0.058 0.007 0.010 −0.036 −0.072 −0.220 0.044 −0.141 0.255 −0.002 −0.010 −0.002 0.062

In addition to examining the similarity in provisions between PTAs and BITs ratified by the same dyads, we also analyzed the extent that duplication might have taken place if a PTA or BIT was ratified first. Figures 15.4 and 15.5 show the proportion of BITs that duplicated provisions from PTAs (meaning the PTA was ratified first), and the proportion of PTAs that duplicated provisions from BITs (meaning the BIT was ratified first), respectively. We recognize that most provisions were not duplicated from the prior PTA to the later BIT, and three investment provisions seem to be copied and transferred from the prior BIT to the later PTA: “Fair and equitable treatment,” “Free transfer of funds,” and “Definition of investment as FDI.” This descriptive analysis of the extent to which investment provisions travel from BITs to PTAs, and vice versa, indicates more of the former. By comparing Figures 15.4 and 15.5, we see that a higher proportion of PTAs with provisions for investment liberalization and protection overlap with those of previously ratified BITs. This is in contrast to BITs, which appear overall to have a lower proportion of provisions that overlap with PTAs ratified earlier. As noted above and in Figure 15.5, in the BIT-to-PTA path

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the regime complex for investment governance Definition FDI Definition FDI & Portfolio ISDS NT/MFN Post-est Only Expropriation Fair & Equitable Treatment Free Transfer of Funds Transfer of Funds (BoP) Transfer of Funds (Others) Performance Requirement Entry of Key Personnel Senior Management Denial of Benefits Transparency 0.0

0.2

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Proportion of BITs that Duplicated Investment Provisions from PTAs

Figure 15.4  Proportion of BITs that duplicated provisions from PTAs.

for investment governance, especially prominent PTA provisions include the definition of investment as FDI and provisions to protect investors such as fair and equitable treatment and free transfer of funds.

15.6 Conclusion The present and future landscape of investment governance is likely to remain embedded in a growing and interdependent network of BITs. In this chapter, we called this overlapping and non-hierarchical network the investment regime complex. The most important driver of this investment regime complex, which in the case of PTAs has linked trade and investment ever close together, is the rise of global value chains and with it the expansion of trade along the international supply chain. These

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soo yeon kim and clara lee Definition FDI Definition FDI & Portfolio ISDS NT/MFN Post-est Only Expropriation Fair & Equitable Treatment Free Transfer of Funds Transfer of Funds (BoP) Transfer of Funds (Others) Performance Requirement Entry of Key Personnel Senior Management Denial of Benefits Transparency 0.0

0.4 0.8 0.2 0.6 Proportion of PTAs that Duplicated Investment Provisions from BITs

1.0

Figure 15.5  Proportion of PTAs that duplicated provisions from BITs.

developments reflect the intensification of global production, which is attended by the further empowerment of multinational firms as transnational political actors, in an era of rising populism and backlash against globalization. In the case of investment governance, scenarios of the future contain three important and inter-related challenges. First, how will multinational firms work with or against home and host countries? As political actors oriented toward the global market, multinational firms stand in the unique position of having political access points in both home and host countries. At the same time, however, multinational firms as transnational political actors must also contend with the re-assertion of the state, as seen in the rise of populist governments representing anti-globalization forces. In the European Union, Brexit and the electoral successes of anti-immigration

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forces have renewed and enhanced the role of the state as defender of such interests. How multinational firms navigate this political landscape in pursuit of global markets – through forum-shopping and regulatory arbitrage – is likely to shape the evolution of the investment regime complex. Second, what are the likely consequences of US and EU competition over the forum for investment arbitration? As an increasingly important provision of PTAs that is marked by divergent preferences and institutional competition, the role of multinational firms in the evolving investment regime complex is likely to shape and be shaped by competition of two models of investment arbitration: the ISDS system espoused by the United States and the multilateral investment arbitration court proposed by the EU that is making its way into EU-led PTAs. Though this can be considered yet another arena in which the United States and EU pursue competing governance models, the likely winner in this scenario concerning investment arbitration is the multinational firm. The investment regime complex of overlapping and non-hierarchical PTAs and BITs facilitates multinational firms’ efforts to engage in forum shopping across these two institutional forums for enforcement of investment agreements. Finally, what is the role of China in the evolving investment regime complex? It is important to consider China’s role as a major node because it is both a major home and host country for capital movements. The challenge posed by China’s economic importance is its location in the network of BITs and PTAs, in which it has the potential to shift the balance of governance models. This can take the form of supporting either the EU or the US model of investment arbitration. Alternatively, and more likely, the announcement in 2017 of the China International Economic and Trade Arbitration Commission (CIETAC) that it would adopt its own investment arbitration rules indicates yet another competing node in the network of investment arbitration mechanisms. While the provisions are not yet available in English, a preliminary assessment finds that CIETAC Investment Arbitration Rules, especially on transparency, fall far short of what is common in the current generation of investment treaties. These questions on possible future scenarios that account for current political trends arise out of this study, in which we have provided an early study of the governance of the trade-investment nexus, as observed through investment commitments in PTAs and BITs. Our theoretical framework conceptualizes PTAs and BITs together as a regime complex, in which the agreement provisions partially overlap and, in some cases,

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complement each other to produce synergistic outcomes. Individually, we differentiate PTAs as agreements for the joint liberalization of trade and investment and BITs as agreements largely for protection of investment. The study employs principal components analysis for a sample of PTAs and BITS to identify the relative significance of particular provisions and governance areas. We also investigate the degree of overlap in the commitments that states make across these two types of agreements and the direction of influence between them. The results of the analysis suggest that PTAs and BITs have different purposes and are largely complementary instruments for governing investment. While PTAs include investment provisions as part of a larger package of trade liberalization commitments, BITs may be directed more toward the protection of investor interests and property rights. Principal component analysis of PTA provisions suggests that, while PTAs and BITs have common provisions, these provisions differ in accounting for the variation in each. Additional analyses examining the degree of duplication when a PTA is signed and followed by a BIT, and vice versa, also indicate that countries do not necessarily seek to duplicate provisions in subsequent agreements. Future research should seek explanations for this divergence in institutional design choices within the broader regime complex governing investment.

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Appendix: PTAs Included in the Analysis African Economic Community ALADI (Latin American Integration Association) ANZTEC (New Zealand and Taiwan) Asia–Pacific Trade Agreement ASEAN–Australia–New Zealand ASEAN–China ASEAN–India ASEAN–Japan ASEAN–Korea, Republic of ASEAN Free Trade Area (AFTA) Agadir (Free Trade Area among Arab Mediterranean Countries) Albania–Moldova Albania–UNMIK (Kosovo) Andean Community Armenia–Kazakhstan Armenia–Moldova Armenia–Russian Federation Armenia–Turkmenistan Armenia–Ukraine Asia Pacific Trade Agreement (APTA)–Accession of China Australia–Chile Australia-New Zealand (ANZCERTA) Azerbaijan–Russian Federation BIMST–EC Bahrain–Jordan Bangladesh–India Bolivia–Chile Brunei Darussalam– Japan CARICOM CARICOM–Colombia CARICOM–Costa Rica CARICOM–Cuba CARICOM–Dominican Republic CEFTA–Croatia Australia–New Zealand Canada–Colombia Canada–Costa Rica

Canada–Israel Canada–Peru Canada–Chile Central European Free Trade Agreement Chile–China Chile–India Chile–Japan Chile–Mexico Chile–Venezuela China–Hong Kong, China China–Macao, China China–New Zealand China–Singapore China–Iceland China–Switzerland Common Economic Zone (CEZ) Common Market for Eastern and Southern Africa (COMESA) Commonwealth of Independent States (CIS) Croatia–Lithuania Croatia–Moldova Croatia–Slovenia Dominican Republic–Central America Dominican Republic–Central America–US (CAFTA-DR) EC (15) Enlargement EC (25) Enlargement EC (27) Enlargement EC–Bulgaria EC–Czech Republic EC–Estonia EC–Hungary EC–Latvia EC–Lithuania EC–Poland EC–Romania EC–Slovak Republic EC–Slovenia

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EFTA–Albania EFTA–Canada EFTA–Chile EFTA–Egypt EFTA–FYR Macedonia EFTA–Israel EFTA–Jordan EFTA–Korea, Republic of EFTA–Lebanon EFTA–Mexico EFTA–Morocco EFTA–Palestinian Authority EFTA–Peru EFTA–SACU EFTA–Serbia EFTA–Singapore EFTA–Tunisia EFTA–Turkey EFTA–Bulgaria EFTA–Colombia EFTA–Croatia EFTA–Bulgaria EFTA–Czech Republic EFTA–Estonia EFTA–Hungary EFTA–Latvia EFTA–Lithuania EFTA–Poland EFTA–Romania EFTA–Slovenia EFTA–Slovak Republic EU–Albania EU–Algeria EU–Andorra EU–Bosnia and Herzegovina EU–CARIFORUM States EPA EU–Cameroon EU–Chile EU–Croatia EU–Côte d’Ivoire

EU–Egypt EU–Faroe Islands EU–FYR Macedonia EU–Israel EU–Jordan EU–Korea, Republic of EU–Lebanon EU–Mexico EU–Montenegro EU–Morocco EU–Palestinian Authority EU–Papua New Guinea–Fiji EU–San Marino EU–Serbia EU–South Africa EU–Tunisia EU–Turkey EU–Bulgaria EU–Moldova EU–OCT EU–Romania EU–Switzerland–Liechtenstein EU–Syria East African Community (EAC) Economic Community of West African States (ECOWAS) Economic Cooperation Organization (ECO) Egypt–Turkey Egypt–Jordan Eurasian Economic Community European Economic Area (EEA) FYROM–Moldova Faroe Islands–Switzerland Faroe Islands–Norway GSTP Georgia–Armenia Georgia–Azerbaijan Georgia–Kazakhstan Georgia–Russian Federation

the regime complex for investment governance Georgia–Turkmenistan Georgia–Ukraine Georgia–EU Gulf Cooperation Council (GCC) Gulf Cooperation Council–Singapore FTA Honduras–El Salvador and Taiwan Hong Kong, China–New Zealand Hong Kong, China–Chile Hong Kong, China–EFTA Hungary–Israel Hungary–Latvia Hungary–Lithuania Hungary–Turkey IGAD Iceland–Faroe Islands India–Afghanistan India–Bhutan India–Japan India–Malaysia India–Singapore India–Sri Lanka India–Nepal India–GCC India–Mongolia India–Thailand Iran–Pakistan Israel–Mexico Israel–Jordan Israel–Poland Israel–Slovak Republic Israel–Slovenia Japan–Indonesia Japan–Mexico Japan–Philippines Japan–Singapore Japan–Switzerland Japan–Thailand Japan–Vietnam Japan–Malaysia

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Japan–Vietnam Jordan–Singapore Jordan–Morocco Jordan–Syria Jordan–Tunisia Jordan–United Arab Emirates Korea, Republic of–Chile Korea, Republic of–India Korea, Republic of–Singapore Korea–United States FTA Kyrgyz Republic–Armenia Kyrgyz Republic–Kazakhstan Kyrgyz Republic–Moldova Kyrgyz Republic–Russian Federation Kyrgyz Republic–Ukraine Kyrgyz Republic–Uzbekistan Lao People’s Democratic Republic–Thailand Latvia–Poland Latvia–Slovak Latvia–Slovenia Latvia–Turkey Lithuania–Poland Lithuania–Slovakia Lithuania–Slovenia Lithuania–Turkey MERCOSUR–India MERCOSUR–Andean Community MERCOSUR–Bolivia Malaysia–Australia Malaysia–Chile FTA Malaysia–US Mauritius–Pakistan Melanesian Spearhead Group (MSG) Moldova–Bosnia and Herzegovina Moldova–Montenegro–Serbia Moldova–Romania Namibia–Zimbabwe New Zealand–Malaysia New Zealand–Singapore

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Nicaragua and Taiwan NAFTA PTN Pacific Island Countries Trade Agreement Pakistan–China Pakistan–Malaysia Pakistan–Sri Lanka Pakistan–Mauritius Pan–Arab Free Trade Area (PAFTA) Panama–Costa Rica (Panama–Central America) Panama–Singapore Panama–Taiwan Papua New Guinea–Australia People’s Republic of China–Costa Rica People’s Republic of China–Taipei Peru–China Peru–Korea, Republic of Peru–Singapore Poland–Turkey Preferential Tariff Arrangement– Group of 8 Developing Countries Romania–Turkey Russia–Kazakhstan–Belarus Russian Federation–Tajikistan SPARTECA Serbia–Montenegro–Romania Singapore–Australia Singapore–Costa Rica Slovak Republic–Turkey Slovenia–FYR Macedonia Slovenia–Turkey South Asian Free Trade Agreement (SAFTA) South Asian Preferential Trade Arrangement (SAPTA) Southern African Customs Union (SACU) Southern African Development Community (SADC)

Southern Common Market (MERCOSUR) TPS–OIC Thailand–Australia Thailand–New Zealand Thailand–Bahrain Thailand–Peru Free Trade Agreement Trans–Pacific Strategic Economic Partnership Turkey–Albania Turkey–Bosnia and Herzegovina Turkey–Chile Turkey–Croatia Turkey–FYR Macedonia Turkey–Georgia Turkey–Israel Turkey–Jordan Turkey–Montenegro Turkey–Morocco Turkey–Palestinian Authority Turkey–Serbia Turkey–Tunisia Turkey–Albania Turkey–Korea Turkey–Lebanon Turkey–Mauritius US–Australia US–Bahrain US–Chile US–Jordan US–Morocco US–Oman US–Peru US–Singapore US–Afghanistan US–Albania US–Central Asia US–Colombia US–Israel US–Laos US–Pakistan

the regime complex for investment governance US–Panama US–Vietnam Ukraine–Azerbaijan Ukraine–Belarus Ukraine–FYR Macedonia Ukraine–Kazakhstan Ukraine–Moldova Ukraine–Russian Federation Ukraine–Tajikistan

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Ukraine–Uzbekistan Ukraine–Turkmenistan United States–Marshall Islands Compact of Free Association United States–Micronesia Compact of Free Association United States–Palau Compact of Free Association Uzbekistan–Russian Federation

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16 Asian Trade Agreements in Services Filling Form with Content

mark manger 16.1 Introduction Liberalizing trade in services remains one of the biggest challenges on the trade policy agenda. In most economies, services contribute more to national income than all other sectors combined. Ongoing technological advances make more and more services internationally tradeable. Clearly, states that undertake liberalization stand to make enormous gains, but the complexity of rules compared to relatively easily quantifiable restrictions on trade in goods puts up enormous hurdles to the liberalization of trade in services. Ever since services were put on the trade negotiations agenda in the Uruguay Round, the United States has been the most active promoter of services liberalization. With the withdrawal of the United States from the Trans-Pacific Partnership (TPP) before its ratification, it is an open question if meaningful liberalization of services via preferential trade agreements (PTAs) will continue in the Asian region and what avenues such efforts will take. The answers to these questions are, of course, speculative, but given the wealth of data accumulated on the formation and design of PTAs, we can make a well-informed guess. In this ­chapter, I draw on three sources – the DESTA dataset (Baccini, Dür, and Elsig 2014), the services trade data assembled by Francois and Pindyuk (2013), and more recent data from UN COMTRADE – to make empirically grounded predictions, and I lay out three possible scenarios for services trade liberalization in the Asia–Pacific region. I ask four related questions. First, is there still a robust relationship between existing trade in services and the formation of services trade agreements? Second, are countries in the Asia–Pacific region willing to fill the form – a trade agreement in services  – with substantive content in terms of services liberalization commitments? In other words, does the strength of the bilateral trade relationship in services influence the depth of liberalization that a trade 388

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agreement provides? Third, can China supplant the United States as the biggest market and induce further liberalization, or are the protectionist interests of the Chinese services sector too strong to permit this outcome? The last question is more than theoretical: The Independent reported on January 24, 2017, that Australian diplomat and former foreign minister Alexander Downer had suggested openly that China could replace the United States in a region-wide agreement, while Forbes predicted that some countries would now join the China-led Regional Comprehensive Economic Partnership (RCEP) (Brinkley 2017). But it is not obvious that China, much less frequently a demandeur in trade negotiations, is willing to open its markets to spur on regional integration. To answer these questions, we have to assume that existing trade in services also creates economic interests that support further bilateral services liberalization. Few PTAs are purely economic in motivation, but in the Asia–Pacific region, the existence of any substantial economic interests has often been doubtful (Ravenhill 2009, 2010), or at least they have played second fiddle to security concerns and political alliances. If there is limited support for services liberalization in the absence of US participation in agreements, we may well see a continued prevalence of token agreements that do not actually offer much market opening. In economic terms, this would be a tremendous opportunity lost. In developed economies, services often make up 75% of value added and contribute 70% to the size of the global economy (Francois and Hoekman 2010). Given the multitude of activities classified as services, from hairdressing to globe-spanning telecommunications, data on trade in services is necessarily more difficult to gather than information on trade in goods. Nonetheless, World Trade Organization (WTO) figures suggest that services trade makes up over 20% of global exports in value terms and is growing at a faster rate than merchandise exports – close to 8% per annum since 1980. Promoting the liberalization of services trade would therefore help to extend the rapid growth phase in East Asia into the next decade. Much of this liberalization will have to take place through PTAs. To be sure, there is little in PTAs specifically that makes them more attractive than multilateral liberalization of services trade. The United States was in fact instrumental in the creation of the 1995 General Agreement on Trade in Services (GATS) itself (Feketekuty 1988; Aggarwal 1992). This reflects the clear comparative advantage of the United States in trade in services (Baccini, Osgood, and Weymouth 2018). The United States

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alone accounts for 14% of global services exports, a share approximately twice as large as that of the next biggest exporter (China). With tariffs at historical lows, the liberalization of services trade is the final frontier of trade negotiations. Yet at the multilateral level, services liberalization has not advanced beyond the GATS. In this agreement, developing countries made very limited commitments and often signed on without offering any liberalization at all (Hoekman 1995; Hoekman and Mattoo 2000; Mattoo and Low 2000; Sauvé 2000). A group of prominent observers called services the biggest “unfinished business” in multilateral trade negotiations (Borchert, Gootiiz, and Mattoo 2011). While a growing number of PTAs incorporate trade in services, many, in particular among developing countries, offer very little liberalization. Under WTO rules, PTAs have to comply with GATS Article V, which allows for regional integration “agreement[s] liberalizing trade in services between or among the parties to such an agreement” but there is no requirement to liberalize “substantially all the trade” as stipulated under GATT Article XXIV, only for the agreement to have “substantial sectoral coverage” and not to “. . . provide for the a priori exclusion of any mode of supply.” More generally, we know that services restrictions are still a major impediment to trade. Observers often comment that Asian countries in particular are more protectionist than developed countries elsewhere or countries of similar or lower levels of economic development in Africa and Latin America (Borchert and Mattoo 2010). Most of the liberalization has taken place unilaterally – though this offers no guarantees to firms engaging in cross-border provision because restrictive regulations can be put back into place. A number of PTAs have broken new ground, however, by building on a negative-list design whereby countries commit to liberalizing all trade except for a list of specifically excluded sectors. By contrast, the common positive-list approach means that countries list only those services sectors and industries that they want to open to foreign access and leave the rest closed, or they retain discretion by opening markets only through domestic laws. PTAs have also often pushed services liberalization into new domains (WTO 2011). Chinese positive-list agreements stand out by not offering much services liberalization at all.

16.2  PTAs in Services: Questions of Institutional Design Although no longer a significant force of liberalization, the GATS as an institutional template has had considerable influence on PTA design. The GATS divides services into four broad categories, or “modes of provision.”

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The modes are (1) cross border supply, such as insurance contracts; (2) consumption abroad, for example, tourism; (3) commercial presence, effectively foreign direct investment (FDI); and (4) movement of n ­ atural persons on a temporary basis. GATS signatories have to offer mostfavored-nation (MFN) treatment and national treatment (NT) to other members of the agreement. The same approach is taken in the majority of PTAs and is commonly referred to as a “positive list.” In such an agreement, the parties list the various services industries and subsequently offer “commitments” in each of the applicable modes of services provision. If a country commits to offer liberalization in one or more of the modes, such a mode is referred to as “bound,” an analogy to the “tariff binding” concept in the General Agreement on Tariffs and Trade (GATT). An “unbound” sector can still be liberalized via domestic legislation, but such market-opening is at the discretion of the host government and can be rolled back. There is no enforcement against violations beyond domestic courts. The alternative is the negative-list approach. With this institutional design, countries do not list all services sectors, they provide only a list of “reservations.” Restrictions on services trade that are not included in these reservations cannot be introduced, and sanctions are enforceable according to the stipulations of the trade agreement itself rather than just through domestic legal avenues. Which approach to use for services liberalization has frequently been contentious. During the Uruguay Round of the GATT, the United States strongly advocated in favor of a negative-list approach at the multilateral level, whereby MFN status was to be granted to all signatories, and national treatment extended to all sectors and all modes of supply, with exemptions subject to negotiations. This strategy failed because developing countries initially resisted any inclusion of services in trade negotiations, while the European Union (EU) favored a positive-list approach (Hoekman and Kostecki 2010: 335), the latter possibly because services did not fall in the jurisdiction of the European Commission at the time. The same holds true for the proposed plurilateral agreement on services in the WTO, again at the insistence of the EU. In principle, it is possible to achieve an identical degree of liberalization with either of the two approaches. In practice, however, the negative list is regularly more liberalizing, and countries with a relative comparative advantage in services are often the parties in bilateral negotiations that ask for a negative-list agreement design. Some services that are not considered tradeable at the time of negotiation may well become so later because of

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technological or business process innovation. In a positive-list approach, such new services are automatically unbound. By contrast, in a negativelist approach, newly tradeable services have typically not been listed as excluded when an agreement was negotiated, so they are not going to be restricted. If domestic regulations limit such services, these restrictions at least have to be non-discriminatory because they would otherwise run afoul of the national treatment clauses in the services agreement. The requirement to draw up an extensive list of existing regulations also represents a burden for developing countries with limited administrative capacity; thus, they often prefer the positive-list approach on these grounds. In fact, it is entirely possible to draw up a GATS-consistent and legally sound positive-list agreement without consulting domestic legislation or regulations: a country could just take the GATS sector list and note every sector as unbound across all modes. Another, subtle reason for why negative-list agreements are more liberalizing relates to the negotiations themselves, with implications analyzed in detail in Kim and Manger (2017). Negative-list agreements require that both partners have to provide exhaustive lists of their reservations at the outset. The negotiation partner can review these reservations and demand specific exclusions to be removed, possibly even strategically as a position to be given up later in negotiations. Because the exemptions become public information, firms with an interest in exporting services to the partner can mount targeted lobbying efforts – in fact, if lobbying is primarily informational (Hall and Deardorff 2006), then the listing of reservations reduces the cost of such action for the party demanding liberalization. A positive-list approach is comparatively less liberalizing because negotiations follow the GATS model of “request and offer”: the party “requesting” liberalization has to catalog trade barriers in order to make substantive proposal for the negotiations, while the “offering” side only has to reveal this information strategically. Such negotiations often proceed to achieve less liberalization. In Kim and Manger (2017) we show that informational asymmetry shapes countries’ future choices of PTA design and partners. As described above, once a country has signed a negative-list PTA, its ­existing reservations are public information. Future negotiating partners are therefore going to use these reservations as starting points for liberalization – in fact, being granted less liberalization would amount to less than parity in market access. Few countries are likely to settle for this. In most countries, liberalization commitments made in a services PTA must be translated

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into domestic law to be implemented. This usually ­happens on a non-­ discriminatory basis. Sectoral restrictions are lifted for all foreign suppliers, although only PTA partner countries can enforce this with the dispute settlement mechanisms of an agreement. A network of negative-list agreements, if it were the only institutional model available, could therefore have profound liberalizing effects, not unlike nineteenth-century bilateral treaties that included an MFN clause (for this, see Lazer 1999). By comparison, a positive-list agreement does not necessarily provide any formation – the more sectors are unbound, the less it reveals about domestic, discriminatory regulations. The implication of this informational difference is that countries that have negotiated negative-list PTAs only rarely accept positive-list liberalization in subsequent PTAs, but they prefer negative-list PTAs in the future as well. Over the medium term, two different PTA networks may appear, each with its own liberalization approach. Such a separation is already evident in the analysis we provide in Kim and Manger (2017), even though our analysis period only extended to 2011. What, then, might follow from the withdrawal of the United States, the most important proponent of services liberalization in the form of the negative-list approach? First, it is possible that countries that have so far pursued a negative-list approach will not continue to sign PTAs because of their relatively weak negotiating position unless more countries switch to this institutional design. Alternatively, it could be that without the United States, the less liberalizing positive-list agreement becomes the default form. More fundamentally, traditional power asymmetry continues to shape liberalization efforts. The retreat of the United States from the field of trade liberalization threatens the opening of markets for services more than further reductions of manufacturing tariffs. In general, trade liberalization only takes place if it is imposed either from the outside or in exchange for better access to a partner country’s markets. Governments must often be prodded by an outside force to overcome domestic protectionists. Sometimes, they may have a liberalizing agenda themselves but use external actors to deflect domestic political anger – a common pattern when developing countries negotiate with the International Monetary Fund (IMF) (Vreeland 2006), but it was also evident when the Japanese government sought to gradually reduce agricultural protectionism (Pempel 1999), an issue that reappeared in the TPP negotiations. Especially in Latin America, reformist governments have sought to use the United States to overcome domestic resistance

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(Cameron 1997; Ethier 1998). Without the United States, prospects for further liberalization in the Asia–Pacific are therefore considerably weaker. Alternatively, governments often negotiate meaningful trade agreements if they can harness the support of export interests at home and in the partner country to overcome the resistance of import-competing industries. This kind of trade liberalization works best when the comparative advantage of the two partners is very different so that, for every importcompeting industry in one country, there is likely an export-oriented, more efficient counterpart in the other. At other times, countries may have very similar comparative advantage, as is common when developed countries bargain over bilateral trade liberalization, but their markets are big enough so that firms can vary their products to appeal to different buyers. Milner (1997) referred to this as “trading off scale economies across industries.” In principle, this could equally apply to services trade liberalization. Withdrawal by the United States leaves few of these options on the table. Japan, as the second most important liberalizer, has largely focused on trade in manufactured goods, where its trade agreements have achieved fair degrees of liberalization and utilization rates (Takahashi and Urata 2010; Manger 2014). Services, while present in the agreements, do not play a large role and often only as complements to trade in goods. Australia has reduced many trade barriers of its own and is a competitive exporter of both services and agricultural goods, but it is not big enough to extract much liberalization from its partners. China would be big enough, but as we will see below, is not a liberalizing actor in services trade in the region.

16.3  Patterns of Services Liberalization in PTAs In the Asia–Pacific region, both positive- and negative-list approaches to services liberalization continue to be popular, with no clear “winner”: 58 negative-list agreements have been negotiated versus 65 positive-list agreements. Figure 16.1 shows the cumulative number of services PTAs of the two types signed in the Asia–Pacific region. The period between 1999 and 2009 was the most active phase of negotiations, with a slight leveling off since then. Wealthier countries typically have more developed services sectors on a per capita basis and, unsurprisingly, prefer the more liberalizing negativelist approach. The partial exceptions are Latin American countries bordering on the Pacific Ocean that also follow this model. On the western side of the Pacific, the US allies Australia, Japan, Korea, and New Zealand

395

asian trade agreements in services 70 60 50 40 30 20 10 0 1994

1999

2004

2009

Negative-list PTAs

2014

Positive-list PTAs

Figure 16.1  Cumulative number of negative- and positive-list PTAs in the Asia-Pacific, 1994–2016.

as well as Singapore and Taiwan have usually adopted this institutional form. But China has made the positive-list design its preferred approach and only signs such agreements (Mercurio 2016, 521–2). The economic interest in PTAs with China often overrides the concerns outlined above. For example, Australia and New Zealand have negotiated positive-list services PTAs with China, deviating from their preferred model, that do not provide for much liberalization. The result is that some agreements promote free trade in services much more than others. Figure 16.2 shows the simple average of the number of

China party to agreement

USA party to agreement

Positive list

Negative list 0

1

2

3

4

5

6

Figure 16.2  Average liberalization depth by type and party (DESTA).

7

8

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services liberalization clauses that are present in the agreements signed in the Asia–Pacific region up to 2015, using the DESTA coding, and a count of services liberalization provisions included in the PTA as listed by DESTA, ranging from 0–8. Negative-list agreements on average include seven to eight clauses, positive-list agreements, five. When the United States is party to an agreement, the same is true (the simple average is 7.4). Although there are differences in sector opening that this measure does not capture, it is clear that other countries adopting the negative-list approach are often offering even more liberalization in their PTAs than the United States. This gives some cause for optimism as long as these PTAs become templates for additional agreements. It is also possible that countries include services trade in PTA negotiations but that they do not actually seek much liberalization. This could be especially problematic when the party opposed to liberalization has a much bigger market, or “market power” in the negotiations in the terminology of Cameron and Tomlin (2000: 3–4). In the Asia–Pacific region, such asymmetries are common. For example, Singapore may be a wealthy economy, but it is also just a city-state and has almost no trade barriers to use bargaining chips. China, on the other hand, not only has the largest market in the region after the United States but also has high existing barriers to trade in services. Bargains between such unequal partners can result in very limited market opening. In general, when China is party to a services PTA, it will not only follow the positive-list approach; it will also list only two or three liberalizing clauses on average. Even with this crude measure, it is immediately evident that China is not a driver of services liberalization and that PTAs with China are unlikely to increase services trade substantially. China’s services PTAs do not suggest any trend toward greater liberalization either, but some influence of the partner country is discernible. For example, the China–New Zealand FTA, signed in 2008, includes a GATS reference, and clauses on MFN, NT, non-establishment, and movement of natural persons. The agreement with Singapore of the same year lacks the MFN reference. Meanwhile, the 2013 China–Korea FTA represents a step back: the MFN, non-establishment, and Mode 4 clauses are all missing. At the same time, it is noteworthy that there is considerable convergence between the investment chapters in the TPP text and the corresponding chapter in the China–Korea FTA. In particular, the investment chapter in the China–Korea FTA (Article 12.18) allows for the application to services in certain circumstances (Wang 2017): from

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minimum standards of treatment to expropriation and compensation, to the settlement of disputes, the investment protection clauses are “imported” into the services and financial services chapters. This may represent China’s growing role as an outward investor that benefits from open services markets elsewhere but still seeks to retain protection of the home market. While such a simple comparison is instructive, it obviously fails to control for various other drivers of the negotiation of services PTAs and the liberalization they entail. To investigate further, I conduct an econometric analysis. I take the following empirical approach. First, I estimate what drives the formation of services in PTAs in a sample of country pairs in the Asia–Pacific and subsequently test which variables are associated with the inclusion of more liberalizing clauses. If services PTAs are driven by economic considerations – specifically, existing services trade – then we can expect political support to sustain future liberalization. If, on the other hand, there is no clear link between services trade and PTAs, then it is possible that we will see only limited further liberalization if the United States does not participate.

16.4  Data and Estimation Two empirical tests provide further evidence. To capture the geographic reach that the TPP originally aspired to, I include countries in East and Southeast Asia, Oceania, and the Pacific littoral of the Americas. For all information on dates of signature and services commitments in these PTAs, I rely on DESTA. The time period under study is from 1994, when NAFTA, the first PTA with a major services trade chapter, was concluded, to 2015. This period comprises the time of the most active formation of trade agreements in the Asia–Pacific region, with an ebbing during the most recent years that may be due to the anticipation that the TPP would make further negotiation of bilateral agreements ­redundant. Like many similar studies of PTA formation going back to Baier and Bergstrand (2004), most of the variables are borrowed from gravity models of trade: if PTAs are driven by the desire to reap the gains from more trade, then the same factors that motivate bilateral trade itself should also motivate bilateral trade liberalization. Table 16.1 lists the countries in the sample. The first model regresses the binary dependent variable, indicating signature of a services PTA on several controls. I use the date of signature rather than ratification because the latter can be determined by

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Table 16.1 Countries in sample Countries Australia Bangladesh Brunei Cambodia Canada Chile China, P.R. Colombia Costa Rica Ecuador Guatemala Honduras Hong Kong, S.A.R. India Indonesia Japan Korea (South) Laos

Macao, S.A.R. Malaysia Mauritius Mexico Mongolia Myanmar Nepal New Zealand Nicaragua Pakistan Panama Papua New Guinea Peru Philippines Russia Singapore Solomon Islands Sri Lanka

g­ overnment changes and the parliamentary calendar, while the ­signature is ­generally the conclusion of negotiations. I include (the log of) GDP per capita for both partner states – wealthier countries are likely to have more important services industries but are also better able to cushion the blow from liberalization (Walter 2010) – and the size of the economy measured by GDP.  Both variables are from the World Development Indicators. I also include the great circle distance drawing on the CEPII gravity dataset, an indicator variable for an existing military alliance between the countries, from Gibler (2009), and an indicator for a prior PTA covering only goods in force between the partners, also drawn from DESTA. While not many countries negotiate PTAs in goods and services separately today, some older agreements are still in force that cover only goods. Such agreements may predispose the partner countries to deepen their relationship by “­adding” a services component. The independent variable of interest is the (log of) bilateral services trade between the two countries in the dyad in year t in millions of current

asian trade agreements in services

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USD. For this data, I draw on Francois and Pindyuk (2013), who collect data from the OECD, IMF, and United Nations COMTRADE; crosscheck the “mirror flows” to ensure consistency; and offer bilateral trade in services data going back to 1985. The data covers modes 1 and 2 and is calculated on a balance-of-payments basis. According to the authors, data quality improves considerably in later years. I expand this data set with the years 2012–15 from the UN COMTRADE database that Francois and Pindyuk consider the most consistent. For the second, linear model, the dependent variable is the count of services liberalization provisions included in the PTA as listed by DESTA, ranging from 0 to 8. While this is clearly only a crude proxy of the “depth” of services liberalization – for example, many agreements include a national treatment provision, but in principle this can be rendered ineffective for many sectors by listing generous exceptions – we can assume that a higher score is correlated with deep liberalization. The covariates are identical except that alliances should not influence liberalization, and goods PTAs are too few in this dataset to allow for estimation. In this model, I include an indicator variable that equals 1 when China is party to an agreement.1 As the error term structure in the models is unknown and complicated because of the non-linearity, I bootstrap the standard errors by panel, resulting in slightly more conservative (larger) errors than the common Huber-White “robust” errors. Bootstrapping also allows for more efficient estimation of the second model, with its small sample of 64 agreements. The results shown in Table 16.2 suggest that services trade is indeed associated with a greater probability of formation of a services PTA. The unconditional probability of PTA formation in the data is only 3.1%. A 1 standard deviation increase in services trade – approximately equal to a 30% increase in trade between the partners – raises the probability of the two forming a PTA by 2% (confidence interval 1%, 4%) for a probability of signature of 5%. This is a sizeable substantive effect comparable with those in other studies, and in particular with the effect of trade in goods, but obviously base probabilities of any PTA formation are low. Perhaps surprisingly, there does not appear to be a strong association between geographical distance and the formation of services PTAs in the Asia–Pacific region – in fact, the opposite. This partly contradicts existing research on Because China and the United States have not signed a PTA with each other, including an indicator for the United States would lead to near-complete separation.

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Table 16.2 Effect of services trade on PTA formation and services liberalization PTA Formation ln services tradeijt ln GDP/capitait ln GDP/capitait ln GPDit ln GDPit ln distanceij Allianceijt Goods PTA in forceijt

0.185** (0.091) 0.025 (0.159) 0.097 (0.159) −0.156 (0.119) −0.155 (0.106) 0.766*** (0.217) −0.417 (0.724) 1.901*** (0.503)

China party to PTA Constant p N

−8.668** (3.673) 0.01 2043

Liberalization −0.355 (0.242) 1.161*** (0.396) 0.912** (0.452) 0.192 (0.248) 0.308 (0.325) 1.262 (0.847)

−4.326*** (1.197) −28.906** (12.981) 0.00 64

Standard errors in parentheses. *** p < 0.01, ** p < 0.05, * p < 0.1.

services trade (Breinlich and Criscuolo 2011; Kimura and Lee 2006), but it may well be idiosyncratic because of the use of the Asia–Pacific region as a sample, with the largest ocean in the middle. Most importantly, having concluded a PTA in goods within the dyad at some point in the past makes it considerably more likely that the two partners will enhance this agreement with a services PTA. This speaks to the well-known complementarity of trade in goods and in services. The picture is slightly different for the model in the right-most ­column: there is no evidence that more services trade between the partners is systematically associated with more liberalizing clauses in their PTAs. Meanwhile, richer countries are still somewhat more likely to liberalize

asian trade agreements in services

401

services. Most striking is the strongly significant, large ­negative effect of Chinese participation in the PTA: the predicted liberalization outcomes are just over 4 points less on the summary scale of the DESTA measures. This is remarkable because it suggests that meaningful ­services liberalization appears almost ruled out when China is among the parties. Clearly these results have to be treated with considerable caution: The limited availability of services trade data is still problematic. With relatively few PTAs signed, the resulting samples are quite small. More important, once the TPP negotiations were announced, countries may have deliberately hedged their commitments to services liberalization in other, ongoing PTA negotiations, knowing the United States would make far-reaching demands in the TPP. Thus, we cannot rule out that the choices of governments would have been different had they known that the United States would withdraw from the TPP. On the other hand, previous research indicates that US allies have adopted “American” models of PTA design even in agreements with third parties (Kim and Manger 2017) before the TPP negotiations got under way. This finding suggests that the appetite for actual liberalization in services PTAs in the Asia– Pacific region is limited unless the United States is a partner to such an agreement and vigorously promotes it.

16.5  The Outlook for Services PTAs As the discussion in this chapter shows, without the United States, the prospects for major advances in the liberalization of services trade in the Asia–Pacific region are considerably weakened. Although the United States had signed only a limited number of PTAs before, these deals implied far-reaching services liberalization for the partner country. Many countries, in particular in Asia, maintain resistance against opening their services sector. Often, this is expressed as a strong preference for positivelist agreements that are generally less liberalizing in principle and, as the DESTA data show, in practice. To be sure, the United States has not been the most important promoter of negative-list agreements itself. But the strong path dependency induced by this institutional design has until very recently implied that countries that had themselves signed an agreement with the United States also preferred the same model in subsequent PTAs. This is clearly evident for Latin American countries, Australia, Singapore, and South Korea. Despite not having yet signed an agreement with the United States, Japan and New Zealand also adopted the negative-list model.

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Meanwhile, the majority of Asian countries follows a positive-list approach. Following the withdrawal of the United States, the biggest economy still in the game, China, retains a comparative advantage in manufacturing rather than services, and it is likely to shift its emphasis there. China also follows the positive-list approach in its own PTAs, making it less likely that the agreements produce similarly far-­ reaching ­liberalization and allowing new service innovations to remain restricted. As the analysis in this chapter has shown, existing services trade links are good predictors of the formation of a services PTA, but they are not necessarily associated with actual market opening as measured by DESTA. What matters for deep services liberalization is primarily the level of economic development of the country involved. Most worrying for the prospect of trade liberalization is that Chinese participation in services PTAs has so far implied very limited liberalization. Future liberalization efforts therefore depend on several important decisions that are likely to result in one or more of the following three scenarios. As common in the field of trade, these policy scenarios are not mutually exclusive, and countries may hedge by pursuing several simultaneously.

16.5.1  Scenario 1: A Renewed TPP The first and most probable scenario is full implementation of the TPP without the United States because all remaining negotiating partners are committed to the TPP’s ratification. Although the United States was the most important demandeur in the TPP negotiations, it has not been necessary to re-open the agreement. With the texts ratified as agreed, much of the liberalization that the United States demanded will be implemented in the successor agreement without extending market access to the party that has withdrawn – though much liberalization driven by the TPP will be implemented in non-discriminatory form through change in domestic legislation. This approach probably also rules out including China, at least in the medium term – an implication that some countries will find problematic but that may suit a sub-group, including Japan, quite well. It also leaves open the possibility that the United States could join the agreement under a new administration more inclined to pursue initiatives – though perhaps not without a renewed negotiation effort and new US demands.

asian trade agreements in services

403

16.5.2  Scenario 2: Minimal Liberalization around a Chinese Hub A second possibility is that countries that have so far followed a ­negative-list approach in their PTAs will have to show flexibility, allowing positive-list models when the partner country would otherwise not sign an agreement. There is evidence that countries are ready to accept this: Australia and New Zealand have negotiated positive-list agreements with China and Malaysia. Japan has done so in its PTA with India – although this agreement is perhaps the best example of a free-trade agreement covering very little bilateral trade, offering minimal new market opening, while standing in for a military alliance. This scenario appears equally viable, but it is questionable how much it will advance services liberalization. The most likely result will be a China-centric network of agreements in the Asia–Pacific region, but these PTAs will predominantly liberalize trade in manufactured goods. A second issue of significance may be the protection of FDI, in particular, Chinese investment in mining and agriculture abroad, and FDI in China by its partner countries. While not the most efficient outcome, we are still likely to see growth in services trade, though much of it will be driven by the complementarity with manufactured goods trade that is bound to increase with this kind of trade agreement network. The biggest challenge in this scenario is that neither the United States nor Japan will participate in such a network, leaving considerable gains from trade as unrealized.

16.5.3  Scenario 3: A China-Centric Trade Regime in Asia–Pacific Finally, if countries perceive a TPP without the United States as insufficient, a third scenario is possible in which continued economic growth leads to the creation of a China-centric trade regime in the region, in the form of the RCEP. Should the major service exporters in the region (minus the United States) join this agreement, then the same coalition could coordinate its negotiating positions to advance the goal of services liberalization. This may lead China to make concessions on services and overall enhance the standards in the agreement, which in early 2018 still remained vaguely defined. Whatever scenarios play out in the end, the challenge remains that services trade agreements are difficult to negotiate because they directly confront domestic regulation. Without sufficient transparency, an automatic requirement of the negative-list approach, they are often no more

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than token agreements. The diversity of levels of development, political regimes, and economic size of countries, often with starkly different comparative advantages that the Asia–Pacific region displays, make such transparency difficult to achieve. Without a key actor such as the United States, which can offer access to its sizeable market as a reward for governments that take on their own services sectors that may prefer continued protection, services liberalization may not advance as much as would be desirable, in particular if services trade does not play the same prominent role as in other regions.

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Francois, J. F. and B. Hoekman. 2010. “Services Trade and Policy,” Journal of Economic Literature 48(3):642–92. Francois, J. F. and O. Pindyuk. 2013. “Consolidated Data on International Trade in Services v8.9.,” IIDE Discussion Paper 20130101. Rotterdam: Institute for International and Development Economics. Gibler, D. M. 2009. International Military Alliances, 1648 to 2008. Washington, DC: Congressional Quarterly Press. Hall, R. L. and A. V. Deardorff. 2006. “Lobbying As Legislative Subsidy,” American Political Science Review 100(1): 69–84. Hoekman, B. 1995. “Assessing the General Agreement on Trade in Services,” In: W. Martin and L. A. Winters (Eds.), The Uruguay Round and the Developing Countries. Cambridge: Cambridge University Press, pp. 88–124. Hoekman, B. and M. M. Kostecki. 2010. The Political Economy of the World Trading System. 3rd ed. New York: Oxford University Press. Hoekman, B. and A. Mattoo. 2000. “Services, Economic Development and the Next Round of Negotiations on Services,” Journal of International Development 12(2):283–96. Kim, S. Y. and M. S. Manger. 2017. “Hubs of Governance: Higher-Order Effects of PTA Formation,” Political Science Research and Methods 5(3):467–88. Kimura, F. and H.-H. Lee. 2006. “The Gravity Equation in International Trade in Services,” Review of World Economics 142(1):92–121. Lazer, D. 1999. “The Free Trade Epidemic of the 1860s and Other Outbreaks of Economic Discrimination,” World Politics 51(4):447–83. Manger, M. S. 2014. “The Economic Logic of Asian PTAs: The Role of IntraIndustry Trade,” Journal of East Asian Studies 14(2):151–84. Mattoo, A. and P. Low. 2000. “Is There a Better Way? Alternative Approaches to Liberalisation under the GATS,” In: P. Sauvé and R. Stern (Eds.), GATS 2000: New Directions in Services Trade Liberalization. Washington, DC: Brookings Institution, pp. 449–72. Mercurio, B. 2016. “The Flow-On Effect: How the TPP Will Re-Shape Trade Relations in East Asia,” In: M. Bungenberg, C. Herrmann, M. Krajewski, and J. P. Terhechte (Eds.), European Yearbook of International Economic Law 2016. European Yearbook of International Economic Law. Cham: Springer, pp. 515–25. Milner, H. V. 1997. “Industries, Governments, and the Creation of Regional Trade Blocs,” In: E. D. Mansfield and H. V. Milner (Eds.), The Political Economy of Regionalism. New York: Columbia University Press, pp. 77–106. Pempel, T. J. 1999. “Structural Gaiatsu: International Finance and Political Change in Japan,” Comparative Political Studies 32(8):907–37. Ravenhill, J. 2009. “East Asian Regionalism: Much Ado about Nothing?” Review of International Studies 35(1):215–35.

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INDEX

Note: Page numbers in italic and bold refer to figures and tables, respectively. access and benefit-sharing (ABS), 276, 279, 283–284, 289, 291 Addis Ababa Action Agenda (AAAA), 295 additive manufacturing, 83 advisory services, 306 dissemination of investment opportunities, 306–307 educational services, 307 feasibility studies, 308 investment missions, 307 match-making services, 307–308 age, individual trade policy preferences and, 26, 28 Agreement on Movement of Natural Persons (AMNP), 261 “America First” trade policy, 333–336 American National Election Survey, 23, 28, 36 analyzing the dimensions of PTAs and BITs in governing investments, 370, 370 investment provisions in BITs, 372–373, 372 investment provisions in PTAs, 371–372, 371 principal component analysis, 373–374, 374 antidumping agreement (ADA), 132, 146, 162, 173–176, 178 anti-trade sentiment corporate political activity and, 56–60 EU trade-dependent firms and protectionist threat, 61–63 roots and faces of, 50–56

ANVISA, 282 Appellate Body (AB), 7–8, 121, 123, 124, 126, 132, 135, 140–147, 172, 284 appropriate scenario, 219–220 ASEAN Framework Agreement on Services (AFAS), 261–263 Asia-Europe Connectivity Vision 2025, 270 Asia-Europe Meeting (ASEM), 270 Asian trade agreements in services, 388–404 average liberalization depth by type and party, 395 China-centric trade regime in AsiaPacific (scenario), 403–404 countries in sample, 398 cumulative number of negative-and positive-list PTAs in AsiaPacific, 395 effect of services trade on PTA formation and services liberalization, 400 minimal liberalization around Chinese hub (scenario), 403 outlook for services PTAs, 401–404 patterns of services liberalization in PTAs, 394–397 questions of institutional design in PTAs, 390–394 renewed Trans-Pacific Partnership (scenario), 402 Asia-Pacific Economic Cooperation (APEC), 269

407

408

index

Association of the Southeast Asian Nations (ASEAN), 260, 261–263 AFAS, 261 China’s trade relations with, 266 Investment Agreement, 306 labour mobility liberalization and, 271 prioritizing trade agreements over treaties on investment protection, 337 attitudes-on-attitudes problem, 35, 36 Bank for International Settlements (BIS), 300 base erosion and profit-shifting (BEPS), 165 behind-the-border measures, 1, 40 Belgian Agency for Foreign Trade, 307 Berne Union, 305 bilateral investment treaties (BITs) analyzing the dimensions of, 370–375, 370 coding schemes for, 369, 370 investment chapters compared to, 341–346, 344, 351–352 investment provisions in, 372–373 joint memberships in, 374–375, 375 overlapping provisions in, 359–380 bilateral PTAs demandeurs on mode 4, India and China, 266–267 mobility-related provisions in, 265 Bipartisan Congressional Trade Priorities and Accountability Act of 2015, 334 border carbon adjustments (BCAs), 8, 183, 185–203 border measures, digitization and, 89 border tax adjustment (BTA), 196, 201 Brazil, India and China (BICs), 275–277 Brazil’s implementation of the TRIPS, 281–284 China’s implementation of the TRIPS, 286–288 India’s implementation of the TRIPS, 284–286 likely scenarios to 2025, 288–291 TRIPS implementation in, 280–288

Brazilian patent office (INPI), 282 Brazil-Peru Economic and Trade Expansion Agreement, 309 breeders’ rights, 285 Brexit, 53 Brexit vote, 17, 40, 49, 55, 64–65, 164, 378 budgetary transfers, 186, 187, 194 business visitors (BVs), 259, 261, 264 Calvo Doctrine, 329 Canada–United States Free Trade Agreement (CUSFTA), 328, 329, 360 causal impact of social trust, 33 censorship, digitization and, 89 Central American Free Trade Agreement (CAFTA), 174 challenges, future, 1–13 China intellectual property and, 137–139 Position Paper on WTO Reform 2018 (First Principle), 130 China-centric trade regime in AsiaPacific (scenario), 403–404 China International Economic and Trade Arbitration Commission (CIETAC), 379 China–Latin American and Caribbean Countries Cooperation Plan, 305 Chinese hub, minimal liberalization around (scenario), 403 Chinese Investment Promotion Agency (CIPA), 307 CIRAD (Centre de coopération internationale en recherche agronomique pour le développement), 314 civil and political rights (CPRs), 234, 235, 240, 246, 248 climate crisis, 182–203 border carbon adjustments, 183, 196, 203 consequences of, 183–186 decarbonization, 186, 195, 197, 198–200 objections and questions, 200–202 policy, 186–196

index transaction costs, 183, 186, 198–200, 202 urgency in addressing, 203 WTO compatibility, 196–198 Clinton, Hillary, 18, 48 closed host country, 267 coding schemes for BITs, 369–370 exceptions, 369 institutional issues, 369 investor-state dispute settlement, 369 other clauses, 369 preamble, 369 scope and definitions, 369 standard of treatment, 369 state-state dispute settlement, 369 treaty duration, 369 coding schemes for PTAs, 366–368 definition of investment, 367 denial of benefits, 368 endeavors without scope, 367 investment commitments in services chapter, 367 investment protection, 367 investor-state dispute settlement, 367 MFN and NT, 367 performance requirements, 368 scope of MFN and NT, 367 senior management/board of directors, 368 separate investment chapter, 367 transfers and payments, 368 transparency, 368 COFACE (Compagnie Française d’Assurance pour le Commerce Extérieur), 305 Committee for Development Policy (CDP), 295 Committee on the Elimination of Discrimination against Women (CEDAW), 236 Common Ground Agreement, 210, 220, 222–228 assistance to developing countries, 225 clauses of, 224–226 domestic level of protection, 224 enforcement, 227 implementation, 226

409

interaction between the environment and nonenvironmental issues, 227 inter-state environmental cooperation, 224–225 MEAs absent from, 228 policy coherence, 225 promotion of environmental protection, 224 specific environmental issue-areas, 225, 227 Common Ground Scenario, 226–227 communications model, 83 compensation fee, 262 compensation hypothesis, 42 competitive neutrality, 297 Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), 2, 6, 74, 96–100, 290, 336 Comprehensive Economic and Trade Agreement (CETA), 5, 48, 124, 126, 233, 332, 333 COMTRADE, 388, 399 concessional loans, 299 Consensual Agreement, 216–217, 222, 223 consensual scenario, 217 contractual service suppliers (CSSs), 257, 259, 259, 261, 263, 264, 266, 267–268 Convention on Biological Diversity (CBD), 278, 283–284, 291 convergence, digitization and, 79–80 cooperation and facilitation investment agreements (CFIAs), 309 corporate codes of conduct, 51 corporate political activities (CPAs), 56–57, 59, 60, 62, 63, 64, 65, 66 corporate social responsibility (CSR), 56, 308–309, 310 corporate tax relief, 302 Council of Scientific and Industrial Research (CSIR), 285 Court of Justice of European Union (CJEU), 99, 326, 331–333

410

index

Cruel, Inhuman or Degrading Treatment or Punishment (CAT), 236 cultural and ideological determinants of individual trade policy preferences, 27–31, 29 cybersecurity, digitization and, 89 data, 80–82 Big Data, 80–82 global flows of, 84 privacy, 88 decarbonization, 186, 195, 197, 198–200 Declaration on Fundamental Principles and Rights at Work, 170 Declaration on the TRIPS Agreement and Public Health, 279, 281, 285 design of PTAs, preferences with regard to, 36–39 Design of Trade Agreements Database (DESTA), 209, 229, 388, 395, 396, 397–399, 401–402 determinants of individual trade agreements, 21–36 developing country classification, 136–137 development finance institution (DFI), 301, 316 development partners direct support, 297–310 fiscal incentives, 301–303 preferential financing programs, 298–301 project-business development, 306–308 risk management tools, 303–306 sustainable and responsible investment, promoting, 308–310 development partners indirect support, 310–315 investment climate, improving, 310–311 of LDCs in investment-related negotiations, 314–315 of private sector in host country, 314 strengthening LDCs investment promotion agencies, 311–314 digital agenda, US, 74, 94 Digital Single Market strategy, 80

digital trade, development and trends, 84–89 domestic regulation, implications for, 86–87 global value chains, 85 services trade and servicification, 85–86 trade barriers, 87–89 digital trade, regulatory framework for, 89–99 CPTPP, 96–99 free trade agreements, 94–96 World Trade Organization, 90–94 digital trade barriers, 87–89 border measures, 89 censorship, 89 cybersecurity, 89 data privacy and protection measures, 88 intellectual property related measures, 88–89 digital trade localization measures, 88–89 data privacy and protection measures, 88 defined, 88 intellectual property related measures, 88–89 digital wrappers, 86 digitization, 73–101 convergence and, 79–80 data, Big Data and, 80–82 defined, 78–79 digital technologies as general purpose technologies, 76–77 effects of, 74–83 existing regulatory framework for digital trade, 89–99 Internet of Things, 82–83 overview and terminological remarks, 74–76 responses to digital challenge, 99–100 trade affected by, 84–89 trade policy responses to, 89–99 Directorate General for Trade of the European Commission (DG Trade), 125

index Dispute Settlement Body (DSB), 138, 141–142, 145, 146 dispute settlement mechanism (DSM) World Bank and, 121, 140, 143, 147 World Trade Organization and, 140–147 dissemination of investment opportunities, 306–307 Doha Declaration, 228, 278–279, 285 Doha Round, 36, 257, 366 ECGD, 305 economic and social rights (ESRs), 234–235, 238, 241, 242, 246, 246, 248 Economic Community of West African States (ECOWAS), 256, 259 economic education mechanism, in individual trade policy preferences, 27, 29, 31 EDC, 305 educational services, 306 EFIC, 305 Employment Permit System, 267 employment status, individual trade policy preferences and, 26, 28 empowerment approach, 245–247, 246, 247 empowerment index, 245 enforcement approach, 245–247, 246, 247 enforcement index, 245–246 environmental clauses, multilateralization of PTA’s, 207–229 convergence of, 210–214 environmental provisions, 211–214 heat mapping of similarity of trade agreements by year, 213, 213 multilateralization scenarios, 214–220 studies assessing, 211 environmental concerns, individual trade policy preferences and, 30, 33 Environmental Goods Agreement (EGA), 128, 208

411

environmental protection (EP), 234–235, 239, 246, 246, 248, 250 equity participation, 301 European Apparel and Textile Confederation (Euratex), 65 European Citizens’ Initiative (ECI), 18 European Commission, 48, 61, 62, 286, 391 European Free Trade Agreement (EFTA), 240–241 European Free Trade Association (EFTA), 100 European Parliament, 121, 127 European Union (EU) CJEU Singapore decision and, 331–333 EU-Singapore Free Trade Agreement, 331 General Data Protection Regulation (GDPR), 124 Treaty of Lisbon, 325, 330, 331 Treaty on the Functioning of the EU, 330–331 exception culturelle, 93 farmers’ rights, 285 feasibility studies, 306 Federation of Indian Chambers of Commerce and Industry (FICCI), 273 financial guarantees, 301 First Principle (China’s Position Paper on WTO Reform 2018), 130 fiscal allowances for qualifying activities, 302–303 fiscal incentives, 298, 301–303, 317 corporate tax relief, 302 fiscal allowances for qualifying activities, 302–303 tax credits, 303 tax deferral, 303 tax exemptions from corporate tax, 302 five-year moving average, 194 flexicurity, 168 Foreign Account Tax Compliance Act (FATCA), 166

412

index

foreign direct investment (FDI), 295–318 challenges and opportunities, 315–316 development partners direct support, 297–310 development partners indirect support, 310–315 direct support, efficiency and efficacy of, 316–317 fiscal incentives, 301–303 framing investment promotion and facilitation, 296–297 future scenarios to foster FDI in LDCs, 315–318 indirect support, promises and pitfalls of, 317–318 international political risk insurance, 304–305 national political risk insurance, 305 outward FDI (OFDI), 298, 299–303, 306, 313, 316 preferential financing programs, 298–301 private risk insurance, 305–306 risk management tools, 303–306 role of other actors, 318 Foreign Investment Review Act (FIRA), 328 Fourth industrial revolution, 75 free trade agreements (FTAs). See also North American Free Trade Agreement (NAFTA) American’s approval of, 17 bi- or multilateral, 124, 126 CAFTA, 174 digital trade and, 94–96 EFTA, 100, 240–241 EU and CJEU Singapore decision, 331–333 inclusion of protection rules in, 328–330 investment chapters as BIT dropped into, 351–352 investment chapters compared to BITs, 341–346 investment chapters in, 327 investment protection rules in, 325–352

liberalization and, 403 normative convergence through litigation, 339–340 normative convergence through PTIAs, 338–339 political power of multinational corporations through, 19 regulatory environment for digital trade influenced by, 94–96 rules of origin in, 108, 109, 111, 112, 118, 119 split between trade and investment protection in other parts of the world, 336–337 split of investment protection rules from, 330–337 trade/investment convergence debate, 337 UK’s post-Brexit strategy and, 53 US policy shift and “America First” trade policy, 333–336 future scenarios anti-trade sentiment, 63–67 Asian trade agreements in services, 402–404 Brazil, India and China, 288–291 to foster FDI in LDCs, 315–318 global trade governance, 1–13 multilateralization, 214–220 non-trade issues, 250 preferential trade agreements, 39–42 protectionism, 63–67 of TRIPS, 275–291 gender gap in trade policy preferences, 26–27, 29 General Agreement on Tariffs and Trade (GATT), 1, 9, 90–91, 93, 97, 123, 126, 127, 129–130, 135–136, 140, 147, 159, 171–172, 197, 198, 201, 215, 216, 328, 334, 359 General Agreement on Trade in Services (GATS), 90, 255, 360, 367, 373, 389–390 General Data Protection Regulation (GDPR), 124 General Electric (GE), 49

index general purpose technology (GPT), 76–77 Generalized System of Preferences (GSP), 137, 177 Global Compact for Migration (GCM), 269 Global financial crisis (GFC), 49, 51, 52, 55, 61 Global North and Global South, negotiating over policy space between, 172–178 feasibility, 178 industrial policy space for developing countries, 176–178 social dumping, safeguards to protect against, 173–176 global supply chains, 162–164 Global Trade Alert (GTA), 49 global trade governance, current challenges and future scenarios, 1–5 global trade war with tit-for-tat protectionism (scenario), 64–66 global value chains (GVCs), 2, 13, 59, 76, 85, 91, 158, 163, 164, 295, 338, 377 globalization. See also anti-trade sentiment anti-globalization sentiments and corporate political activity, 56–60 negative impacts of, on developed countries, 52–56 negative impacts of, on developing countries, 51–52 government procurement, 88, 90, 97, 348 Government Procurement Agreement (GPA), 126, 128, 129 grants, 298–299 greenhouse gas (GHG), 9, 182, 183, 184, 185, 187, 197, 198, 199, 218, 223 Group of Twenty (G20), 5, 122, 165, 297, 298, 311, 315 Guiding Principles on Business and Human Rights (“Ruggie Principles”), 316

413

H1-B1 visa, 263 Heckscher-Ohlin (HO) model, 22–25, 26 high and new technology enterprises (HNTEs), 302 home country measures (HCMs), 298, 299, 301, 306, 315, 316, 317 income inequality, individual trade policy preferences and, 33 independent professionals, 258, 259, 262, 266, 271 Indian Patent Act, 277, 284, 285 individual trade policy preferences, 21–36 international trade theory and, 21–25 non-economic determinants of, 25–36, 28–30 industrial policy space for developing countries, 176–178 industry competitiveness criteria, 177 information technology (IT), 75, 79, 83, 86, 89, 90, 91, 95, 126, 128, 268, 271, 278 Information Technology Agreement (ITA), 90–91, 128, 131 information-updating processes, 38 in-group favoritism, individual trade policy preferences and, 29 intellectual property (IP) adaptation by emerging economies to TRIPS, 277–280 China and, 137–139 digital trade localization measures, 88 International Court for the Settlement of Investment Disputes (ICSID), 347, 350, 360, 367 International Covenant on Civil and Political Rights (ICCPR), 236 International Financial Institutions (IFIs), 308 international investment agreements (IIAs), 295, 309, 312, 314, 315, 360, 369 International Labour Organization (ILO), 157, 170, 174 Declaration on Fundamental Principles and Rights at Work, 170

414

index

international political risk insurance, 304–305 international regime complexity, 362–363 International Social Survey Program (ISSP), 19, 23, 24, 28, 29 intra-corporate transferees (ICTs), 258, 260, 261, 264 intra-industry trade (IIT), 59 investment chapters affected by wider trade agreement, 346–347 compared to BITs, 341–346, 344, 351–352 separate, in coding scheme for PTAs, 367 investment climate, 306, 310–311, 317 Investment Code, 312, 316 Investment Facilitation Arrangements (IFA), 266 investment governance, international regime complexity in, 362–363 investment missions, 307 investment opportunities, dissemination of, 306–307 Investment Policy Framework for Sustainable Development (IPFSD), 316 investment promotion agencies (IPAs), 306, 311–312, 316, 318 investment protection rules in FTAs, 325–352 EU and CJEU Singapore decision, 331–333 inclusion of, 328–330 investment chapters affected by wider trade agreement, 346–350 investment chapters compared to BITs, 341–346, 344, 351–352 split between trade and investment protection in other parts of the world, 336–337 split of, from trade agreements, 330–337 trade/investment convergence debate, 337–340 US policy shift and “America First” trade policy, 333–336

investment provisions in BITs, 372–373, 372 in PTAs, 371–372, 371 investment regime complex, 360, 366, 375, 377–379 investment, sustainable and responsible, 298, 308–310 investor-state dispute settlement (ISDS), 326, 329, 330–337, 342, 349, 360, 361, 366, 367, 369, 374, 375, 379 issue areas, 10, 13, 26, 40, 217 covered by PTAs, 234–235, 239, 245 environmental, 217, 218, 224, 226 in governance of investment, 359, 361 labour mobility and movement of students, 270 in mapping of investment provisions, 366, 367, 371 protection of foreign direct investment, 403 issue salience, 25, 58 Itamaraty, 282, 283 Jaccard index, 220–222 Japan External Trade Organization (JETRO), 307 job flexicurity, 168 Joint Statement on the Trilateral Meeting of the Trade Ministers of the United States, Japan, and the European Union, 133 Kendall rank correlation, 220–222 knowledge-based perspective, individual trade policy preferences and, 27–31 known substances, patents on new, 285 Kyoto Protocol, 212 labor clauses, 170–171 least developed countries (LDCs) challenges and opportunities, 315–316 development partners direct support, 297–310 development partners indirect support, 310–312 direct support, efficiency and efficacy of, 316

index framing promotion and facilitation, 296–297 future scenarios to foster FDI in, 315–318 indirect support, promises and pitfalls of, 317–318 investment promotion agencies, strengthening, 311–312 investment promotion and facilitation for, 295–312 negative impacts of globalization on, 51–52 role of other actors, 318 legalization of CPR, 236, 238 MERCOSUR and, 264 mode of legalization index, 247 of non-trade issues in PTAs, 236 of NTIs in PTAs, 238, 247 liberalization, embedding, 42–43 loans, 299–301 concessional loans, 299 non-concessional loans, 300 risk-sharing arrangements, 301 structured finance, 300 local working requirements, 277, 282 localization measures, 88, 97, 100 Lomé Conventions, 328 mapping investment provisions, 366–370 coding schemes for BITs, 369–370 coding schemes for PTAs, 366–368 marital status, individual trade policy preferences and, 26, 28 match-making services, 307–308 mergers and acquisitions (M&As), 302–303 migration, 255–272. See also mode 4 ASEAN, 261–263 bilateral level, 270–271 entry into multilateral trade agenda, 256–259 expanding status quo through bilateral PTAs, 264–268 global level, 268–269 MERCOSUR, 263–264 NAFTA, 260–261 projecting towards 2025, 268–271

415

regional level, 269–270 trade-migration nexus in regional economic communities, 259–264 MIKTA countries, 297 minimal liberalization around Chinese hub (scenario), 403 multilateral agreement on investment (MAI), 365 mutual recognition arrangements (MRAs), 261–262 mode 4, 92, 255, 256 in bilateral PTAs, 264, 265 in case of China, 271 countries with most comprehensive, 267 demandeurs on, 266–267 level of market access for, 258, 259 MNP and, 261 multilateral level of commitments in, 257–258 in PTA with India, 268, 270–271 in US-Singapore PTA, 263 mode of legalization index, 238, 247 Montreal Protocol on Substances that Deplete the Ozone Layer, 227 most-favoured nation (MFN), 90, 96, 108–109, 110, 112, 114, 115, 118–119, 129–130, 135, 366, 369, 370, 373, 374, 396 Movement of Natural Persons (MNP), 261 multilateral environmental agreements (MEAs), 207, 208, 210, 215, 228 Multilateral Investment Guarantee Agency (MIGA), 304–305 multilateralization concept of, 207 of PTA environmental clauses, 207–229 multilateralization scenarios, 214–220 appropriate scenario, 219–220 consensual scenario, 216–217 power-game scenario, 218–219 routine scenario, 215–216 trendy scenario, 217–218 mutual recognition arrangements (MRAs), 263

416

index

Nagoya Protocol, 11, 276, 283–284, 288, 291 National Association of Software and Services Companies (NASSCOM), 270 National Election Survey (NES), 24, 28 national political risk insurance, 305 national treatment (NT), 90, 95, 366, 370, 372, 374, 376, 391 negative list, 367, 390, 391–396, 401–403 NEXI, 305 non-concessional loans, 300 non-economic factors in individual trade policy preferences, 25–36, 28–30 age, 26, 28 cultural and ideological determinants, 27, 29 economic education mechanism, 27, 29 employment status, 26, 28 environmental concerns, 29, 33 gender, 26–27, 29 income inequality, 33 in-group favoritism, 29 knowledge-based perspective, 27–31 marital status, 26, 28 non-material costs, 33 political orientation, 26, 28 social trust, 29, 32–33 sociotropic hypothesis, 30, 34–35 non-governmental organizations (NGOs), 51, 52, 53, 236, 238, 250, 280, 284, 285, 286 non-market environment, 56 non-market strategies (NMSs), 56 non-material costs, individual trade policy preferences and, 33 non-trade issues (NTIs), 9–10, 233–250 agenda, broadening, 239–244 catch-up of developing countries, 248 civil and political rights aspects, evolvement of, 241 commitment style, convergence in, 244–247 design of, how to measure, 235–239 development of, over time, 248

economic and social rights aspects, evolvement of, 240 enforcement and empowerment approach, 246–247, 246, 247 environmental protection aspects, evolvement of, 243 future research, 249 future scenarios, 250 high commitment level, 244 scope of, evolution in, 240 summary of trends, 249 trends to more and stricter, 239–248 normative convergence through litigation, 339–340 through PTIAs, 338–339 North American Free Trade Agreement (NAFTA), 260–261 Article 1105, 347 chapters, 345, 346–350, 360 higher tariffs leading to higher utilization of, 114–115 investment protection rules, 326, 327, 328–330, 333–336 investor-state dispute settlement, 326, 329, 330–337, 343, 349, 360, 366, 367, 369, 373–374, 375, 379 ISDS “opt-in” mechanism, 334 MEAs and, 228 non-investment chapters, 347 preamble, 348 ratification of, 19 renegotiation of, 49, 94, 334 rules of origin, 107–120, 115 trade-migration nexus in regional economic communities, 259–260 visa, 260 Obama, Barack, 124, 141, 184 official development assistance (ODA), 309 ONDD, 305 OPIC, 305, 309 Organisation for Economic Cooperation and Development (OECD), 9, 32, 61, 66–67, 118, 125, 127, 131, 133, 166, 187, 189, 194–195, 198, 199, 229, 258, 266, 289, 297, 302, 305, 307, 309, 399

index outward FDI (OFDI), 298, 299–303, 306, 313, 316 overlapping provisions in PTAs and BITs, 359–380 coding schemes for BITs, 369–370 coding schemes for PTAs, 366–368 investment provisions in BITs, 372–373, 372 investment provisions in PTAs, 371–372, 371 joint memberships in PTAs and BITs, 374–375, 375 overlapping commitments, 375–377, 377 principal component analysis, 373–374, 374 over-the-top services, 80 Paris agreement, 182, 183, 184, 185, 195–196, 198, 203 Patent Cooperation Treaty, 284 per capita income, 176–177, 195 Plant Variety Protection and Farmers’ Rights Act, 285 policy space, negotiating over, 171–178 for complementary domestic social policies, 167–171 existing mechanisms for ensuring policy space, 171–172 feasibility, 178 between Global North and Global South, 172 industrial policy space for developing countries, 176–178 market access and, 171–178 social dumping, safeguards to protect against, 173–176 political orientation, individual trade policy preferences and, 26, 28 political risk insurance (PRI), 298, 303–306 international, 304–305 national, 305 purpose of, 304 positive list, 367, 390–396, 401–403 Power Game Agreement, 218, 222, 223, 226 power game scenario, 218–219

417

preferential financial programs, 298 preferential financing programs, 298–301 equity participation, 301 financial guarantees, 301 grants, 298–299 loans, 299–301 preferential trade agreements (PTAs), 17–43 analyzing the dimensions of, 370–377 civil and political rights aspects in, evolvement of, 241 coding schemes for, 366–368 compensation hypothesis, 42 convergence of environmental clauses, 210–214 cumulative number of negative-and positive-list PTAs in AsiaPacific, 395 design of, preferences with regard to, 36–39 determinants of individual, 21–36 economic and social rights aspects in, evolvement of, 242 effect of services trade on PTA formation and services liberalization, 400 environmental clauses, 207–229 environmental protection aspects in, evolvement of, 243 expanding status quo through bilateral PTAs, 264–268 future scenarios, 39–42 gender gap and, 26, 27 international trade theory and, 21–25 investment provisions in, 371–372 joint memberships in, 374–375 labour rights in, 241 liberalization, embedding, 42–43 multilateralization of, 207–229 multilateralization of environmental clauses, 207–229 non-economic factors, impact of, 25–36 non-trade issues in, 233–250 outlook for services PTAs, 401–404

418

index

preferential trade agreements (PTAs) (cont.) overlapping provisions in, 359–385 patterns of service liberalization in, 394–397 protectionism and, 18–19, 20, 22, 33 services liberalization, 388–404 through citizens’ eyes, 17–43 preferential trade and investment agreements (PTIAs), 325, 327, 328, 330, 333, 336–346, 351 principal component analysis, 373–374 printing press, 76 private risk insurance, 305–306 private social auditing, 51 project-business development, 298, 306–308 dissemination of investment opportunities, 306–307 educational services, 307 feasibility studies, 308 investment missions, 307 match-making services, 307–308 PROPARCO, 316 protection measures, in digital trade, 88 protectionism, 4–5 corporate political activity and, 56–60 corporate strategy and, 48–67 EU trade-dependent firms and protectionist threat, 61–63 factor endowments versus industry interests, 24 future scenarios, 64–67 global depression and, 20 global trade war with tit-for-tat protectionism (scenario), 64–66 Heckscher-Ohlin (HO) model and, 19, 22 income inequality and, 33 as key issue in 2016 US presidential election campaign, 48 support for, 19, 22 Protocol of Montevideo on Trade in Services, 264 provisions for sectoral coverage, 367 public interest litigation, 285

re-framing, 54–55 regime complex for investment governance, 359–385 concept of regime complexity, 360–361 longitudinal patterns in formation of BITs and PTAs, 364–366 mapping investment provisions, 366–370 with PTAs and BITs, 363–366 Regional Comprehensive Economic Partnership (RCEP), 389, 403 regional content in rules of origin, 112–114 at firm level, 112, 113 at industry level, 113 regional trade agreements (RTAs), 2, 111, 211, 229, 280 related-party trade, 116 renewed Trans-Pacific Partnership (scenario), 402 Right to Information Act, 285 risk insurance political, 298, 303–306 private, 305–306 risk management tools, 303–306 international political risk insurance, MIGA, 304–305 national political risk insurance, 305 private risk insurance, 305–306 risk-sharing arrangements, 300–301 Routine Agreement, 216, 223 routine scenario, 215–216 RTA Exchange, 229 “Ruggie Principles” (Guiding Principles on Business and Human Rights), 316 rules of origin in WTO, 107–120 defined, 109–110 multiplying, 111–119 NAFTA preferences, 114, 115 as protection, 110–111 reforms, 119 regional content, 112–114 small exporters and startups disadvantaged by, 115–116 supply chains and, 108, 114, 116, 118–119

index tariffs and, 111 transport sector constrained by, 116–119 SADC Investment Protocol, 310 Sanitary Movement, 281 scenarios. See future scenarios ‘Schedules of Specific Commitments’ (WTO), 91 Second Lomé Conventions, 328 SERV, 305 services liberalization, 388–404 average liberalization depth by type and party, 395 China-centric trade regime in AsiaPacific (scenario), 403–404 countries in sample, 398 cumulative number of negative-and positive-list PTAs in AsiaPacific, 395 data and estimation, 397–401 effect of services trade on PTA formation and services liberalization, 400 minimal liberalization around Chinese hub (scenario), 403 outlook for services PTAs, 401–404 patterns of service liberalization in PTAs, 394–397 questions of institutional design in PTAs, 390–394 renewed Trans-Pacific Partnership (scenario), 402 services trade, 85–86 servicification, 85–86 Singapore decision, 331–333 SINOSURE, 305 small and medium-sized enterprises (SMEs), 79, 88, 89, 269, 298, 300, 304, 308, 312, 314 small exporters, rules of origin and, 115–116, 116 social dumping, safeguards to protect against, 173–176 social policy, 157, 160. See also trade agreements for social inclusion job flexicurity, 168 labor clauses, 170–171

419

policy space for, safeguarding, 167–171 social security, 167–168 trade adjustment policies, 168–170 social security, 167–168 social trust, individual trade policy preferences and, 29, 32 sociotropic hypothesis, individual trade policy preferences and, 30, 34–35 special purpose vehicle (SPV), 300 specific commitments, 91, 92, 257, 258, 367 startups, rules of origin and, 115–116, 116 State Intellectual Property Organization (SIPO), 286, 287 status quo scenario, 63–64 structured finance, 300 structured finance instruments, 300 Subsidies and Countervailing Measures (SCM Agreement), 126, 132, 176–177 Substantive Patent Law Treaty, 284, 288 supply chains exploitative labor conditions in, 51 global, rise of, 162–164 net taxation of carbon energy in, 186 rules of origin and, 108, 114, 116, 117, 119 sustainable and responsible investment, promoting, 308–310 tariff binding, 391 tax credits, 303 Tax Cuts and Jobs Act, 166 tax deferral, 303 tax exemptions from corporate tax, 302 tax expenditures, 186, 187, 194, 301 Text of Trade Agreements (ToTA), 329 Think Tank ECIPE, 61 Third Lomé Conventions, 328 3D printing, 66, 75, 83 3-Vs of Big Data, 81 TPP11 or TPP 2.0. See Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)

420

index

Trade Act of 1974, 139 Trade Act of 2002, 345 trade adjustment policies, 168–170 trade agreements for social inclusion, 157–179 challenges, 160–162 existing mechanisms for ensuring policy space, 171–172 global supply chains and TPP, 162–164 negotiating over policy space between Global North and Global South, 172–178 negotiations as over market access and policy space, 171–178 organizing principle of, 164–165 policy space for complementary domestic social policies, 167–171 safeguarding policy space for complementary domestic social policies, 167–171 tax, trade, and inequality, 165–167 WTO and, purpose of, 158–160 TRade and ENvironment Database (TREND), 209, 211, 212, 213, 215, 229 Trade Expansion Act of 1962, 143–144 Trade in Services Agreement (TiSA), 128, 266, 268 trade/investment convergence debate, 337–340 normative convergence through litigation, 339–340 normative convergence through PTIAs, 338–339 trade-migration nexus in regional economic communities, 259–264 ASEAN, 261–263 MERCOSUR, 263–264 NAFTA, 260–261 Trade Promotion Authority (TPA), 334 Trade Related Intellectual Property Rights (TRIPS)

Declaration on the TRIPS Agreement and Public Health, 279, 281, 285 flexibilities, 277, 279, 281, 282, 284, 286, 287, 290, 291 future scenarios to 2025, 288–291 implementation in Brazil, 280–284 implementation in China, 286–288 implementation in India, 284–286 IP regime and adaptation by emerging economies to, 227–280 Trade-Related Investment Measures (TRIMs), 359–360, 368, 369 trade remedies law, reform of, 132–136 trading off scale economies across industries, 394 transaction costs, 183, 186, 198–200, 202 Transatlantic Trade and Investment Partnership (TTIP), 5, 18, 38, 40, 48, 59, 61, 62, 63, 66, 233, 290, 366 Trans-Pacific Partnership (TPP), 5, 12, 17, 49, 96, 124, 131, 162–164, 219, 290, 310, 334, 343, 345, 360, 388, 393–394, 396, 397, 401 existing mechanisms for ensuring policy space, 171–172 global supply chains and, 162–164 negotiating over policy space between Global North and Global South, 172–178 negotiations as over market access and policy space, 171–178 organizing principle, 164–165 policy space for complementary domestic social policies, 167–171 renewed (scenario), 402 tax, trade, and inequality, 165–167 transport sector, rules of origin and, 116–119, 117 treaties with investment provisions (TIPs), 359 Treaty of Asunción, 259, 263–264 Treaty of Lisbon, 325, 330, 331 Treaty on the Functioning of the EU (TFEU), 330, 331 TREND Analytics, 229

index Trendy Agreement, 217, 218, 222, 223 trendy scenario, 217–218 Trilateral offices, 282 Trump, Donald, 3, 17, 18, 39, 40, 41, 48, 49, 53, 64, 66, 67, 124, 131, 157, 164, 182, 184, 185, 291, 333, 335, 345 underlying taxes, 303 United Kingdom (UK), 17, 49, 53, 55, 187, 194, 195, 297 BITs led by, 365 equity participation in, 301 feasibility studies, 308 in improving investment climate, 311 Technology Partnership Initiative in, 314 United Nations Commission on International Trade Law (UNCITRAL), 367 United Nations Committee for Development Policy (CDP), 295 United Nations COMTRADE, 388, 399 United Nations Conference on Trade and Development (UNCTAD), 10, 307, 325, 329, 338–339, 341, 343, 359, 360, 366 IIA Mapping Project, 369 IPFSD, 316 United Nations Economic and Social Council (ECOSOC) Committee for Development Policy, 137 Forum on Financing for Development, 295 United Nations Framework Convention on Climate Change (UNFCCC), 194, 198, 203 United States International Trade Commission (USITC), 88, 286 United States Mexico Canada Agreement (USMCA), 96, 326, 335–336 United States Trade Representative (USTR), 124, 125, 137, 141, 142, 143, 326, 334, 335

421

Uruguay Round, 90, 92–93, 122–123, 256, 257, 278, 359–360, 388, 391 US policy shift and “America First” trade policy, 333–336 value added tax (VAT), 187, 199, 201 visas GATS, 258 H1-B1, 263 investment promotion and, 311 requirements in China, 266 requirements in India, 266, 270 for temporary entry of business persons, 164 Treaty NAFTA (TN), 260 two-week visa-free, 262 Vision 2025 and, 270 Vision 2025, 270 World Bank, 79, 199 dispute settlement mechanism, 121–122, 125, 140–147 Facility for Investment Climate Advisory Services, 311 Global Investment Promotion Best Practices, 318 Inspection Panel, 308 Investment Climate Assessments, 310 MIGA, 304–305 per capita income criteria, 177 World Health Organization (WHO), 278, 363 World Intellectual Property Organization (WIPO), 278, 280, 283–284, 288, 291 World Trade Organization (WTO) antidumping agreement, 132, 146, 162, 173–176, 178 Appellate Body, 7–8, 121, 123, 124, 126, 132, 135, 140–144, 172, 284 China and intellectual property, 137–139 climate crisis and, 196–198 developing country classification, 136–137 digital trade and, 89–99

422

index

World Trade Organization (WTO) (cont.) dispute settlement mechanism, 140–147 future of, 121–147 reform of trade remedies law, 132–136 rules of origin in, 107–120 SCM Agreement, 126, 132, 176–177 trade agreements and, 158–160 Trade-Related Investment Measures, 359–360, 365, 368

as universal organization, preserving, 125–131 WTO-Agreement, 7, 122, 126, 136, 144 World Values Survey (WVS), 24, 28 WTO-Agreement (WTO-A), 7, 122, 126, 136, 144 Zero Draft, 269 Zeroing cases, 132, 140