Trade in the Service of Sustainable Development: Linking Trade to Labour Rights and Environmental Standards 9781782257165, 9781782257158, 9781782257134

Table of contents :
Cover
Half-title
Title
Copyright
Foreword
Acknowledgements
Contents
List of Boxes
List of Figures
List of Tables
Introduction
1. Setting the Stage: The Limits of Fragmentation
I. Trade and Labour Rights
II. Trade and Environmental Standards
III. The Use of Environmental and Labour Conditionalities in Trade Policies
2. Sanctions Against Goods or Services that do not Comply: WTO Disciplines
I. The Core Disciplines of the WTO Regime
II. The ‘Likeness’ of Goods and Services and the Product/Process Distinction
III. The ‘General Exceptions’ Clauses of Article XX GATT and Article XIV GATS
IV. Conclusion
3. The Special Regime of Border Tax Adjustments: Levelling the Playing Field
I. The Notion of Border Tax Adjustments
II. Border Tax Adjustments under WTO Law
III. Determining the Level of the Compensatory Tax
IV. Conclusion
4. Generalized Systems of Preferences: The ‘Conditional Preferences’ Approach
I. The Origins of the Generalized System of Preferences
II. The Emergence of ‘Special Incentives’ within the EU GSP Scheme
III. The Three Layers of the Current EU GSP Scheme
5. Labelling Schemes: Supporting Ethical Consumerism
I. The Rise of the Debate on Labelling Schemes
II. Compatibility with WTO Law
6. Public Procurement: The Power of the Purse
7. Conclusions
I. ‘Sanctions’ for Non-compliance with Labour Rights or Environmental Standards
II. ‘Carbon Equalization’ through Border Tax Adjustments: Levelling the Playing Field
III. The EU Generalized System of Preferences: Making Preferences Conditional
IV. Labelling Schemes: Supporting Ethical Consumerism
V. Government Procurement: The Power of the Purse
Afterword
Index

Citation preview

Trade in the Service of Sustainable Development LINK ING T R A DE TO L A BOUR R IGHTS A ND ENVIRONM EN TA L STA NDA R DS

Olivier De Schutter

TRADE IN THE SERVICE OF SUSTAINABLE DEVELOPMENT In the Bretton Woods era, trade liberalization, the improvement of labour rights and working conditions, and the strengthening of environmental policies, were seen as mutually supportive. But is this always true? Can we continue to pretend to protect the rights of workers and to improve environmental protection, particularly through climate change mitigation strategies, within an agenda focused on trade liberalization? Is it credible to pursue trade policies that aim to expand the volumes of trade, without linking such policies to labour and environmental standards, seen as ‘nontrade’ concerns? This book asks these questions, offering a detailed analysis of whether linkage is desirable and legally acceptable under the disciplines of the World Trade Organization (WTO). It concludes that trade can work for sustainable development, but only if we see it as a means for social and environmental progress, including climate change mitigation, and if we avoid fetichizing it as an end to be pursued for its own sake.

Trade in the Service of Sustainable Development Linking Trade to Labour Rights and Environmental Standards

Olivier De Schutter

OXFORD AND PORTLAND, OREGON 2015

Published in the United Kingdom by Hart Publishing Ltd 16C Worcester Place, Oxford, OX1 2JW Telephone: +44 (0)1865 517530 Fax: +44 (0)1865 510710 E-mail: [email protected] Website: http://www.hartpub.co.uk Published in North America (US and Canada) by Hart Publishing c/o International Specialized Book Services 920 NE 58th Avenue, Suite 300 Portland, OR 97213-3786 USA Tel: +1 503 287 3093 or toll-free: (1) 800 944 6190 Fax: +1 503 280 8832 E-mail: [email protected] Website: http://www.isbs.com © Olivier De Schutter 2015 Olivier De Schutter has asserted his right under the Copyright, Designs and Patents Act 1988, to be identified as the author of this work. Hart Publishing is an imprint of Bloomsbury Publishing plc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission of Hart Publishing, or as expressly permitted by law or under the terms agreed with the appropriate reprographic rights organisation. Enquiries concerning reproduction which may not be covered by the above should be addressed to Hart Publishing Ltd at the address above. British Library Cataloguing in Publication Data Data Available

ISBN: 978-1-78225-715-8 ISBN (ePDF): 978-1-78225-713-4

Foreword International Trade as a Means to Diverse Ends: Development, Workers, the Environment, and Global Public Goods SANJAY G REDDY1

I. THE ENDS OF THE TRADING SYSTEM

There are diverse goals which are widely agreed to be important in world society. Nevertheless, discussions on trade policy often refer only to economic objectives, often still more narrowly conceived in terms of gains in aggregate income through trade. Where other objectives are not simply ignored, it is often assumed either that they can be met through the independent exercise of non-trade policy instruments or that they will be met automatically if only the stated economic objectives are furthered. In contrast, I argue below that many such aims will not be promoted automatically by increasing the volume of trade of or global income and that it is not generally sufficient to suppose that these other objectives can be promoted satisfactorily by separately applying suitable non-trade policy instruments. As a result, it is necessary to take them into account in the design of the world trading system. It is reasonable to suggest that the world trading system must be evaluated, at least in part, according to the consequences it generates, and that these can in turn be assessed according to criteria which are, at least in part, public and shared. There are some shared values in world society, even if there are disagreements about how exactly these should be formulated and prioritized. It is necessary to acknowledge the often real contrast between ‘your values and my values’ without being distracted, however, from also recognizing the fact of shared values, and the possibility of a public deliberation, at global level, as to how to achieve such values. International human rights instruments and global development goals, imperfect though they are, testify to the possibility of such concurrence.

1 Department of Economics, The New School for Social Research, New York; reddysanjayg@ gmail.com. I am deeply grateful to Olivier De Schutter for his example, encouragement and specific suggestions.

vi

Foreword

The starting point of this investigation is the assumption that there exist aims which are shared but diverse. It is then necessary to ask whether the trading system plays a useful role in furthering these diverse aims, and if so how?2 The current volume makes a signal contribution to answering this important question—one that is essential for envisioning alternate forms of the global order.

II. THE CASE FOR AN INTEGRATED APPROACH

In recent years, prominent advocates of a world trading system have forcefully argued against taking a broad view of its objectives, arguing that its appropriate focus is on ‘maximizing’ global trade (with an implicit premise that this will be associated with higher levels of global income).3 Such arguments will be addressed in section III. In contrast, there are three main rationales for an ‘integrated approach’, which this section explores. Such an approach conceives of the world trading system as having objectives of diverse kinds, and calls for it to be structured so as to further all of them (while recognizing that there may be tensions between the different objectives).4

A. The Case for an Integrated Approach: Interdependence Between Concerns The first rationale for an integrated approach derives from the recognition of interdependencies, both practical and evaluative, between different concerns, or as they have been sometimes called in the recent literature on international governance, ‘issue areas’. There is good reason to avoid an a priori conception of what is an ‘economic’ objective or a ‘trade-related’ objective. Such a classification assumes an answer to the question, since it cannot be determined what is or is not trade-related without assessing the interdependencies that are present. Nevertheless, for the purpose of exposition let us assume that we can distinguish ‘trade-centred objectives’, such as increasing trade volumes—based on the presence of a direct reference to trade in the statement of the objectives 2 This is not of course to deny the role of rules in expressing values, independently of their role in promoting these values consequentially. 3 See the various arguments, eg by J Bhagwati and A Panagariya, cited in C Barry and S Reddy, International Trade and Labor Standards: A Proposal for Linkage (New York, Columbia University Press, 2008). 4 An argument emphasizing the legal feasibility as well as desirability of such an approach in the context of trade and climate change mitigation is convincingly provided by Olivier. De Schutter, ‘Trade in the Service of Climate Change Mitigation: The Question of Linkage’ (2014) 5 Journal of Human Rights and the Environment 65–102.

Foreword

vii

themselves—and ‘non-trade-centred’ ones, such as increasing employment, improving labour standards, protecting biodiversity or lowering climatechange-producing emissions, recognizing that the interdependence between the two kinds of objectives may ultimately result in a distinction without a difference. Let us first consider practical (causal) interdependence between distinct objectives. The practical interdependence between objectives of different kinds may take the form of the ability to achieve trade-centred objectives being affected by the degree of attainment of non-trade-centred objectives: for instance, the ability to promote trade in agricultural commodities may be influenced by the effects of the climate or other environmental conditions on agricultural output or conditions of transport; or the ability to export manufactured products on foreign markets may depend on the protection of workers’ rights, because of the rise of ‘ethical consumerism’ in those markets. Practical interdependence may also take the form of the ability to achieve non-trade-centred objectives being influenced by the degree of attainment of trade-centred objectives. For instance, the climate or other environmental conditions may be influenced by export-led agriculture, encouraged by the opportunities for international trade; or the ability of a country to raise the level of wages and improve working conditions may be reduced by the prospect of losing investment and export revenues, since other countries may compete in these very respects to provide an attractive platform for the production and export of labour-intensive products. If policies are not designed with due regard to the reality of these interdependencies, undesirable outcomes may result. It is straightforward to recognize that a given objective may sometimes be furthered only at the cost of achieving another (as genuine trade-offs between objectives may be unavoidable). In such a case, it will be important to take note of the trade-off in order to determine how far to go in making it. For instance, if the introduction of measures to reduce greenhouse gas emissions lowers economic output, the appropriate choice between these must be informed both by an understanding of the nature and extent of the trade-off and by appropriate evaluative considerations which would determine the ‘optimal’ stopping point. More subtly, there may be overlooked opportunities to take note of the interdependencies in such a way as to further both objectives to a greater extent. If greenhouse gas abatement can in fact be pursued without sacrificing the level of economic output, but is not being pursued because of difficulties of coordination, then it is easy to recommend policies which bring such coordination about. Another example is that it may turn out that a restraint on international trade in a specific variety of fish has the benefit of bringing about more sustainable levels of fishing and thereby sustaining fish stocks, thus enhancing both trade volumes and the preservation of marine resources, viewed as an objective of intrinsic interest, eg because it contributes to biodiversity, in the longer term. The restraint on trade helps

viii

Foreword

to bring the level of fishing down to a level that is immediately lower but more sustainable in the long run (and therefore higher in later time periods), reducing the inefficiency which results from overfishing by fishers who do not take account of—internalize—their effect on one another. In cases such as these, overlooking causal interdependencies leads to inefficiency rather than to an inappropriate trade-off. There may, of course, be other, possibly superior, means of lowering the amount of fishing. (Voluntary reductions in fishing might achieve the same end while avoiding the loss of gains from trade. The restraint on trade, however, might be useful to bring those reductions about.) Regardless, causal interdependence must be taken into account in order to avoid unnecessarily sacrificing the attainment of the individual objectives (ie, to achieve efficient combinations of diverse outcomes). A second form of interdependence to consider is that of evaluative interdependence. Evaluative interdependence involves the idea that the value we attach to the further attainment of one objective may depend on the extent to which another objective has already been attained. For instance, the extent to which we value greater national income relative to goals such as environmental quality and improved labour standards, may well depend on the volume of national income as well as on the extent to which these other goals have been already attained: it seems reasonable to assume, for instance, that the higher the income per capita of one particular society, the greater is the contribution to further improvements in well-being of measures such as providing a healthier environment as compared to greater private consumption. Assessments of how far one should go in furthering one goal at the expense of another require some way of integrating these different considerations into a comprehensive evaluative assessment.5 Having an adequate regard to these interdependencies in assessment is necessary in order to arrive at judgements concerning where to stop in trading off goals against one another, as practical interdependencies may make it necessary to engage in such trade-offs. It is important, of course, to recognize what is a means and what is an end (in at least a proximate or provisional sense of the term) before confronting distinct ends with one another. For instance, where it is wholly plausible that national income is a means rather than an end, it seems altogether unavoidable to conclude that trade volumes are a means rather than an end, since the presumed primary value of trade lies in its contributing to higher real incomes. Where interdependencies exist of the kind identified here, whether practical or evaluative, there is a case in principle for coordination of actions taken in different realms. A well-motivated authority or authorities would 5 In this connection, in his pioneering work on the formal theory of economic policy, Jan Tinbergen used the concept of a ‘collective ophelimity function’ to refer to the broadly conceived general interest (see Jan Tinbergen, On the Theory of Economic Policy (Amsterdam, North-Holland, 1952) and for a discussion, see C Barry and S Reddy, International Trade and Labor Standards: A Proposal for Linkage, n 3 above, at 47–49 and 86–87).

Foreword

ix

need to take such causal and evaluative interdependencies into account in an appropriate way in order to ensure that the most desirable outcomes result. The need to jointly consider different desirable outcomes when wielding the instruments which affect them simply follows from the fact that, in these various ways, such outcomes can be interdependent.

B. The Case for an Integrated Approach: Incentives for Countries The second rationale for an integrated approach derives from the role of policies of one kind (for example, trade policies) in creating incentives for actors (for example, countries) to take actions which are desirable, or for that matter to avoid actions which are undesirable. The premise is that trade policies (or more generally, the rules of the trading system) create benefits or costs for countries, or for particular actors within countries,6 and that these can therefore be structured to encourage or discourage specific actions. Such a process need not be thought of in terms of individual countries creating incentives for other countries. It may be thought of instead in terms of countries collectively agreeing to a set of rules which facilitate collective action, for instance by lowering the cost or increasing the reward of cooperative behaviour or by lowering the reward or creating a cost to uncooperative behaviour such as ‘free riding’. Since the absence of supra-national coordination and enforcement authority is an intrinsic feature of the interstate system, such commonly agreed incentive structures may be greatly important in ensuring that individual states act so as to promote shared goals. Why would countries agree to bind themselves by such rules, if they are not inclined to take such actions unilaterally? The answer lies in the dynamics of collective action. For instance, there may be an ‘assurance problem’: I may be more likely to commit to doing certain things (or to agree to an arrangement which will make it costly for me not to do so) if I can be assured that others will do the same, as this will ensure a net benefit as against the alternative scenario in which none of us do these things. In the absence of such an assurance, I may not be willing to do these things at all. Crucially, it may never be necessary for such potential costs ever actually to be imposed, as long as their presence in the background suffices to bring about the desired actions.7 A very important role can be played by strategic complementarities, in which the benefit derived by each actor from acting in a specific way 6 See the discussion of mechanisms to ensure that relevant incentives are experienced by companies as well as countries, in Arnaud Zacharie, ‘International Trade and Social and Environmental Standards: The Challenges of Globalization’, draft presented at the Francqui International Conference, Brussels, 8–9 May 2014. 7 In the language of game theory, the threat of such costs being imposed is present only ‘out of equilibrium’.

x

Foreword

increases as other actors act similarly. If so, then rule systems that encourage actors to act in a particular desirable way can generate self-sustaining ‘equilibria’ which would otherwise not emerge. Conversely, rule-systems that encourage actors to act in an undesirable way can create incentives for other actors to act similarly undesirably. Kyle Bagwell and Robert Staiger have made the very interesting point that the WTO system, by placing a ceiling on tariffs or prohibiting trade-distorting subsidies, creates a powerful incentive for countries to create advantages for their domestic producers by lowering their costs, in particular by weakening labour and environmental standards.8 They suggest that this means that the WTO system cannot adequately fulfil its own objectives, of guaranteeing mutual market access in conditions that are fair (ie, ensuring a ‘level playing field’), without ensuring floors to such standards in addition to ceilings on tariffs. In this line of argument, a concern with labour and environmental standards must be introduced into the trading system in order to remove an existing incentive to weaken those standards—an incentive which is created by the current rules of the world trading system itself. For a given country, tariffs on the one hand and labour and environmental standards on the other hand are strategic substitutes: the lower tariffs are set the greater the benefit to lowering labour and environmental standards. For different countries, however, labour and environmental standards are strategic complements: the lower (higher) the labour and environmental standards are in other countries, the higher (lower) the cost, in terms of foregone trading opportunities, of maintaining such standards at home. Incentives created by the trading system to enhance labour and environmental standards may also, secondarily, help states in overcoming domestic opposition to such measures by strengthening the hand of those groups that wish to promote such aims. To distinguish the incentive-based rationale from that of practical interdependence it is important to note that there may be benefits to creating incentives which support desirable actions which might not otherwise be undertaken quite apart from whether there are practical interdependencies between aims of different sorts. Whether or not such benefits exist will depend on the empirical question of whether decisions taken by decentralized decision-makers in specific ‘issue areas’ would be inferior in the absence of the incentives provided by linkage to another ‘issue area’. Thus, for instance, it might be desirable to establish a trade-related benefit that encourages countries to undertake policies which diminish harmful climate change, if this would help to ensure that the resulting global public good were provided to a greater extent than it would otherwise be provided. Such

8 See C Barry and S Reddy, International Trade and Labor Standards: A Proposal for Linkage, n 3 above, at 15–17 and 55–57.

Foreword

xi

an incentive-providing beneficial effect of linkage could exist even if there were no causal effects of trade-related activities on climate change or vice versa. Incentives for influential actors may simply be stronger in one issue area than in another. For example, powerful business interests may have strong interests in certain trade outcomes, but there may be no comparably powerful interests in regard to environmental outcomes or labour standards. Linking the former to the latter may in this case raise the level of attention to the latter and give rise to increased effort on the part of the country in all areas simultaneously.9 The incentive-based rationale for an integrated approach is based on the realistic assumption that decision-making in a given ‘issue area’, while decentralized, is responsive to consequences of that decision-making in other ‘issue areas’.

III. RESPONDING TO FALSE ARGUMENTS AGAINST AN INTEGRATED APPROACH

In recent discussions on international trade and social objectives (in particular, regarding labour standards) the argument has been made that distinct goals should be pursued by distinct institutions if the best consequences are to be achieved.10 In favour of this position, the argument has been made, invoking the ideas of Jan Tinbergen concerning the theory of economic policy, that as many instruments are needed as there are targets: this has colloquially been referred to as the ‘two birds principle’. In fact, no such conclusion follows, as Tinbergen himself made clear.11 Although it is generally true that at least as many policy instruments are needed as there are targets if all of the targets are to be met fully and simultaneously, coordination between the use of these different instruments may be necessary in order to achieve this because of the presence of interdependence which necessitates that specific combinations of instruments be employed to achieve specific combinations of targets. Such coordination can in principle be achieved either by a single agency applying all of the different instruments or by different agencies acting in concert, but either way coordination is indispensable. This is therefore not only not an argument against creating a single institutional scheme involving linkage between different issue areas as a way of simultaneously attaining goals within all of them, but it 9 This is an issue given some attention in recent formal literature on international organizations which assesses how linkage between issue areas affects the ‘power’ of incentives. 10 See most prominently in this regard the arguments made by J Bhagwati and A Panagariya cited in detail in C Barry and S Reddy, International Trade and Labor Standards: A Proposal for Linkage, n 3 above, at 47–54. 11 See in particular J Tinbergen, On the Theory of Economic Policy, 2nd edn (Amsterdam, North-Holland, 1966).

xii Foreword can indeed be treated as an argument for doing so. Where there are not as many instruments as targets, the latter cannot all be met simultaneously. In this case, too, there is a need for coordination, however, as the appropriate trade-off between the attainment of one goal and another can only be determined on the basis of appropriate ‘higher level’ evaluative reasoning which integrates this information into an overall assessment of the consequences attained. The ‘first-best’ approach to attaining the best consequences involves integrated decision-making and the coordinated use of diverse instruments to attain diverse goals, taking due account of causal as well as evaluative interdependencies. There may be practical reasons for delegated or disaggregated decision-making. For instance, it may be that separation of roles and responsibilities confers certain administrative benefits because of factors such as the gain from concentrating relevant information and specialized knowledge in a specific institution, or improved performance resulting from a division of labour (perhaps because of cognitive benefits of specialization such as ‘learning by doing’ or because of higher domain-specific effort elicited by creating domain-specific rewards). Even with such a separation of responsibilities, the concerned actors may wish to collaborate if they can achieve their individual objectives to a fuller extent by doing so. Contrarily, practical reasoning may suggest benefits to having an institutional scheme in which decision-making or administration is integrated. These benefits could arise, for instance, from the transmission of information across domains or the ability to moderate the pursuit of particular goals at the expense of others through the discipline provided by a unified decision-making apparatus. In particular, incentives for an actor (eg a country) to act may be stronger in one issue area than in another. For example, powerful business interests may have strong interests in certain trade outcomes, but there may be no comparably powerful interests in regard to environmental outcomes or labour standards. Linking the former to the latter may in this case give rise to increased effort on the part of the country in all areas simultaneously by generating more ‘high-powered’ incentives (This is an issue given some attention in recent formal literature on international organizations.) There may also be non-consequentialist reasons for favouring disaggregated decision-making, arising for instance from a view that certain matters should be determined independently of others, because of procedural considerations relating to liberties. For instance considerations about the intrinsic value of individual privacy might lead to the conclusion that a ministry of health should not share health information about individuals automatically with other ministries, notwithstanding the potential usefulness of this information in the coordination of policies, and even if it could somehow be guaranteed that such information would not be misused. Although these arguments can be important in certain institutional contexts, they have not been the focus of recent discussions in the international context and in particular on international trade.

Foreword

xiii

IV. PRACTICAL MECHANISMS OF AN INTEGRATED APPROACH

An approach that integrates environmental and labour concerns with trade should adopt the following principles, reflecting both normative and practical considerations, in order to avoid charges of injustice or impracticality:12 1. A transparent and rule-based system: Labour and environmental concerns must enter into the working of the international trading system in a manner that is transparent and rule-based, in order to ensure even-handed implementation. In particular, the system must have these features in order to avoid such considerations being invoked opportunistically as a cover for the promotion of protectionist or other interests which aim to undermine market access rather than to promote the stated goals. 2. A ladder of graduated expectations: The expectations placed upon countries in relation to labour and environmental concerns should depend in an appropriate way on contextual circumstances, such as their level of development.13 This is necessary to ensure that an integrated system does not impose unrealistic expectations upon countries, and provides them with ample opportunity to realize possible gains from international trade, both static and dynamic (ie both the gains to national income that might be attainable through reallocation of activities in an existing framework of production possibilities, and the long-term gains from technological and economic transformation). The system should focus on efforts rather than outcomes, in recognition of possible difficulties in ascribing responsibility for outcomes as well as of the institutional and political constraints which shape many countries’ ability to implement fully policies that bring about desired outcomes. One way to implement such an approach is through a method of ‘peer and partner review’, which aims to redefine periodically what expectations may reasonably be had as to what a country can do, in light of experiences in other countries similarly and dissimilarly situated, and through an ongoing and iterative process of consideration of a country’s plans in light of internal and external processes, including unanticipated shocks, and realized outcomes.14 The process of peer and partner review can potentially make reference to global goals (eg regarding

12 For a more detailed exposition, see C Barry and S Reddy, International Trade and Labor Standards: A Proposal for Linkage, n 3 above. 13 Such a principle has long been recognized in international instruments which incorporate a principle of special and differential treatment for developing countries. 14 See, eg, Sanjay Reddy and Antoine Heuty, ‘Peer and Partner Review: A Practical Approach to Achieving the Millennium Development Goals’ (2005) 6 Journal of Human Development 399–420. Such a method could be viewed as broadly in line with perspectives of ‘democratic experimentalism’ (see for instance Charles F Sabel, ‘Dewey, Democracy and Democratic Experimentalism’ (2012) 9 Contemporary Pragmatism 35–55; or Roberto M Unger, Democracy Realized: The Progressive Alternative (London, Verso, 1998)).

xiv

Foreword

aggregate greenhouse gas emissions) in highlighting appropriate aims for individual countries, to ensure that actions in individual countries cumulate to desired outcomes. 3. A reward-oriented system: The trading system should be designed to provide rewards for countries which take desirable labour and environmental measures, as compared with the status quo ex-ante.15 Such an approach is based on the premise that it is worthwhile for countries to undertake such measures but that they should do so voluntarily, and that poorer countries and poorer persons within them must be seen to benefit from the measures, for the system to have legitimacy. It is also based on the premise that if individual countries undertake such measures they will enable others to do so more easily (because of the existence of strategic complementarities). A reward-oriented system should both provide an incentive for a country to undertake these actions and aim to augment its resources to enable it better to do so. The system can in principle accommodate rewards which take the form of additional access to trading opportunities and complementary rewards such as financial transfers. Financial transfers can be especially important in enabling a country to enhance labour and environmental standards without losing their advantages in global trade by employing countervailing subsidies, implemented for instance through excise tax rebates.16

V. THE PATHWAY TO A REFORMED WORLD TRADING SYSTEM AND THE SPECIAL ROLE OF EUROPE

The argument for an integrated approach implies that trade (or indeed other) policies should be organized so as best to further a range of desirable consequences. These may be conceived broadly, for instance in terms of consequences for the good of human beings and of nature today and in the future. Such a formulation would imply, inter alia, that trade policies should be designed with regard to dynamic (developmental) as well as static

15 This is of course an imperfect basis for the distinction between reward and penalty, which involves an intrinsically normative conception of the appropriate baseline and thus requires appropriate ancillary argumentation in order to be convincingly specified. However, the distinction is employed here in a manner that contrasts deliberately with the dominant presentation of linkage as involving ‘punishment’ because it is (wrongly) presumed to demand the withdrawal of existing market access for non-compliant countries. 16 Such transfers would be based on the principle of ‘correcting distortions at the source’. See the discussion in C Barry and S Reddy, International Trade and Labor Standards: A Proposal for Linkage, n 3 above, on this application of the classic arguments of Bhagwati and others (Jagdish Bhagwati and TN Srinivasan, ‘Optimal Intervention to Achieve Non-Economic Objectives’ (1969) 36 Review of Economic Studies 27–38; Jagdish Bhagwati, VK Ramaswami and TN Srinivasan, ‘Domestic Distortions, Tariffs, and the Theory of Optimum Subsidy: Some Further Results’ (1969) 77 Journal of Political Economy 1005–13).

Foreword

xv

objectives. The argument that the WTO system has been designed with insufficient attention to the way in which its rules permit or restrict actions which would have developmental benefits for countries in the long run has been made extensively elsewhere.17 These arguments can also be thought of as being in part ‘internal’ to the concern that trade policy should further national income. However, the same concern with the dynamic implications of the policy framework can be applied to a more broadly conceived range of developmental objectives. The policy framework to be applied must take appropriate account of such long-term consequences. What is a possible pathway to constructing a world trading system which serves an adequately diverse range of objectives? A starting point for answering such a question may be to recognize that the actually existing world trading system has features which are at variance with the proposed system in numerous respects. The global institutional regime, taken as a whole, presents an ‘unintegrated’ rather than an integrated system, furthering diverse goals, if at all, through the uncoordinated actions of various institutions. This stands in sharp contrast to the clear-cut recognition, in international law, that such integration is not only permitted but demanded.18 Europe has a potentially special role in this context, for three distinct reasons. The first is that it, more than any other contemporary group of nations, stands as an example of a ‘social market economy’ model, reflecting the ambition of furthering diverse economic and social aims simultaneously, however much that model is both incomplete and under threat. The second is that the European project is itself an example of an integrated approach, pursuing a series of aims simultaneously within a common institutional structure, and implicitly conditioning the deriving of benefits in specific issue areas on actions in other issue areas, although its structure is still seen by many as unbalanced, to the extent that ‘negative integration’ by the lowering of obstacles to trade has made far more progress than ‘positive integration’ in areas such as labour and environmental concerns.19 The third

17 See for instance Alice. H Amsden, The Rise of ‘The Rest’: Challenges to the West from Late-Industrializing Economies (Oxford, Oxford University Press, 2002); Ha-Joon Chang, Kicking Away the Ladder: Development Strategy in Historical Perspective (London, Anthem Press, 2002); Erik Reinert, How Rich Countries Got Rich … and Why Poor Countries Stay Poor (London, Constable and Robinson, 2007); Roberto M Unger, Free Trade Reimagined: The World Division of Labor and the Method of Economics (Princeton NJ, Princeton University Press, 2007). 18 This point was recognized even by Pascal Lamy, then the Director General of the World Trade Organisation: see Lamy, ‘The Place of the WTO in the International Legal Order’, 15 June 2008, Lecture Series of United Nations Audiovisual Library of International Law, available on: www.wto.org/english/news_e/sppl_e/sppl94_e.htm. 19 Various of its institutional mechanisms aim in principle to offer an iterative, learningoriented and open-ended approach, drawing from national and sub-national experiences in order to facilitate common efforts to achieve desired outcomes. The Open Method of Coordination, launched in various areas after 2000, is one example of such a mechanism (see, eg, Charles F Sabel and Jonathan Zeitlin, ‘Learning from Difference: The New Architecture of Experimentalist Governance in the European Union’ (2008) 14 European Law Journal 271–327).

xvi Foreword is that any change to the current ‘unintegrated’ system would be more likely to result initially from developing ‘add-on’ agreements involving a subset of countries than from comprehensive renegotiation of WTO undertakings. While such an approach is unsatisfactory, especially where it concerns the generation of global public goods such as greenhouse gas emissions reductions, it may provide for a more realistic beginning to a reformed world trading system. Moreover, some aspects of the European Union’s international trade relations with developing countries such as Aid for Trade initiatives, the successive Generalised System of Preferences scheme, and the Cotonou Agreement, already include some relevant provisions, which may be extended as part of a new approach to integrating diverse objectives. Of course, both approaches can be pursued, even in parallel. The European countries, in light of their relatively stronger social and environmental commitments, constitute the most likely group to pioneer such an approach. At the same time, in order for such an effort to be successful, and to avoid the appearance or the reality of placing self-serving concerns before the global common good, it is essential that its advocates focus on establishing a rulebased and multilateral approach. They should aim to link trade to diverse and shared goals, ground their case in common values as well as shared interests, and promote it through global democratic processes. The current volume provides the essential beginning to this vital public project.

Acknowledgements This book originates in a report commissioned in 2013 by the VicePresident and Minister in charge of Sustainable Development of the Walloon Region/Brussels-Wallonia Federation. An initial draft of the report was discussed at an expert meeting convened in Brussels on 13 January 2014. The meeting included a range of academics, but also members of national administrations, a representative of the European Commission (DG Trade), the vice-chair of the Intergovernmental Panel on Climate Change Professor J-P van Ypersele, representatives of trade unions and of development and human rights non-governmental organizations. The author is grateful to all the participants in the seminar for their constructive comments, that allowed for significant improvements to be made to the initial document. He owes special thanks to Michel Cermak, Philippe Coppens, Martine Dardenne, Laurence Dubin, Nadine Gouzee, Monika Hencsey, Stéphanie Kpenou, Delphine Misonne and Pierre Ozer. Another version of the report was presented and discussed at the Francqui International Conference, that took place in Brussels on 8 and 9 May 2014. The author thanks Professor Hélène Ruiz Fabri, then at the University of Paris I-Panthéon-Sorbonne, for her contribution to the debate. He also gratefully acknowledges the comments received from Karin Ulmer, from the European Confederation of relief and development NGOs (CONCORD), from Paul de Clerck of Friends of the Earth-Europe, and from Ms Franziska Keller, Member of the European Parliament. Professor Sanjay G. Reddy from the New School in New York presented the main report to this session of the Francqui International Conference: his report, a model of analytical clarity and of concision, forms the basis of the foreword that he contributed to this volume. Some of the participants in the seminar of January 2014 agreed to contribute more detailed comments in writing. These comments appear in this volume in the form of ‘boxes’. The contributors are Elisabeth Bürgi Bonanomi, from the World Trade Institute (WTI) and Centre for Development and Environment, both at the University of Bern (Box 6. Trade and Sustainable Development: the role of impact assessments); David Luff, from Luff & Appleton and the Free University of Brussels (ULB) (Box 11. Unilateral measures and the non-discrimination requirement under Article XX GATT); and Edwin Zaccai, also from the Free University of Brussels (ULB) (Box 5. Social and environmental standards: commonalities and differences) and Sergi Corbalán, Executive Director of the Fair Trade Advocacy Office (FTAO) in Brussels (Box 24. Fair Trade making trade work for sustainable

xviii

Acknowledgements

development: what role for the EU?). Arnaud Zacharie, Secretary-General of the network of development non-governmental organisations CNCD11.11.11, and a professor at the Free University of Brussels (ULB) and the University of Liège (ULg), prepared an afterword to the book, highlighting the changes of the international division of labour and the challenges of imposing environmental and social regulations in the current context of economic globalization. Finally, some sections of the book owe a lot to the work I prepared in my capacity as United Nations Special Rapporteur on the right to food, a mandate I fulfilled between May 2008 and May 2014. During this intense period, I was fortunate to interact with a number of leading experts on the relationship between trade and sustainable development. In relation to the issues discussed in this volume, I should cite in particular Ha-Joon Chang, Thomas Cottier, Christian Häberli, Richard Howse, Raj Patel, Sanjay Reddy and Timothy Wise. I also had a number of debates with Pascal Lamy, during that period the Director General of the World Trade Organization: those debates allowed me to sharpen my understanding of the world vision animating the proponents of free trade, and therefore to better refine my own views. Both Sanjay Reddy and Nadia Lambek made a decisive contribution to the work I did during that period on the establishment of a Global Fund for Social Protection, which I refer to briefly in Chapter two of the book. I should add in closing that none of those listed above—friends, colleagues and influences—should be seen as endorsing either specific arguments made in the book, or even the general idea that linkage between trade and ‘nontrade’ values should be further encouraged. The views exposed are my own, and I accept full responsibility for the remaining infirmities in the argument. Olivier De Schutter 30 January 2015

Contents Foreword by Sanjay G Reddy ................................................................... v Acknowledgements ............................................................................... xvii List of Boxes .......................................................................................... xxi List of Figures ...................................................................................... xxiii List of Tables ........................................................................................ xxv

Introduction .............................................................................................. 1 1. Setting the Stage: The Limits of Fragmentation ................................... 7 I. Trade and Labour Rights ............................................................ 7 II. Trade and Environmental Standards ......................................... 14 III. The Use of Environmental and Labour Conditionalities in Trade Policies .............................................. 26 2. Sanctions Against Goods or Services that do not Comply: WTO Disciplines ..................................................... 45 I. The Core Disciplines of the WTO Regime ................................ 46 II. The ‘Likeness’ of Goods and Services and the Product/Process Distinction ................................................. 48 III. The ‘General Exceptions’ Clauses of Article XX GATT and Article XIV GATS ................................................... 57 IV. Conclusion ................................................................................ 75 3. The Special Regime of Border Tax Adjustments: Levelling the Playing Field................................................................. 85 I. The Notion of Border Tax Adjustments .................................... 85 II. Border Tax Adjustments under WTO Law ................................ 92 III. Determining the Level of the Compensatory Tax ...................... 98 IV. Conclusion .............................................................................. 101 4. Generalized Systems of Preferences: The ‘Conditional Preferences’ Approach ......................................... 102 I. The Origins of the Generalized System of Preferences ............. 102 II. The Emergence of ‘Special Incentives’ within the EU GSP Scheme...................................................... 103 III. The Three Layers of the Current EU GSP Scheme ................... 110

xx

Contents

5. Labelling Schemes: Supporting Ethical Consumerism...................... 124 I. The Rise of the Debate on Labelling Schemes ......................... 124 II. Compatibility with WTO Law ................................................ 131 6. Public Procurement: The Power of the Purse................................... 153 7. Conclusions .................................................................................... 165 I. ‘Sanctions’ for Non-compliance with Labour Rights or Environmental Standards......................................... 165 II. ‘Carbon Equalization’ through Border Tax Adjustments: Levelling the Playing Field ................................. 168 III. The EU Generalized System of Preferences: Making Preferences Conditional ............................................. 169 IV. Labelling Schemes: Supporting Ethical Consumerism .............. 170 V. Government Procurement: The Power of the Purse ................. 171

Afterword by Arnaud Zacharie ............................................................. 174 Index..................................................................................................... 187

List of Boxes Box 1. The answer of the international community to the threats associated with climate change Box 2. The growing body of international environmental law Box 3. The Kimberley Process Certification Scheme for ‘Conflict Diamonds’ Box 4. The relevance of international human rights to the interpretation of WTO agreements Box 5. Social and environmental standards: commonalities and differences— by Edwin Zaccai Box 6. Trade and Sustainable Development: the role of impact assessments— by Elisabeth Bürgi Bonanomi Box 7. Do consumers’ preferences matter?—the EC—Asbestos case Box 8. The ‘Tuna/Dolphin’ case before the WTO Dispute Settlement bodies: may the United States label tuna fished under certain conditions as ‘dolphin-safe’? Box 9. Should measures targeting production or process methods be treated as import bans? Box 10. May the General Exception clauses of Article XX GATT 1994 and Article XIV GATS be invoked to protect interests outside the territorial jurisdiction of the Member taking the measure? Box 11. Unilateral measures and the non-discrimination requirement under Article XX GATT—by David Luff Box 12. Making social protection floors universal Box 13. Two forms of Border Tax Adjustments: import-BTAs and export rebates Box 14. ‘Carbon equalization’ as a reaction to the risk of ‘carbon leakage’: the debate on border tax adjustments in the EU Box 15. Is the obligation to join an emissions trading scheme a ‘tax’ or ‘charge’ for the purposes of Article II:2(a) GATT? Box 16. The US Superfund Tax case: taxes on chemicals used as feedstock in the production of derivated products Box 17. The compatibility of ‘special incentives’ with WTO law: the European Communities—Conditions for Granting of Tariff Preferences to Developing Countries dispute Box 18. 27 international conventions related to sustainable development and good governance that countries seeking to benefit from the ‘GSP+’ scheme must ratify and effectively comply with

xxii

List of Boxes

Box 19. The sanctions mechanism for ‘serious and systematic violations’ of human rights and labour rights: the examples of Burma/Myanmar and Belarus Box 20. The ‘special incentive’ for sustainable development and good governance (‘GSP+’) Box 21. What are ‘technical regulations’ and ‘standards’ to which the TBT Agreement applies? Box 22. ‘Technical Regulations’ and ‘Standards’ under the TBT Agreement Box 23. The EU Ecolabel: an example of linkage through an environmental standard Box 24. Fair Trade: a bottom-up approach to make trade work for sustainable development: what role for the EU?—by Sergi Corbalan Box 25. The Massachusetts Burma Law Box 26. The use of public purchasing for sustainable development in the European Union

List of Figures Figure 1. Largest interregional fluxes of emissions embodied in trade (Mt CO2y−1) from dominant net exporting countries (blue) to the dominant net importing countries (red). Figure 2. CO2 content of trade and share of CO2 emissions traded Figure 3. Mean CO2 intensity of imports and exports to and from the largest net importing/exporting countries (and Middle East region) Figure 4. Different methods for ‘carbon equalization’ border measures Figure 5. Should a label indicating the carbon footprint of a product be mandatory in the future (EU-27 total)? Figure 6. Should a label indicating the carbon footprint of a product be mandatory in the future (EU-27, on a country-by-country basis)? Figure 7. Number of licences to use the Ecolabel (1992–2011)

List of Tables Table 1. A typology of trade-related measures linking access to compliance with labour or environmental standards Table 2. WTO Member concerns on carbon labels, as expressed within the Committee on Trade and Environment (2009–10) Table 3. ISO standards relevant for environmental labelling

Introduction

W

E ARE AT an impasse. Over the past decades, the growth of international trade and investment has allowed a number of developing countries to catch up with the rich countries, thanks to a strong, export-led growth. But many developing countries are still being left behind from this process. And even where the convergence process is at work, inequalities have often developed within the countries that benefit. The international charity group Oxfam calculated that seven out of ten people live in countries where the gap between the rich and poor is worse today than it was 30 years ago.1 Moreover, while growth has had powerful poverty-reducing effects in many developing countries, it has also led in many cases to environmental degradation and to an uncontrolled increase of greenhouse gas emissions. We now use about 1.6 planets annually to provide us with resources and to absorb our waste, and this ecological overshoot increases each year.2 The concentration of carbon dioxide (CO2) in the atmosphere is now 40% higher than it was in 1750, before the industrial era, and the levels of concentration of methane (NH4) and nitrous oxide (N2O), the two other major greenhouse gases resulting from human activity, increased by 150 per cent and 20 per cent respectively in that time: these concentrations exceed what has been recorded during the past 800,000 years, and the rates of increase we are witnessing today are unprecedented in the last 22,000 years.3

1 Calculation based on data updated in June 2013: econ.worldbank.org/WBSITE/ EXTERNAL/EXTDEC/EXTRESEARCH/0,,contentMDK:22301380~pagePK:64214825~pi PK:64214943~theSitePK:469382,00.html. A range of authors have expressed their concern about growing inequality in recent years. They include François Bourguignon, La mondialisation de l’inégalité (Paris, Seuil, 2012); Joseph Stiglitz, The Price of Inequality. How today’s divided society endangers our future (WW Norton & Co, New York and London, 2012); James K Galbraith, Inequality and Instability: A Study of the World Economy Just Before the Great Crisis (Oxford, Oxford University Press, 2012); Thomas Piketty, Capital in the TwentyFirst Century (Cambridge MA, Harvard University Press, 2014). Probably the most detailed indictment of the impacts of growing inequality on the health of societies is Richard Wilkinson and Kate Pickett, The Spirit Level. Why Greater Equality Makes Societies Stronger (New York, Bloomsbury Press, 2009). 2 See the calculations of the Global Footprint Network, available at: www.footprintnetwork. org/ar/index.php/GFN/page/world_footprint/ (consulted on 30 January 2015). 3 International Panel on Climate Change (IPCC), 5th Assessment Report, Approved Summary for Policymakers adopted at the Twelfth session of Working Group I: Climate Change 2013: The Physical Science Basis (IPCC WG1 AR5) (27 September 2013) 7.

2

Introduction

The expansion of volumes of trade in recent decades may be successful, in certain respects, as long as we consider countries as a whole, and as long as we define success as increase in GNP per capita. But once we examine the situation of different groups within countries and once we abandon the fetishism of growth as measured by GNP increase to take into account the other pillars of sustainable development, serious doubts emerge as to its ability to deliver what it promises. If globalization as such is not to be blamed, then perhaps its current form is. This book asks whether part of the problem may be in the fragmentation of international regimes, and specifically, in the failure to create effective linkages between the multilateral trade regime, on the one hand, and universally recognized labour and environmental standards, on the other hand. Trade liberalization has proceeded through bilateral and regional trade agreements, as well as through successive rounds of multilateral negotiations under the General Agreement on Tariffs and Trade (GATT),4 now integrated as part of the Agreements of the World Trade Organization which, by the end of 2014, 160 members had joined.5 Labour rights have been gradually defined at international level under the auspices of the International Labour Organization, which since its establishment in 1919 has led to the conclusion of about 400 instruments open for signature and ratification by its 185 members. And environmental standards have been defined in a set of conventions, covering a range of areas including the protection of the ozone layer, hazardous waste, endangered species, biodiversity and climate change (Box 2). But these developments have hitherto remained largely separate and disconnected from one another. International trade law, international labour law, and international environmental law, co-exist. These various regimes are established under specific instruments. They each have separate negotiation fora and means of enforcement, including dispute settlement mechanisms. International lawyers refer to this as ‘fragmentation’, ie the differentiation of international law into a number of self-contained regimes, each with their own norms and adjudication mechanisms, and relatively autonomous both vis-à-vis each other and vis-à-vis general international law.6 This book explores whether fragmentation, as it has developed since the Second World War, is an obstacle to the pursuit of sustainable development, and if so, what can be done about it. Specifically, it asks whether the 4 General Agreement on Tariffs and Trade (GATT 1947), Geneva, 30 October 1947, entered into force on 1 January 1948 (55 UNTS 187). 5 Agreement establishing the World Trade Organization, Marrakesh, 15 April 1994, entered into force on 1 January 1995 (33 ILM 1125 (1994)). 6 Report of the Study Group of the International Law Commission, Fragmentation of international law: difficulties arising from the diversification and expansion of international law, UN doc A/CN.4/L.702, 18 July 2006, para 8; Bruno Simma, ‘Self-contained regimes’ (1985) 16 Netherlands Yearbook of International Law 111–36.

Introduction

3

multilateral trade regime, now developed under the auspices of the World Trade Organization, allows Members of the WTO to link their trade policies to concerns related to labour rights or the environment, in order to use market access as a leverage to encourage their trading partners to improve labour conditions and to better protect the environment. This volume is not about the flexibility each WTO Member has, at domestic level, to protect workers’ rights or the environment—for they undoubtedly have such a freedom, unless this leads to the adoption of measures that result in discriminatory trade policies, in violation of WTO disciplines. The book is, rather, about the use of trade to promote such values outside the jurisdiction of the country concerned: it is about whether WTO Members may use trade as a tool to influence the conduct of their trading partners, or of economic actors seeking access to their markets, by making market access conditional upon those partners or actors doing more in the areas of labour and the environment. The issue has become increasingly divisive. On the one hand, as illustrated for instance by the continuous growth of bilateral free trade agreements and by the emergence of large free trade zones negotiated between major economies, countries and regions continuously work towards the expansion of trade as a means to stimulate growth.7 On the other hand, there is a wide recognition that ‘non-trade’ issues, including labour and the environment, should be taken into account in trade negotiations, in order to ‘level the playing field’, and might play a role in the shaping of trade policies.8 There are a number of channels through which this may be done: they include improving the multilateral trade regime in order to take these ‘non-trade’ issues more explicitly into account; the inclusion of social and environmental clauses in bilateral or regional free trade agreements; or, finally, the adoption of measures taken unilaterally by one trading partner in order to encourage the other partner, or economic agents exporting from that partner’s jurisdiction, to improve the protection of labour or environmental standards. 7 At the time of writing, in late 2014, negotiations are nearing completion for a Trans-Pacific Partnership (TPP) between the United States and a group of eight countries of the AsiaPacific zone (Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam); Canada and the European Union have signed the Comprehensive Trade and Economic Agreement (CETA); and a Transatlantic Trade and Investment Partnership (TTIP) is under discussion between the European Union and the United States. Clearly, the major economies in the world see the removal of obstacles to trade, in particular of non-tariff barriers through regulatory convergence, as a significant tool to overcome the impacts on growth of the economic crisis. 8 For instance, the negotiators of the TPP reported on 10 November 2014 that, ‘recognizing the commitment of all TPP countries to strong environmental protection and conservation’, they had ‘made progress toward agreement on a set of enforceable environmental disciplines’, and that ‘to ensure that the benefits of trade are broadly shared, we are close to agreement on a set of enforceable commitments on labour rights that embody key ILO labour rights’ (Trade Minister’s Report to Leaders, 10 November 2014, available from the website of the Office of the United States Trade Representative (last consulted on 30 January 2015).

4

Introduction

It is this latter question that is explored here. This book asks whether, even in the absence of an explicit clause to that effect in the instruments regulating the trade relationships between the parties, resorting to unilateral trade measures may be legitimate and allowed; and, in particular, whether the WTO framework authorizes its Members to establish such a link. In a well-known resolution on human rights and social and environmental standards in international trade agreements adopted on 25 November 2010, the European Parliament proposes a series of measures to ensure a greater compatibility between the trade, labour and environment agendas, including the use of unilateral trade measures.9 Under which conditions would it be legitimate to have access to the EU markets depend on compliance with certain labour or environmental standards? What are the tools that could be used in this regard? Is there a danger that these tools might be used for protectionist purposes, denying developing countries the comparative advantage they have in the global competition, and to which extent would the disciplines imposed on WTO Members prohibit such a linkage, in order to avert such a risk? The negotiators of the WTO Agreements were themselves fully aware of the links between trade, employment, and the environment. They saw the growth of trade not as an end to be promoted for its own sake, but as a means to attain higher, non-instrumental objectives, including improved standards of living for all and a sustainable use of the world’s resources. The preamble of the Agreement establishing the World Trade Organization (WTO) states that Members’ relations in the field of trade and economic endeavour should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, 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, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development.

The question however, is whether trade policies can be harnessed to encourage the very results that were expected to follow from the establishment of

9 See operational paragraph 6: the European Parliament ‘reaffirms that the objectives of maintaining and preserving an open and non-discriminatory multilateral trade system on the one hand, and protecting the environment and promoting sustainable development on the other hand, should be mutually supportive; underlines that, pursuant to Article 20 of the GATT, the Member States may adopt trade measures to protect the environment, subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination; encourages the Member States to make full use of this provision’ (European Parliament resolution of 25 November 2010 on human rights and social and environmental standards in international trade agreements (rapporteur Saïfi), EP doc P7_TA(2010)0434, inter-institutional file 2009/2219(INI)).

Introduction

5

a rules-based, multilateral trading system, and whether WTO Members may act unilaterally, through their trade policies, to humanize globalization. In order to address this question, this volume first recalls the background of the debate. It does so in general terms, identifying what may be troubling about the current situation in which the trade agenda is being pursued in disregard of other, ‘non-trade’ issues, such as labour rights or environmental standards (Chapter one). It then reviews the various tools that could be used to ensure a linkage between trade policies on the one hand, and a concern for compliance with labour and environmental standards on the other hand. Five such tools are examined. Chapter two examines the potential use of a sanctions-based mechanism, consisting in a ban or in the imposition of higher tariffs on products or services that do not comply with certain requirements to use clean technologies or to respect labour rights in the production process. It offers a general presentation of the applicable legal framework under the main WTO Agreement, the General Agreement on Tariffs and Trade (GATT), applicable to trade in goods, the disciplines of which have been replicated in similar form in the General Agreement on Trade in Services (GATS). Chapter three assesses the role of border tax adjustment measures, including what is colloquially known as the ‘carbon tax’. Chapter four provides an assessment of the linkage between access to market at preferential conditions and compliance with certain labour and environmental standards within the General Systems of Preferences that were established in the 1970s in order to accelerate the integration of developing countries in the global economy. Chapter five discusses the role of ecolabelling schemes. Chapter six, finally, provides an overview of the use of public procurement as a means to encourage compliance with labour rights or environmental standards. The final chapter, Chapter seven, provides a brief conclusion. The inquiry shows that governments, even acting unilaterally—that is, without having to go through the negotiation of a new international agreement—, could do much better at being consistent across the trade, social justice and environmental sustainability agendas. They could put trade in the service of sustainable development. The WTO framework only constrains them insofar as it prohibits them from using the various tools they have at their disposal for protectionist purposes. As the legal obstacles dissolve, however, the political responsibilities come to light. I argue that it is possible to reconcile trade with labour rights and with environmental objectives, in particular in order to mitigate climate change. An agenda establishing a linkage between trade on the one hand and labour rights and environmental standards on the other hand would only succeed, however, if coupled with strong support for developing countries, including by the transfer of technologies, the financing of clean development projects, and support for the establishment or strengthening of social protection schemes. Combining unilateral measures linking market access to social and environmental conditions, on the one

6

Introduction

hand, with, on the other hand, support to the right to development of poor countries may be seen as a new brand of multilateralism: one in which each country or region uses trade as an opportunity, not just to export more and to grow faster, but to move towards a more humane form of globalization. This is a multilateralism of the ends, rather than a multilateralism of the tools: though the tool of trade policies is in the hands of each country for it to use, it can serve the ends that the international community has set for itself, rather than the selfish interests of the few whom trade benefits today.

1 Setting the Stage: The Limits of Fragmentation

T

RADE HAS GRADUALLY been drifting apart from so called ‘nontrade’ issues, including labour rights and environmental standards. This is not inevitable. It is in fact the result of a process of separation that began in the 1980s, and took a decisive turn with the establishment of the World Trade Organization in the mid-1990s. But international law has not always been as fragmented as it seems to be today. In order to understand how we can move towards a more coherent international legal order, and one that would be therefore better equipped to humanize globalization, it may be useful to recall where we come from. Trade has never been an end in itself. Its relative autonomization—its strengthening as a separate regime of international law—is recent, and it can be challenged.

I. TRADE AND LABOUR RIGHTS

Trade and labour rights have not always been treated in isolation. Indeed, their interconnectedness was acknowledged when the International Labour Organization (ILO) was established in 1919. One of the key factors leading to its creation was the conviction of governments that ‘the failure of any nation to adopt humane conditions of labour is an obstacle in the way of other nations which desire to improve the conditions in their own countries’:1 insofar as nations compete on global markets and enter into relationships through trade and investment, they might be discouraged from moving towards the improvement of workers’ rights unless other nations are doing the same. The ILO was set up, primarily, to address this collective action problem. Its purpose was to ensure that the development of international trade would not delay the achievement of progress in the area of labour rights, as would be the case if countries were to seek to improve their international competitiveness2 at the expense of the protection of workers. 1

ILO Constitution, Preamble, para 3. Strictly speaking, it is not countries, but economic actors—firms—that compete on international markets. Thus, the mention of ‘international competitiveness’ of countries is a shorthand way of referring to the conditions under which companies established under the jurisdiction of the countries concerned can export goods and services abroad. 2

8

The Limits of Fragmentation

The link was initially reaffirmed after World War II. Already in the Declaration concerning the aims and purposes of the International Labour Organization (Declaration of Philadelphia) adopted on 10 May 1944, and integrated to the Constitution of the ILO, the International Labour Conference included among the fundamental principles on which the ILO is based that ‘labour is not a commodity’ and that ‘poverty anywhere constitutes a danger to prosperity everywhere’, thus reaffirming the need to ensure that the growth of trade should not be at the expense of workers’ rights.3 Even more explicitly, it stated that all national and international policies and measures, in particular those of an economic and financial character, should be judged in this light and accepted only in so far as they may be held to promote and not to hinder the achievement of this fundamental objective [of ensuring that all human beings, irrespective of race, creed or sex, have the right to pursue both their material well-being and their spiritual development in conditions of freedom and dignity, of economic security and equal opportunity].4

In February 1946, negotiations began on the establishment of an International Trade Organization (ITO), as a specialized agency of the United Nations. The Charter of the ITO was agreed in Havana in March 1948. The Members pledged to implement Article 55 of the UN Charter by assuring ‘a large and steadily growing volume of real income and effective demand’, and by increasing ‘the production, consumption and exchange of goods, and thus to contribute to a balanced and expanding world economy’. They also committed to ‘foster and assist industrial and general economic development, particularly of those countries which are still in the early stages of industrial development, and to encourage the international flow of capital for productive investment’; to ‘further the enjoyment by all countries, on equal terms, of access to the markets, products and productive facilities which are needed for their economic prosperity and development’; to promote trade as an instrument of economic development; and generally, to ‘facilitate through the promotion of mutual understanding, consultation and co-operation, the solution of problems relating to international trade in the fields of employment, economic development, commercial policy, business practices and commodity policy’.5 The ITO thus was conceived as an

3

Para I(a) and (c). Para II(c). These principles were reaffirmed in the ILO Declaration on Social Justice for a Fair Globalization adopted statement of principles and policies adopted unanimously on 10 June 2008 by the International Labour Conference at its ninety-seventh session. The Declaration builds on principles recognized in the Constitution of the International Labour Organization, including the Declaration concerning the Aims and Purposes of the ILO of 1944 and the Declaration on Fundamental Principles and Rights at Work of 1998. 5 United Nations Conference on Trade and Employment, held at Havana, Cuba, from 12 November 1947, to 24 March 1948, Final Act and Related Documents (Havana, Cuba, March 1948) (Charter of International Trade Organization, Art 1). 4

Trade and Labour Rights

9

organization in which countries could gradually agree on how to support international trade in order to ensure that it would contribute to employment and development, and in close cooperation with the United Nations Economic and Social Council.6 The Charter establishing the ITO also noted that unemployment should be treated as a common concern calling for international cooperation, and that the promotion of trade should not be at the expense of the protection of fair labour standards: it acknowledged that ‘all countries have a common interest in the achievement and maintenance of fair labour standards related to productivity, and thus in the improvement of wages and working conditions as productivity may permit’.7 It included strong provisions on the role of international assistance and cooperation in the service of development.8 Those objectives soon appeared to be overambitious, however. On 6 December 1950, drawing the conclusions from the strong opposition of the US Congress many members of which feared the ITO would represent an excessive check on the United States’ sovereignty, President Truman announced that the United States would not ratify the ITO Charter.9 In the meantime, the General Agreement on Tariffs and Trade (GATT) had become provisionally applicable in January 1948.10 But what had been lost was more than the promise of one international agency that would ensure a consistent approach across the areas of trade, employment, and economic development: as would soon become clear, it was the idea of international cooperation itself for the fulfilment of the latter two objectives that was being questioned. The consequences of this initial failure to set up the International Trade Organization are well known. The GATT—initially made to enter into force on a purely provisional basis in order to avoid a sudden suspension of trade flows—was institutionalized. The Marrakesh Agreement of 15 April 1994 establishing the WTO, almost 50 years after the initial GATT, significantly strengthened the regime of international trade, and represented a decisive 6 See the definition of the functions of the ITO in Art 72 of the Charter. The Charter included chapters on Employment and Economic Activity (II); on Economic Development and Reconstruction (III); on Commercial Policy (IV); on Restrictive Business Practices (V); and on Inter-Governmental Commodity Agreements (VI). See also Steve Charnovitz, ‘The (neglected) employment dimension of the World Trade Organization’ in Virginia A Leary and Daniel Warner (eds), Social Issues, Globalisation and International Institutions (Leiden, Martinus Nijhoff, 2006) 138–39. 7 Charter of the ITO, Arts 2 and 7. 8 See Chapter III of the Charter of the ITO. 9 On the circumstances behind this failure, see John H Jackson, World Trade Law and the Law of GATT: A Legal Analysis of the General Agreement on Tariffs and Trade (Charlottesville MI, 1969) 37–38; William Diebold, The end of ITO. Essays in International Finance No 16 (Princeton NJ, Princeton University Press, 1952); J-C Graz, Precursor of the WTO: the stillborn Havana Charter, 1941–1950 (Geneva, Droz, 1999). 10 Protocol on the Provisional Application of the GATT of 30 October 1947, 55 UNTS 308 (1947).

10

The Limits of Fragmentation

and potentially dangerous move towards its autonomization. The establishment of the World Trade Organization may be seen as the final stage in a process that began in 1948, through which international trade was gradually liberalized through a series of trade negotiations that were conducted formally outside the United Nations system, and without any explicit connection to other areas (such as labour rights, environmental standards, or human rights) that were subject to international cooperation.11 In addition, since the establishment of the WTO, the disciplines imposed in the multilateral trading system are enforced under the threat of economic sanctions: this is in contrast with the enforcement means at the disposal of the International Labour Organization or the UN human rights system, that essentially rely on the reputational costs incurred by countries who ignore their international commitments in these areas. The enforcement of labour rights and of human rights is relatively weaker, especially for countries who care less about their standing in international relations than about their export opportunities;12 and the dispute settlement mechanism established as part of the WTO Agreements is a particularly effective tool in the hands of the largest and most developed economies (which are in effect the only ones who can impose sanctions that can hurt), whereas enforcement is decentralized in the system of the ILO and in the UN human rights system.13 Countries may be pressured to conform to international law because of the fear of disrepute, of course: research shows that international law regimes typically succeed to the extent that compliance is rewarded by countries being seen as trustworthy and reliable participants in the international legal process.14 As regards economic sanctions that might be imposed on a country infringing its trade commitments, however, the weight on governmental decision-making of powerful economic interests who may suffer the most 11 See, for a discussion of the successive trade negotiation rounds, A Hoda, Tariff Negotiations and Renegotiations under the GATT and the WTO. Procedures and Practices (Cambridge, Cambridge University Press, 2001). 12 See n 14 below. 13 The Memorandum of Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) is contained in annex 2 to the Marrakesh Agreement. Enforcement relies on the possibility, for the WTO Member affected by another Member’s non-compliance, to request consultations, and potentially a binding arbitration if consultations fail; ultimately, the complaining Member may be authorized to adopt counter-measures against the delinquent Member. Commentators have often remarked that the mechanism was highly biased in favour of the powerful. As Stiglitz writes: ‘The WTO’s international law is an imperfect rule of law; the rules are derived from bargaining, including bargaining between the rich and the poor countries, and in that bargaining it is the rich and powerful that typically prevail. Enforcement is asymmetric—a threat of trade restriction by the United States against a small country like Antigua will elicit a response, but the United States does not pay much attention if Antigua threatens a trade restriction. Only when the practice affects a large number of countries … is the threat of retaliation even credible’ (Joseph Stiglitz, Making Globalization Work (New York, WW Norton & Co, 2006) 76). 14 See Abram Chayes and Antonia Handler Chayes, The New Sovereignty. Compliance with International Regulatory Agreements (Cambridge MA, Harvard University Press, 1995).

Trade and Labour Rights

11

significant losses from restrictions to exports will often prove decisive, especially when the trading partner is too important to ignore and retaliatory measures adopted by that partner, therefore, particularly costly. Following the entry into force of the WTO Agreement in 1995, the United States and the EU sought to introduce a link between international trade and labour standards. This was resisted by developing countries, who feared, understandably, that this would justify protectionism and would deprive them of what they saw as their comparative advantage, particularly for labour-intensive lines of production. The outcome of this battle was the adoption of an explicit recognition, within the WTO, that trade liberalization should not be linked to considerations related to labour rights. In the Singapore Ministerial Declaration adopted on 13 December 1996 at the first WTO Ministerial Conference, the WTO Members stated: We renew our commitment to the observance of internationally recognized core labour standards. The International Labour Organization (ILO) is the competent body to set and deal with these standards, and we affirm our support for its work in promoting them. We believe that economic growth and development fostered by increased trade and further trade liberalization contribute to the promotion of these standards. We reject the use of labour standards for protectionist purposes, and agree that the comparative advantage of countries, particularly low-wage developing countries, must in no way be put into question. In this regard, we note that the WTO and ILO Secretariats will continue their existing collaboration.15

In effect, this put an end to attempts to explicitly link trade to labour rights at multilateral level. The 2008 ILO Declaration on Social Justice for a Fair Globalization,16 the primary purpose of which was to ensure that the Decent Work Agenda would be effectively promoted, does task the ILO to ensure that other institutions support the agenda: Other international and regional organizations with mandates in closely related fields can have an important contribution to make to the implementation of the integrated approach. The ILO should invite them to promote decent work, bearing in mind that each agency will have full control of its mandate. As trade and financial market policy both affect employment, it is the ILO’s role to evaluate those employment effects to achieve its aim of placing employment at the heart of economic policies.17

But it appeared clearly, by then, that the trade regime would continue to develop separately from the efforts conducted by the ILO in the area of labour rights. Yet, linkage between trade and labour rights is far from being unprecedented. References to labour rights are included in some commodities agreements. For instance, consistent with its key objectives to promote 15 16 17

WT/MIN(96)/DEC, 18 December 1996, para 4. Adopted by the ninety-seventh session of the International Labour Conference. Paragraph II, C.

12

The Limits of Fragmentation

international trade of coffee by facilitating exchanges of information and adopting market-stabilizing measures, but also to encourage Members to ‘develop a sustainable coffee sector in economic, social and environmental terms’,18 the 2007 International Coffee Agreement provides that Members shall give consideration to improving the standard of living and working conditions of populations engaged in the coffee sector, consistent with their stage of development, bearing in mind internationally recognized principles and applicable standards on these matters. Furthermore, Members agree that labour standards shall not be used for protectionist trade purposes.19

At the request of the new Clinton administration—a request made after it came into office in the United States in 1992—the North American Free Trade Agreement also was concluded accompanied by side agreements on Labour and Environment Cooperation between the Parties. The conclusion of these agreements in 1993 was, in effect, a compromise solution between allowing a form of regulatory competition potentially destructive of environmental and labour standards and seeking to harmonize such standards, which could have been seen by Mexico in particular, one of the Parties to the agreement, as depriving it of its comparative advantage on the newly created North American free trade area. The side agreements impose essentially an argument of transparency, as the Parties commit to maintain such regulations at a high level and to enforce their labour and environmental regulations. The objective is to avoid the Parties being tempted to improve the competitiveness of the economic actors operating on their territory by reducing labour and environmental standards.20 Are the fears of ‘social dumping’ justified?21 The evidence is inconclusive. Econometric studies tend to show that the countries with the most open

18

Article 1, (3). Article 37. In the Preamble of the Agreement, the Members also recognize ‘the need to foster the sustainable development of the coffee sector, leading to enhanced employment and income, and better living standards and working conditions in Member countries’ (para 4). 20 See Jack I Garvey, ‘Current Development: Trade Law and Quality of Life—Dispute Resolution under the NAFTA Side Accords on Labor and the Environment’ (1995) 89 American Journal of International Law 439; Laura O Pomeroy, ‘The Labor Side Agreement under the NAFTA: Analysis of Its Failure to Include Strong Enforcement Provisions and Recommendations for Future Labor Agreements Negotiated with Developing Countries’ (1996) 29 George Washington Journal of International Law and Economics 769. 21 The notion of ‘social dumping’ may of course be given various definitions, ranging from situations in which an employer deliberately violates existing legislation in order to achieve a competitive advantage to situations where practices as regards working conditions and wages comply with the applicable labour legislation and simply reflect different levels of productivity between workers, without entailing any distortion of competition (see on these understandings Daniel C Vaughan-Whitehead, EU Enlargement versus Social Europe? The Uncertain Future of the European Social Model (Cheltenham, Edward Elgar, 2003) 325–27). The notion is used here to refer to the (perfectly legal) practice of companies to locate their activities in the state, and thus under the regulatory regime, that will make compliance with social regulations least costly, in order to be the most competitive on international markets. 19

Trade and Labour Rights

13

trade policies have witnessed improvements in working conditions, at faster rates than countries with closed trade policies.22 But that does not prove that fears of social dumping are without foundation. First, correlation does not imply causality. The improvement in labour conditions may be attributable to a range of other factors than trade per se. Among such factors, we may include the role of foreign investment and the arrival of multinational corporations in the country concerned, general progress in the standard of living (ie that trade may or may not have accelerated, depending on the position of the country in the international division of labour and the evolution of the terms of trade) or, perhaps most importantly, the level of organization of workers and the strength of their bargaining position. Secondly, a generally positive correlation between trade openness and working conditions does not provide information about the counter-factual: what if a country had resorted to more protectionist policies, shielding certain sectors from competition? Could it be that the working conditions would have improved even further? It is equally difficult to arrive at definitive conclusions concerning the relationship between trade openness and the evolution of labour regulations in any particular country. How the regulatory framework evolves depends, first and foremost, on the balance of political forces in a country at any point in time, as well as on the respective bargaining power of employers and workers’ unions. Trade openness is one among many factors that influences the respective positions of the different social political actors in the country. It implies, for instance, that the employers may with some plausibility threaten to relocate production plants if the workers demand too much, or if the labour legislation imposes excessive costs on them: such a threat becomes realistic once it appears that they could easily produce goods in another location, or provide services from elsewhere, without losing access to the consumers in the home country. How much weight this argument will have, however, will depend on the particular context of the country concerned, and this again is only one of the inputs in a political system that shall receive many others. Arguments about ‘social dumping’ are therefore difficult to assess. Those arguments are not to be confused, however, with the argument in favour of establishing a stronger linkage between trade and labour rights. This latter argument is not premised on the idea that trade openness will result in a

22 See, eg, providing a systematic empirical analysis, Robert J Flanagan, Globalization and Labor Conditions. Working conditions and worker rights in a global economy (Oxford, Oxford University Press, 2006). Flanagan concludes that fears of ‘social dumping’ are largely ill-founded. However, even he does note one exception: ‘If trade threatens working conditions, the threat is strongest for some workers in the richest countries, not the poorest countries. The evidence suggests that trade has a small negative impact on the wages of unskilled workers in industrialized countries’ (ibid, 85).

14

The Limits of Fragmentation

deterioration of working conditions or a dismantling of labour regulations, all in the name of ensuring competitiveness on global markets. What is suggested here, rather, is that ‘trade openness’ can be designed in a number of ways, and that forms of trade liberalization that include a protection against the risks of social dumping are preferable to forms of trade liberalization that simply ignore that there may be any such link. Linkage, thus, is to be seen more like an insurance policy: it seeks to ensure that trade will not be used as an opportunity to lower labour standards or as a pretext to refuse to improve the protection of workers or to raise their wages as labour productivity improves. It is precisely because the risks of social dumping are difficult to ascertain that taking out an insurance policy makes sense.

II. TRADE AND ENVIRONMENTAL STANDARDS

The relationship between trade and climate change mitigation may be considered from two perspectives. We may ask, first, to which extent international competition is a disincentive for the adoption of regulatory standards that, though aiming to mitigate climate change, may raise costs of the enterprises operating from within the state seeking to adopt such standards. It is arguable at least that the more economies are characterized by a high degree of openness to trade—depending more on exports to be able to import more in order to satisfy their needs—the more difficult it will be to justify the adoption of measures imposing constraints on companies, in the form of stronger environmental requirements, that are perceived as reducing the competitiveness on global markets.23 The debates that followed the establishment of the carbon emissions trading system within the European Union illustrate this, as they included an important discussion on how to avoid companies based in the EU being penalized in international competition, in the sectors that

23 Of course, the relationship between constraints imposed on companies based on environmental concerns—leading for instance to a higher price of energy or to obliging a company to acquire allowances for greenhouse gas emissions—and the competitiveness of companies, understood as their ability to maintain sufficient profit margins, is not a direct one, and depends on a range of factors, including the trade openness of the sector concerned and the ability of the companies concerned to pass on the increases in production costs to the consumer: see, for a detailed discussion of this point, Trade and Climate Change. A Report by the United Nations Environment Program and the World Trade Organization (Geneva, World Trade Organization, 2009) at 99 (finding that ‘the effects on competitiveness of environmental regulations, including climate change policies, are relatively small, or are likely for only a small number of sectors, because the costs of compliance with a regulation are a relatively minor component of a firm’s overall costs’, yet acknowledging at the same time that environmental regulations impact the competitiveness of ‘a few energy-intensive manufacturing industries’ and that ‘the carbon constraint in some emission trading schemes … is expected to be increasingly stringent, with fewer free allowances, which will therefore increase the potential impact on the competitiveness of a number of sectors’).

Trade and Environmental Standards

15

are relatively exposed to such competition and where compliance with the requirement to reduce emissions would be relatively costly.24 We may also take another perspective, and ask how the expansion of trade as such affects the growth of greenhouse gas emissions. On the one hand, trade favours in many cases the diffusion of cleaner technologies which, once taken up, can lead to less carbon-intensive types of growth in the importing country. This is the ‘technology effect’ of international trade, which the WTO Members have pledged to accelerate through prioritizing the liberalization of trade in environmental goods and services.25 On the other hand however, international trade favours increased economic growth and higher levels of consumption, as resources are freed-up from their less productive uses to be reinvested or spent elsewhere. This is the ‘scale effect’ of trade; it is built into the very idea of trade having to improve allocative efficiency, and thus leading to increased levels of outputs and reduced prices for the end consumer. Studies are now converging to show that the ‘scale effects’ of international trade outweigh ‘technology effects’.26 In other terms, the increased consumption favoured by trade expansion raises the levels of greenhouse gas emissions more than the technological spill-over effects of trade. If this is true, it follows that we cannot pretend, at the same time, to pursue a free trade agenda leading to the expansion of North-South trade flows and also to combat climate change. Indeed, with the expansion of trade, consumers in industrialized countries continue to have access to cheap manufactured 24 See for instance Commission Decision of 24 December 2009 (2010/2/EU) determining, pursuant to Directive 2003/87/EC of the European Parliament and the Council, a list of sectors and subsectors which are deemed to be exposed to a significant risk of carbon leakage, [2010] OJ L1/10. The Decision identifies the lines of production within the EU that are at a significant risk of losing markets as a result of having to pay for carbon emission quotas under the EU’s emissions trading scheme (‘carbon leakage’), as organized by Directive 2003/87/EC of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community ([2003] OJ L275/32). In order to provide such a determination, it relies on two criteria: (i) the sum of direct and indirect additional costs induced by the implementation of the ETS Directive would lead to an increase in production costs, of a least 5 per cent of the gross value added; and (ii) the ratio between the total value of exports to third countries plus the value of imports from third countries and the total market size for the Union is above 10 per cent, indicating an important intensity of trade with third countries in that sector, thus exposing the EU-based companies of the sector to foreign competition. 25 See Doha Ministerial Declaration, WTO doc WT/MIN(01)/DEC/1, para 31 (iii) (committing to negotiate ‘the reduction or, as appropriate, elimination of tariff and non-tariff barriers to environmental goods and services’). 26 See M Heil and T Selden, ‘International Trade Intensity and Carbon Emissions: A CrossCountry Econometric Analysis’ (2001) 10 Journal of Environment and Development 35–49; M Cole and R Elliott, ‘Determining the Trade-Environment Composition Effect: the Role of Capital, Labor and Environmental Regulations’ (2003) 46 Journal of Environmental Economics and Management 363–83. For an overview, see Climate and Trade. Why climate change calls for fundamental reforms in world trade policies, report authored by Tilman Santarius for the German NGO Forum on Environment and Development and Heinrich Böll Foundation, 2009.

16

The Limits of Fragmentation

products imported from developing countries—and they are cheap both because they are relatively labour-intensive and produced in low-wage countries, and because the negative externalities that result from polluting technologies are not taken into account in their retail prices. But this postpones the need for a change in affluent lifestyles, despite the urgency of such changes; it may in fact favour the kind of runaway, mindless consumption that increases our per capita ecological footprint.

Box 1. The answer of the international community to the threats associated with climate change The rate at which greenhouse gases (GHG) are emitted into the atmosphere as a result of human activity has been continuously increasing since the beginning of the industrial era. During the period 1970–2000, such emissions (calculated as volumes of carbon dioxide equivalents— CO2e) grew by 1.3 per cent annually. Despite growing awareness of the need to reduce greenhouse gas emissions and the launch of a number of mitigation strategies, emissions grew even faster, by 2.2 per cent per year, from 2000 to 2010. About half of the total cumulative man-made emissions of carbon dioxide, the most important of greenhouse gases, were emitted during the last 40 years, between 1970 and 2010.27 The most well-known and most widely discussed impact of increased concentrations of GHG in the atmosphere is global warming. According to the most recent assessments of the Intergovernmental Panel on Climate Change (IPCC), the Earth’s temperature already has risen by 0.85 °C in comparison to 1880,28 and the 10 warmest average global temperatures recorded since 1880 have occurred in the last 15 years: according to the World Meteorological Association, the decade of the 2000s (2000–09) was warmer than the decade spanning the 1990s (1990–99), which in turn was warmer than the 1980s (1980–89).29 Such global warming is only one facet of man-made climate change. The other associated phenomena include the contraction of snowcovered areas and the shrinking of sea ice; the rise of sea levels and higher water temperatures; more extreme droughts and heatwaves;

27 International Panel on Climate Change (IPCC), 5th Assessment Report, Approved Summary for Policymakers adopted at the Twelfth session of Working Group III: Climate Change 2014: Mitigation of Climate Change (IPCC WGIII AR5) (12 April 2014) 5–6. 28 International Panel on Climate Change (IPCC), 5th Assessment Report, Approved Summary for Policymakers adopted at the Twelfth session of Working Group I: Climate Change 2013: The Physical Science Basis (IPCC WG1 AR5) (27 September 2013) 3. 29 World Meteorological Organization, Press Release No 869, 2000–2009, The Warmest Decade, at: climateemergencynews.blogspot.be/2009/12/20002009-warmest-decade.html (last accessed 20 January 2015).

Trade and Environmental Standards

17

heavy rainfalls and resulting floods; and an increased intensity of tropical cyclones. This leads to severe impacts on livelihoods of many vulnerable populations, which are already being felt particularly in developing countries. A 2010 report called The Anatomy of a Silent Crisis, at the time the most detailed report on the human impacts of climate change to date, estimated that every year climate change is responsible for over 300,000 premature deaths, that 325 million people are already seriously affected, and that economic losses amount to US$125 billion. The report estimates that four billion people are vulnerable to climate change today, and that 500 million people are at extreme risk.30 The international community has not remained passive in the face of this challenge. Awareness about the unsustainability of demographic growth, combined with our modes of production and consumption, has been developing since the publication of the Club of Rome Report The Limits to Growth31 and the Stockholm Conference of June 1972, which resulted in the establishment of the United Nations Environment Programme (UNEP) as a subsidiary body of the United Nations General Assembly (UNGA).32 In 1987, the World Commission on Environment and Development, known as the Brundtland Commission,33 presented its report Our Common Future, leading the UNGA to convene a Conference on Environment and Development. This conference—known as the ‘Earth Summit’—was held in Rio de Janeiro from 3 June to 14 June 1992.34 In addition to adopting the Convention on Biological Diversity, the Rio Conference launched the UN Framework Convention on Climate Change (UNFCCC), which had been agreed upon only a month earlier.35 It also adopted a Declaration on Environment and Development, and an ambitious plan of action, Agenda 21.36 The objective of the UNFCCC is to ensure ‘stabilization of greenhouse gas concentrations in the atmosphere at a level that would

30 The Anatomy of a Silent Crisis. Human Impact Report—Climate Change (Geneva, Global Humanitarian Forum, 2010). 31 D Meadows et al, The Limits to Growth: A Report for the Club of Rome’s Project on the Predicament of Mankind (New York, Universe Books, 1972). 32 UN doc GA res. 2997 (XXVII), 15 December 1972. 33 Established by the UNGA in 1983, see UN doc A/RES/38/161, 19 December 1983. 34 UN doc A/CONF.151/26. 35 The UNFCCC was opened for signature on 9 May 1992, after an Intergovernmental Negotiating Committee produced the text of the Framework Convention as a report following its meeting in New York from 30 April to 9 May 1992. It was signed by 154 countries on 12 June 1992. It entered into force on 21 March 1994 (1771 UNTS 107; 31 ILM 851 (1992)). As of December 2014, the UNFCCC had 195 states Parties. 36 UN doc A/CONF.151/26/Rev.1 (vol I) (UNCED).

18

The Limits of Fragmentation

prevent dangerous interference with the climate system’ (Article 2). The Parties agree on a set of principles listed in Article 3, including the principle of equity according to which the Parties have ‘common but differentiated responsibilities and respective capabilities’ (Principle 1) and the principle according to which measures taken to combat climate change should not lead to discrimination in international trade (Principle 5). The full text of Article 3 (Principles) reads as follows: In their actions to achieve the objective of the Convention and to implement its provisions, the Parties shall be guided, inter alia, by the following: 1. The Parties should protect the climate system for the benefit of present and future generations of humankind, on the basis of equity and in accordance with their common but differentiated responsibilities and respective capabilities. Accordingly, the developed country Parties should take the lead in combating climate change and the adverse effects thereof. 2. The specific needs and special circumstances of developing country Parties, especially those that are particularly vulnerable to the adverse effects of climate change, and of those Parties, especially developing country Parties, that would have to bear a disproportionate or abnormal burden under the Convention, should be given full consideration. 3. The Parties should take precautionary measures to anticipate, prevent or minimize the causes of climate change and mitigate its adverse effects. Where there are threats of serious or irreversible damage, lack of full scientific certainty should not be used as a reason for postponing such measures, taking into account that policies and measures to deal with climate change should be cost-effective so as to ensure global benefits at the lowest possible cost. To achieve this, such policies and measures should take into account different socio-economic contexts, be comprehensive, cover all relevant sources, sinks and reservoirs of greenhouse gases and adaptation, and comprise all economic sectors. Efforts to address climate change may be carried out cooperatively by interested Parties. 4. The Parties have a right to, and should, promote sustainable development. Policies and measures to protect the climate system against human-induced change should be appropriate for the specific conditions of each Party and should be integrated with national development programmes, taking into account that economic development is essential for adopting measures to address climate change. 5. The Parties should cooperate to promote a supportive and open international economic system that would lead to sustainable economic growth and development in all Parties, particularly developing country Parties, thus enabling them better to address the problems of climate change. Measures taken to combat climate change, including unilateral ones, should not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade.

Trade and Environmental Standards

19

The principle of ‘common but differentiated responsibilities’ is the basis of the distinction between industrialized and developing countries that is one of the key features of the climate change regime. In 2007 (but using data from 2004), it was estimated that industrialized countries (representing 19.7 per cent of the global population) emitted on average 16.1 tonnes of CO2e annually per capita; developing countries (which included 80.3 per cent of the world’s population) had average annual per capita emissions of GHG of 4.2 tonnes of CO2e.37 This gap is gradually being reduced, both as a result of the industrialization of a number of countries formally classified as ‘developing’, and because of mitigation strategies in rich countries that result in these countries having a less carbon-intensive type of growth. Yet, the gap remains. In 2010, all industrialized countries together,38 representing just above one fifth (20.5 per cent) of the world’s population, still accounted for 58.3 per cent of global GHG emissions, while the rest of the world with 79.5 per cent of population accounted for 41.7 per cent of global emissions. It is noteworthy that the gap is even higher if we consider consumption-based emissions: with one fifth of the world’s population, industrialized countries represent almost two thirds (65 per cent) of global consumption-based emissions.39 This illustrates that the main challenge mitigation policies face today has to do with high levels of consumption in rich countries, rather than with a failure to implement clean technologies in industrial processes of production. This contrast between regions was even more striking at the time the UNFCCC was under discussion. It is this gap that the negotiators sought to capture. Under the UNFCCC, ‘Annex I’ countries are the industrialized countries and countries in transition, which have historically contributed most to greenhouse gas emissions and are best

37 International Panel on Climate Change (IPCC), Climate Change 2007: Synthesis Report (adopted at IPCC Plenary XXVII (Valencia, Spain, 12–17 November 2007), and representing the formally agreed statement of the IPCC concerning key findings and uncertainties contained in the Working Group contributions to the Fourth Assessment Report) figure 2.2(a). 38 This includes North America (USA and Canada), the countries from the Pacific Organisation for Economic Co-operation 1990 (Japan, New Zealand and Australia), Eastern European countries and countries from the former Soviet Union (the so-called ‘economies in transition’), and Western Europe. 39 These figures are from S Agrawala, S Klasen, R Acosta Moreno, L Barreto, T Cottier, D Guan, EE Gutierrez-Espeleta, AE Gámez Vázquez, L Jiang, YG Kim, J Lewis, M Messouli, M Rauscher, N Uddin and A Venables, ‘2014: Regional Development and Cooperation’ in O Edenhofer, R Pichs-Madruga, Y Sokona, E Farahani, S Kadner, K Seyboth, A Adler, I Baum, S Brunner, P Eickemeier, B Kriemann, J Savolainen, S Schlömer, C von Stechow, T Zwickel and JC Minx (eds), Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change (Cambridge and New York, Cambridge University Press, 2014) 1086–1140, at 1087.

20

The Limits of Fragmentation

equipped to deal with climate change thanks to their financial and technological resources. These countries must ‘adopt national policies and take corresponding measures on the mitigation of climate change, by limiting [their] anthropogenic emissions of greenhouse gases and protecting and enhancing [their] greenhouse gas sinks and reservoirs’ (Article 4 § 2(a)). In addition, a subset of ‘Annex I’ countries—in fact, OECD countries that were not economies in transition in 1992—are expected to provide financial support to developing countries to allow them to meet their obligations under the UNFCCC, and to assist those that are particularly vulnerable to the adverse effects of climate change (including small island states, countries with low-lying coastal areas, or particularly prone to natural disasters) in meeting costs of adaptation.40 In contrast, developing countries are not expected to reduce emissions, although they must, like all Parties to the UNFCCC, report on the basis of a national inventory of anthropogenic emissions by sources and removals by sinks of greenhouse gases.41 In addition to imposing these obligations, the UNFCCC establishes certain areas of cooperation between Parties in the development and transfer of technologies, practices and processes to mitigate climate change; in the preparation to adapt to the impacts of climate change; in the exchange of information; and in education, training, and raising public awareness. The UNFCCC is often described as an agreement that sets forth certain objectives, without being the source of legal obligations in the absence of binding targets. This is a common misrepresentation. It is based on the fact that the Framework Convention does not quantify the targets to be reached, and is therefore difficult to enforce. Indeed, it was in order to strengthen the Framework Convention that the 3rd Conference of Parties (COP-3) held in 1997 adopted the Kyoto Protocol.42 The Kyoto Protocol defined the greenhouse gas emissions reduction obligations for Annex I countries : under the Protocol, most industrialized countries and some central European economies in transition agreed to legally binding reductions in greenhouse gas emissions of an average of 6 to 8 per cent below 1990 levels between the years 2008–12.43

40

Article 4, §§ 3–4 and 8. On the reporting obligations, see Art 12. 42 Kyoto Protocol to the United Nations Framework Convention on Climate Change, Kyoto, 11 December 1997, entered into force on 16 February 2005 (UN doc FCCC/CP/L.7/ Add.1, 10 December 1997; 37 ILM 22 (1998)). 43 The United States initially agreed to reduce its total emissions by an average of 7% below 1990 levels. However, the US Congress blocked ratification of the Protocol, which was formally denounced by President George W Bush in 2001. 41

Trade and Environmental Standards

21

The Protocol also introduced so-called ‘flexibility mechanisms’ such as emissions trading, the clean development mechanism and joint implementation. Emissions trading means that Parties which, under the Kyoto Protocol, have committed to certain reduction targets, may sell their unused ‘assigned amount units’ (AAUs) to countries which exceeded their emission rights.44 This has led to the emergence of a market in carbon emissions, which is meant to reconcile a concern for equity (since the most advanced countries have agreed to stricter commitments) with a concern for efficiency (since it is presumed that allocative efficiency will be improved if countries can trade their emission credits).45 Under the Clean Development Mechanism provided for in Article 12 of the Kyoto Protocol to the UNFCCC, Annex I countries that have committed to reducing greenhouse gas emissions receive additional carbon emission reduction credits (CREs) if they help to implement emission-reducing projects in developing countries.46 In order to be eligible, the project must provide emission reductions that are additional to what would otherwise have occurred. A two per cent levy imposed on CERs contributes to the financing of the UNFCCC Adaptation Fund, which finances adaptation projects and programmes in developing countries Parties to the Kyoto Protocol that are particularly vulnerable to the adverse effects of climate change. The Joint Implementation mechanism finally, the third flexibility mechanism, is based on the idea that the Annex I Parties to the Protocol shall, individually or jointly, ensure that their aggregate anthropogenic carbon dioxide equivalent emissions of [GHG] do not exceed their assigned amounts … with a view to reducing their overall emissions of such gases by at least 5 per cent below 1990 levels in the commitment period 2008 to 2012:47

Article 6(1) of the Kyoto Protocol provides that, under certain conditions, these Parties ‘may transfer to, or acquire from, any other such Party emission reduction units resulting from projects aimed at reducing anthropogenic emissions by sources or enhancing anthropogenic removals by sinks of greenhouse gases in any sector of the economy’.

44

Kyoto Protocol, Art 17. The intellectual foundations behind the carbon market are of course to be found in the work of the Nobel Economics Laureate Ronald H Coase: see in particular Ronald H Coase, ‘The Problem of Social Cost’ (1960) 3 Journal of Law and Economics 1. 46 At the time of writing (July 2011), more than 3.300 CDM projects had been registered, for a total 500 million CERs annually (or 2 billion CERs until the end of the commitment period in 2012). 47 Kyoto Protocol, Art 3(1). 45

22

The Limits of Fragmentation

Perversely, because of how greenhouse gas emissions are computed in the global climate change regime (Box 1) it is highly tempting for industrialized countries to ignore these impacts of trade.48 The reporting mechanism under the 1997 Kyoto Protocol only records emissions arising from production and consumption within the country concerned—and not the ‘virtual’ emissions arising from the production of export products that the same country imports in order to meet its consumers’ demands. You count as emitted in country A the pollution caused by driving the car within that country, but not the pollution caused by the production of the car in the car-exporting country B. This allows industrialized countries to meet their obligations under the UNFCCC to reduce their emissions simply by outsourcing the most polluting industries to developing countries: thus, confirming earlier studies that point to this trend,49 a team of researchers from the University of Munich, led by Rahel Aichele and Gabriel Felbermayr, estimated in 2011 that while accession to the Kyoto Protocol led the countries which made commitments under the Protocol to reduce their domestic emissions by seven per cent on average, their carbon footprints have not decreased.50 This is the problem of ‘carbon leakage’, or ‘virtual emissions’. As trade volumes grow, a larger proportion of the greenhouse gases emitted in the production processes of products that are consumed will be emitted outside the national territory, and thus ‘externalized’—or outsourced to its trading partners—by the importing country. The current accounting of emissions thus gives an incorrect picture of the reality of what the industrialized countries are doing to reduce their carbon footprint. For the moment, the reason why we can pretend to limit greenhouse emissions without changing our lifestyles is not because we are smart at developing cleaner technologies: it’s because we outsource the most polluting types of production. The volumes concerned are significant. It has been calculated that in 2001 the ‘virtual emissions’ of the EU amounted to 992 megatonnes (Mt) CO2, representing the emissions from products imported by the EU, whereas the emissions from EU exports represented 446 Mt CO2.51 In effect therefore, the EU displaced over 500 Mt of CO2 emissions overseas that year: by the 48 This potential risk was noted even before the negotiation of the Kyoto Protocol: see, eg, J Oliveira-Martins, J-M Burniaux and JP Martin, ‘Trade and the effectiveness of unilateral CO2-Abatement policies: Evidence from Green’ (Winter 1992) OECD Economic Studies 19(Paris, OECD, France); C Perroni and TF Rutherford, ‘International trade in carbon emission rights and basic materials: General equilibrium calculations for 2020’ (1993) 95 Scandinavian Journal of Economics 257–78. 49 GP Peters and EG Hertwich, ‘CO embodied in international trade with implications for 2 global climate policy’ (2007) 42 Environmental Science & Technology 1401–7. 50 R Aichele and G Felbermayr, Kyoto and the Carbon Footprint of Nations, Ifo Working Paper No 103 (June 2011), Ifo Institute for Economic Research at the University of Munich (reproduced in (2012) 63 Journal of Environmental Economics and Management 336–54). 51 Climate and Trade. Why climate change calls for fundamental reforms in world trade policies, n 26 above, 9.

Trade and Environmental Standards

23

simple magic of trading more, it could make progress towards meeting its reduced greenhouse gas emissions targets with almost no impact on people’s consumption levels and habits. This trend has been continuing since. Researchers from the Carnegie Institute estimated in 2010 that 23 per cent of the greenhouse gas emissions linked to the goods consumed in developed countries—for a total of 6.4 billion tonnes of CO2—had in fact been emitted elsewhere, and that 22.5 per cent of the GHG emissions from China were for the production of export goods—to satisfy the tastes of consumers in the North (see figure 1).52

Figure 1. Largest interregional fluxes of emissions embodied in trade (Mt CO2y−1) (the thickest arrows represent the most important flows of virtual emissions). Source: Steven J Davis and Ken Caldeira, ‘Consumption-based accounting of CO2 emissions’ (2010) 107 Proceedings of the National Academy of Sciences 5687–92.

These findings were confirmed a year later by the study of the University of Munich.53 Using data covering 40 countries for the 1995–2007 period, covering 80 per cent of global greenhouse gas emissions, Aichele and Felbermayr found that over the period concerned the carbon emissions embodied in international trade increased significantly: in 1995, nine per cent of globally produced emissions were traded, but the figure was 15 per cent in 2007 (figures 2 and 3). This increase leads to a growing wedge between the domestic CO2 emissions and the carbon footprints of countries once we include their imports: the ratio of CO2 imports over domestic CO2 emissions increased by 17 per cent over this period, indicating a significant increase of carbon leakage. 52 Steven J David and Ken Caldeira, ‘Consumption-based accounting of CO emissions’ 2 (2010) 107 Proceedings of the National Academy of Sciences 5687–92. 53 R Aichele and G Felbermayr, Kyoto and the Carbon Footprint of Nations, n 50 above.

The Limits of Fragmentation 3500

16

3000

14

2500

12

2000

10

1500

8

%

Tons of CO2

24

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Year Sample CO2 content of trade, left scale CO2 trade as share of total emissions, right scale

Figure 2. CO2 content of trade and share of CO2 emissions traded Source: calculations by R Aichele and G Felbermayr, Kyoto and the Carbon Footprint of Nations, Ifo Working Paper No 103 (June 2011), based on a sample of 40 countries.

Russia

2.43

0.85

China

2.18

0.49

India

2.07

0.88 0.98

Middle east

0.61 0.49 0.77

US 0.30

Japan

0.25

Italy

0.21

Germany

0.91 0.53 0.52

0.21

UK

0.17

France 0

0.63

Exports Imports

0.51 0.5

1 1.5 kg CO2/US$ Trade

2

2.5

Figure 3: Mean CO2 intensity of imports and exports to and from the largest net importing/exporting countries (and Middle East region). Source: Steven J Davis and Ken Caldeira, ‘Consumption-based accounting of CO2 emissions’ (2010) 107 Proceedings of the National Academy of Sciences 5687–92.

Trade and Environmental Standards

25

It is therefore inconsistent to pretend to tackle climate change without regulating international trade in ways that take into account its impacts on the increased production of GHG emissions. ‘Carbon leakage’ as documented in the studies cited54 entails three risks.55 First, there is a risk that countries that have only weak carbon-constraining environmental policies—for instance, low levels of taxation of carbon—will attract carbon-intensive industries, resulting in what has been described as ‘carbon havens’. Secondly, this in turn may entail the loss of employment in certain sectors in the most carbon-intensive sectors of the industry, in the countries which have more robust climate change mitigation policies. Thirdly, the fear of whole industries relocating may delay efforts aimed at reducing emissions even in the countries that would wish to do more in this regard, since this would come at an important economic cost. Taken together, these concerns are both environmental and, in the countries that have the strongest carbon-constraining environmental policies in place, economic. The position of the EU is typical in this regard. In order to avoid a situation in which the introduction of the EU Emissions Trading Scheme would result in a loss of employment opportunities in certain particularly exposed industries (exposed both because of their high energyintensity and because of the trade openness of the sector in which they operate), the EU has initially resorted to the free allocation of emission quotas to the sectors concerned. As it now seeks to move to the next phases of implementation of the EU ETS, and to gradually rise the percentage of allowances that are allocated through an auctioning mechanism (imposing further costs to the industry), it is facing increased resistance. We are thus caught in a vicious cycle. The free allocation of quotas is seen as a means to reduce the impact of the EU carbon emissions trading system on the ability of companies operating from within the EU to compete on global markets. But this reduces the fiscal revenues from the scheme, and therefore the ability of the EU to finance a climate change fund or the transfer of clean technologies to developing countries. Instead, if the problem of carbon leakage were effectively addressed, allowing the EU quotas-based system of allocation of carbon allowances to evolve (with a gradual generalization of the auctioning system for their allocation), this could lead to a virtuous cycle in which the financial resources collected by the EU could fund climate change adaptation and mitigation strategies in the developing world. 54 See also, more recently, Jie He and Jingyan Fu, ‘Carbon leakage in China’s manufacturing trade: An empirical analysis based on the carbon embodied in trade’ (2014) 23 Journal of International Trade & Economic Development: An International and Comparative Review 329–60, DOI: 10.1080/09638199.2012.713389 (noting that China is a net carbon exporter, though primarily due to the fact that China has a large trade surplus and a high carbon emission intensity compared to its trade partners, rather than because China would have a comparative advantage in the most highly polluting industries: in fact, these researchers note, China’s comparative advantage is essentially concentrated in relatively less polluting, labour-intensive sectors). 55 Compare Trade and Climate Change. A Report by the United Nations Environment Programme and the World Trade Organization, n 23 above, 99 (describing the two first risks but not the third one referred to here, though it would seem to follow as a direct consequence).

26

The Limits of Fragmentation

Box 2. The growing body of international environmental law The two instruments dealing with the impacts of greenhouse gas emissions on climate change, the 1992 United Nations Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol adopted at the 3rd Conference of Parties (COP-3) to the UNFCCC, held in 1997, were referred to above (Box 1). The range of agreements forming the corpus of international environmental law is much broader, however. Among the most important are the 1985 Convention on the Protection of the Ozone Layer and the 1987 Montreal Protocol on Substances that Deplete the Ozone Layer;56 the 1989 Basel Convention on the Control of Transboundary Movement of Hazardous Wastes and Their Disposal;57 the 2001 Stockholm Convention on Persistent Organic Pollutants;58 the 1973 Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES Convention);59 the Convention on Biological Diversity;60 the 2000 Cartagena Protocol on Biosafety.61

III. THE USE OF ENVIRONMENTAL AND LABOUR CONDITIONALITIES IN TRADE POLICIES

It is against this background that the idea of linking trade to labour rights and environmental standards is gaining ground. Such a linkage can take a number of forms: it includes bans on certain products or increased tariffs, where such products are made in violation of such labour rights or environmental standards; the adoption of ‘border tax adjustments’, such as the so-called ‘carbon taxes’;62 the inclusion of social and/or environmental 56 Convention on the Protection of the Ozone Layer, Vienna, 23 March 1985, entered into force on 22 September 1988 (1513 UNTS 293; 26 ILM 1529 (1985)); andProtocol on Substances that Deplete the Ozone Layer, Montreal, 16 September 1987, entered into force on 1 January 1989 (1522 UNTS 3; 26 ILM 164 (1987)). 57 Basel Convention on the Control of Transboundary Movement of Hazardous Wastes and Their Disposal, entered into force on 5 May 1992 (28 ILM 649 (1989)). 58 Stockholm Convention on Persistant Organic Pollutants, Stockholm, 22 May 2001, entered into force on 17 May 2004: UN doc UNEP/POPS/CONF/4, App II (2001) (40 ILM 532 (2001)). 59 Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES), Washington, 3 March 1973, entered into force on 1 July 1975 (993 UNTS 243; 12 ILM 1085 (1973)), and amended at Bonn, on 22 June 1979. 60 Convention on Biological Diversity, Rio de Janeiro, 5 June 1992, 1760 UNTS 79. 61 The Cartagena Protocol on Biosafety to the Convention on Biological Diversity was adopted on 29 January 2000 as a supplementary agreement to the Convention on Biological Diversity and entered into force on 11 September 2003 (39 ILM 1027 (2000)). 62 BTAs aim to compensate for differences between the respective taxation systems of the exporting and the importing countries: these taxation systems shall be ‘equalized’ by ensuring that the taxes that are paid are those applicable in the country of destination of the goods (ie, where the final products are bought by the end consumer), rather than in the country of origin. See further on BTAs Chapter three of this volume.

Environmental and Labour Conditionalities

27

conditions in the design of preferential schemes benefiting developing countries (the so-called ‘Generalized Systems of Preferences’ (GSP) schemes that have sought, since the 1970s, to accelerate the integration of developing countries in the global trading system); or labelling schemes, to encourage the consumer to take into account compliance with labour rights or environmental standards in his/her purchasing practices. Table 1 below lists these different tools, relating them to the relevant provisions of the WTO Agreements, and referring them to the Parts of the book where they are discussed in greater detail. Table 1. A typology of trade-related measures linking access to compliance with labour or environmental standards Definition

Key provisions under Relevant portion WTO law of this volume

Sanctions

Bans or increased import tariffs applied to products or services that have not been produced in compliance with certain social or environmental standards (or originating in countries that do not comply with certain international standards)

Most-Favoured Nation and National Treatment Clauses (respectively Art I and III GATT, Art II and XVII GATS); prohibition of quotas and import bans (Art XI GATT and Art XVI GATS); but General Exceptions Clauses (Art XX GATT and Art XIV GATS)

Border tax adjustments

Article II:2(a) GATT ‘Equalizing’ the tax treatment of imported products to the level of internal taxation imposed on like domestic products

Preferential access to developing countries combined with‘sustainable development’ incentives

Granting preferential access to developing countries’ exports under the Generalized System of Preferences schemes, but imposing certain

‘Enabling Clause’ (1979) (Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries)

Chapter two (nondiscrimination requirements and prohibition of quotas and import bans; and the General Exceptions Clauses)

Chapter three

Chapter four

(continued)

28

The Limits of Fragmentation

Table 1. (Continued) Definition

Key provisions under Relevant portion WTO law of this volume

conditionalities and rewarding countries who accept supplementary obligations related to sustainable development and good governance Labelling

Labels awarded to some products on the condition that they comply with certain conditions, linked to compliance with social and environmental standards

TBT Agreement (Agreement on Technical Barriers to Trade (applicable to technical regulations and standards)); and Article II GATT

Chapter five

Some distinctions apply across these various instruments for linkage. A distinction can be made, first of all, between ‘general’ or ‘country-based’ measures and ‘tailored’ measures targeting certain lines of production.63 ‘General’ or ‘country-based’ measures would target all the products originating from a country not complying with certain conditions (for instance, found to be acting in violation of labour standards, or not taking measures that have been proven to be effective in slowing down the growth of greenhouse gas emissions). Such country-based measures can take a variety of forms.64 They include, in particular, import bans (where all products from one country are banned from being imported), quotas (where a quantitative limit is established on the volume of goods that can be imported from the country targeted), licensing requirements (where the products from one country are subject to a particular screening), or increased import tariffs. Border tax adjustments may also target all products originating from certain countries (for example, all countries that have not introduced a carbon tax 63 It would be tempting to use a terminology opposing ‘country-based’ measures to ‘productbased’ measures, but that would risk creating a confusion, since as mentioned above, the measures we have in mind here do not target products based on their physical characteristics, but rather on the process of production: they are thus ‘process-based’ rather than ‘product-based’. 64 I follow closely the typology proposed by James Harrison: J Harrison, The Human Rights Impact of the World Trade Organisation (Oxford and Portland OR, Hart Publishing, 2007) 70.

Environmental and Labour Conditionalities

29

in some form). And, of course, where GSP schemes are introduced, they may include certain advantages that are especially favourable to countries that have taken measures to strengthen the protection of labour rights or the environment. Country-based measures can take the form of ‘sanctions’ or of ‘incentives’. ‘Sanctions’ reduce the advantages one trading partner would otherwise enjoy, because that partner does not comply with a certain condition. ‘Incentives’ consist in granting additional advantages to the trading partner which complies with certain conditions. Though it has been put forward in the debate on the conditionalities the EU has gradually attached to its GSP scheme in favour of developing countries (as detailed in Chapter four), the difference between ‘sanctions’ and ‘incentives’ should not be overemphasized. For the countries that are denied access to markets, whether this is in retaliation for a failure to comply with certain conditions or whether it is because they do not satisfy certain conditions for being granted preferential treatment makes no substantive difference; and from the point of view of the requirement of non-discrimination, differential treatment in both cases will have to be justified on the same grounds. ‘Country-based’ measures will typically be very difficult to justify, because of the strong suspicion that, as they penalize all exports from the targeted country, they are motivated by protectionist purposes. Such measures also may be seen as imposing unnecessary restrictions to trade since, per definition, they do not allow for a product-by-product examination. In contrast to ‘general’ or ‘country-based’ measures, ‘product-based’ measures target specific lines of products, either because of particular physical characteristics of the product itself, or because the process of production is considered not to comply with certain environmental or labour norms. Again, the range of measures is a broad one: they include bans (for instance, the prohibition on all imports produced with prison or child labour), the imposition of increased tariff rates, or labelling schemes. Labelling schemes are discussed in Chapter five of this volume. Though such schemes can occasionally be country-based—not only indicating the country of origin of the product, but also providing the consumer with information about whether the said country complies with certain standards—they generally are awarded to some products on the condition that they comply with certain conditions, thus potentially making them more desirable in the eyes of the consumer. Between ‘country-based’ and ‘product-based’ measures, there are various intermediate situations, in which not a particular product, but a particular sector is targeted, based on the perceived need to encourage general improvements in that sector, and without a product-by-product examination of whether particular conditions were complied with in the production process. One example is the Kimberley Process Certification Scheme (KPCS), established in order to ensure that ‘conflict diamonds’ will not be traded and thus finance conflict in the diamond-producing countries. In

30

The Limits of Fragmentation

2003, the WTO General Council granted a waiver allowing the establishment of this scheme, exempting the countries participating in the process from their obligations under Articles I, XI and XIII of the GATT vis-à-vis the non-participants in the process (Box 3).

Box 3. The Kimberley Process Certification Scheme for ‘Conflict Diamonds’ The Kimberley Process Certification Scheme was established on 5 November 2002 by the Interlaken Declaration, as a means to implement resolutions of the UN Security Council relating to the trade in diamonds from countries in conflict. Its objective was to avoid such trade fuelling armed conflict in African countries such as Angola, Liberia and Sierra Leone.65 To achieve this, the KPCS established a certification scheme for rough diamonds, prohibiting the export to, and import from, participating countries, of diamonds that are not thus certified: so-called ‘conflict diamonds’, that are ‘used by rebel movements or their allies to finance conflict aimed at undermining legitimate governments’,66 are excluded from such trade. Trade in diamonds between participating countries is thus limited to certified diamonds; trade in diamonds is prohibited between participating countries and non-participating countries. The scheme entered into force on 1 January 2003. At the time it was launched, it involved 39 participating countries, representing in total 98 per cent of the production and trade of diamonds worldwide; 37 of them were WTO Members.67 In May 2003, the WTO Council for Trade in Goods agreed on a waiver exempting the participants in the Kimberley Process from the MFN clause with respect to measures ‘necessary to prohibit the export [and import] of rough diamonds to [and from] non-Participants in the Kimberley Process Certification Scheme’.68 Ostensibly, however, the decision to grant a waiver was stated explicitly to be ‘for reasons of legal certainty’ and according to its terms, ‘does not prejudge the consistency of domestic

65 On the relationship between the Kimberley Process and the WTO, see Tracey Michelle Price, ‘The Kimberley Process: Conflict Diamonds, WTO Obligations and the Universality Debate’ (2003) 12 Minnesota Journal of Global Trade 1; Joost Pauwelyn, ‘WTO Compassion or Superiority Complex?: What to Make of the WTO Waiver for “Conflict Diamonds”’ (2003) 24 Michigan Journal of International Law 1177–1207. 66 Kimberley Scheme, § I. 67 Joost Pauwelyn, ‘WTO Compassion or Superiority Complex?’, n 65 above, at 1179–80 (citing ‘WTO Goods Council Approves Kimberley Process Waiver’, Bridges Weekly Trade News Digest, 27 February 2003). 68 WTO Council in Goods, Waiver Concerning Kimberley Process Certification Scheme for Rough Diamonds: Communication, C/G/W/432/Rev.1.

Environmental and Labour Conditionalities

31

measures taken consistent with the Kimberley Process Certification Scheme with provisions of the WTO Agreement, including any relevant WTO exceptions’. It therefore should not be taken as guidance for the interpretation of the WTO agreements. In particular, it should not be presumed that, because a waiver was adopted, the measures restricting trade in conflict diamonds were considered to be otherwise in violation of WTO rules.

Whether they are ‘country-based’ or ‘products-based’, and whether they take an approach that is negative (using ‘sanctions’) or positive (using ‘incentives’), the adoption of unilateral measures to link access to markets to certain labour or environmental standards is necessarily ‘outward-looking’: their main objective is not to protect certain important values within the importing country, but to encourage the countries exporting to that country to pay greater attention to these standards domestically. For this very reason, they have generally been considered with suspicion: why, after all, would one country care about whether certain labour or environmental standards are complied with in the exporting country, if not for protectionist purposes, ie, because of the fear of social or environmental ‘dumping’? That was the concern expressed already at an early stage of the debate on the links between trade and the environment by one of the most influential commentators of the emerging trade regime. Writing in 1992, John H Jackson took the view then that while the trade regime established under GATT should not ignore environmental problems and instead ‘give specific and significant attention’ to potential trade-offs between trade openness and environmental concerns, the exceptions under which trade restrictions should be accepted should have well-established boundaries so as to prevent them from being used as excuses for a variety of protectionist devices or unilateral social welfare concerns. Possibly these exceptions should be limited to the situation where governments are protecting matters that occur within their territorial jurisdiction.69

In other terms, while it would be entirely understandable for a country to seek to protect important values at home, it is less understandable, and perhaps problematic, for a country to include ‘nosy preferences’ in its trade policies—ie, to demand that other countries take into account those same values under their jurisdiction. The distinction between ‘outward-looking’ and ‘inward-looking’ forms of linkage between trade and non-trade values is not always a clear-cut one, 69 John H Jackson, ‘World Trade Rules and Environmental Policies: Congruence of Conflict?’ (1992) 49 Washington and Lee Law Review 1227–78, at 1244.

32

The Limits of Fragmentation

however, even for process-based trade measures where the focus of attention is not the product itself but the means through which it was produced. Any measure that affects trade, even if primarily aimed at the protection of domestic interests (‘inward-looking’), by definition has impacts outside the territorial jurisdiction of the WTO Member adopting it, because it will influence choices of producers located in other jurisdictions seeking to penetrate the markets of that Member: for instance, measures aimed at protecting the health of the consumer in the importing country by regulating products will influence how such products will be manufactured elsewhere. Conversely, even if a measure adopted by one WTO Member primarily seeks to protect some interests outside that Member’s territorial jurisdiction (and is, in that sense, ‘outward-looking’), such a measure will relate in certain respects to the domestic interests of that Member almost by definition, because it corresponds to the preferences expressed in the jurisdiction of the Member adopting the measure, and because it may influence the flows of trade: for instance, a ‘social clause’ seeking to encourage the trading partners of one Member to improve labour conditions under their respective jurisdictions by making access to markets for their products conditional upon such goods complying with certain labour standards, also caters to the ‘tastes’ of consumers-voters in the importing country imposing such a conditionality, and may be seen as protecting workers in that country from unfair competition from abroad. Consumers within one country may legitimately express a preference for products imported within that country that do not depend on forced labour or on child labour, or that are produced in conditions that respect the environment, and the linkage mechanism may be seen as a means to take into account such preferences. As we will see, such preferences may be relevant in tracing regulatory distinctions (see Box 7). Considerations linked to the preservation of ‘public morals’ within the country concerned may be useful, moreover, in assessing whether the adoption of the said measure will be compatible with undertakings under the General Agreement on Tariffs and Trade (GATT).70 The distinction between ‘inward-looking’ and ‘outward-looking’ measures, therefore, is a relative one; it is in many cases contestable, and it is easy to deconstruct by relying alternatively on the professed aim of the measure and on the reality of its impacts. Nevertheless, the distinction does seem to play a role when assessing the acceptability of relying on environmental and social clauses in trade policies. The dominant perception remains that ‘inward-looking’ measures affect the trading partners of the Member adopting such conditionalities only indirectly, whereas ‘outward-looking’ measures directly affect the position of the trading partners—that is, indeed, their raison d’être.

70

See Art XX(a) of GATT, discussed in greated detail in section III of Chapter two.

Environmental and Labour Conditionalities

33

It is perhaps unfortunate that the ‘inward-looking’/‘outward-looking’ distinction sometimes obfuscates the arguably more important question that concerns the nature of the interests that a WTO Member seeks to protect by the adoption of a certain regulatory measure. Labour rights and environmental standards, at least when they are defined in accordance with universally agreed norms, are not mere impositions that one WTO Member seeks to impose on others; nor do they simply reflect ‘preferences’ of consumers, comparable to preferences for products complying with certain quality standards or for foods that present certain nutritional qualities. Instead, labour rights and environmental standards relate directly to universally recognized human rights that are binding on all states.71 This may be more relevant than is traditionally assumed to assessing the compatibility of linkage with WTO disciplines. As any other international treaty, the interpretation of WTO agreements must take into account ‘together with the context … any relevant rules of international law applicable in the relations between the parties’.72 This may imply that human rights treaties, or international human rights norms as part of customary international law, should influence the reading of the WTO agreements, in particular in order to ensure that the disciplines imposed under these agreements shall not constitute an obstacle to the ability of the Members to comply with their human rights obligations. This is not to say that any measure adopted by a WTO Member necessarily shall have to be treated as acceptable, for the mere reason that it contributes to the promotion of human rights, however weak the link is between the two. Uncertainties remain concerning the range of instruments that may be relevant to the interpretation of WTO agreements under this

71 This is true, in particular, due to the impacts on the enjoyment of human rights of climate disruptions that are resulting from climate change. The sixteenth session of the COP to the UNFCCC that met in Cancun between 29 November and 10 December 2010 recognized ‘the adverse effects of climate change [on] a range of direct and indirect implications for the effective enjoyment of human rights’ and that ‘the effects of climate change will be felt most acutely by those segments of the population that are already vulnerable owing to geography, gender, age, indigenous or minority status and disability’ (Report of the Conference of the Parties on its sixteenth session, held in Cancun from 29 November to 10 December 2010, FCCC/CP/2010/7/ Add.1 (15 March 2011), 7th Preambular Paragraph). They referred in this regard to resolution 10/4 of the United Nations Human Rights Council on human rights and climate change (Resolution 10/4 on Human Rights and Climate Change, adopted on 25 March 2009 without a vote, Report of the Human Rights Council on its tenth session, UN doc A/HRC/10/29, at 11). Many of these human rights impacts of climate change were summarized in the analytical study prepared by the Office of the High Commissioner for Human Rights, following an initiative of the Maldives, and presented at the tenth session of the Human Rights Council in March 2009: see Annual Report of the United Nations High Commissioner for Human Rights and Reports of the Office of the High Commissioner and the Secretary-General. Report of the Office of the United Nations High Commissioner for Human Rights on the relationship between climate change and human rights, A/HRC/10/61 (15 January 2009). 72 Vienna Convention on the Law of Treaties, opened for signature on 23 May 1969, entered into force on 27 January 1980, 1155 UNTS 331, 8 ILM 679 (Art 31.3(c)).

34

The Limits of Fragmentation

rule of interpretation (see Box 4). Moreover, even if we accept in principle that human rights norms should be taken into account in the interpretation of WTO agreements, there remains a difference between (i) the measures that a WTO Member adopts in order to ensure the full protection of human rights under its (territorial) jurisdiction, and (ii) the measures that it adopts in order to promote respect for human rights outside its (territorial) jurisdiction. Though the notion that human rights treaties impose extraterritorial duties on states has made significant progress in recent years,73 the mainstream doctrine would still challenge that there exists an obligation for the state to adopt affirmative measures to ensure that human rights are respected, protected and fulfilled outside its national territory. Whereas a state is duty-bound to respect, protect and fulfil human rights of people under its territorial jurisdiction, its duties to contribute to the protection of human rights outside its jurisdiction are generally seen as more limited, due both to the need to respect the sovereignty of the territorial state concerned and to the fact that the powers of the first state to influence situations outside its national territory are limited. Therefore, whereas ‘inward-looking’ measures adopted by the state in order to protect human rights within its national (territorial) jurisdiction may be defended on the basis of the duties of that state under international human rights law—an argument that the Dispute Settlement Bodies of the WTO cannot ignore—the same cannot be said of ‘outward-looking’ measures: here, quite apart from the question whether such measures are authorized under general international law or under WTO law, it would be difficult to argue that they are a means for a state to discharge its obligations under international human rights law. Despite these restrictions, it cannot be dismissed as simply irrelevant that measures aiming to link trade policies to labour rights or environmental standards are related to the promotion of internationally recognized human rights. In taking such measures, the importing state does not seek to impose its own (unilaterally defined) values on its trading partners; it may be said, rather, to be contributing to the enforcement of universally accepted values.74

73 See in particular the restatement of international human rights law in this regard, in Olivier De Schutter et al, ‘Commentary to the Maastricht Principles on Extraterritorial Obligations of States in the area of Economic, Social and Cultural Rights’ (2012) 3434 Human Rights Quarterly 1084–1171. 74 This is especially clear where the imposition of certain conditionalities based on labour rights or environmental standards in fact deprives consumers in the importing country of access to certain products subject to an import ban, or of access to foreign products at a low cost, although these consumers would have preferred to be able to have access to these products. The case of ‘carbon taxes’ imposed by industrialized countries at the border is typical: such taxes would force consumers in the importing country to change their consumption patterns, in contrast to the present situation where they may maintain their lifestyles unchallenged, while governments can pretend to reduce greenhouse gas emissions simply by increasing the volumes of imports.

Environmental and Labour Conditionalities

35

Whatever the reasons are for the exporting state not effectively protecting such values, the imposition of linkage by the importing state may be seen as a means to facilitate the compliance of the exporting state with its international obligations under the international law of human rights. This distinction plays an essential role, for instance, in the discussion on the so-called extraterritorial jurisdiction of states.75 In contrast with situations where states take ‘outward-looking’ measures to promote their own sovereign interests, where such measures promote solidarity between states, they should be considered as valid in principle. Indeed, the preservation of human rights has occasionally been referred to as of interest to all states, even in the absence of any more specific link between the state and the situation where human rights are violated. Although the significance of this dictum in the Barcelona Traction judgment referring to this specific character of international norms relating to ‘the basic rights of the human person’76 has been widely debated—and its consequences probably exaggerated by some commentators77—the erga omnes character of at least a handful of internationally recognized human rights may justify allowing the adoption by states of certain measures, even in conditions which might otherwise make such measures suspect, where this seeks to promote such rights.

75 It is no exaggeration to say that this distinction is central to the work by the Select Committee of Experts on Extraterritorial Jurisdiction set up within the Council of Europe by the European Committee on Crime Problems, and which benefited, in particular, from the contribution of Professor Rosalyn Higgins. See Extraterritorial Criminal Jurisdiction, Report prepared by the Select Committee of Experts on Extraterritorial Jurisdiction (PC-R-EJ), set up by the European Committee on Crime Problems (CDPC) (Strasbourg, Council of Europe, 1990) 25–30. 76 The International Court of Justice declared in the Barcelona Traction judgment that ‘an essential distinction should be drawn between the obligations of a State towards the international community as a whole, and those arising vis-à-vis another State in the field of diplomatic protection. By their very nature the former are the concern of all States. In view of the importance of the rights involved, all States can be held to have a legal interest in their protection. They are obligations erga omnes. Such obligations derive, for example, in contemporary international law, from the outlawing of acts of aggression, and of genocide, as also from the principles and rules concerning the basic rights of the human person, including protection from slavery and racial discrimination. Some of the corresponding rights of protection have entered into the body of general international law; others are conferred by international instruments of a universal or quasi-universal character’. International Court of Justice, Case concerning the Barcelona Traction, Light and Power Co (Belgium v Spain) (second phase—merits), 5 February 1970, [1970] ICJ Rep 3, paras 33–34. 77 For illuminating discussions, see Ian Seiderman, Hierarchy in International Law. The Human Rights Dimension (Antwerpen-Groningen-Oxford, Hart-Intersentia, 2001), ch IV; Maurizio Ragazzi, The Concept of International Obligations Erga Omnes (Oxford, Oxford University Press, 2000).

36

The Limits of Fragmentation

Box 4. The relevance of international human rights to the interpretation of WTO agreements Article 31.3(c) of the Vienna Convention provides that, in the interpretation of treaties, ‘[t]here shall be taken into account together with the context … any relevant rules of international law applicable in the relations between the parties’. Consistent with Article 3(2) of the Dispute Settlement Understanding included among the WTO agreements, this should also guide the interpretation of WTO agreements, which must be interpreted ‘in the light of customary rules of interpretation’. Indeed, the relevance of the Vienna Convention to the interpretation of WTO agreements has been acknowledged in a large number of Reports by Panels or by the Appellate Body of the WTO.78 However, diverging views have been expressed concerning the range of the human rights instruments that should be taken into consideration in the interpretation of WTO agreements. One view is that the only instruments that could be considered are those that are binding on all WTO Members.79 There is a logic to this position: any more generous approach—ie, any approach more open to taking into account other international treaties in the interpretation of WTO law—would result in WTO Members being opposed to agreements that they are not parties to, and that for them are res inter alios acta. This may explain why this view was apparently adopted, albeit in dicta, by a WTO Panel in the EC—Biotech dispute.80 However, in practice, this reading would deprive human rights treaties of any relevance to the interpretation of WTO law, since even the most widely ratified treaties would not be ratified by at least one Member of the

78

See, eg, United States—Convention and Reformulated Gasoline, n 84 above, pp 17–18. See Joost Pauwelyn, Conflict of Norms in Public International Law: How WTO Relates to Other Rules of International Law (Cambridge, Cambridge University Press, 2003) 263. However, Pauwelyn argues that human rights instruments can and indeed must be taken into account directly in the Dispute Settlement bodies of the WTO, insofar as they cannot ignore the fact that such instruments may impose on the WTO Members obligations that contradict their commitments under WTO agreements: thus, while human rights instruments cannot be a means of interpretation of WTO agreements, nor could they be ignored in the adjudication of disputes within the WTO—on the contrary, they should be accorded primacy above trade commitments, given the special nature of human rights treaties that cannot be reduced to an exchange of bilateral rights and obligations between States. See Joost Pauwelyn, Conflict of Norms in Public International Law, cited above, 52ff; and Pauwelyn, ‘The Role of Public International Law in the WTO: How Far Can We Go?’ (2001) 95 American Journal of International Law 535. This suggestion is resisted, in particular, by Gabrielle Marceau: G Marceau, ‘WTO Dispute Settlement and Human Rights’ (2002) 13 European Journal of International Law 753–814, at 762. On this debate, see J Harrison, The Human Rights Impact of the World Trade Organisation, n 64 above, 189–91 and 200–205. 80 European Community—Measures Affecting the Approval and Marketing of Biotech Products, WTO doc WT/DS291-293/R (7 February 2006) (Report of the Panel), para 7.68. 79

Environmental and Labour Conditionalities

37

WTO. In addition, since some WTO Members are not states, that situation would not be a provisional one, attributable only to a failure by some WTO Members to ratify the relevant human rights instruments: it is bound to persist indefinitely, because, with few exceptions, such instruments are not open to being ratified by subjects of international law other than states.81 Another view is that the WTO agreements should be interpreted taking into account the other treaties that are applicable to the relationships between the parties to the dispute, whether or not all the WTO Members are also parties to these treaties. Though this view has been attributed to Martti Koskeniemmi,82 it bears notice that the conclusions reached by the Study Group of the International Law Commission chaired by Koskeniemmi do refer to the fact that, in the interpretation of one treaty, another treaty will be ‘of particular relevance’ where all the parties to the first treaty are also parties to the second treaty.83 It is in any case doubtful whether these differences matter much. Few still would question that human rights recognized in international law through relevant international treaties, with very few exceptions, now belong to customary international law. As such, they cannot be ignored in the interpretation of WTO agreements: the Appellate Body has acknowledged that these agreements should not be read ‘in clinical isolation from public international law’.84 In the exceptional

81

J Harrison, The Human Rights Impact of the World Trade Organisation, n 64 above, 201. J Harrison, The Human Rights Impact of the World Trade Organisation, n 64 above, 201 (citing International Law Commission, Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of International Law. Report of the Study Group of the International Law Commission, UN doc A/CN.4/L.682 (13 April 2006), para 471). 83 See International Law Commission, Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of International Law. Report of the Study Group of the International Law Commission, UN doc A/CN.4/L.702 (18 July 2006), para 21 (‘Article 31(3)(c) also requires the interpreter to consider other treaty-based rules so as to arrive at a consistent meaning. Such other rules are of particular relevance where parties to the treaty under interpretation are also parties to the other treaty, where the treaty rule has passed into or expresses customary international law or where they provide evidence of the common understanding of the parties as to the object and purpose of the treaty under interpretation or as to the meaning of a particular term’ (emphasis added)) (also reproduced as: Report on the work of the fifty-eighth session of the International Law Commission (1 May to 9 June and 3 July to 11 August 2006) to the UN General Assembly, Official Records, Sixty-first Session, Supplement No 10 (A/61/10), chapter 12). 84 Appellate Body Report, United States—Standards for Reformulated and Conventional Gasoline Treatment of Imported Gasoline and Like Products of National Origin, WT/DS2/ AB/R (adopted on 20 May 1996). Article 3.2 of the Dispute Settlement Understanding confirms that WTO norms may be ‘clarified … in accordance with customary rules of interpretation of international law’, which the Vienna Convention codifies. Article 31, para 3(c) of the 82

38

The Limits of Fragmentation

situations where a conflict may arise between WTO agreements and human rights as part of customary international law, it could be argued in principle that the latter should prevail, based on the special nature of human rights treaties. This, however, does not imply that, as bodies specialized to adjudicate trade disputes under the relevant WTO agreements—rather than bodies tasked with applying the full range of international law applicable to the dispute—the Dispute Settlement bodies of the WTO should necessarily recognize such primacy in their decisions. This question, in any event, is largely theoretical, and it is likely to remain unresolved until a WTO Member shall invoke its human rights obligations in order to justify the adoption of a measure that is otherwise found to be in violation of its commitments under the WTO.

Table 1, placed earlier in this chapter, presents the overall structure of this volume, linking the various topics covered to the key provisions of the WTO Agreements and to the related chapters of the book. There are limitations, of course, to the approach proposed here. First, measures linking trade policies to non-trade values aim to improve the contribution of trade to sustainable development. They are not, however, a substitute for comprehensive sustainability impact assessments (SIAs) of trade agreements. Such SIAs have been increasingly prepared in recent years, and they have become a standard practice for trade agreements negotiated on behalf of the EU by the European Commission since 1999. Despite their many limitations, particularly as regards the human rights dimensions, only through such SIAs can we hope to align better trade agreements with the objectives of sustainable

Vienna Convention on the Law of Treaties stipulates that the interpretation of treaties must take into account ‘any relevant rules of international law applicable in the relations between the parties’. The ‘relevant rules of international law’ referred to by Article 31 para 3(c) of the Vienna Convention on the Law of Treaties are not deemed to be static, but may evolve, particularly, as a result of legal interpretation: see Legal Consequences for States of the Continued Presence of South Africa in Namibia (South-West Africa) notwithstanding Security Council Resolution 276 (1970), Advisory Opinion, [1971] ICJ Reports 16 at 31, para 53; Case concerning the Gabčíkovo-Nagymaros Project (Hungary/Slovakia), [1997] ICJ Reports 76–80, paras 132–147. On the need for an evolutionary interpretation, see Appellate Body Report, 12 October 1998, United States—Import Prohibition of Certain Shrimp and Shrimp Products (United States v India, Malaysia, Pakistan, Thailand), WT/DS58/AB/R, para 129. See also James Cameron and Kevin R Gray, ‘Principles of International Law in the WTO Dispute Settlement Body’ (2001) 50 International and Comparative Law Quarterly 248. On the relevance of international human rights treaties to the interpretation of WTO agreements, see Sarah Cleveland, ‘Human Rights Sanctions and International Trade: A Theory of Compatibility’ (2002) 5 Journal of International Economic Law 133–89.

Environmental and Labour Conditionalities

39

development: the adoption of unilateral trade measures is a second best, in effect compensating for the adoption of trade agreements that have been insufficiently attentive to objectives other than the expansion of the volume of exports of each party (see Box 6). Secondly, although labour rights and environmental standards are considered together here—although mostly analysed separately in what follows— it is important to acknowledge that they each present their own challenges: with respect to labour rights, it would be useful to distinguish between standards as they are set in the domestic legislation, and working conditions, as the latter may be either better or worse than what the legislative or regulatory framework requires; and the environmental impacts of any product considered in its whole life-cycle, are varied and touch on different values, whether we consider the depletion of natural resources, climate disruptions linked to the rise in greenhouse gas emissions, the inability for the ecosystems to recycle waste, or biodiversity loss (see Box 5). Moreover, labour rights and environmental standards present a different relationship to economic growth and higher levels of affluence: whereas growth means a greater pressure on resources and more pollution, it also generally means improvements in working conditions, and improved labour standards. Although such trade-offs cannot be considered in detail here, they would deserve to be part of any debate concerning the desirability of linking trade to social and environmental conditions.

Box 5. Social and environmental standards: commonalities and differences—by Edwin Zaccai In the search of a trade policy in line with sustainable development, it would be desirable to distinguish between standards relevant either for social or for environmental matters, and among the latter, between different types of ecological impacts. Social and environmental standards differ first by the ease with which, based on such standards, we can assess the impacts of various manufactured products. Social standards on products are mostly based on manufacturing conditions. But environmental standards are not only related to the manufacturing stage, but also to the entire life-cycle of a product. These steps include the extraction of raw materials, manufacturing, transportation, use, and the end of a product ‘life’ (disposal or recycling). This means that, in the calculation of such an ecological profile, the conditions prevailing in several countries are often involved. This can make it difficult to actually highlight a particular impact generated in any specific country. In addition, the impact generated at different steps generally splits into various forms of pollution, affecting a combination

40

The Limits of Fragmentation

of targets, from human health to specific species. In contrast, and without minimizing the difficulties in establishing social criteria to be met in production processes, this latter issue seems a priori better circumscribed. Another difference between the objectives of meeting social and environmental standards originates from the relations of those with the increase in global consumption, favoured by trade. A simplistic formula reflecting the evolution of Impact in a country or in the world, combines three factors, Population (P), Affluence (A) and Technology (T). In this approach, the Impact (I) is defined as the product of the last three terms (PAT).85 Most of the time the population factor will have much less variation than the increasing affluence, and thus consumption, favoured by economic growth. Thus, during the twentieth century the global population has been multiplied by a factor of four, and during the same period, the industrial output increased by a factor of 40.86 This explains the important role in international discussions of ‘clean’ technology. If affluence increases, and acknowledging that population does not decrease, it is only the factor technology, which represents technological solutions that could possibly make a difference to diminish the impact. To take a simple example, enabling more people to possess cars will generate more impact. But if they use highly polluting or less polluting cars (ie technology), the impact will vary accordingly. With regard to labour standards, no such relations exist. An increase in affluence may in fact lead to an improvement in labour standards; in contrast, although the relationship between technological change and labour standards is undoubtedly an important issue, environmentally efficient technologies as such do not play a defined role for those standards. Another general theory concerning the relationship between environment and economy is the so-called ‘Environmental Kuznets Curve’.87 The model assumes that as the wealth of a country increases its environmental impact starts with an increase, before reaching a maximum and then decreasing. If we combine this vision with the IPAT equation, it follows that, if this equation holds true, technology should be particularly effective above certain levels of wealth.

85 M Chertow, ‘The IPAT Equation and Its Variants. Changing Views of Technology and Environmental Impacts’ (2000) 4(4) Journal of Industrial Ecology 13–29. 86 JR McNeill, Something New Under the Sun: An Environmental History of the TwentiethCentury World (New York, WW Norton & Company, 2000). 87 S Dinda, ‘Environmental Kuznets Curve Hypothesis: A Survey’ (2004) 49 Ecological Economics 431–55.

Environmental and Labour Conditionalities

41

What has the observation of the evolution of environmental impacts shown in this respect during the last decades? Technologies have indeed been able to reduce some nuisances in richer countries, as is the case for some forms of air and water pollution, or by improving waste management. However technological responses have proved clearly insufficient, especially at global level, to reduce total material consumption, greenhouse gas emissions (both in absolute terms and as compared to the objectives the international community has set for itself) or remedy to biodiversity loss.88 It is thus apparent that the global increase in consumption is partly incompatible with a reduction of some environmental damage, at least in the present state of technology, for more fundamental reasons than the relative absence of environmental standards to be provided on commercial products. Of course, this contradiction does not occur in all areas, and many improvements are possible and desirable in the context of current consumption and trade. But in this regard, it may be useful, rather than talking about environmental standards in general, to better distinguish between different environmental issues within various national contexts.

Box 6. Trade and Sustainable Development: the role of impact assessments—by Elisabeth Bürgi Bonanomi International sustainable development law research places emphasis on the requirement of substantive coherence between treaties: it leads one to ask whether one treaty, through its impacts, provides an enabling or a hindering environment for effective implementation of another treaty, and vice versa.89 The legal principle of sustainable development is well-suited for approaching substantive coherence, as it provides a multidimensional methodological norm that requires careful balancing of legal interests enshrined in the different regimes. This, in turn, calls for transparent uncovering of trade-offs and a focused and deliberative search for optimal options.90 Based on this approach, a trade regime is sustainable if it provides for an environment that is simultaneously optimal for the implementation of human

88 E Zaccai, ‘Over two decades in pursuit of sustainable development: Influence, transformation, limits’ (2012) 1 Environmental Development 79–90. 89 E Bürgi Bonanomi, Sustainable Development in International Law Making and Trade (Cheltenham, Edward Elgar, forthcoming 2015). 90 Katja Gehne, Nachhaltige Entwicklung als Rechtsprinzip, Normativer Aussagegehalt, rechtstheoretische Einordnung, Funktionen im Recht (Tübingen, Mohr Siebeck, 2011).

42

The Limits of Fragmentation

rights and other social standards, for the protection of environmental standards, and for the promotion of economic vitality.91 Sustainability impact assessments (SIAs)—undertaken both before (ex ante) and after the agreement in question has been concluded (ex post)—have a key role to play in the process of defining sustainable trade options, as they encourage evidence-based, informed, and creative decision-making in the process of transformation towards sustainable trade.92 Since the late 1990s, the EU has been conducting SIAs prior to concluding new trade agreements.93 However, while representing an important first step, the methodology that is currently applied94 needs to be strengthened, in particular by responding to obligations derived from the human rights framework.95 Accordingly, effective ex ante SIAs of trade agreements need to thoroughly examine how a tabled trade regulation option—via the dynamics it will trigger—will impact on the ability of the partner countries’ governments to implement human rights; whether the trade agreement will strengthen or weaken social safety nets; whether the players in the new market will respect environmental standards; and whether the trade agreement will improve or worsen economic performance at both aggregate and individual levels in the short and long run. It is imperative that trade-SIA results then inform the policy processes.96 A core (and frequently neglected) aim of trade SIA processes is to identify the optimal and the most enabling trade regulation options. These may or may not correlate with the trade options originally tabled. To enable drafting of such optimal trade options, any relevant legal standards—which may derive from national, regional, or international law and include the human rights, fundamental principles of

91 Marie-Claire Cordonier Segger and Christopher G Weeramantry (eds), Sustainable Justice, Reconciling Economic, Social and Environmental Law (Leiden, Martinus Nijhoff, 2005). 92 Clive George and Colin Kirkpatrick, ‘Sustainability Impact Assessment of Trade Agreements: from public dialogue to international governance’ (2008) 10 Journal of Environmental Assessment Policy and Management 67. DOI: 10.1142/S1464333208002956. 93 See: ec.europa.eu/trade/analysis/sustainability-impact-assessments/assessments/. 94 EU Commission, Handbook for Trade Sustainability Impact Assessment (EU External Trade, 2006). 95 UN Guiding Principles on human rights impact assessments of trade and investment agreements, report of the Special Rapporteur on the right to food, Olivier De Schutter (19 December 2011) (UN doc A/HRC/19/59/Add.5). See also James Harrison, The Human Rights Impact of the World Trade Organisation (Portland OR, Hart Publishing, 2007); and Simon Walker, The Future of Human Rights Impact Assessments of Trade Agreements (Antwerp, Intersentia, 2009). 96 Elisabeth Bürgi Bonanomi, EU Trade Agreements and Their Impacts on Human Rights. Study commissioned by the German Federal Ministry for Economic Cooperation and Development (BMZ) (Bern, CDE/WTI, 2014).

Environmental and Labour Conditionalities

43

environmental law, and constitutional principles of the WTO—must first be put on the table in order to identify the range of most relevant targets to which the respective trade agreement should most optimally contribute (duty to include). These legal standards then need to be structured according to current theory of hierarchy of norms (duty to structure and weigh). In a further step, trade SIAs are carried out to establish an evidence base and help identify trade-offs. Their findings finally provide a basis for identifying optimal options (duty to balance and reconcile by developing optimal options).97 The search for optimal or most enabling trade options is a process of approximation and not an exact science, and ‘the optimal trade option generally lies somewhere in between’.98 Usually, there will be not just one, but a range of optimal options with different emphases. The search for these options must come without any foregone conclusions and requires openness to nuanced trade regulation options. It is about considering different forms of market access and of safeguards; about shaping exception clauses in such a way that they are invoked whenever necessary (eg by finding creative ways of dealing with procedural obstacles such as prohibitive bearing of the burden of proof); about including human rights clauses tailored to the needs of developing countries;99 about effectively combining trade benefits with good governance requirements; and about the introduction of effective sustainability incentives as discussed in this volume. When drafting nuanced trade options, consideration should be given to the fact that open-texture rules, if interpreted systemically, can be helpful in providing contextual flexibility.100 Linking market access to social and environmental conditionalities in order to ‘use market access as a leverage to encourage […] trading partners to improve labor conditions and to better protect the environment’, as suggested in this volume, deals with only one component of the entire ‘trade and sustainability package’. Even if such a sustainability measure is deemed compatible with WTO law, its implementation will not per se produce outcomes aligned with the

97 K Gehne, Nachhaltige Entwicklung als Rechtsprinzip, n 90 above; E Bürgi Bonanomi, Sustainable Development in International Law Making, n 89 above. 98 E Bürgi Bonanomi, Sustainable Development in International Law Making, n 89 above, 379. 99 Lorand Bartels, The EU’s Human Rights Obligations in Relation to Policies with Extraterritorial Effects, University of Cambridge Faculty of Law Research Paper No 10/2014. 100 See Article 31.3(c) of the Vienna Convention on the Law of Treaties; and see Box 4 in this chapter.

44

The Limits of Fragmentation

objective of sustainable development. Therefore, while linking market access to sustainability standards can be important in transforming the current trade regime into one that is sustainable, it is important to assess the impacts of such measures carefully. Further, sustainability standards should be introduced along with other provisions promoting sustainable trade, as the core contents of a trade agreement may be no less decisive in enabling sustainable development than measures that explicitly target sustainability.

2 Sanctions Against Goods or Services that Do Not Comply: WTO Disciplines

T

HERE EXISTS A large literature on the relationship between trade and labour rights, as well as on trade and the environment.1 We focus here on the specific questions that arise from the use by one country or region of its trade policies to encourage its trading partners to improve the protection of labour rights and to make progress in improving compliance with environmental standards, particularly in the area of climate change mitigation. We first describe, in a summary format, the main disciplines that are imposed under the relevant WTO agreements (section I). Next, we examine whether it is in principle acceptable for a WTO Member to take into account, in making a regulatory distinction, preferences expressed by its constituency not only for certain physical characteristics of a good, that matter for its end-use, but also certain characteristics that concern how a good is made—and in particular, under which labour conditions and with which environmental consequences. We will find that although, in principle, WTO Members may operate on that basis, any sanctions they would impose to discourage the imports of products or services that do not comply with certain labour or environmental conditions shall be treated as if they were quantitative restrictions (or ‘bans’) (section II). The result is that such measures can only be saved if the importing Member can successfully

1 On the relationship between trade and human or labor rights, see S, Polanski Trade and Labor Standards. A Strategy for Developing Countries (Washington DC, Carnegie Endowment for International Peace, 2003); Lance A Compa and Stephen F Diamond (eds), Human Rights, Labor Rights, and International Trade (Philadelphia PA, University of Pennsylvania Press, 1996); Sarah Joseph, David Kinley and Jeff Waincymer (eds), The World Trade Organization and Human Rights: Interdisciplinary Perspectives (Cheltenham, Edward Elgar, 2009); J Harrison, The Human Rights Impact of the World Trade Organisation (Oxford and Portland OR, Hart Publishing, 2007); C Kaufmann, Globalisation and Labour Rights—The Conflict between Core Labour Rights and International Economic Law (Oxford and Portland OR, Hart Publishing, 2007);T Cottier, J Pauwelyn and E Bürgi Bonanomi (eds), Human Rights and International Trade (Oxford, Oxford University Press, 2006); S Aaronson and J Zimmerman, Trade Imbalance. The Struggle to Weigh Human Rights Concerns in Trade PolicyMaking (Cambridge, Cambridge University Press, 2008); Sarah Joseph, Blame it on the WTO? A Human Rights Critique (Oxford, Oxford University Press, 2011).

46

Non-Compliance: WTO Disciplines

invoke the General Exception Clause of Article XX GATT (or its equivalent provision in GATS, Article XIV), which contains a closed set of admissible justifications to otherwise prohibited measures (section III).

I. THE CORE DISCIPLINES OF THE WTO REGIME

The General Agreement on Tariffs and Trade (GATT), originally concluded in 1947 but incorporated in the Agreements of the World Trade Organization in 1994, and the General Agreement on Trade in Services (GATS), impose three key disciplines on WTO Members. First, Article I of the GATT contains a most-favoured nation (MFN) clause: the central rule is that any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties (Article I:1 GATT 1994).

In other terms, no difference of treatment may be made between ‘like’ products of various WTO Members, without justification. A similar rule is established in Article II of the GATS, according to which, unless it may invoke a specific exception, ‘each Member shall accord immediately and unconditionally to services and service suppliers of any other Member treatment no less favourable than that it accords to like services and service suppliers of any other country’ (Article II:1 GATS). Secondly, Article III GATT requires ‘national treatment’ for foreign products: taxes, charges or regulations ‘should not be applied to imported or domestic products so as to afford protection to domestic production’ (Article III:1 GATT 1994); imported products ‘shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products’ (Article III:2 GATT 1994), a provision that is especially relevant for border tax adjustments; and the products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use (Article III:4 GATT 1994).

Any discrimination between domestically produced goods and foreign (imported) goods is thus prohibited. The equivalent provision in GATS is Article XVII. Thirdly, Article XI GATT 1994 forbids quantitative restrictions such as quotas, import bans and export bans. Therefore, any quantitative restrictions must be transformed in quantifiable ‘taxes’, or ‘duties’, which are expected to be gradually reduced in successive rounds of trade negotiations,

Core Disciplines of the WTO Regime

47

and should provide sufficient transparency to ensure that foreign products that are ‘like’ domestic products are not discriminated against. Similarly, Article XVI GATS guarantees market access, as regards the services sectors for which market access commitments are made. Thus, both under GATT 1994 and GATS, WTO Members may not discriminate either between ‘like’ goods from different countries (mostfavoured nation clause) or between foreign goods and domestic goods (national treatment); nor may they impose quantitative restrictions, for example restricting market access through a system of quotas. But this may be the effect of measures banning certain goods that are produced in violation of labour rights or environmental standards, or imposing higher import tariffs on such goods. The Dispute Settlement Bodies of the WTO have consistently held that both de jure and de facto discrimination were prohibited under the most-favoured nation and national treatment clauses.2 Therefore, the measures that are prohibited are not only measures that explicitly target goods from a certain country, or that are directed towards foreign goods without similar requirements being imposed on domestic goods: the prohibition extends to apparently neutral measures that have the effect of disadvantaging goods from a particular country, or that have the effect of disadvantaging foreign goods vis-à-vis domestic goods. The question that is decisive is whether, considering the nature of the industry in question, consumers’ preferences, and historic trade patterns, the introduction of the measure in question will change competitive conditions in such a way as to represent a disadvantage for the goods originating in one country, or for foreign goods: given this full range of facts, is the governmental measure at issue one which ‘affects the conditions under which like goods, domestic and imported, compete in the market within a Member’s territory’?3 In principle, this non-discrimination requirement thus expressed may affect any regulatory measure, even applied indifferently to all goods sold in the territory of one WTO Member, whether of domestic or of foreign origin: if an exporting country demonstrates that the measure in question creates obstacles to its ability to export goods to the country adopting the measure, it may seek to challenge the measure as discriminatory. However, because any regulatory measure has, at least potentially, impacts on trade patterns, the non-discrimination requirement must be understood reasonably. First, a distinction should be made between regulatory measures 2 Appellate Body Report, United States—Measures Affecting the Production and Sale of Clove Cigarettes (US—Clove Cigarettes), WTO doc WT/DS406/AB/R, adopted 24 April 2012, para 175; Appellate Body Report, United States—Measures Concerning the Importation, Marketing and Sale of Tuna and Tuna Products (US—Tuna II (Mexico)), WTO doc WT/ DS381/AB/R, adopted 13 June 2012, para 225. 3 Appellate Body Report, Korea—Measures Affecting Imports of Fresh, Chilled and Frozen Beef, WTO doc WT/DS161/AB/R, WT/DS169/AB/R, adopted 10 January 2001, DSR 2001:I, 5, para 139.

48

Non-Compliance: WTO Disciplines

that encourage market actors to change their behaviour by switching from foreign products to domestic products, which are in principle suspect, and changes in the competitive conditions in a marketplace that are ‘not imposed directly or indirectly by law or governmental regulation, but [are] rather solely the result of private entrepreneurs acting on their own calculations of comparative costs and benefits’:4 the latter, the Appellate Body has noted, ‘cannot be the basis for a finding that a measure treats imported products less favourably than domestic like products’.5 Therefore, ‘it is the effect of the measure on the competitive opportunities in the market that is relevant to an assessment of whether a challenged measure has a detrimental impact on imported products’.6 Secondly, where the detrimental impact on foreign products ‘stems exclusively from a legitimate regulatory distinction’7 or may be ‘explained by factors or circumstances unrelated to the foreign origin of the product’,8 it will not be considered to constitute a discrimination. The following sections examine the implications of this framework for the introduction in trade policies of conditionalities related to compliance with labour rights or with environmental standards. The next section addresses a preliminary question: is it legitimate for a WTO Member, as a matter of principle, to make a regulatory distinction based not on the physical characteristics of a product alone, but also on its process of production—for instance, on whether or not the rights of workers or environmental conditions were complied with in that process? The answer is that such a distinction is not per se illegitimate, but that it should not be relied upon for protectionist purposes: it is treated, therefore, with a certain degree of suspicion.

II. THE ‘LIKENESS’ OF GOODS AND SERVICES AND THE PRODUCT/PROCESS DISTINCTION

To start with, it may be useful to dispel a potential source of confusion. This has to do with the question of which regulatory distinctions may legitimately be drawn by the importing WTO Member, and in particular whether such distinctions may take into account the preferences that consumers express for products or services complying with certain social or environmental standards. Indeed, in the different forms in which it is 4

Appellate Body Report, Korea—Various Measures on Beef, para 149. Appellate Body Report, United States—Certain Country of Origin Labelling (COOL) Requirements, WTO doc WT/DS384/AB/R, adopted 29 June 2012, para 270. 6 Appellate Body Report, United States—Certain Country of Origin Labelling (COOL) Requirements, cited above, para 271. 7 Appellate Body Report, United States—Certain Country of Origin Labelling (COOL) Requirements, cited above, para 271. 8 Appellate Body Report, Dominican Republic—Measures affecting the importation and internal sale of cigarettes, WTO doc WT/DS302/AB/R, adopted 25 April 2005, para 96. 5

‘Likeness’ and the Product or Process

49

envisaged here, linkage seeks to take into account how the particular good or service that is exported to the EU has been produced: it targets production or process methods (PPMs), rather than the product itself (its physical characteristics).9 This has usually led commentators to raise the question whether two otherwise identical products, but produced according to different processes or methods (respecting, or instead violating, labour or environmental standards), must be treated as ‘like’ products for the purposes of the non-discrimination requirements of the GATT and GATS agreements, or whether they may instead be treated as distinct. If they are indeed distinct, then does the non-discrimination requirement apply at all? This formulation of the question is misleading, however. As noted in the EC—Asbestos case (Box 7), consumers may express preferences for products that are made in compliance with certain standards related to labour or the environment. Though they may be unrelated to the physical characteristics of the product, such preferences matter: therefore, products complying with certain standards consumers care about are not necessarily to be treated as substitutable for products that do not comply with such standards. The WTO Agreements in fact allow regulatory distinctions to be made between products that cannot be differentiated by their physical characteristics, nor by their end-use by the consumer, but that have been produced under different conditions.10 However, this does not mean that distinctions based on PPMs shall never be treated as discriminatory. Such distinctions still must comply with the disciplines the WTO Agreements impose: they must not be discriminatory towards foreign products, and they must not result in disproportionate obstacles to trade. Indeed, the test under WTO law is whether such distinctions treat products originating from different WTO Members without discrimination, not whether they treat products that comply with certain standards like products that do not comply. As illustrated by EC—Asbestos (Box 7), it is legitimate to base a regulatory distinction on preferences expressed by consumers concerning processes of production. But the ‘Tuna/Dolphin’ case shows that this may be of limited use where measures linking access to market to certain social or environmental considerations are denounced as resulting in discrimination (Box 8). This is because of the choice of the comparator in such disputes: the comparison will be between products that have different national origins, and not between products that present certain characteristics and other products that do not present such characteristics. In cases where less 9 On this distinction, see Robert Howse and Donald Regan, ‘The Product/Process Distinction—An Illusory Basis for Disciplining “Unilateralism” in Trade Policy’ (2000) 11 European Journal of International Law 249–89. 10 See in particular Howard F Chang, ‘An Economic Analysis of Trade Measures to Protect the Global Environment’ (1995) 83 Georgetown Law Journal 2131; Steve Charnovitz, ‘The Law of Environmental “PPMs” in the WTO: Debunking the Myth of Illegality’ (2002) 27 Yale Journal of International Law 59–110.

50

Non-Compliance: WTO Disciplines

Box 7. Do consumers’ preferences matter?—the EC—Asbestos case European Communities-Measures Affecting Asbestos and Products Concerning Asbestos (EC—Asbestos) has long been seen as the leading case concerning the question of whether two products can be considered ‘like’ products for the purposes of defining the scope of applicability of the non-discrimination provisions of the GATT 1994.11 The Appellate Body was asked to determine whether building products made with chrysolite asbestos fibres were ‘like’ other building products used for the same purposes, such as ‘PCG’ fibres. It noted that the ‘likeness’ of two products should be assessed differently depending on the precise context in which the question of interpretation arises (and, indeed, depending on the provision of the GATT that refers to this condition). However, taking into account the general purpose of Article III GATT 1994—which is to avoid the adoption of internal measures that aim to protect domestic goods against foreign goods with which they are in a competitive relationship—it did suggest that the framework for examining ‘likeness’ includes four characteristics of the goods concerned: (i) the physical properties of the products; (ii) the extent to which the products are capable of serving the same or similar end-uses; (iii) the extent to which consumers perceive and treat the products as alternative means of performing particular functions in order to satisfy a particular want or demand; and (iv) the international classification of the products for tariff purposes.12

The Appellate Body considered that the health risks associated with chrysotile asbestos fibres could be included in the examination of the physical properties of that product, the first of the characteristics cited, in order to assess whether it is in a ‘competitive relationship’ with other building products used for the same purposes.13 In the EC—Asbestos Case, the Appellate body also noted that ‘consumers’ tastes and habits regarding fibres, even in the case of commercial parties, such as manufacturers, are very likely to be shaped by the health risks associated with a product which is known to be highly carcinogenic’.14 This, it is important to note, does not imply that consumers’ tastes and preferences only deserve to be taken into

11 European Communities—Measures Affecting Asbestos and Products Concerning Asbestos (EC—Asbestos), WTO doc WT/DS135/AB/R, AB-2000-11 (12 March 2001) (Report of the Appellate Body). The case was the first one providing the Appellate Body with an opportunity to define the criteria for the ‘likeness’ of products under Article III.4 of GATT 1994, which is the national treatment clause in the Agreement. 12 At para 101. 13 At paras 115–116. 14 At para 122.

‘Likeness’ and the Product or Process

51

consideration if they relate to the physical characteristics of a product. Substitutability depends on the tastes of consumers, whether such tastes relate to physical characteristics of the product or to processes of production: the two characteristics—the first and the third ones, in the framework proposed by the Appellate Body, related respectively to ‘physical properties’ and to consumers’perceptions—each have an independent function to fulfil, in determining whether the two products concerned are in a competitive relationship. It is the presence of such a competitive relationship that is the ultimate benchmark of ‘likeness’. Therefore, if consumers do care about how a particular good was produced (and specifically, about whether it was produced in compliance with labour or environmental standards), then the implication is that products that do not satisfy these expectations are not ‘like’ products that do satisfy these expectations, for the purposes of defining the scope of the non-discrimination requirement. The rise of ‘ethical consumerism’—the transformation of the behaviour of consumers that care more about whether the products that they buy have been produced responsibly—has been amply documented.15 Its implication is that products that may have been substitutable in the past may not be so anymore today, even without any change in their physical characteristics or in their end-use, if the consumers perceive these products as different, whether for justified on unjustified reasons,16 and even if such a perception relates exclusively to considerations of production or process methods. It therefore cannot be excluded, in theory, that the increased taste of consumers for products and services that are produced according to processes and methods that respect labour rights and use ‘clean’ technologies that respect the environment, will be relevant in an examination of discrimination by WTO Dispute Settlement Bodies. 15 See, eg, KA Elliott and RB Freeman, ‘White Hats or Don Quixotes? Human Rights Vigilantes in the Global Economy’, Working Paper No 8102, National Bureau of Economic Research, Cambridge, MA; Marymount University Centre for Ethical Concerns, The Consumers and Sweatshops, November 1999. 16 See also European Communities—Measures Affecting the Approval and Marketing of Biotech Products, WTO docs WT/DS291/R, WT/DS292/R and WT/DS293/R (29 September 2006) (Reports of the Panel). In this case, which concerned the de facto moratorium on the approval of genetically modified organisms by the EC as well as bans on GMOs issued by individual Member States of the EU, the Panel suggested that the regulatory option chosen by the EU could be explained by the perception of consumers concerning the safety of GMOs, independently of the question whether such a perception was grounded on solid scientific evidence. They stated, in the context of the SPS Agreement: ‘it is not self-evident that the alleged less favourable treatment of imported biotech products is explained by the foreign origin of these products rather than, for instance, perceived differences between biotech products in terms of their safety’ (para 7.2514). See S Joseph, Blame it on the WTO?, n 1 above, 99; Adam McBeth, International Economic Actors and Human Rights, (Oxford, Routledge, 2010) 135.

52

Non-Compliance: WTO Disciplines

Box 8. The ‘Tuna/Dolphin’ case before the WTO Dispute Settlement bodies: may the United States label tuna fished under certain conditions as ‘dolphin-safe’? In the most recent ‘Tuna/Dolphin’ case, Mexico complained that the conditions under which the label ‘dolfin-safe’ for the sale of tuna in the United States could be used (the use of this label was strictly regulated under US law) made access to the US market particularly difficult for Mexican exports of tuna, and that this constituted discrimination, inter alia, under Articles I:1 and III:4 of GATT 1994. The EU questioned whether tuna harvested without complying with the conditions prescribed for the acquisition of the label and tuna complying with such conditions could be treated as ‘like’ products. Following the argument presented above on the basis of EC—Asbestos, the position of the EU was that consumers’ preferences mattered for the determination of the ‘likeness’ of the products concerned. It argued that: to consumers’ minds and purchasing patterns, tuna that has been fished in a manner that harms dolphins may be considered as a different product from tuna that has been fished in a manner that does not harm dolphins. The segment of consumer demand for ‘dolphin-safe’ tuna appears to be very important and to probably outweigh by far the segment of consumer demand for ‘non-dolphin-safe’ tuna. Mexico recognizes that only ‘dolphinsafe’ tuna can be commercialised successfully in the United States. This is the reason why Mexico wishes to have tuna fished through [certain fishing techniques] labelled as ‘dolphin-safe’.

The EU concluded that if ‘consumers tend to perceive ‘dolphin-safe’ tuna as being different from ‘non-dolphin-safe’ tuna and that their consumption patterns confirm this difference in the perceptions’, then ‘dolfin-safe’ tuna and ‘non-dolfin-safe’ tuna should not be treated as similar products.17 The Panel did not reject this interpretation of the EU.18 Indeed, the Panel explicitly noted that the information it was presented with does suggest that US consumers have certain preferences with respect to tuna products, based on their dolphin-safe status, and [the Panel does] not exclude that such preferences may be relevant to an assessment of likeness.

17 United States—Measures concerning the importation, marketing and sale of tuna and tuna products, WTO doc WT/DS381/R (Report of the Panel, 15 September 2011), paras 5.101 and 5.102 (third party submission and oral statement of the European Union). 18 Though the Panel reasoned under Article 2.1 of the TBT Agreement rather than under Articles I:1 and III:4 of GATT 1994, which the EU was referring to, the test of ‘likeness’ is essentially the same under both agreements.

‘Likeness’ and the Product or Process

53

To the extent that consumer preferences, including preferences relating to the manner in which the product has been obtained, may have an impact on the competitive relationship between these products, [the Panel considers] it a priori relevant to take them into consideration in an assessment of the likeness.19

The Panel emphasized however that the ‘likeness’ should be assessed between Mexican tuna products and tuna products from the US or other countries, and not between tuna that is ‘dolfin-safe’ and tuna that does not present this characteristic, since to substitute the latter comparison for the former would be to presume that the Mexican tuna per definition would not be able to comply with the conditions allowing it to be certified as ‘dolphin-safe’. Therefore, though it did acknowledge the argument of the EU and did not dismiss it as either wrong or irrelevant, the Panel considered that tuna products originating in Mexico should be considered to be ‘like’ tuna products from the US or from any other country: the question to be examined was whether the conditions under which the ‘dolphin-safe’ label was attributed discriminated against Mexican tuna. The Appellate Body did not question this conclusion, as it was not part of the appeal made by the Parties to the dispute.20

favourable treatment is given to products originating from a WTO Member, in alleged violation of the non-discrimination requirements of the GATT, GATS or TBT agreements, due to certain requirements linked to compliance with labour rights or environmental conditions, the question presented to the dispute settlement bodies will be whether products originating from that Member are ‘like’ products from the importing Member or originating from other Members, and not whether products complying with certain conditions are ‘like’ products not complying with such standards: indeed, it may not be presumed that the products originating from the exporting WTO Member do not comply with such conditions, or this would imply that the conditions for demonstrating compliance are discriminatory and result in unnecessary obstacles to trade. Though not illegitimate per se, regulatory distinctions that impose certain requirements as to how a good is to be produced (in particular, in 19 United States—Measures concerning the importation, marketing and sale of tuna and tuna products, WTO doc WT/DS381/R (Report of the Panel, 15 September 2011), para 7.249. 20 United States—Measures concerning the importation, marketing and sale of tuna and tuna products, WTO doc WT/DS381/AB/R (Appellate Body Report of 16 May 2012), para 202.

54

Non-Compliance: WTO Disciplines

accordance with social or environmental norms), such distinctions being based on the preferences expressed by consumers, are nevertheless treated with great suspicion. As opposed to product-based regulations, that address the physical characteristics of the goods, regulations concerning production or process methods (PPMs) are seen as a form of unilateralism, making it more difficult for foreign goods to penetrate domestic markets, and thus as potentially protectionist either in intent, or in effect. Panels have generally treated the imposition of such regulations on foreign goods as discriminatory, resulting in a regime in which such measures can be saved only by recourse to the General Exceptions Clause. Howse and Regan have convincingly argued that such a suspicion is not necessarily justified.21 The distinction between product-based and processbased measures has no foundation either in the text of the General Agreement, or in its general structure. In addition, far from rejecting unilateralism in favour of multilateralism, prohibiting the imposition of production or process methods (PPMs) to imported products simply replaces one unilateralism by another. For instance, in the absence of negotiated rules or norms [concerning the protection of the environment], leaving the country of production to make these determinations [on the level of global environmental externalities that a country may create by allowing a particular economic activity] on its own, unconstrained by stipulations imposed by its trading partners who are importing the product, would itself be countenancing ‘unilateralism’, in this case, the unilateral determination by the country of production of matters that affect the global commons.22

While this remark is obviously valid where environmental regulations are concerned and where a failure by one country to effectively regulate economic activities within its territory may have impacts on other countries, causing negative externalities, this reasoning cannot be limited to that hypothesis: the fact that the exporting country does not protect the rights of workers or does not address even local environmental pollution caused by the economic activity concerned also has impacts on its trading partners, insofar as it may contribute to giving a competitive advantage to the industries operating under its jurisdiction—and this, too, could in principle be treated as ‘externality’, and the failure to take action, as ‘unilateralism’. The interpretation of the notion of prohibited ‘discrimination’ is therefore a flexible one, that allows a certain policy space to WTO Members; and the distinction between product-based and process-based regulatory measures could be challenged, on both legal and policy grounds.

21 22

R Howse and D Regan, ‘The Product/Process Distinction’, n 9 above. R Howse and D Regan, ‘The Product/Process Distinction’, n 9 above, at 251.

‘Likeness’ and the Product or Process

55

The suspicion remains, however. The jurisprudence of the Dispute Settlement Bodies shows a strong tendency to treat regulatory requirements that concern PPMs, when extended to foreign goods, as a quantitative measure, comparable to a quota or an import ban, to be examined under Article XI GATT. This is a particularly penalizing approach, since Article XI:1 GATT forbids quantitative restrictions without allowing for measures that take that form to be justified outside the narrow exceptions of Article XI:2: where a quantitative restriction is imposed, then, it can only be allowed by the successful invocation of the General Exception Clause of Article XX GATT, which contains a closed set of admissible justifications for otherwise prohibited measures. In the field of services, the equivalent provision is Article XIV of GATS. The next section turns to these General Exception Clauses.

Box 9. Should measures targeting production or process methods be treated as import bans? The choice to treat regulatory requirements that concern PPMs as quantitative restrictions has not gone unchallenged.23 The Ad note to Article III GATT, that relates to national treatment, refers to the fact that regulations applied to imported products and to ‘like’ domestic products and imposed at the time or point of importation, are to be considered under Article III.24 This would seem inconsistent with treating measures targeting products on the basis of PPMs as equivalent to quantitative restrictions. In the first Tuna/Dolphin dispute, basing itself in part on this note, the United States took the view that the regulation on the methods of catching tuna that it sought to impose was subject to Article III. Their view was: Where the United States had requirements in place regarding the production method for a particular product, such as in the current proceeding on tuna, the United States could then exclude imports of that product that did not meet the United States requirements, provided that such regulations were not applied so as to afford protection to domestic production

23 See the comments by Joel Trachtman on the first Tuna/Dolphin dispute, in (1992) 86 American Journal of International Law 142–51. 24 The Ad note reads: ‘Any internal tax or other internal charge, or any law, regulation or requirement of the kind referred to in paragraph 1 which applies to an imported product and to the like domestic product and is collected or enforced in the case of the imported product at the time or point of importation, is nevertheless to be regarded as an internal tax or other internal charge, or a law, regulation or requirement of the kind referred to in paragraph 1, and is accordingly subject to the provisions of Article III’ (Annex I to the GATT).

56

Non-Compliance: WTO Disciplines

(as provided in Article III:1), and as long as the treatment accorded the imported product was no less favourable than the treatment accorded the like domestic product (as provided in Article III:4).25

The Panel rejected this view, however. It considered instead that Article III ‘covers only those measures that are applied to the products as such’ (emphasis added).26 In contrast, said the Panel, the United States Marine Mammal Protection Act regulates the domestic harvesting of yellowfin tuna to reduce the incidental taking of dolphin, but … these regulations could not be regarded as being applied to tuna products as such because they would not directly regulate the sale of tuna and could not possibly affect tuna as a product.27

Article III was therefore not applicable, according to the Panel: the contested measure was to be examined as a quantitative restriction prohibited under Article XI of the General Agreement. The Panel established in the second Tuna/Dolphin case, which raised similar issues, also reached the conclusion that the ban of goods not complying with certain conditions should be treated as equivalent to quantitative restrictions, and thus as in violation of Article XI of the General Agreement.28 In the Shrimp/Turtles case, similarly, the Panel found that the United States’ prohibition of imports of shrimp from non-certified Members should be treated as a quantitative restriction on imports and that it violated Article XI:1 of the General Agreement. It based itself, in this regard, on the very wording of Section 609 of Public Law 101–162, adopted by the United States in 1989, which was at issue in the dispute. Indeed, Section 609 expressly required the imposition of an import ban on imports from countries where shrimp were harvested with technology that could adversely affect certain sea turtles, unless the countries concerned were certified by the President, on an annual basis, as having a regulatory programme governing the incidental taking of sea turtles in the course of harvesting comparable to that of the United States, or having an average rate of incidental taking of sea turtles comparable to that by United States vessels using turtle-excluding devices, or having a fishing environment

25 United States—Restrictions on Imports of Tuna (‘Tuna I’), WTO doc DS21/R, Panel Report, 3 September 1991 (not adopted), para 3.19. 26 United States—Restrictions on Imports of Tuna (‘Tuna I’), WTO doc DS21/R, Panel Report, 3 September 1991 (not adopted), para 5.14. The full reasoning of the Panel is in paras 5.8 to 5.14. 27 United States—Restrictions on Imports of Tuna (‘Tuna I’), WTO doc DS21/R, Panel Report, 3 September 1991 (not adopted), para 5.14. 28 United States—Restrictions on Imports of Tuna (‘Tuna II’), WTO doc DS29/R, Panel Report, 16 June 1994 (not adopted), para 5.10.

The ‘General Exceptions’ Clauses

57

such that there exists no threat of incidental taking of sea turtles in the course of such harvesting. ‘In other words’, the Panel concluded, ‘the United States bans imports of shrimp or shrimp products from any country not meeting certain policy conditions’.29 The Panel could adopt this without difficulty, since the point was this time conceded by the United States.30

III. THE ‘GENERAL EXCEPTIONS’ CLAUSES OF ARTICLE XX GATT AND ARTICLE XIV GATS

Article XX GATT provides for a range of ‘General Exceptions’ to the national treatment and most-favoured nation rules, as well as to the prohibition of quantitative restrictions to trade. This provision reads, in its relevant part: Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures: (a) necessary to protect public morals; (b) necessary to protect human, animal or plant life or health; … (e) relating to the products of prison labour; … (g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption…

The equivalent provision in GATS is Article XIV, according to which: Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail, or a disguised restriction on trade in services, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any Member of measures: (a)

necessary to protect public morals or to maintain public order; [Footnote: The public order exception may be invoked only where a genuine and sufficiently serious threat is posed to one of the fundamental interests of society.]

29 United States—Import Prohibition of Certain Shrimp and Shrimp Products, WTO doc WT/DS58/R, Report of the Panel, adopted on 15 May 1998, para 7.16. 30 United States—Import Prohibition of Certain Shrimp and Shrimp Products, n 29 above, para 7.13.

58

Non-Compliance: WTO Disciplines

(b) necessary to protect human, animal or plant life or health; (c) necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement including those relating to: (i) the prevention of deceptive and fraudulent practices or to deal with the effects of a default on services contracts; (ii) the protection of the privacy of individuals in relation to the processing and dissemination of personal data and the protection of confidentiality of individual records and accounts; (iii) safety…

Though the General Exceptions are not worded identically in Article XX of GATT and in Article XIV of GATS respectively, these provisions are sufficiently close to justify being treated together. We consider in turn measures that seek to protect the environment (a) and measures that aim at incentivising the exporting country, or the producers withing that country, to comply with labour standards (b). In both cases, we must examine both whether the objectives pursued are considered legitimate under the General Exceptions Clauses, and whether the measures taken are sufficiently closely related to the fulfilment of the said objectives to justify reliance on these provisions.

A. Measures Seeking to Protect the Environment (i) Does the Measure Aim at the Protection of ‘Human, Animal or Plant Life or Health’, or at the ‘Conservation of Exhaustible Natural Resources’? The requirement according to which, in order to be saved under the General Exception Clause of Article XX GATT, a measure making access to market conditional on compliance with certain environmental standards should relate to one of the objectives listed as legitimate in that provision, would not seem particularly difficult to meet. In particular, measures to reduce climate change by seeking to discourage trade of goods that result in large avoidable volumes of greenhouse gas emissions would appear to seek to ‘protect human, animal or plant life or health’: the human consequences of climate change are well documented and by now have achieved a high degree of scientific consensus.31 Article XX(b) would therefore in principle be applicable. However, alternatively, such measures could be described as aiming at the preservation of the atmosphere, which may be seen as an

31 See, among many other sources, The Anatomy of a Silent Crisis. Human Impact Report— Climate Change (Geneva, Global Humanitarian Forum, 2010), and the other sources cited in Box 1 (p 16).

The ‘General Exceptions’ Clauses

59

‘exhaustible natural resource’ (Article XX(g)), insofar as the modification of its chemical composition is irreversible. Indeed, it deserves notice that in the US—Reformulated Gasoline case, the Panel considered that ‘clean air’ may be seen as an ‘exhaustible natural resource’ in the meaning of Article XX(g) GATT: it agreed with the United States that clean air is a resource, that such a resource is natural, and that it could be depleted.32 It is not necessary that the resource be exhausted or depleted; it is sufficient that it can be exhausted or depleted.33 The Appellate Body did not question this interpretation of the notion of ‘exhaustible natural resource’. Under this second qualification, the test under Article XX(g), referring to a measure ‘relating to the conservation of exhaustible natural resources’, would be less demanding. It would not be one of strict necessity. It is a test best described as a test of appropriateness: a measure that serves the objective of conserving exhaustible natural resources shall pass the test, even if other measures might have had the same effect and if, therefore, the measure concerned was not, strictly speaking, ‘necessary’ to achieve the aim pursued. Whether they seek to ‘protect human, animal or plant life or health’ under Article XX(b) GATT or whether they seek to preserve an ‘exhaustible natural resource’ under Article XX(g) GATT, measures that restrict access to markets on the basis of environmental considerations may raise the question whether the General Exceptions Clause may serve to protect interests outside the territory of the importing country, which adopts such measures. Such extraterritorial dimensions are not necessarily present, of course. Measures that seek to take into account environmental concerns may aim at protecting the environment in the importing country (as in the US—Reformulated Gasoline or the Brazil—Measures Affecting Imports of Retreaded Tyres disputes, where the measures challenges sought to protect the health of the population in the United States or Brazil respectively); or they may aim to do so in order to protect a global public good (such as the sea turtles as an endangered species that migrates from one jurisdiction to another, in the US—Shrimp dispute). But such measures may also seek to protect the environment only in the exporting country: such would be the case, for instance, where products originating from that country would attract higher tariffs if produced by techniques leading to pollution of the soils in that country alone, without the impacts of the pollution being felt in the importing country adopting the measure concerned. Environmental conditions imposed in this latter situation are most problematic, because they would only be authorized under Article XX GATT 1994 if it were accepted that this provision be given ‘extraterritorial effect’, ie, that a WTO Member be accorded the right to invoke a concern for the situation in the exporting 32

WT/DS2/R, 29 January 1996, para 6.37. See also United States—Restrictions on the Import of Tuna, WTO doc DS29/R (16 June 1994) (Report of the Panel), para 5.13. 33

60

Non-Compliance: WTO Disciplines

country to justify what otherwise might be discriminatory measures. Yet, such ‘extraterritorial effect’—the ability for countries to invoke the General Exception Clause with a view to addressing concerns in the exporting country—is still disputed (see Box 10).

Box 10. May the General Exception clauses of Article XX GATT 1994 and Article XIV GATS be invoked to protect interests outside the territorial jurisdiction of the Member taking the measure?34 In the first Tuna/Dolphin dispute (‘Tuna I’), Mexico was challenging the enforcement by the United States of the 1972 Marine Mammal Protection Act, as revised. The disputed Act banned imports of commercial fish or products from fish caught with commercial fishing technology that resulted in the incidental killing or incidental serious injury of ocean mammals in excess of United States standards. The ban extended, in particular, to the importation of yellowfin tuna harvested in purse-seine nets in the Eastern Tropical Pacific Region (ETP) and products therefrom: in that region, schools of underwater tuna can be spotted by encircling the dolphins on the ocean surface, leading to a particularly problematic practice of fishing through purse-seine nets. The ban would not apply, however, if the Secretary of Commerce could provide certain assurances concerning measures taking in the harvesting country. The United States argued in particular that the measures were justified under Article XX, (b) and (g) of the General Agreement, as they were ‘necessary to protect … animal or plant life or health’ or ‘relating to the conservation of exhaustible natural resources’. Mexico countered that nothing in Article XX entitled any contracting party to impose measures in the implementation of which the jurisdiction of one contracting party would be subordinated to the legislation of another contracting party. It could be deduced from the letter and spirit of Article XX that it was confined to measures contracting parties could adopt or apply within or from their own territory. To accept that one contracting party might impose trade restrictions to conserve the resources of another contracting party would have the consequence of introducing the concept of extraterritoriality into the GATT, which would be extremely dangerous for all contracting parties (emphasis added).35

34 See generally Lorand Bartels, ‘Article XX of GATT and the Problem of Extraterritorial Jurisdiction. The Case of Trade Measures for the Protection of Human Rights’ (2002) 36 Journal of World Trade 353. 35 United States—Restrictions on Imports of Tuna (‘Tuna I’), WTO doc DS21/R (3 September 1991) (Report of the Panel) (not adopted), para 3.31; see also para 3.48.

The ‘General Exceptions’ Clauses

61

The position of the United States was that there was nothing in Article XX to support assertions that the United States legislation was extraterritorial. These measures simply specified the products that could be marketed in the territory of the United States. Trade measures by nature has effects (sic) outside a contracting party’s territory … The conservation objective of these measures motivated and permeated the United States legislation. Without conservation measures, dolphins, a common natural resource, would be exhausted. Without these measures on imports, the restrictions on domestic production would be ineffective at conserving dolphins. Dolphins were a highly migratory species that roamed the high seas. The interpretation urged by Mexico would mean that a country must allow access to its market to serve as an incentive to deplete the populations of species that are vital components of the ecosystem.36

The dispute provides an excellent illustration of the stakes concerning the interpretation of Article XX of the General Agreement as authorizing, or not, its invocation by a country to protect interests outside its territorial jurisdiction, but this question of interpretation was not decisively settled on that occasion. The United States Marine Mammal Protection Act was again in dispute in Tuna II.37 Of particular concern to the countries at the origin of the dispute were the extraterritorial consequences of the Act.38 Indeed, the Act prohibited the import into the United States of any marine mammal or marine mammal product, and any fish or fish product harvested through the incidental taking of marine mammals (‘primary nation embargo’). This made the import of tuna from a state conditional upon that state imposing fishing practices in line with US standards, although these standards will be deemed not to be violated if the fish exporting country provides evidence to United States authorities that it has a comparable regulatory programme and a comparable rate of incidental taking; or if the state concerned opts to enter into a formal agreement with the United States containing certain specified commitments. Finally, the Act provided that any nation that exports yellowfin tuna or yellowfin tuna

36 United States—Restrictions on Imports of Tuna (‘Tuna I’), WTO doc DS21/R (3 September 1991) (Report of the Panel) (not adopted), para 3.50. 37 United States Restrictions on the Import of Tuna, WTO doc DS29/R (16 June 1994) (Report of the Panel). 38 The US Marine Mammal Protection Act of 1972 also prohibited the taking, including the incidental taking, of marine mammals by any person or vessel subject to the jurisdiction of the United States, or within any area subject to the fisheries jurisdiction of the United States, as well as the use by United States flag vessels of any method of fishing contrary to regulations issued under the Act. These restrictions concerned domestic tuna and tuna fishing, though they related also to tuna captured outside the US territorial jurisdiction.

62

Non-Compliance: WTO Disciplines

products to the United States, and that imports yellowfin tuna or yellowfin tuna products that are subject to a direct prohibition on import into the United States, must certify and provide reasonable proof that it has not imported products subject to the direct prohibition within the preceding six months. This is referred to as the ‘intermediary nation embargo’. The stated purpose of the Act was, of course, to conserve marine mammals which may be in danger of extinction or depletion: specifically, the United States Congress sought to protect dolphins incidentally affected by the fishing of tuna. The case posed directly the question whether Article XX(g) could be invoked where the ‘exhaustible natural resource’, that the measure aims to conserve, is located outside the territorial jurisdiction of the Member imposing the restriction. The Netherlands in particular believed it could not. In response, the Panel first noted that, on the basis of a textual analysis alone, Article XX(g) was silent about ‘the nature and precise scope of the policy area named in the Article, the conservation of exhaustible natural resources … in particular with respect to the location of the exhaustible natural resource to be conserved’.39 It also observed that other provisions of Article XX(g) could apply ‘with respect to things located, or actions occurring, outside the territorial jurisdiction of the party taking the measure’: such was the case, obviously, with Article XX(e) relating to products of prison labour, which shows that the General Agreement does not exclude in an absolute manner measures relating to things or actions outside the territorial jurisdiction of the party taking the measure. In conclusion, the Panel could ‘see no valid reason supporting the conclusion that the provisions of Article XX (g) apply only to policies related to the conservation of exhaustible natural resources located within the territory of the contracting party invoking the provision’.40 It closed, however, by saying that it consequently found that ‘the policy to conserve dolphins in the eastern tropical Pacific Ocean, which the United States pursued within its jurisdiction over its nationals and vessels, fell within the range of policies covered by Article XX (g)’.41 This is surprising, since at stake were not only restrictions concerning

39 United States—Restrictions on the Import of Tuna, WTO doc DS29/R(16 June 1994) (Report of the Panel), WTO doc DS29/R, para 5.15. 40 United States—Restrictions on the Import of Tuna, WTO doc DS29/R (16 June 1994) (Report of the Panel), WTO doc DS29/R, para 5.20. 41 United States—Restrictions on the Import of Tuna, WTO doc DS29/R(16 June 1994) (Report of the Panel), WTO doc DS29/R, para 5.20.

The ‘General Exceptions’ Clauses

63

domestic tuna and tuna fishing, but also the ‘primary nation’ and ‘intermediary nation’ embargoes. There is no convincing explanation for this choice of the Panel. However, the Panel does take the view that, whereas an interpretation of Article XX GATT 1947 allowing contracting parties to deviate from the obligations of the General Agreement ‘by taking trade measures to implement policies, including conservation policies, within their own jurisdiction’, would be consistent with the objectives of the General Agreement, in contrast, were Article XX to be interpreted to permit contracting parties to take trade measures so as to force other contracting parties to change their policies within their jurisdiction, including their conservation policies, the balance of rights and obligations among contracting parties, in particular the right of access to markets, would be seriously impaired.42

It concluded that the United States could not invoke Article XX GATT 1947 in order to save measures—the ‘primary nation’ and ‘intermediary nation’ embargoes—otherwise found to be in violation of Article XI:1 GATT. The position of the Panel expressed in Tuna II dispute is incoherent. That position appears to be that (i) WTO Members may invoke Article XX GATT also in order to protect interests situated outside their territorial jurisdiction, but (ii) this may not be used in order to impose on other WTO Members that they change their policies within their jurisdiction. However, this latter prohibition (expressed in (ii)) in effect nullifies the first proposition (expressed in (i)), for practically any measure affecting trade that seeks to take into account interests situation outside the territorial jurisdiction of one WTO Member will result in encouraging the Member under whose territorial jurisdiction the said interests are located to modify its policies—a ban on the import of goods produced with prison labour, for instance, will discourage countries affected to resort to such exploitation of detainees. The case of nationals fishing in the high seas or in foreign territorial waters is one, relatively marginal, exception to this. Though it is contestable, this jurisprudence suggests that there may be limitations to the invocation of Article XX GATT by Members seeking to influence the behaviour of other Members by resorting to trade restrictions, as regards matters located within the territorial jurisdiction of the Members thus affected. On the other hand however, any

42 United States—Restrictions on the Import of Tuna, WTO doc DS29/R (16 June 1994) (Report of the Panel), WTO doc DS29/R, para 5.26.

64

Non-Compliance: WTO Disciplines

measure motivated by a desire to protect the environment that aims at the ‘conservation of exhaustible natural resources’, within the meaning of Article XX(g) GATT 1994, where the said resource constitutes a global public good, would not be affected by such a prohibition. This is the case for migratory species, for instance:43 in the ShrimpTurtle dispute, the fact that the sea turtle species that the United States sought to protect were known to migrate through the waters of several countries, including waters over which the United States exercises jurisdiction, was considered sufficient to justify the possibility of the United States invoking Article XX(g).44 The same reasoning would be valid for measures aiming at mitigating climate change by incentivizing a reduction in greenhouse gas emissions: ‘clean air’, we have seen above, is considered an ‘exhaustible natural resource’, and it is clear that a failure by one state to take measures against the growth of emissions has consequences for the whole community of states. But doubts remain as to the acceptability of measures that are purely outward-looking, in other terms, all the consequences of which would be located in the territory of the exporting Member. In Shrimp-Turtle, the Appellate Body explicitly declined to ‘pass upon the question of whether there is an implied jurisdictional limitation in Article XX(g), and if so, the nature or extent of that limitation’.45 The question thus remains, for now, an open and contested one, at least as regards the aim of ‘conservation of exhaustible natural resources’ under Article XX(g).46

43 See also Reports of the Panels in Canada—Measures affecting the exports of unprocessed herring and salmon, adopted 22 March 1988, WTO doc 35S/98; United States—Prohibition of imports of tuna and tuna products from Canada, adopted 22 February 1982, WTO doc 29S/91. In both these disputes, the Panels did not question the reliance on Article XX GATT 1947 for the protection of migratory species of fish. They made no distinction between tuna caught within or outside the territorial waters of the Member invoking the exception. 44 United States—Import Prohibition of Certain Shrimp and Shrimp Products (‘United States—Shrimp I’), WTO doc WT/DS58/AB/R, AB-1998-4 (12 October 1998) (Report of the Appellate Body), para 133. 45 United States—Import Prohibition of Certain Shrimp and Shrimp Products (‘United States—Shrimp I’), WTO doc WT/DS58/AB/R, AB-1998-4(12 October 1998) (Report of the Appellate Body), para 133 (‘We note only that in the specific circumstances of the case before us, there is a sufficient nexus between the migratory and endangered marine populations involved and the United States for purposes of Article XX(g)’). 46 As regards ‘public morals’ in Article XX(a), the interpretation according to which the concerns of the public may relate to situations occurring outside the territory of the Member concerned seems undisputed: see European Communities—Measures Prohibiting the Importation and Marketing of Seal Products, WT/DS400/AB/R and WT/DS401/AB/R, 22 May 2014 (Appellate Body Report), para 5.289.

The ‘General Exceptions’ Clauses

65

(ii) Is the Measure ‘Necessary to Protect Human, Animal or Plant Life or Health’, or does it ‘Relat[e] to the Conservation of Exhaustible Natural Resources’? Ensuring that environmental provisions included in trade policies serve a legitimate objective is one essential requirement in order to invoke the General Exception Clause of Article XX GATT. Another, distinct condition, is that the measures taken in the name of fulfilling that objective are sufficiently closely related to it; otherwise such measures may be seen as suspect of being motivated by protectionist purposes, with the asserted environmental concerns serving merely as a pretext. The case of United States—Standards for Reformulated and Conventional Gasoline (‘US—Reformulated Gasoline’)47 provides a convenient departure point for the analysis of the closeness of the link that is required between the measure challenged and the objective, stated in Article XX(g) GATT, of conserving exhaustible natural resources. The WTO Dispute Settlement Bodies were requested to consider a dispute between the United States, on the one hand, and Venezuela, later joined by Brazil, on the other, concerning the implementation by the United States of its domestic legislation known as the Clean Air Act of 1990. Particularly at stake was the regulation enacted by the United States’ Environmental Protection Agency to control toxic and other pollution caused by the combustion of gasoline manufactured in or imported into the United States. The measures adopted vis-à-vis foreign gasoline were, on their face, more restrictive—imposing a heaving burden on foreign producers—than the measures adopted vis-à-vis domestic producers. Is this acceptable? The key requirement is that the contested measure should be primarily aimed at the legitimate objective pursued, even though this may negatively affect the ability of foreign producers to access the market of the country adopting the measure. A Panel of the WTO had taken the view in the Herring and Salmon case that: the purpose of including Article XX:(g) in the General Agreement was not to widen the scope for measures serving trade policy purposes but merely to ensure that the commitments under the General Agreement do not hinder the pursuit of policies aimed at the conservation of exhaustive natural resources. The Panel concluded for these reasons that, while a trade measure did not have to be necessary or essential to the conservation of an exhaustible natural resource, it had to be primarily aimed at the conservation of an exhaustible natural resource to be considered as ‘relating to’ conservation within the meaning of Article XX:(g).48

47 WT/DS2/R, 29 January 1996 (for the Panel Report); and WT/DS2/AB/R, 29 April 1996 (for the Appellate Body Report). 48 Canada—Measures Affecting Exports of Unprocessed Herring and Salmon, BISD 35S/98, para 4.6; adopted on 22 March 1988 (the emphasis is added by the Panel itself). The same reading was applied in two unadopted panel reports: United States—Restrictions on Imports of Tuna, DS29/R (1994); United States—Taxes on Automobiles, DS31/R (1994).

66

Non-Compliance: WTO Disciplines

It is the measure adopted by the state (and otherwise potentially discriminatory), and not, as such, the difference in treatment between the foreign product and like domestic products, that must be ‘primarily aimed’ at the objective of conservation of natural resources.49 Whereas Article XX(b) GATT 1994 refers to a measure that is ‘necessary to protect human, animal or plant life or health’, Article XX(g) refers to a measure ‘relating to the conservation of exhaustible natural resources’. The first test is more demanding, but it is possible to pass without demonstrating that no other measure would have succeeded in fulfilling the objective. In its interpretation of Article XX(d) GATT, which also uses the term ‘necessary’, the Appellate Body explicitly excluded an interpretation of ‘necessary’ that would equate it with ‘indispensable’. It explained: Measures which are indispensable or of absolute necessity or inevitable to secure compliance certainly fulfil the requirements of Article XX(d). But other measures, too, may fall within the ambit of this exception. As used in Article XX(d), the term ‘necessary’ refers, in our view, to a range of degrees of necessity. At one end of this continuum lies ‘necessary’ understood as ‘indispensable’; at the other end, is ‘necessary’ taken to mean as ‘making a contribution to.’ We consider that a ‘necessary’ measure is, in this continuum, located significantly closer to the pole of ‘indispensable’ than to the opposite pole of simply ‘making a contribution to’. [Assessing whether a measure is ‘necessary’ for the fulfilment of a legitimate aim is] a process of weighing and balancing a series of factors which prominently include the contribution made by the compliance measure to the enforcement of the law or regulation at issue, the importance of the common interests or values protected by that law or regulation, and the accompanying impact of the law or regulation on imports or exports.50

The test of necessity does not require that the risk to be prevented be quantified, or that the impact from the challenged measure be quantified; nor is it required that the country imposing a restriction to trade, such as an import ban, demonstrate that the ban has been effective in addressing the problem the measure was meant to address. Not only would such proof be difficult to provide, as any improvement that would be found to occur may always be traced back to a number of interacting causes, but in addition, trade-restrictive measures may have effects only after a period of time: the Appellate Body explained this view by referring to the example of efforts to mitigate climate change.51 The key question under this test is whether the 49 United States—Standards for Reformulated and Conventional Gasoline (‘US—Reformulated Gasoline’), WT/DS2/AB/R, 29 April 1996 (Report of the Appellate Body), p 16. 50 Appellate Body Report, Korea—Measures Affecting Imports of Fresh, Chilled and Frozen Beef, WT/DS161/AB/R, WT/DS169/AB/R, adopted 10 January 2001, paras 161 and 164. 51 Appellate Body Report, Brazil—Measures Affecting Imports of Retreaded Tyres, WT/ DS332/AB/R(3 December 2007), para 151 (‘the results obtained from certain actions—for instance, measures adopted in order to attenuate global warming and climate change, or certain preventive actions to reduce the incidence of diseases that may manifest themselves only after a certain period of time—can only be evaluated with the benefit of time’).

The ‘General Exceptions’ Clauses

67

challenged measure has been shown to be ‘apt to produce a material contribution to the achievement of the objective’: it must neither be indispensable; nor must if have been proven successful; but its potential impact should not be merely hypothetical.52 (iii) Are the Measures ‘Made Effective in Conjunction with Restrictions on Domestic Production or Consumption’? Article XX(g) also requires that, in order for an otherwise contestable measure to be saved under this paragraph of the General Exception provision, such measures should be ‘made effective in conjunction with restrictions on domestic production or consumption’. This is interpreted as a requirement that the measures impose restrictions, not only as regards foreign (imported) products, but also as regards domestic products.53 The Appellate Body has taken the view that this is ‘a requirement of even-handedness in the imposition of restrictions, in the name of conservation, upon the production or consumption of exhaustible natural resources’.54 However, it is not necessary to demonstrate that the measures adopted that affect the production or the consumption of domestic products in order to conserve exhaustible natural resources are successful, ie, that their impacts are such that they are proven to work. Such a burden would be difficult to meet for the state concerned, both because of the difficulty of proving causation (ie, how much of the conservation of the resource is attributable to the measure under challenge), and because, as already noted, environmental measures typically require a long time before they can have impacts. (iv) Does the Measure Constitute ‘a Means of Arbitrary or Unjustifiable Discrimination Between Countries where the Same Conditions Prevail’, or a ‘Disguised Restriction on International Trade’? In order for a measure to be saved under the General Exception of Article XX GATT 1994, it also must comply with the ‘chapeau’ of that provision, which states that its authorization is Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade. 52 Appellate Body Report, Brazil—Measures Affecting Imports of Retreaded Tyres, para 152. 53 United States—Standards for Reformulated and Conventional Gasoline (‘US—Reformulated Gasoline’), WT/DS2/AB/R, 29 April 1996 (Report of the Appellate Body), p 20. 54 United States—Standards for Reformulated and Conventional Gasoline (‘US—Reformulated Gasoline’), WT/DS2/AB/R, 29 April 1996 (Report of the Appellate Body), p 21.

68

Non-Compliance: WTO Disciplines

The purpose of this provision is to ensure that the exceptions allowed in Article XX will not be abused, ie, used for protectionist purposes. In US— Reformulated Gasoline, the measures adopted by the United States were considered to fail this test: whereas statutory baselines were used as regards gasoline imported from abroad in the United States, individual baselines were relied upon as regards domestic refiners, allowing the latter greater flexibilities to adapt to the new regulatory environment. This difference in treatment was tentatively justified by the United States by the practical difficulties the Environmental Protection Agency would be facing in the enforcement and verification of individual baselines for producers located abroad. The Appellate Body noted however that ‘established techniques [are available] for checking, verification, assessment and enforcement of data relating to imported goods, techniques which in many contexts are accepted as adequate to permit international trade—trade between territorial sovereigns—to go on and grow’. Although the United States must have been aware that for these established techniques and procedures to work, cooperative arrangements with both foreign refiners and the foreign governments concerned would have been necessary and appropriate, [they] had not pursued the possibility of entering into cooperative arrangements with the governments of Venezuela and Brazil or, if [they] had, not to the point where it encountered governments that were unwilling to cooperate.55

Alternatively, the United States could have required its domestic refiners to comply with the statutory baseline, thus treating domestic producers like their foreign competitors. This however the United States were reluctant to do because, the Appellate Body finds, they did not want to impose on the domestic refiners the ‘physical and financial costs and burdens’ that such a solution would have entailed: the Appellate Body therefore felt bound to note that, while the United States counted the costs for its domestic refiners of statutory baselines, there is nothing in the record to indicate that it did other than disregard that kind of consideration when it came to foreign refiners.56

Later, in the Shrimp/Turtle dispute, the Appellate Body confirmed its view that the requirement of non-discrimination prohibited the adoption of unilateral measures, unless such measures have been preceded by good faith attempts to reach an agreement with the trading partners on the adoption of common standards achieving the desired objective. It is of course not required that such agreement is reached: unilateral measures remain available to the WTO Members, as a last resort. But it would not be acceptable for a Member to impose on other Members compliance with certain standards,

55 United States—Standards for Reformulated and Conventional Gasoline (‘US—Reformulated Gasoline’), WT/DS2/AB/R, 29 April 1996 (Report of the Appellate Body) p 27. 56 WT/DS2/AB/R, 29 April 1996, p 28.

The ‘General Exceptions’ Clauses

69

without giving at least a fair chance for a joint approach to succeed.57 It remains debated whether the existence of a multilateral agreement that is broadly ratified, but which some WTO Members have refused to join, may be a substitute for the search for such a consensus prior to the adoption of unilateral measures by a WTO Member (see Box 11).

Box 11. Unilateral measures and the non-discrimination requirement under Article XX GATT—by David Luff The chapeau of Article XX GATT prohibits measures ‘which would constitute a means of arbitrary or unjustifiable discrimination’ or a ‘disguised restriction on international trade’. Unjustifiable discrimination can occur when a WTO Member unilaterally imposes production methods on other Members, as a condition for the other Members to take advantage of their rights under the WTO. For instance, a unilateral scheme of an importing country, which would exempt an imported product from the application of a discriminatory border tax adjustment on the condition that the producer’s country adopts a tax similar to that of the importing country, is ‘arbitrary’ and ‘unjustifiable’. By the same token however, in case WTO Members have already agreed on the tax adjustment or the policy behind it in the context of a multilateral environmental agreement, the tax adjustment would likely be consistent with Article XX of the GATT. Indeed, the tax would no longer be a unilateral measure. Furthermore, no WTO member can claim it suffers from ‘unjustifiable’ or ‘arbitrary’ treatment if it is subject to an adjustment of a competitive advantage it illegitimately draws from the violation of an international environmental treaty to which it is a party. The Panel Report in EU—Biotech58 clearly suggested that when interpreting the WTO Agreement a panel would probably consider itself bound by a provision in a multilateral environmental agreement to the extent all WTO Members have signed such agreement. The parties to the dispute never appealed this ruling. This, however, leaves the environmental community in a difficult position, since some states (in particular the United States) have been reticent to assume international commitments to reduce greenhouse gas emissions if major traders (and imported carbon emitters) like China do not sign up for such

57 United States—Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/ AB/R, 12 October 1998 (Report of the Appellate Body), paras 161 to 165, 171, 172. 58 European Communities—Measures Affecting the Approval and Marketing of Biotech Products, WT/DS291, 292, and 293/R, 21 November 2006 (Panel Report), paras 7.49–7.75.

70

Non-Compliance: WTO Disciplines

reductions. In that case, could, for instance, a border tax adjustment be unilaterally imposed on products originating in the United States, given the existence of the Kyoto Protocol, even though the US is not a party? While the legal response remains uncertain, and subject to the legal reasoning above, the end issue is actually one of competitiveness and cost. This is a discussion that must continue both within and outside the WTO until a consensus position emerges. Which productive solutions can then be negotiated either inside or outside the WTO? WTO case law provides a clear incentive to integrate border tax adjustments into a multilateral environmental agreement (MEA). However, the relationship between an MEA to which not all WTO Members are a party and the WTO is not something that need only be discussed before the WTO Appellate Body in Geneva or in the context of trade negotiations, although this general issue is part of the Doha Development Agenda (DDA).59 While the WTO’s Appellate Body is not going to look outside the WTO agreements to assess this relationship, if an MEA providing for border tax adjustments draws near-universal support from WTO Members it will be politically difficult for Members, and even the Appellate Body to ignore.

Finally, in order to pass the test of non-discrimination, any measure justified on the basis of Article XX GATT should be transparently applied, and not so ambiguous as to leave to the authorities in charge of its implementation an excessive margin of appreciation, resulting in a risk of arbitrariness. In the European Communities—Measures Prohibiting the Importation and Marketing of Seal Products case, this is what led the Appellate Body to conclude that the so-called ‘EU Seal Regime’ could not be justified under the General Exceptions Clause. At issue was a legal regime60 which prohibited the placing on the EU market of seal products except ‘where the seal products result from hunts traditionally conducted by Inuit and other indigenous communities and contribute to their subsistence’; ‘where it is of an occasional nature and consists exclusively of goods for the personal use of travellers or their families’; or ‘where the seal products result from byproducts of hunting that is regulated by national law and conducted for the

59 Doha WTO Ministerial 2001: Ministerial Declaration, WT/MIN(01)/DEC/1, 20 November 2001, adopted on 14 November 2001, para 31. 60 Regulation (EC) No 1007/2009 of the European Parliament and of the Council of 16 September 2009 on trade in seal products ([2009] OJ L286/36), implemented by Commission Regulation (EU) No 737/2010 of 10 August 2010 laying down detailed rules for the implementation of Regulation (EC) No 1007/2009 of the European Parliament and of the Council on trade in seal products ([2010] OJ L216/1).

The ‘General Exceptions’ Clauses

71

sole purpose of the sustainable management of marine resources’ on a nonprofit basis, and within the limits prescribed by the total allowable catch (TAC) quota established in accordance with the national or regional natural resources management plan concerned.61 The Dispute Settlement Bodies of the WTO were prepared to accept that the EU Seal Regime could be justified as necessary for the protection of ‘public morals’, in view of the concerns for the welfare of seals that were the main objective of the regime. However, it was apparent from the exceptions provided that even seal products resulting from hunting practised for commercial purposes could be allowed in the EU, provided the hunting was by indigenous communities and ‘contributed to their subsistence’. This created an ambiguity, since the ‘subsistence’ criterion could not readily be combined with the rule that seal products sold by indigenous communities could enter the EU. The Appellate Body concluded that: ‘Given the ambiguities in the criteria of the [exception established in favour of indigenous communities] and the broad discretion that the recognized bodies consequently enjoy in applying these criteria’, seal products derived from what should in fact be properly characterized as ‘commercial’ hunts could potentially enter the EU market under the [indigenous communities] exception. Thus, pursuant to its design, the EU Seal Regime could be applied in a manner that would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail.62

B. Measures Seeking to Protect Labour Standards The logic exposed above concerning the possibilities to rely on Article XX GATT, or its equivalent, Article XIV, under GATS, also would apply to measures restricting access to markets for products that are considered to have been produced in violation of certain labour standards. The latter may be more difficult to justify, however. The outward-looking nature of such measures is indeed more pronounced here than in the case of trade restrictive measures adopted out of environmental concerns. The doubts concerning the ‘extraterritorial reach’ of the General Exception Clause (as described in Box 10) are particularly strong in the case of measures imposing restrictions on certain imported products based on the fact that such products are produced in disregard of workers’ rights. Indeed, if we set aside the general interest a state may have in promoting universal compliance

61 Regulation (EC) No 1007/2009, Art 3; Commission Regulation (EU) No 737/2010, Art 5. 62 European Communities—Measures Prohibiting the Importation and Marketing of Seal Products, WT/DS400/AB/R and WT/DS401/AB/R, 22 May 2014 (Appellate Body Report), para 5.328.

72

Non-Compliance: WTO Disciplines

with international labour standards, the only ‘domestic’ interest in ensuring such protection is that workers in the importing country adopting such a measure shall not be facing what is sometimes called ‘social dumping’, ie competition considered unfair because originating from competitors in labour-intensive industries who do not incur the same costs associated with compliance with labour rights: such a domestic interest is highly suspect, because of its economic nature. May a WTO Member invoking workers’ rights in the exporting country justify, on the basis of the General Exception Clauses of GATT or GATS, the adoption of a trade-restrictive measure to penalise the unwillingness or the inability of the exporting country to uphold labour standards? (i) The Notion of ‘Public Morals’ Under Article XX(a) GATT or Article XIV(a) GATS How legitimate is it for a WTO Member to seek to respond to labour rights violations committed under the jurisdiction of another Member? In contrast to what is the case for environmental objectives, the General Exceptions Clause of Article XX GATT 1994 makes no explicit reference to labour rights outside the special case of goods produced with prison labour. Article XX(a) does mention measures ‘necessary to protect public morals’, however. That notion is not defined further in the GATT. In Article XIV(a) GATS, where the same expression appears, reference is made in addition to ‘public order’, and a footnote appended to the Agreement notes that this latter notion can be invoked ‘where a genuine and sufficiently serious threat is posed to one of the fundamental interests of society’. The notion of ‘public morals’ was defined—in the context of GATS— in the case of United States—Measures Affecting the Cross-Border Supply of Gambling and Betting Services. The dispute concerned federal statutes adopted in the United States (the Wire Act, the Travel Act and the Illegal Gambling Business Act) that prohibited internet gambling in the US.63 The Panel found that ‘the term “public morals” denotes standards of right and wrong conduct maintained by or on behalf of a community or nation’.64 Taking note of statements made in Congress according to which the measures challenged ‘were adopted to address concerns such as those pertaining to money laundering, organized crime, fraud, underage gambling and pathological gambling’, it found that the three federal statutes at stake were ‘measures that are designed to “protect public morals” and/or “to maintain

63 United States—Measures Affecting the Cross-Border Supply of Gambling and Betting Services, WTO docs WT/DS285/R (10 November 2004) (Panel Report) and WT/DS285/AB/R, AB-2005-1 (Appellate Body Report). 64 WT/DS285/R (10 November 2004), para 6.465.

The ‘General Exceptions’ Clauses

73

public order” within the meaning of Article XIV(a)’.65 The Appellate Body agreed with these characterizations. While it did not comment on the Panel’s remark that the notion of ‘public morals’ may vary according to ‘prevailing social, cultural, ethical and religious values’, and that WTO Members have some discretion in defining what ‘public morals’ require ‘according to their own systems and scales of values’,66 this approach is classic in international law and should not be seen as particularly controversial. It finds confirmation in the case of European Communities—Measures Prohibiting the Importation and Marketing of Seal Products, which concerned the prohibition of access to the EU market of seal products except in a limited range of cases. The WTO Dispute Settlement bodies agreed that the contested measure could be provisionally justified under the ‘public morals’ exception of Article XX(a) GATT, as a scheme that ‘was adopted in order to respond to EU public moral concerns with regard to the welfare of seals’.67 Most commentators take the view that the notion of ‘public morals’, thus construed, includes universally recognized human rights.68 Indeed, it may be argued that an interpretation of ‘public morals’ that is grounded on internationally recognized human rights should be less controversial than one that simply refers to the deeply held values in one society: by definition, universal human rights are not imposed unilaterally by one state restricting access to its markets; they are a reference to norms that all states, in principle, have recognized to be legitimate and obligatory. In addition, WTO agreements should be interpreted, in so far as possible, consistently with international human rights law, as required under the Vienna Convention of the Law of Treaties (see Box 4 in Chapter one above). It is relevant in this regard that human rights are considered as imposing on states obligations that are erga omnes. Such obligations are owed to the international community as a whole, rather than to those states alone whose interests have been prejudiced by the alleged violation. All states therefore may in principle assert a legal interest in taking measures that seek to respond to such a violation.

65

WT/DS285/R (10 November 2004), para 6.487. WT/DS285/R (10 November 2004), para 6.461. 67 European Communities—Measures Prohibiting the Importation and Marketing of Seal Products, WT/DS400/AB/R and WT/DS401/AB/R, 22 May 2014 (Appellate Body Report), paras 5.142, 5.167 and 5.289. As we will see however, the EU Seal Regime did not pass the non-discrimination test imposed under the chapeau of Article XX GATT. 68 Steve Charnovitz, ‘The Moral Exception in Trade Policy’ in S Charnovitz (ed), Trade Law and Global Governance (London, Cameron May, 2002) 361; Robert Howse, ‘Back to Court After Shrimp? Almost but not quite yet: India’s short-lived challenge to labour and environmental exceptions in the European Union’s generalized system of preferences’ (2003) 18 American Universities International Law Review 1333–81, at 1338; Robert Howse, ‘The World Trade Organization and the Protection of Workers’ Rights’ (1990) 13 Journal of Small and Emerging Small Business Law 131–72, at 143; Adam McBeth, International Economic Actors and Human Rights (Oxford, Routledge, 2010) 117; Sarah Joseph, Blame it on the WTO?, n 1 above, 109. 66

74

Non-Compliance: WTO Disciplines

A WTO Member invoking the need to protect ‘public morals’ to justify introducing trade restrictions in order to discourage human rights violations would simply be acting in accordance with this understanding of the interest that all states have in not leaving human rights abuses unpunished wherever they may occur.69 (ii) The Condition of ‘Necessity’ Whereas, concerning measures that aim at the conservation of exhaustible natural resources under Article XX(g) GATT, the requirement is that such measures are ‘relevant’ to the aim pursued, the test is formulated more strictly with respect to measures aimed at protecting ‘public morals’ (in the context of Article XX(a) GATT and Article XIV(a) GATS) or (in the context of Article XIV(a) GATS alone) ‘public order’: such measures must be ‘necessary to protect public morals [or to maintain public order]’ (emphasis added). Such textual differences cannot be ignored: it has been traditional for the WTO Dispute Settlement bodies to attach to them a significant weight; however, nor should the consequences of such formulations be overstated. The Appellate Body has moved away from a ‘strict necessity’ test in its recent case law. It mentions instead that the test should be ‘whether a WTO-consistent alternative measure which the Member concerned could “reasonably be expected to employ” is available, or whether a less WTO-inconsistent measure is “reasonably available”’.70 In engaging in what the Appellate Body calls ‘a process of weighing and balancing a series of factors’ to assess whether a particular trade restriction introduced in the name of the protection of ‘public morals’ is indeed ‘necessary’ for that purpose,71 the importance of the aims pursued by the measure concerned and the importance of the restriction to trade both play a role. Whether the ‘necessity’ condition is fulfilled will depend on whether, considering the respective weight of the interests at stake, there were alternative measures, less restrictive of trade, that the WTO Member concerned could have reasonably been expected to use.72 This test of necessity, of course, produces paradoxical results when applied to measures that a state adopts in order to put pressure on another state, or on producers of goods or service providers within that state, to

69 See, making this argument in the context of the interpretation of WTO agreements, Sarah Cleveland, ‘Human Rights Sanctions and International Trade: A Theory of Compatibility’, Chapter one, fn 84 above, at 152–53. 70 Appellate Body Report, Korea—Measures Affecting Imports of Fresh, Chilled and Frozen Beef, WT/DS161/AB/R, WT/DS169/AB/R, adopted 10 January 2001, DSR 2001: I, 5, para 166. 71 Korea—Various Measures on Beef, WT/DS169/AB/R, adopted 10 January 2001, para 164. 72 See also United States—Gambling, WTO doc WT/DS285/AB/R, paras 305–307.

Conclusion

75

improve their compliance with labour rights. First, the more important the restriction to trade, the more effective the pressure will be on the exporting side. Therefore, we may expect any less restrictive measure to diminish its effectiveness as regards the aim pursued: this would seem to plead in favour of the recognition to the Member of a large margin of appreciation. Secondly, the more important the market of the Member imposing the measure, the more plausible it is to expect that its trading partner will bow to the pressure and make the changes necessary to ensure that it will not lose access to markets. This of course explains in part the sensitivity of the topic: within the WTO, the most powerful Members—those on whose markets the other Members depend the most—have the most important bargaining power, to the extent that the adoption of unilateral measures is not subject to WTO disciplines.73 The requirements that the aims pursued be universally recognized as legitimate, and that the measures do not result in discrimination, take on a particular importance in that context, insofar as such requirements can avoid the most powerful Members of the WTO abusing their dominant position in international trade.

IV. CONCLUSION

We may conclude as follows. WTO Members may, in principle, introduce regulatory distinctions that make it more difficult or more expensive for goods or services produced in violation of labour rights or of environmental standards to have access to their markets. In that sense, there is no absolute prohibition on ‘linkage’, even where such linkage takes the form of measures that penalise such goods or services. The WTO disciplines nevertheless apply to such measures. Both under GATT 1994 and GATS, WTO Members may not discriminate either between ‘like’ goods from different countries (most-favoured nation clause) or between foreign goods and domestic goods (national treatment); nor may they impose quantitative restrictions, for example restricting market access through a system of quotas. If a WTO Member were to impose restrictions on goods or services produced in violation of certain labour rights or not complying with certain environmental standards, it would have to demonstrate that these measures constitute neither a form of discrimination prohibited under the most-favoured nation and national treatment clauses, nor a quantitative restriction prohibited under Article XI of the General Agreement (and its equivalent provision, Article XVI, in GATS). Were it to fail to provide such a demonstration, it would have to justify the particular restriction imposed by relying on the General Exceptions Clauses of Article XX GATT or Article XIV GATS.

73

See Chaper one, fn 13, above.

76

Non-Compliance: WTO Disciplines

Restrictions to trade based on a failure to comply with labour rights or environmental standards will be particularly difficult to justify, both because they target production or process methods (PPMs), rather than the product itself (its physical characteristics), and because they are ‘outward-looking’: their main objective is not to protect certain important values within the importing country, but to encourage the exporting countries (and the producers located in these countries) to take these standards into account. For both these reasons, such restrictions are treated with suspicion. The Dispute Settlement Bodies have generally treated regulatory requirements that concern PPMs, when extended to foreign goods, as a quantitative measure, comparable to a quota or an import ban, to be examined under Article XI GATT. This provision imposes an absolute prohibition on quantitative restrictions (except for the narrow exceptions of Article XI:2): where a quantitative restriction is imposed, then, it can only be allowed by the successful invocation of the General Exception Clause of Article XX GATT, which contains a closed set of admissible justifications to otherwise prohibited measures. May trade restrictions based on a failure to comply with labour rights or environmental standards be saved under the General Exceptions Clauses formulated in Article XX GATT or its equivalent in the GATS, Article XIV? The answer is a qualified yes, though strict conditions will apply. The discussion above examined separately the imposition of environmental conditions and requirements to comply with labour rights. As regards conditions related to climate change mitigation, Article XX(g) GATT may allow the adoption of measures aiming at protecting the atmosphere by encouraging the reduction of greenhouse gas emissions in the production of goods: this exception may be invoked insofar as the trade-restrictive measure seeks to preserve an ‘exhaustible natural resource’ under this provision, provided (i) equivalent measures are taken at domestic level within the jurisdiction of the WTO Member concerned to curb the emissions resulting from production or consumption there; and (ii) the measures are not discriminatory and are not a disguised restriction on trade. Similar measures targeting services rather than goods may be less easy to justify under Article XIV GATS, because of the absence of any reference, in this latter instrument, to the ‘conservation of exhaustible natural resources’. However, to the extent that climate change may be seen as threatening ‘human, animal or plant life or health’, measures restricting the trade in services could be justified as ‘necessary’ to the protection against such a threat, if such measures are neither discriminatory nor a disguised restriction on trade. Insofar as there exists a consensus across the international community that climate change is a serious threat that demands to be addressed by Governments, and insofar as climate change produces a range of human rights impacts, a flexible interpretation of the GATT and GATS agreements to allow for the adoption of such measures would be justified by the need to read these agreements,

Conclusion

77

insofar as possible, in accordance with the duty of all states to respect, protect and fulfil human rights.74 Measures restricting trade in order to encourage an improved protection of the rights of workers in the exporting country will be more difficult to justify under the General Exceptions Clauses. However, such a justification may be found in the reference that these clauses make to the adoption of measures ‘necessary to protect public morals’, since this expression (which appears in both Article XX(a) GATT and Article XIV(a) GATS) may be considered to include the need to protect internationally recognized labour rights. This would include at least the basic labour rights that appear in the 1998 ILO Declaration on Fundamental Principles and Rights at Work75 adopted by the International Labour Conference as standards that all members of the ILO should comply with whatever their level of economic development and whichever the specific conventions they have ratified. These core labour standards include freedom of association and the effective recognition of the right to collective bargaining, the elimination of forced or compulsory labour, the abolition of child labour and the elimination of discrimination in respect of employment and occupation. Because of their universal nature and because of the international consensus surrounding them, they may be a particularly appropriate reference for the imposition of trade sanctions, since it would be difficult for the targeted countries to argue that it should be left to them to decide whether or not they wanted to abide by those minimum requirements. Here again, however, the chapeau of Articles XX GATT and XIV GATS must be taken into account: even a trade-restrictive measure that would in principle be justified as ‘necessary to protect public morals’, if ‘basic labour rights’ are considered to be included in this expression, would be prohibited if it appeared to be discriminatory and to result in a disguised restriction on international trade. Ultimately, whether or not trade restrictions aimed at encouraging compliance with labour rights or environmental standards will be acceptable shall depend on the broader package within which such measures fit. Such measures would be easier to justify under the relevant WTO agreements—and they would be more acceptable politically—if they were accompanied by appropriate burden-sharing towards developing countries, including for instance by the transfer of clean technologies, capacitybuilding measures to improve the ability of exporting companies to comply with the labour standards, and generally the financing of measures that can support reform towards sustainable development in those countries.

74 On the need to interpret WTO agreements in the light of the other international obligations of the states concerned, including their human rights obligations, see above, text corresponding to nn 68–69, and Chapter one, Box 4. 75 CIT/1998/PR20A.

78

Non-Compliance: WTO Disciplines

The debate on the establishment of a Global Fund for Social Protection illustrates the positive linkages that could result from such an approach— from the vicious cycle of today, in which some countries specializing in labour-intensive lines of production are hesitant to increase wages and to strengthen social protection because of their fear of being less competitive on global markets, to a virtuous cycle in which countries would be rewarded for improving labour conditions and better protecting their populations from ill-heath, disability, old age or unemployment. According to estimates from the International Labour Organization (ILO), 75 to 80 per cent of the world population does not have access to ‘comprehensive social security’ protection to shield them from the effects of unemployment, illness, old age or disability.76 Yet, such an investment in the countries’ future would be affordable. The total costs of introducing basic social protection amount to between two and six per cent of global GDP, depending on how many people would be covered—only the world’s poor or all people currently without basic social protection.77 Based on the global GDP of 2010 the amount needed to finance social protection would therefore equate to US$ 1.26 to 3.79 trillion.78 Progress on this front is slow, however. The reason is not simply lack of political will and poor capacity, in particular to collect taxes and establish social protection schemes in countries where a large part of the economy remains informal. The lack of support from the international community is also to blame. In many developing countries—especially small countries in which a large portion of the population is susceptible to the same risks— governments may be understandably reluctant to insure their citizens against the risks they face. One of the reasons little or no social protection is provided by the Least Developed Countries (LDCs), 79 even if it is affordable, is

76 Advisory Group, Report of the Advisory Group: Social Protection Floor for a Fair and Inclusive Globalization (Geneva, International Labour Office, 2011) xxi; United Nations International Labour Organization (ILO), Why we Need a Recommendation of Social Protection Floors, www.ilo.org/global/about-the-ilo/press-and-media-centre/news/WCMS_ 182200/lang--en/index.htm (last visited 24 August 2012). 77 International Labour Organization, Social Security Department, Can Low-Income Countries Afford Basic Social Security? 3 (Social Security Policy Briefing, No 3, 2008). See also International Labour Organization, Social Security Department, Social Security for All: Investing in Global Social and Economic Development (Discussion Paper, No 16, 2006). 78 Calculation based on the data of the World Bank, data.worldbank.org/indicator/NY.GDP. MKTP.CD (last visited 31 January 2012). 79 LDCs are characterized by three criteria: low-income, rating on the Human Asset Index (taking into account health, nutrition, and education), and on the Economic Vulnerability Index (reflecting economic and geographic factors). Currently 48 countries are considered as LDCs: 33 located in Africa, 14 in Asia and the Pacific and one in Latin America. See Least Developed Countries, United Nations Office of the High Representative for the Least Developed Countries, Landlocked Developing Countries and the Small Island Developing States, available at www.unohrlls.org/en/ldc/25/ (last visited 28 January 2012).

Conclusion

79

the fear of unpredicted, covariant shocks.80 In these countries, shocks such as natural disasters,81 epidemic diseases or extreme price increases of basic food commodities could lead to peaks in demand for social protection that could not be accommodated by the national system and would cause its ruin.82 If a single event affects a significant portion of the population, not only will demand for social support grow too rapidly for the government to absorb, but the shock may decrease government revenues at the same time by, for example, lowering tax or export revenues. Where poverty is widespread, infrastructure limited and the ability of local populations to pay into the system weak, meeting the basic costs of social protection systems is already a challenge, even before shock-related risks are accounted for. Given these basic costs, as well as the cost associated with the risk, governments have been reluctant to adopt social protection systems. In order to make social protection a reality, the international community may have to step in, supporting countries’ efforts to establish social protection schemes. The establishment of a Global Fund for Social Protection was proposed to that effect in 2012. Such a fund would help to close the financing shortfall, thus providing incentives to LDCs to put in place a social protection floor; and it would underwrite these schemes against the risks of excess demand triggered by major shocks. These goals would be achieved by advising those

80 See David M Dror and Alexander S Preker, Social Reinsurance—A New Approach to Sustainable Community Health Financing (Washington DC, World Bank and Geneva, International Labour Office, 2002) 469 (explaining covariant risk as risks related to events that are not independent, ie the occurrence of one may affect the occurrence of another and pointing out that shocks are classic cases where proximity influences covariation (covariance)). See also Reinhard Mechler, Natural Disaster Risk Management and Financing Disaster Losses in Developing Countries (Karlsruhe, Verlag Versicherungswirtschaft, 2004) 79 (stating that covariant risks cause a risk portfolio to be highly correlated and that the variance of the portfolio of losses is close to the variance of individual losses if all individuals are affected by the same event). See also Definition and Types of Shocks and Coping Strategies To Be Monitored, PEPCBMS Network Coordinating Team, www.pepnet.org/fileadmin/medias/pdf/CBMS_country_ proj_profiles/Philippines/poverty_maps/Coping/Session2_Shocks_Coping_To_Monitor.pdf (last visited 19 March 2012) (giving an overview of scholarly literature and describing a shock as the realization of a risk that produces a significant negative welfare effect.) Covariant shocks affect groups of individuals (households, communities, regions, or entire countries) as opposed to idiosyncratic shocks that only affect one individual. 81 Tse-Ling Teh and Alan Martina, Developing Countries Spreading Covariant Risk Into International Risk Markets: Subsidised Catastrophe Bonds or Reinsurance, or Disaster Assistance, Working Papers in Economics & Econometrics, 3 et seq (2008) (developing countries suffered in the past more from natural disasters than developed countries (measured though losses in relation to gross domestic product [GDP]) and are more prone to negative consequences of climate change in the future). 82 Lauchlan T Munro, ‘Risks, Needs and Rights: Compatible or Contradictory Bases for Social Protection’ in Armando Barrientos and David Hulme (eds), Social Protection for the Poor and Poorest—Concepts, Policies and Politics (London Palgrave Macmillan, 2008), at 27 (strong covariant risks lead typically to market failure as it is not profitable for commercial insurers to insure these risks. Developed countries have built welfare systems to remedy the market failure).

80

Non-Compliance: WTO Disciplines

countries on suitable private reinsurance options, subsidising premiums where necessary, and acting as the reinsurer of last resort in cases where private schemes are not extensive or affordable enough.83

Box 12. Making social protection floors universal More than a decade ago, the ILO came to the conclusion that the prevailing model of globalization and the emphasis on structural adjustment policies had made social protection more necessary than ever.84 At the 2001 International Labour Conference the Committee on Social Security met for the first time and began to discuss how to promote social protection systems.85 In 2003, the International Labour Office launched the Global Campaign on Social Security and Coverage for All.86 Social protection has remained on the agenda of the ILO, gaining prominence and international support since.87 In recent years, the ILO has promoted the concept of the social protection floor. It was first introduced when the World Commission on the Social Dimension of Globalization adopted the idea of a ‘social economic floor’ in its 2004 report.88 This concept was later spelled out in June 2011 when the ILO, at its 100th Session, adopted a resolution setting out a two-pronged strategy for the adoption of

83 This proposal was made by this author, in his official capacity as the United Nations Special Rapporteur on the right to food, together with Ms Magdalena Sepúlveda, then the UN Special Rapporteur on extreme poverty and human rights: see Underwriting the Poor. A Global Fund for Social Protection, Special Rapporteur on the right to food Briefing Note No 7 (October 2012). Following a hearing on the impact of the financial and economic crisis on human rights convened by the European Parliament’s Subcommittee on Human Rights (July 2012), the European Parliament supported a proposal for the GFSP (European Parliament resolution of 18 April 2013 on the impact of the financial and economic crisis on human rights, P7_TA(2013)0179, para 26 (rapporteur I Vaidere)). The proposal to establish the Global Fund for Social Protection as a follow-up to various commitments to support the establishment of social protection floors in developing countries was among the key recommendations that emerged from global consultations led by the High-Level Panel of Eminent Persons on the Post2015 Development Agenda (A New Global Partnership: Eradicate Poverty and Transform Economies through Sustainable Development. Report of the High-Level Panel of Eminent Persons on the Post-2015 Development Agenda, May 2013, 60). 84 Report of the Committee on Social Security, Social Security—Issues, Challenges and Prospects (International Labour Conference, Provisional Record, 89th Session, 2001) 33. 85 ibid at 1. 86 International Labour Organisation, Global Campaign on Social Security and Coverage for All, www.ilo.org/public/english/protection/socsec/pol/campagne/. 87 See eg International Labour Organization, Social Security Dept, Social Security for All: Investing in Social Justice and Economic Development (Social Security Policy Briefings, Paper 7, 2009), and International Labour Organization, Declaration on Social Justice for a Fair Globalization (2008). 88 World Commission on the Social Dimension of Globalization, A Fair Globalization: Creating Opportunities for All (Geneva, International Labour Office, 2004) at xiii and 66.

Conclusion

81

social protection systems.89 The first dimension of the strategy, the horizontal dimension, seeks to encourage states, in line with national circumstances, to adopt or extend current social protection coverage to meet the universal protection of the population with respect to at least minimum levels of income security and access to health care.90 This is the social protection floor. The second dimension, the vertical dimension, seeks to encourage states to progressively build on their social protection coverage in order to ensure higher levels of protection in line with up-to-date ILO social security standards.91 The 100th Session also led to a demand for ‘a Recommendation complementing the existing standards that would provide flexible but meaningful guidance to member States in building Social Protection Floors within comprehensive social security systems tailored to national circumstances and levels of development’.92 Several months later, a comprehensive report advocating for the global implementation of the social protection floor was published by the Social Protection Floor Initiative’s advisory group convened by the ILO with the collaboration of the World Health Organization (WHO), and chaired by Michelle Bachelet, at the time head of UN Women and a former president of Chile.93 The findings of the report include recommendations for coherence and coordination among international organizations and calls for innovative solutions to address economic shocks, structural changes and sustainability as well as for finding creative sources for financing social protection.94 The report stresses the importance of linking the social protection floor initiative to other strategies on the international level, noting that adopting social protection could be a major step towards achieving the UN Millennium Development Goals in 2015, in particular to eradicate extreme poverty and hunger, reduce child mortality rates, improve maternal health and combat HIV/AIDS, malaria and other diseases.95

89 International Labour Organization, Resolution and Conclusions Concerning the Recurrent Discussion on Social Protection (Social Security) (adopted at the 100th Session of the International Labour Conference, 2011). While not explicit within the document, this twopronged approach reflects the state obligations under international human rights law to meet basic standards, but to allow the space for the progressive realization of economic, social and cultural rights. 90 ibid at 1. 91 ibid at 1–2. 92 ibid at 1. 93 Advisory Group, Report of the Advisory Group: Social Protection Floor for a Fair and Inclusive Globalization (International Labour Organisation, Geneva, 2011) (‘Advisory Report’). The Report was released on 27 October 2011. 94 Advisory Report, at xi–xii, 71–75, 82–83. 95 Advisory Report, at 39–41, 96.

82

Non-Compliance: WTO Disciplines

In June 2012, the ILO Conference adopted the Recommendation (No 202) Concerning National Floors of Social Protection, referred to as Social Protection Floors Recommendation, 2012. An overwhelming majority of delegates from the ILO’s 185 member states, including government, employer and worker delegates, supported the initiative, with 453 votes in favour of adopting the Recommendation and one abstention.96 Recommendation No 202 defines social protection floors as ‘nationally defined sets of basic social security guarantees which secure protection aimed at preventing or alleviating poverty, vulnerability and social exclusion’.97 Such floors should secure protection aimed at preventing or alleviating poverty, vulnerability and social exclusion, and allowing a life in dignity. Defined at the national level, such social protection floor guarantees may be achieved through a variety of means, including contributory or non-contributory social transfers. These can include old-age pensions, disability benefits, child benefits, income support benefits and/or employment guarantees and services for the unemployed and working poor, as well as access to essential health care. National social protection floors would also facilitate access to essential social services, including health, water and sanitation, education, food security, housing, and other areas defined according to national priorities.98

The ILO calls on member states to, in accordance with national circumstances, establish as quickly as possible and maintain their social protection floors comprising basic social security guarantees. The guarantees should ensure at a minimum that, over the life cycle, all in need have access to essential health care and to basic income security which together secure effective access to goods and services defined as necessary at the national level.99

More specifically, the ILO mentions that social protection floors should include at least four basic social security guarantees: (a)

access to a nationally defined set of goods and services, constituting essential health care, including maternity care, that meets the criteria of availability, accessibility, acceptability and quality;

96 International Labour Organisation, Global Extension of Social Security, ILO Social Protection Floors Recommendation Adopted (12 June 2012). 97 International Labour Organization, Text of the Recommendation Concerning National Floors of Social Protection, para 2 (2012). 98 International Labour Organization, Why we need a Recommendation on Social Protection Floors, www.ilo.org/global/about-the-ilo/press-and-media-centre/news/WCMS_182200/ lang--en/index.htm. 99 ILO, Recommendation Concerning National Floors, at para 4.

Conclusion

83

(b) basic income security for children. At least at a nationally defined minimum level, providing access to nutrition, education, care and any other necessary goods and services; (c) basic income security, at least at a nationally defined minimum level, for persons in active age who are unable to earn sufficient income, in particular in cases of sickness, unemployment, maternity and disability; and (d) basic income security, at least at a nationally defined minimum level, for older persons.100

Since it was initially articulated, the concept of the social protection floor has been gaining international recognition and support.101 Most notably, the United Nations Chief Executive Board adopted the Social Protection Floor Initiative in April 2009 as one of the nine UN joint initiative multilateral actions to address the global crises of 2008 (food, financial and economic). The social protection floor approach was again endorsed by the United Nations Chief Executives Board and by the Heads of State and Government in the 2010 Millennium Development Summit, where it was part of an integrated set of ‘social policies designed to guarantee income security and access to essential social services for all, paying particular attention to vulnerable grounds and protecting and empowering people across the life cycle’.102 Following the publication of the ILO’s Advisory Group’s Report in 2011 and only days after the adoption of Recommendation No 202, the leaders of the G-20 meeting in Los Cabos on 18–19 June 2012 released a declaration in which they offered support for the promotion and adoption of social protection systems.103 Similar messages have also been put forward, for instance, in the High Level Segment Ministerial Declaration of the United Nations Economic and Social Council.104

100

ibid at para 5. For a list of endorsements of the Social Protection Floor, see International Labour Organization, Social Protection Flood Advisory Group: International Endorsement, www.ilo. org/public/english/protection/spfag/endorsement/index.htm. 102 Advisory Report, at xxii. 103 G-20, Leaders’ Declaration, at para 22 (Mexico, 2012). The Declaration supports this by stating: ‘Recognizing the impact of the continuing crisis on developing countries, particularly low income countries, we will intensify our efforts to create a more conducive environment for development, including supporting infrastructure investment. Our policy actions will improve living conditions across the globe and protect the most vulnerable. In particular, by stabilizing global markets and promoting stronger growth, we will generate significant positive effects on development and poverty reduction across the globe’. ibid at para 9. 104 See High Level Segment of the United Nations Economic & Social Council, Draft Ministerial Declaration of the 2012 High-Level Segment para 10, E/2012/L.10 (July, 2012) (‘We stress the need to provide social protection to all members of society, fostering growth, resilience, social justice, and cohesion, including those who are not employed in the formal 101

84

Non-Compliance: WTO Disciplines

The establishment of a linkage between access to markets and compliance with labour standards could be combined with greater efforts in support of the efforts of low-income countries to move towards the establishment of social protection floors. This provides just one illustration among many of how such a linkage could in fact be made to work for a more just international economic order, and for a more inclusive type of globalization. If it is favourable enough to the developing countries concerned, the adoption of such a package would allow one to buy political goodwill: if these countries feel that the measures concerned benefit them more than they hurt their exports, they will refrain from questioning their legality. Of course, that does not mean that trade restrictive measures justified by a concern for labour rights or environmental standards shall be immune from legal challenge, in particular because other WTO Members, not benefiting from the same package of measures, could be tempted to mount such a challenge. However, there are strong arguments in support of the view that such a challenge would fail, particularly if the measures that are denounced as restricting trade are accompanied by a series of mechanisms that ensure that the benefits shall accrue to the countries that need most to be supported in their quest for sustainable development: indeed, the provision of such benefits, including the burden-sharing component, would help to dispel the impression that the adoption of trade restrictive measures could be guided by protectionist motives rather than by the ‘purer’ aim of achieving sustainable development. For trade to be placed at the service of sustainable development, it is such a balance that should be found.

economy. In this regard, we strongly encourage national and local initiatives aimed at providing social protection floors for all citizens. We support global dialogue on best practices for social protection programmes that takes into account the three dimensions of sustainable development and, in this regard, we note the International Labour Organization Recommendation 202 concerning National Floors of Social Protection’.).

3 The Special Regime of Border Tax Adjustments: Levelling the Playing Field I. THE NOTION OF BORDER TAX ADJUSTMENTS

B

ORDER TAX ADJUSTMENTS (BTAs) occupy a specific place among the range of measures that countries may adopt in order to react to the ‘unfair competition’ from trading partners producing goods under less demanding regulatory standards. The basic idea is simple enough: through the adoption of BTAs, WTO Members compensate for differences between the respective taxation systems of the exporting and the importing countries concerned, thus establishing the conditions of ‘fair’ competition between producers, by ensuring that the taxes that are paid are those applicable in the country of destination of the goods (ie, where the final products are bought by the end consumer) rather than in the country of origin.1 BTAs therefore substitute the destination principle (taxes on products should be applied at the level at which the products are sold to the end-consumer and consumed) to the origin principle (according to which taxes on products are imposed at the place of production).2 BTAs are increasingly discussed in the context of climate change mitigation strategies that seek to reduce emissions by carbon taxes or through cap-and-trade schemes: the UNFCCC itself alludes to such measures being

1 Of course, if similar taxes were imposed within each of the countries concerned, there would be no need for BTAs, nor would there be any justification in imposing them: see Paul Demaret and Raoul Stewardson, ‘Border Tax Adjustments under GATT and EC Law and General Implications for Environmental Taxes’ (1994) 28 Journal of World Trade 5, at 6. 2 Thus, in its 1970 report on the topic, the GATT Working Party on Border Tax Adjustments defined border tax adjustments as ‘any fiscal measures which put into effect, in whole or in part, the destination principle (i.e. which enable exported products to be relieved of some or all of the tax charged in the exporting country in respect of similar domestic products sold to consumers on the home market [BTA on exports] and which enable imports sold to consumers to be charged with some or all of the tax charged in the importing country in respect of similar domestic products [BTA on imports])’ (GATT Working Party on Border Tax Adjustments, para 4).

86

Border Tax Adjustments

adopted, though without prejudging their legality under WTO law.3 Indeed, carbon taxes or cap-and-trade schemes for carbon emissions allowances may expose certain sectors of the economy to competition from foreign producers who will produce at more competitive conditions, because they will not be required to buy allowances, in turn leading the countries which do not have cap-and-trade schemes to be seen as more attractive to investors—the phenomenon described above as ‘carbon leakage’.4 A plausible reaction to such a situation is for the importing country where a carbon tax or a capand-trade scheme is in place to oblige importers of products to join the said scheme, thus compensating for the ‘unfair’ advantage that the imported products would otherwise benefit from, as a result of not having to buy emissions allowances in the country of origin.

Box 13. Two forms of Border Tax Adjustments: import-BTAs and export rebates A country imposing carbon taxes on its producers (for instance, by obliging them to join a cap-and-trade scheme) may seek to oblige importers to pay an equivalent level of taxes for the goods that they introduce into the country (or to join the same scheme), by way of compensation. This would ‘equalize’ the position of domestic producers and of foreign producers: both would pay the levels of taxes that apply in the country of destination of the goods concerned, which is the market on which they compete. Another possible reaction however, that can be combined with the first, would be to ‘equalize’ the conditions of competition between producers operating from countries with different approaches to carbon taxes or carbon emissions allowances by granting tax rebates for exported products, in other terms, by compensating exporters from the country that has in place a carbon tax or otherwise imposes on producers that they bear the costs of their greenhouse gas emissions for such taxes or costs, thus ensuring that they are not put at a disadvantage when seeking to export to countries which do not impose similar requirements on their producers. BTAs, therefore, may take two forms: they may consist either in imposing on imported goods taxes that correspond to the internal taxes imposed in the importing country on similar products, or in granting tax rebates on exported products. In the first scenario, the

3 Article 3.5 of the UNFCC states that ‘measures taken to combat climate change, including unilateral ones, should not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade’, thus leaving open the question of the conditions under which unilateral measures such as BTAs might be compatible with WTO disciplines. 4 See above, Chapter one, text corresponding to fns 48–55.

The Notion of BTAs

87

foreign products are denied the ‘unfair’ advantage that would otherwise result from the fact that the taxes paid in the country of origin are lower than those imposed on similar products in the country of destination; in the second scenario, the exporter of goods that are subjected to internal taxes in the country of origin is compensated when the product is exported, in order to avoid the product being penalized in the market of destination. In the context of climate change mitigation policies, the rationale for border adjustment measures (BAMs) such as these is adequately captured by the expression of ‘carbon equalization’. As explained by K Holzer: Import-BAMs for carbon taxes of carbon-related requirements level the playing field between domestic and foreign firms in the home market by imposing the same costs on imports as the costs imposed by climate legislation on domestic products. Export-BAMs eliminate competitive disadvantages of domestic firms in the world markets by reimbursing carbon costs when they export their products. Putting domestic and foreign producers on an equal footing prevents relocation of emission-intensive production to countries without emissions restrictions and supports the efficiency of climate change mitigation actions.5

The second scenario, however, relying on export rebates to compensate for the taxes paid in the country of origin, though it may be considered as part of a comprehensive ‘carbon equalization’ strategy, would run directly counter to the objective of mitigating climate change by discouraging production processes that produce large amounts of greenhouse gases: in effect, though it would avoid the economic consequences of ‘carbon leakage’ (ie, the distortions of competition that result from countries adopting different approaches to climate change mitigation), it would constitute a step backwards from the point of view of the protection of the environment. This option will therefore not be explored further here.6

5 Kateryna Holzer, ‘Proposals on Carbon-related Border Adjustments: Prospects for WTO Compliance’ (2010) 1 Carbon and Climate Law Review 51–64, at 54. 6 However, were such tax rebates to be established to reduce the risks of ‘carbon leakage’, their compatibility under WTO law would have to be carefully examined. Export subsidies are prohibited under Article XVI GATT and the Agreement on Subsidies and Countervailing Measures (SCM Agreement). Article XVI:4 GATT provides, however, that: ‘No product of the territory of any contracting party imported into the territory of any other contracting party shall be subject to anti-dumping or countervailing duty by reason of the exemption of such product from duties or taxes borne by the like product when destined for consumption in the country of origin or exportation, or by reason of the refund of such duties or taxes’. This in effect exempts from the prohibition of export subsidies the tax exemptions or rebates that ‘do not exceed those borne by like products if destined for domestic consumption’ (Kateryna Holzer, ‘Proposals on Carbon-related Border Adjustments: Prospects for WTO Compliance’, n 5 above, at 54).

88

Border Tax Adjustments

The use of border tax adjustment measures is not unprecedented where environmental taxes are concerned. The most well-known example concerns the implementation of the Montreal Protocol on Substances that Deplete the Ozone Layer.7 In order to meet their obligations under this Protocol, the United States introduced in 1989 both import and export border adjustment taxes on ozone-depleting chemicals, whether such chemicals were used in the production of certain goods or whether they were embodied in the final product itself. The excise duties imposed on the goods imported into the US under the Ozone Depleting Chemicals (ODC) Tax scheme were calculated based either on the information provided by the importer concerning the amount of ozone-depleting chemicals used in the production process or contained in the product in question, or on the predominant production method in the US. Ten years following the entry into force of the scheme, it was found that the ODC border tax adjustment ‘was quite effective in protecting the domestic ODC industry from foreign competitors while allowing the systematic phase-out of ODCs in US industry, and therefore established the importance of border tax adjustments in the context of taxes with environmental purposes’.8 The next section examines how such measures fit under the framework of WTO law.

Box 14. ‘Carbon equalization’ as a reaction to the risk of ‘carbon leakage’: the debate on border tax adjustments in the EU The debate on carbon taxes has been particularly lively on this issue since the EU launched its Emissions Trading Scheme in 2005, and then adopted its ambitious Climate Action and Energy Package in 2008.9 Directive 2003/87/EC establishes the current greenhouse gas emissions trading scheme (EU ETS).10 This scheme was revised in 2009, with

7 The Montreal Protocol on Substances that Deplete the Ozone Layer (1522 UNTS 3) was signed on 16 September 1987 and entered into force on 1 January 1989. It currently has 197 Parties (on 1 September 2014). 8 On the US ODC Tax, see Frank Biermann and Rainer Brohm, ‘Implementing the Kyoto Protocol without the USA: The Strategic Role of Energy Tax Adjustments at the Border’ (2005) 4 Climate Policy 289–302, at 294 (referring to D Brack, M Grubb and C Windram, International Trade and Climate Change Policies (London, Earthscan, 2000)). 9 See, inter alia, F Sindico, ‘The EU and Carbon Leakage: How to Reconcile Border Adjustment with the WTO?’ (2008) 17 European Energy and Environmental Law Review 328–40; J Werksmann, ‘Greenhouse Gas Amissions Trading and the WTO’ (1999) 8 Review of European Community and International Environmental Law 251–64; Nicole Ahner, Final Instance: World Trade Organization—Unilateral Trade Measures in EU Climate Change Legislation, EUI Working Papers—RSCAS 2009/58. 10 Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC, [2003] OJ L275/32.

The Notion of BTAs

89

the adoption of Directive 2009/29/EC.11 This more recent directive is explicit about the risks of carbon leakage.12 Its Preamble notes that in the event that other developed countries and other major emitters of greenhouse gases do not participate in this international agreement, this could lead to an increase in greenhouse gas emissions in third countries where industry would not be subject to comparable carbon constraints (carbon leakage),

a situation which ‘could put certain energy-intensive sectors and subsectors in the Community which are subject to international competition at an economic disadvantage’ (Recital 24). The directive provides that to address the risk of carbon leakage, the Community should allocate allowances free of charge to sectors or subsectors meeting the relevant criteria, instead of allocating such allowances by an auctioning scheme imposing costs on these companies.13 This illustrates the danger, referred to above,14 that in the absence of a multilateral agreement on the adoption of measures to mitigate climate change, some regions may be discouraged from taking bold measures because of the fear of putting the economic actors operating on their territory at a competitive disadvantage.15 However, the directive notes that another option to counter the risks of carbon leakage would be to introduce what it calls an effective carbon equalisation system … putting installations from the Community which are at significant risk of carbon leakage and those from third countries on a comparable footing. Such a system could apply requirements to importers that would be no less favourable than those applicable

11 Directive 2009/29/EC of the European Parliament and of the Council of 23 April 2009 amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading scheme of the Community, [2009] OJ L140/63. 12 On the notion of carbon leakage, see above Chapter one, text corresponding to fns 48–55. 13 See Commission Decision of 24 December 2009 (2010/2/EU) determining, pursuant to Directive 2003/87/EC of the European Parliament and the Council, a list of sectors and subsectors which are deemed to be exposed to a significant risk of carbon leakage, cited above, Chapter one, fn 33. 14 See Chapter one, above, text corresponding to fns 53–55. 15 As clearly recognized by the European Commission: see Proposal for a directive of the European Parliament and the Council amending directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading system of the Community, COM(2008) 16 final of 23.1.2008, p 7 (‘auctioning should be the basic principle for allocation. The efforts to be made by the European economy to reach the greenhouse gas reduction targets set for 2020 will, however, be more significant than those currently required by 2012 and in the absence of comparable constraints for industry in third countries, there may arise a risk of “carbon leakage”, i.e. relocation of greenhouse gas emitting activities from the EU to third countries and thereby increasing global emissions’).

90

Border Tax Adjustments

to installations within the Community, for example by requiring the surrender of allowances. Any action taken would need to be in conformity with the principles of the UNFCCC, in particular the principle of common but differentiated responsibilities and respective capabilities, taking into account the particular situation of least developed countries (LDCs). It would also need to be in conformity with the international obligations of the Community, including the obligations under the WTO agreement. (Recital 25).

Indeed, such a ‘carbon equalization system’ was included in an initial draft of the proposal for a directive amending directive 2003/87/EC (as circulated on 20 December 2007). It met with resistance, however, and was not retained in the final proposal submitted by the Commission to the European Parliament and the Council; nor, therefore, does it appear in the text finally adopted.16 Were such a measure to be adopted, in effect imposing on the importers of products within the EU compliance with the EU ETS, the volume of emission allowances that such importers would have to surrender would presumably be calculated on the basis of the cleanest technologies used in the EU in the production process concerned, or even on the basis of the best technology available.17 This approach would be the easiest to justify as compatible with the requirements of WTO law, since it would in effect establish a presumption that the production processes outside the EU rely on the cleanest technologies available: such a presumption is highly favourable to the goods imported within the EU, and cannot be said to be motivated by protectionist motives beyond that of avoiding a situation in which EU-based producers would be penalized by the operation of the EU ETS. However, a carbon equalization system thus conceived would not allow producers in the EU to be protected from ‘unfair’ foreign competition, resulting from the import within the EU of similar products not facing similar requirements in their production process, if these producers continue to rely on less advanced technologies resulting in higher emission levels per volume of production. Moreover, there would be no incentive for the companies intending to have access to the EU markets to use the best technologies available in order to reduce the costs implied in the acquisition of allowances.

16 See K Holzer, ‘Proposals on Carbon-related Border Adjustments: Prospects for WTO Compliance’, n 5 above; and, from the same author, ‘Current Legislative Proposals on Border Adjustment Measures for Climate Policy: Are There Potential Conflicts with WTO Law?’, CITEL Working Paper 2009/Research Paper 2010/01, NCCR Climate/Swiss Climate Research. 17 Roland Ismer and Karsten Neuhoff, ‘Border Tax Adjustment: a feasible way to support stringent emission trading’ (Oct 2007) 24 European Journal of Law and Economics 137–64.

The Notion of BTAs

91

The sensitivity of the issue may be assessed from the reactions that followed the decision of the EU to include aviation in the EU ETS. The amendment to that effect of Directive 2003/87/EC18 resulted in requiring from airlines—including those from third countries—that they acquire and surrender emission allowances for their flights from and to European aerodromes, unless a third country adopts measures for reducing the climate change impact of flights departing from that country which land in the EU, in which case Article 25a of the amended directive provides that ‘the Commission, after consulting with that third country, and with Member States … shall consider options available in order to provide for optimal interaction between the Community scheme and that country’s measures’. The planned inclusion of aviation in the EU ETS met with strong opposition from the airline industry, however, which argued that in so far as the scheme would apply to parts of flights which take place outside the airspace of EU Member States, this would run counter to a number of principles of customary international law (including that each state has complete and exclusive sovereignty over its airspace; that no state may validly purport to subject any part of the high seas to its sovereignty; and the principle of freedom to fly over the high seas) and/or to specific international agreements, including the 1944 Chicago Convention on International Civil Aviation,19 the 1997 Kyoto Protocol to the United Nations Framework Convention on Climate Change,20 and the 2007 Open Skies agreement concluded between the EU and the USA, as

18 Directive 2008/101/EC of the European Parliament and of the Council of 19 November 2008 amending Directive 2003/87/EC so as to include aviation activities in the scheme for greenhouse gas emission allowance trading within the Community ([2009] OJ L8/3). 19 15 UNTS 295. 20 Article 2(2) of the Kyoto Protocol provides: ‘The Parties included in Annex I shall pursue limitation or reduction of emissions of greenhouse gases not controlled by the Montreal Protocol from aviation and marine bunker fuels, working through the International Civil Aviation Organisation and the International Maritime Organisation, respectively’. This was interpreted by the airline companies challenging the inclusion of aviation in the EU ETS as prohibiting the adoption of unilateral measures by the EU, working outside the ICAO. In the opinion she delivered on 6 October 2011, Advocate General J Kokott answers to this argument that ‘the Contracting Parties’ preference for a multilateral solution within the framework of the ICAO is only translated by Article 2(2) of the Kyoto Protocol into a very general obligation of conduct (in French: ‘obligation de moyen’). If no agreement is reached within the framework of the ICAO within a reasonable period, the Parties to the Kyoto Protocol must be at liberty to take the measures necessary to achieve the Kyoto objectives at national or regional level, otherwise there would be a serious risk that those objectives might not be achieved’ (para 184).

92

Border Tax Adjustments

later amended by a 2010 Protocol.21 Though the claim was rejected by the Court of Justice of the European Union for reasons that need not retain us here,22 the Commission subsequently announced that it would postpone the entry into force of the scheme in order to favour the possibility of an agreement being reached in the multilateral forum of the International Civil Aviation Organisation (ICAO).

II. BORDER TAX ADJUSTMENTS UNDER WTO LAW

Border tax adjustments are subject to a specific regime under GATT. The General Agreement makes an essential distinction between a BTA and import tariffs in Article II:2(a) GATT, which allows WTO Members to apply a charge on imports equivalent to an internal tax provided that such a charge complies with the national treatment principle of Article III:2, in other terms, provided the charge is not ‘in excess of those applied … to like domestic products’.23 This provision thus allows for the adoption of border tax adjustments (BTAs). The authorization, however, only concerns taxes imposed on products (ie, indirect taxes such as VATs or excise duties). It does not extend to taxes imposed on producers in the form of direct taxes such as a payroll tax or a corporate tax:24 for the purposes of this distinction, ‘direct taxes’ imposed on producers are defined as ‘taxes on wages, profits, interests, rents, royalties, and all other forms of income, and taxes on the ownership of real property’.25 But a question of interpretation arises here: where taxes are applied to end-products indirectly, for instance by the imposition of taxes on the use of energy or by the imposition on the producer of a duty to acquire carbon 21 Air Transport Agreement between the European Community and its Member States, of the one part, and the United States of America, of the other part, [2007] OJ L134/4; Protocol to amend the Air Transport Agreement signed on 25 and 30 April 2007 between the United States of America and the European Community and its Member States, signed in Luxembourg on 24 June 2010, [2010] OJ L223/3. 22 Case C-366/10, Air Transport Association of America and Others v Secretary of State for Energy and Climate Change and Others Judgment of 21 December 2011, [2011] ECR I-13755. 23 Article II:2(a) GATT states that the schedule of commitments agreed under Article II GATT shall not be interpreted to ‘prevent any contracting party from imposing at any time on the importation of any product: … a charge equivalent to an internal tax imposed consistently with the provisions of paragraph 2 of Article III in respect of the like domestic product or in respect of an article from which the imported product has been manufactured or produced in whole or in part’. 24 K Holzer, ‘Proposals on Carbon-related Border Adjustments: Prospects for WTO Compliance’, n 5 above, at 54; Frank Biermann and Rainer Brohm, ‘Border Adjustments on Energy Taxes: A Possible Tool for European Policymakers in Implementing the Kyoto Protocol?’ (2005) 74 Vierteljahrshefte zur Wirtschaftsforschung 249–58, at 251–52. 25 Annex I to the Agreement on Subsidies and Countervailing Measures 1994, fn 58.

Border Tax Adjustments under WTO Law

93

credit allowances, how should they be treated? When a GATT Working Party on border tax adjustment was established in 1968 to discuss the issue, no consensus could be reached on this question of interpretation. The Final Report of the Working Party, delivered in 1970, notes in this regard that ‘there was a divergence of views with regard to the eligibility for adjustment of certain categories of tax’, including the so-called ‘taxes occultes’, defined as ‘consumption taxes on capital equipment, auxiliary materials and services used in the transportation and production of other taxable goods. Taxes on advertising, energy, machinery and transport were among the more important taxes which might be involved’. Perhaps surprisingly, the Working Party took the view that ‘while this area of taxation was unclear, its importance—as indicated by the scarcity of complaints reported in connexion with adjustment of taxes occultes—was not such as to justify further examination’.26 The wording of Article II:2(a) GATT seems to suggest that indirect taxes that may be subject to a BTA are those that are raised on products, not including taxes that target the process of production, except as regards taxes imposed on products ‘physically incorporated into the final product’.27 The case law of the WTO Dispute Settlement Bodies appears to be less restrictive, however. The US Superfund case in particular seems to support an interpretation of the GATT that includes among border tax adjustments (the imposition of which is in principle legitimate under Article II:2(a) GATT) duties that are imposed on products based on their production process, even though this may not affect the physical characteristics of the end-product (see Box 16). However, not all commentators agree with this reading.28 Moreover, even though there are precedents of such BTAs being applied to

26 Border Tax Adjustments. Report of the Working Party adopted on 2 December 1970 (GATT doc L/3464) para 15. 27 Biermann and Brohm, ‘Border Adjustments on Energy Taxes: A Possible Tool for European Policymakers in Implementing the Kyoto Protocol?’, n 24 above, at 252. Article II:2(a) GATT states that WTO Members are not prohibited from imposing on the importation of any product ‘a charge equivalent to an internal tax imposed consistently with the provisions of paragraph 2 of Article III in respect of the like domestic product or in respect of an article from which the imported product has been manufactured in whole or in part’ (emphasis added). The reference to ‘an article from which the imported product has been manufactured in whole or in part’ (‘une marchandise qui a été incorporée dans l’article importé’) supports a restrictive reading of the authorization to impose a BTA, one that would not extend to taxes imposed on the production process (as opposed to the end-product itself). 28 See in particular, opposing the interpretation proposed here, J de Cendra, ‘Can Emissions Trading Schemes be Coupled with Border Tax Adjustments? An Analysis vis-à-vis WTO Law’ (2006) 15 Review of European Community & International Environmental Law 131–45. The joint report by UNEP and the WTO Secretariat adopts a cautious position, stating simply that ‘Article II:2(a) may restrict the application of Article II to inputs physically incorporated into, or part of, the final product, which would therefore exclude the possibility to adjust taxes on the energy or fossil fuels used during the production of goods (other than taxes on fuels themselves)’ (at 103).

94

Border Tax Adjustments

reconcile fairness in international trade with the use of fiscal tools to encourage more environmentally friendly modes of production—the US Superfund case and the Ozone Depleting Chemicals taxes have both been mentioned—, which shows that such scenarios are viable, the main problems may reside in the technical feasibility of BTAs: as Biermann and Brohm note, ‘collecting the relevant data for the process-based calculation of a border tax adjustment, that is, tracing the proper amount of taxed input in the production process in the respective country of origin, is still difficult’.29 The European Commission mentioned the same difficulties if foreign products were to be brought into the existing Emissions Trading Scheme of the EU, even assuming—what cannot necessarily be taken for granted (see Box 15)—that the requirement imposed on importers of foreign products to remit emissions allowances resulting from the inclusion of imports into the EU ETS may be considered as a ‘tax’ or ‘charge’ in the meaning of Article II:2(a) GATT. The Commission explained: The inclusion of imports per se into the ETS would need to be very carefully designed to ensure that it is fully compatible with WTO requirements. It could be hard to implement a system which sought to define in detail the carbon content of each individual category of goods, but such precision might be required: this suggests that the system could at best only be envisaged for a limited number of standardised commodities, such as steel or cement. Secondly, for each category of goods an average EU carbon content would have to be defined. This could become an administrative burden, and require agreement on such an average, likely to be a difficult and protracted process. Thirdly, it would seem challenging to verify the performance of individual installations in third countries without a highly sophisticated monitoring and reporting system in place at installation level.30

A range of proposals have been made to overcome this problem. They include identifying a narrow range of energy-intensive products to which the BTA system would apply, making the number of products manageable, or— similar to what is done in VAT schemes—applying an ‘energy-added tax’ system, requesting from the importer that he provides information about the amount of energy used in the production process, and allowing him to seek a rebate for the taxes imposed on that amount from the tax authorities of the country of origin.31 However, as already indicated above where 29 Biermann and Brohm, ‘Border Adjustments on Energy Taxes: A Possible Tool for European Policymakers in Implementing the Kyoto Protocol?’, n 24 above, at 254. 30 European Commission, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions—Analysis of options to move beyond 20% greenhouse gas emission reductions and assessing the risk of carbon leakage, COM(2010) 265 final of 26.5.2010, p 12. 31 Biermann and Brohm, ‘Border Adjustments on Energy Taxes: A Possible Tool for European Policymakers in Implementing the Kyoto Protocol?’, n 24 above, at 255 (citing a proposal of J Andrew Hoerner and Frank Muller, ‘Compatibility of Offsets with International Trade Rules’ in Elke Staehelin-Witt and Hansjörg Blöchliger (eds), Ökologisch orientierte Steuerreformen: Die fiskal- und außenwirtschaftspolitischen Aspekte (Bern, Haupt, 1997) 235–53).

Border Tax Adjustments under WTO Law

95

reference was made to the proposals of Ismer and Neuhoff,32 probably a better method would consist in applying a BTA on imports on a narrow range of products for which the carbon-intensity is particularly high (as measured by the amount of embedded CO2e divided by its value, indicating that the price tag attached to emissions in the production process is an important component of the competitiveness of the product).

Box 15. Is the obligation to join an emissions trading scheme a ‘tax’ or ‘charge’ for the purposes of Article II:2(a) GATT? In the context of the discussion concerning the obligation imposed on airline companies operating flights to or from the EU to join the EU Emissions Trading Scheme (ETS), a commentator has expressed the view that since ‘in the current EU system the overwhelming majority of allowances is attributed free of charge, it is difficult to argue that the ETS constitutes a “charge on products”’ within the meaning of Article II:2(a) GATT. Indeed, even in a system in which allowances would be auctioned, the production units concerned are left with a choice either to keep their emissions below the level of allowances they have, turning this into a profit by selling their allowances on the secondary market, or to invest in better technologies, or buy certificates at market price: ‘The choices and variations provided for by the system make it difficult’, in the view of this author, ‘to consider the auctioning of the allowances as an “indirect charge on products”’.33 This position finds some support in the judgment delivered by the Court of Justice of the European Union on 21 December 2011, in Air Transport Association of America and others v Secretary of State for Energy and Climate Change and others.34 Airline companies were challenging in that case the validity of measures adopted in the United Kingdom to implement Directive 2008/101/EC including aviation activities in the EU ETS.35 One of their arguments was that the obligation imposed on airline companies to join the EU ETS was in violation

32 Roland Ismer and Karsten Neuhoff, ‘Border Tax Adjustment: a feasible way to support stringent emission trading’ (Oct 2007) 24 European Journal of Law and Economics 137–64. 33 Reinhard Quick, ‘“Border Tax Adjustment” in the Context of Emission Trading: Climate Protection of “Naked” Protectionism?’ (2008) 3 Global Trade and Customs Journal 163–75, at 165–66. 34 Case C-366/10 Air Transport Association of America and Others (n 22 above). 35 Directive 2008/101/EC of the European Parliament and of the Council of 19 November 2008 amending Directive 2003/87/EC so as to include aviation activities in the scheme for greenhouse gas emission allowance trading within the Community ([2009] OJ L8/3).

96

Border Tax Adjustments

of the 2007 Air Transport Agreement between the European Community and the United States (the ‘Open Skies Agreement’), article 11 of which provides that airplanes from the other Party ‘shall be exempt, on the basis of reciprocity, from all import restrictions, property taxes and capital levies, customs duties, excise taxes, and similar fees and charges’, on all ‘equipment, ground equipment, fuel, lubricants, consumable technical supplies … in connection with the operation or servicing of aircraft engaged in international air transportation’. The Court dismissed this argument on the basis of what it saw as distinguishing the obligation to surrender emissions allowances and taxes on fuel: in contrast to such taxes, it said, there is no direct and inseverable link between the quantity of fuel held or consumed by an aircraft and the pecuniary burden on the aircraft’s operator in the context of the allowance trading scheme’s operation. The actual cost for the operator, resulting from the number of allowances to be surrendered, a quantity which is calculated inter alia on the basis of fuel consumption, depends, inasmuch as a market-based measure is involved, not directly on the number of allowances that must be surrendered, but on the number of allowances initially allocated to the operator and their market price when the purchase of additional allowances proves necessary in order to cover the operator’s emissions. Nor can it be ruled out that an aircraft operator, despite having held or consumed fuel, will bear no pecuniary burden resulting from its participation in the allowance trading scheme, or will even make a profit by assigning its surplus allowances for consideration.36

In addition, the EU ETS ‘is not intended to generate revenue for the public authorities’.37 For these reasons, the Court concluded, ‘the allowance trading scheme … constitutes a market-based measure and not a duty, tax, fee or charge on the fuel load’:38 it therefore rejects the challenge based on Article 11 of the Open Skies Agreement. Whether this is a decisive argument against extending the special regime applicable to border tax adjustments under Article 11:2(a) GATT to the obligation to join an emissions trading scheme remains to be seen, however. Article 11 of the Open Skies Agreement and Article 11:2(a) GATT each have a specific rationale, and use the notions of ‘tax’ or ‘charge’ with specific objectives in mind. There is no reason to suppose that the same expressions should necessarily be given the same meaning in both contexts.

36 Case C-366/01, Air Transport Association of America and others, judgment of 21 December 2011, [2011] ECR I-13755, para 142. 37 ibid, para 143. 38 ibid, para 147.

Border Tax Adjustments under WTO Law

97

Box 16. The US Superfund Tax case: taxes on chemicals used as feedstock in the production of derivated products The US Superfund Tax case concerned the 1986 United States Superfund Amendments and Reauthorization Act, legislation that, inter alia, imposed an excise tax on certain chemicals used as inputs for the processing of chemical derivative products: the tax targeted the domestic use of these feedstock chemicals (though the taxes thus imposed were remitted when the derivative products were exported), and not the final products themselves. The revenue collected through this tax was to be used to clean up toxic waste disposals related to such chemicals. In order to ensure that the system would not put the US producers relying on such chemical inputs at a disadvantage vis-à-vis foreign competitors not subject to similar taxes, products imported within the US made from the listed chemicals were taxed at a level corresponding to the internal tax imposed on the domestic feedstock chemicals. The rate of taxation was based on the information provided by the importer of the product concerned (imposing on that producer a tax equivalent to what he would have paid if the production had taken place in the US). In the absence of such information being provided, it would be determined on the basis of the predominant production method used in the US; a flat penalty rate of five per cent of the value of the product was to be applied where no such ‘predominant production method’ could be defined. The Superfund tax thus established was challenged before a GATT panel by the European Communities, Mexico and Canada. The United States defended the imposition of the tax on imported substances as one that was explicitly authorized under Article II:2(a) since, they asserted, the amount of tax to be imposed on the imported substances would be equal the amount of tax that would have been imposed on the chemicals used in producing the imported substances if the chemicals had been sold in the United States for an equivalent use,

thus imposing ‘the same fiscal burden on imported and like domestic substances: Substances of domestic origin bore a fiscal burden corresponding to the tax on the chemicals used in their production’.39 The argument of the European Communities was that the tax on chemicals used in the production process should not be treated as eligible as a border tax adjustment, as it was ‘designed to tax polluting activities

39 United States—Taxes on Petroleum and Certain Imported Substances (17 June 1987) (Report of the Panel) (L/6175—34S/136), para 3.2.5.

98

Border Tax Adjustments

that occurred in the United States and to finance environmental programmes benefiting only United States producers’; instead, they alleged, ‘the United States should have taxed only products of domestic origin because only their production gave rise to environmental problems in the United States’.40 The panel found, against the position of the EC, that the measure adopted by the US was eligible as a border tax adjustment, the use made of the revenues collected through the tax being irrelevant for the purposes of such a determination: ‘the tax adjustment rules of the General Agreement distinguish between taxes on products and taxes not directly levied on products[;] they do not distinguish between taxes with different policy purposes’.41 The panel also concluded that the national treatment requirement was complied with, since, in principle, the tax imposed on certain imported substances would be equivalent to the tax borne by like domestic substances as a result of the tax on the use of certain chemicals as feedstock in the production process: though it did express concern about the flat rate of five per cent of the total value of the product where the producer did not provide information about the production process necessary to determine the amount of tax to be imposed, it took comfort in the statement by the United States that that rate would in all likelihood never be applied, since regulations could be issued determining the level of tax if the substance were produced using the predominant method of production.42

III. DETERMINING THE LEVEL OF THE COMPENSATORY TAX

A separate but connected question is how to determine the level at which the tax should be set. In theory, three methods would be available, with each method presenting some advantages and some disadvantages (see fig 4). Under the ‘applied technology’ criterion, the tax would be based on the actual production process used in the country of origin: the imported products would therefore be taxed as if they had been produced, using that same technology, in the country of destination. The advantage of this method is that it represents a strong incentive for the foreign producer to switch to the cleaner technologies. But, because it requires a case-by-case determination of the applicable tax, it may be difficult to implement, particularly in the absence of collaboration from the authorities of the country of origin. 40 41 42

ibid, para 5.2.3. ibid. ibid, para 5.2.9.

Determining Compensatory Tax Level

99

In contrast, the two other methods available to determine the tax to be applied are easier to implement, but they do not incentivize the foreign producer to reduce the carbon intensity of the production processes, since they rely on presumptions that favour that producer whichever method of production he opts for. The second method would rely on the ‘predominant method of production’ criterion. Here, the tax would be set assuming that the imported good is produced in accordance to such methods of production that are predominant in the importing country. This method is relatively easy to implement, and it encourages domestic producers to improve their production processes, thus ‘raising the bar’ which will be set for the foreign producers. Finally, a third method relies on the ‘best available technology’ criterion. Here, the level of the tax imposed would be set based on a presumption that the imported good has been produced using the cleanest technologies that exist. This method would be clearly favourable to the foreign producers, making this method the least vulnerable to the accusation of being motivated by protectionist purposes. It would place the domestic producers in the importing country, in contrast, at a relative disadvantage. These producers would be under a strong incentive to shift to the cleanest technologies available: unless they do so, the BTA on imports will only provide partial protection from foreign products. This may also be the method that is easiest to implement: since it relies on a presumption rather than on the information provided by the producer as to which process of production was followed, it removes the obstacle that may otherwise arise from the unwillingness of the producer to reveal production processes to the authorities, especially authorities of a foreign country. On the other hand, like where the tax is defined based on the ‘predominant method of production’ in the importing country, reliance on the ‘best available technology’ criterion creates no incentive for the producer operating from within the exporting country to improve its production processes, since he will benefit from the rate applied whatever method of production he uses. And, for the same reason, the ability of this method to pressure the trading partners of the importing country applying BTAs into taxing carbon emissions at a higher rate or into introducing carbon emissions allowances and cap-and-trade systems remains limited. In fact, it may even turn out to be counter-productive, reducing the incentive for the exporting countries to encourage their industries to switch to cleaner methods of production. Though any BTA system would have to take into account the existence of such taxes or allowances system in the country of origin in order to avoid a particular product being taxed twice for the same emissions involved in its production, the introduction of more robust carbon-reducing measures in the country of origin may in fact lead the importing country imposing BTAs to adapt its regime, by taking into account the reality of the production processes involved (as they have been assessed in the country of origin), rather than by maintaining in

100

Border Tax Adjustments

place a presumption according to which the production processes used by the foreign producers were based on the best available technologies.43 Applied technology

Predominant method of production

Best available technology

Difficult to implement: requires case-by-case determination and access to reliable information about production processes

Easy to implement

Easy to implement

Incentive for domestic producers in the importing country to improve production processes, thus ‘raising the bar’

Most immune to legal challenge because clearly advantageous to foreign producers, who are presumed to use the cleanest technologies available

Protects domestic producers in the importing country from what they may see as ‘unfair competition’

Disadvantageous to domestic producers in the importing country

Disadvantageous to domestic producers in the importing country

No incentive for foreign producers to improve production processes

No incentive for foreign producers to improve production processes

Incentive for the foreign producers to improve production processes

Figure 4. Different methods for ‘carbon equalization’ border measures

As confirmed by the GATT panel to which the US Superfund case was presented in 1986–87 (see Box 16), the question of the use of the revenues generated, for the importing country, by the imposition of BTAs, is irrelevant for an assessment of its legality under WTO rules. The destination of such revenues does matter, however, from the point of view of political perception. The primary objective of BTAs—and the reason why, under Article II:2(a) GATT, they are allowed in principle under WTO law—is to equalize conditions of competition between foreign and domestic producers, where the products through which they compete are subjected to different levels of taxation in the respective countries. It is not the objective of BTAs to raise public revenues for the benefit of the importing country. In fact, the primary objective of ‘carbon equalization’ would be achieved just as well if the revenues raised through the introduction of BTAs were placed in a fund exclusively destined for financing climate mitigation and adaptation policies in developing countries that trade with the importing country. 43 Nevertheless, there still would be an incentive for the exporting country to improve its climate change mitigation regime, since, were it to impose a tax on energy or a carbon tax, or to auction emissions allowances, this would increase its public revenues. In contrast, where BTAs are imposed in the country of destination on foreign products, the revenues are captured by the importing country.

Conclusion

101

This would avoid creating the impression that BTAs are protectionist in nature, and it would defuse the risks of a ‘trade war’ being launched by its trading partners in retaliation for a unilateral initiative from the importing country taking a border tax measure. Indeed, it may be argued that only by combining such positive measures with the introduction of BTAs, will BTAs make an effective contribution to the adoption, on a global scale, of robust climate mitigation strategies.

IV. CONCLUSION

The only system of BTAs that is at once practical to implement and irreproachable from the point of view of its legality, may be one in which foreign products are taxed at a level that assumes that they rely on the cleanest technologies available. For the reasons explained above however, this is not incentivising these producers to switch to better technologies; nor does it encourage the country of origin, where carbon taxes are concerned to improve its climate change mitigation regime, since whatever those producers do or that country does, their access to the markets of the importing country having introduced BTAs will not improve. The most likely outcome in such a scenario is that importers will simply pay the tax at the border, and that the country of origin will raise concerns, but not take any action: the exporting country is well aware the BTAs adopted following the ‘best available technology’ method of calculation are in fact highly favourable to its producers, and that it is unlikely that a legal challenge will be successful. In contrast, positive changes may be triggered by increased efforts by the importing country to finance climate change mitigation and adaptation strategies in the countries from which it imports (at least where these are developing countries), with the revenues that would accrue from the introduction of BTAs. Thus conceived, BTAs would become more than a tool simply designed to equalize conditions of competition in the presence of different taxation systems that may lead to carbon leakage as a form of ‘environmental dumping’: they would form the basis of a positive policy encouraging reform under the jurisdiction of the trading partners of the WTO Member adopting such measures, and accelerating the adoption of cleaner technologies.

4 Generalized Systems of Preferences: The ‘Conditional Preferences’ Approach I. THE ORIGINS OF THE GENERALIZED SYSTEM OF PREFERENCES

S

CHEMES ESTABLISHING GENERALIZED Systems of Preferences (GSP schemes) are a legacy from the attempts, from the late 1960s to the late 1970s, to build a ‘New International Economic Order’ improving the position of developing countries in the global economic system. By the mid-1960s, a decade after the process of decolonization was launched in Asia and Africa, it had become clear to all observers that the existing international economic order was not working for the benefit of developing countries, and that the rules of international trade should be revised in order to take into account the specific needs of these countries. The establishment of the United Nations Conference on Trade and Development (UNCTAD) in 1964 was both a result of the effort to better link the international economic regime to the aims of development and an instrument to achieve this aim. Revisiting the rules of international trade in order to allow for special and differential treatment of developing countries formed an integral part of that agenda.1 One way to contribute to this was to allow developed countries to grant preferential market access to their former colonies, and to extend such preferential treatment to other developing countries in order to support their efforts at development and the diversification of their economies: GSP schemes were borne out of this ambition. The European Economic Community (as it was then) launched its initial GSP scheme in June 1971, with the intention at the time of establishing it for a period of 10 years. The scheme provided unilateral and non-reciprocal

1 The Preamble to the 1971 Decision refers to the agreement reached at the Second UNCTAD conference (of 1968), in favour of ‘the early establishment of a mutually acceptable system of generalized, non-reciprocal and non-discriminatory preferences beneficial to the developing countries in order to increase the export earnings, to promote the industrialization, and to accelerate the rates of economic growth of these countries’ (see Resolution 21 (ii) taken at the UNCTAD II Conference in New Delhi in 1968).

‘Special Incentives’ in the EU GSP

103

trade preferences to developing countries, ostensibly in order to encourage their integration in the global trading system; a more implicit agenda was to maintain strong relationships with the formerly colonized regions, who therefore could be quietly maintained within the geopolitical sphere of influence of the then declining imperial powers. The United States soon followed suit, with the first US GSP scheme entering into force on 1 January 1976, on the basis of the 1975 Trade Act. By definition, GSP schemes treat preferentially products originating from developing countries, in derogation of the Most Favoured Nation (MFN) principle established by Article 1 of the General Agreement on Tariffs and Trade (GATT). Therefore, in order to allow for the launch of the EEC’s GSP scheme, a waiver was granted from the MFN principle in 1971.2 The derogation from the principle of non-discrimination was confirmed on a permanent basis in 1979, as part of the Tokyo Round of trade negotiations under the GATT (1973–79), thus allowing the regime to be maintained beyond the initial limit of 10 years, and making it possible for such schemes to become de facto a permanent feature of the EU’s trade policy. The so-called ‘Enabling Clause’ adopted in 1979 provides that, under certain conditions, in derogation to 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’.3 The waiver was later integrated as part of the WTO Agreements when the World Trade Organization was established in 1995.

II. THE EMERGENCE OF ‘SPECIAL INCENTIVES’ WITHIN THE EU GSP SCHEME

The EU GSP scheme took a different turn when, beginning in 1998,4 the EU complemented the general GSP arrangement with ‘special incentive’ provisions. These so-called ‘GSP+’ arrangements encouraged developing countries to comply with the fundamental labour standards adopted by the International Labour Organization and with certain environmental standards. Establishing such a linkage—making preferential market access conditional upon compliance with certain environmental and labour standards—was, 2 Decision relating to the establishment of generalized, non-reciprocal and nondiscriminatory preferences beneficial to the developing countries, Decision L/3545 (25 June 1971) GATT B.I.S.D. (18th Supp) at 24 (1972). 3 Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries, Decision L/4903 (28 November 1979) GATT B.I.S.D. (26th Supp) at 203 (1980). 4 The ‘GSP+’ scheme was inaugurated by Article 7 of Council Regulations (EC) Nos 3281/94 of 19 December 1994 and 1256/96 of 20 June 1996, which provide for extra preferences to be granted, at their request, to countries implementating ILO conventions Nos 87 and 98 on the right of association and collective bargaining, and No 138 on a minimum working age.

104

Generalized Systems of Preferences

of course, controversial. Yet, in a communication it submitted in 1997, in which it presented a report to the Council of the EU on the work done within OECD, ILO and WTO on the link between international trade and social standards, the European Commission took the view that, while protectionism is ‘ruled out’, this leaves the way open for a ‘positive, incentive-based approach to the issue which could include greater cooperation between the WTO and ILO’.5 The European Commission was alluding to the Ministerial Declaration adopted in December 1996 at the first WTO Ministerial Conference, where, as we have seen, the Governments explicitly rejected ‘the use of labour standards for protectionist purposes’, while at the same time noting, approvingly, the collaboration between WTO and ILO Secretariats.6 In presenting the GSP+ schemes that the Community was about to introduce as not ‘endangering the natural comparative advantage of developing countries’, the Commission noted that fears of protectionism stem from a focus on the ‘negative and punitive aspects of the social clause’: in contrast, it stated, ‘the Community GSP is offering incentives to developing countries in an approach based on cooperation rather than confrontation’.7 The distinction between positive incentives, in the form of preferential access to markets by lower tariff rates, and negative sanctions, in the form of denying advantages to countries that do not comply with certain standards, is not particularly convincing. Such a distinction is in fact entirely dependent on the existence of a baseline—a specific tariff structure applicable to the imports from developing countries—that is supposed to be neutral: without such a baseline, the distinction collapses entirely, and whether you call ‘positive incentive’ the advantage or ‘negative sanction’ its denial has more to do with packaging than with content. Initially, few developing countries had in fact expressed their interest in benefiting from the positive incentives of the ‘GSP+’ schemes, presumably because they felt that the advantages they could gain were not worth the increased scrutiny they would be subjected to as a result of them joining the scheme, and also perhaps because of the lack of transparency in the operation of the scheme. The Commission therefore proposed, in 2001, to improve the attractiveness of the scheme by widening the range of the additional trade preferences under the incentives schemes, by increasing the transparency and by streamlining the procedures, so as to help countries make better use of the special incentives and the market access opportunities 5 Commission of the European Communities, Commission Report to the Council pursuant to Article 7(2) of Council Regulations Nos 3281/94 and 1256/96 on the Scheme of Generalised Preferences, Summary of work conducted within the OECD, ILO and WTO on the link between international trade and social standards, COM(97) 260 final, of 2.6.1997. 6 See Chapter one above, text corresponding to fn 15. 7 Commission of the European Communities, Commission Report to the Council pursuant to Article 7(2) of Council Regulations Nos 3281/94 and 1256/96 on the Scheme of Generalised Preferences, n 4 above, 14.

‘Special Incentives’ in the EU GSP

105

offered.8 But the key question—whether the use of ‘positive conditionalities’ is acceptable under WTO law—was only addressed in 2004 by a panel of the WTO, and then by the Appellate Body, at the request of India (Box 17).

Box 17. The compatibility of ‘special incentives’ with WTO law: the European Communities—Conditions for Granting of Tariff Preferences to Developing Countries dispute The context of the European Communities—Conditions for Granting of Tariff Preferences to Developing Countries dispute was the following.9 Under the EU GSP scheme for the period 2001–04,10 developing countries could benefit from five different types of preferences, each corresponding to a specific logic. These were (i) general GSP arrangements, benefiting all developing countries; (ii) special incentive arrangements for the protection of labour rights; (iii) special incentive arrangements for the observance of environmental standards; (iv) special arrangements for least developed countries (LDCs)— what has been referred to as the ‘everything but arms’ arrangements; and (v) special incentive arrangements to combat drug production and trafficking (article 1). In its original request for consultations with the

8 Commission of the European Communities, Promoting core labour standards and improving social governance in the context of globalisation, COM(2001) 416 final, of 18.7.2001. 9 Appellate Body Report, European Communities—Conditions for Granting of Tariff Preferences to Developing Countries, WT/DS246/AB/R, adopted on 20 April 2004. For comments, see Lorand Bartels, ‘The Appellate Body Report in European Communities—Conditions for the Granting of Tariff Preferences to Developing Countries and its Implications for Conditionality in GSP Programmes’ in Thomas Cottier, Joost Pauwelyn and Elisabeth Bürgi Bonanomi (eds), Human Rights and International Trade, Chapter two, fn 1 above, 463–87; James Harrison, ‘Incentives for development: the EC’s Generalised System of Preferences, India’s WTO challenge and reform’ (2005) 42 Common Market Law Review 1663–89; Robert Howse, ‘India’s WTO Challenge to Drug Enforcement Conditions in the European Community Generalised System of Preferences: a Little Known Case with Major Repercussions for “Political” Conditionality in US Trade Policy’ (2003) 4 Chicago Journal of International Law 385–40; Gregory Shaffer and Yvonne Apea, ‘Institutional Choice in the General System of preferences Case: Who Decides the Conditions from Trade Preferences? The Law and Politics of Rights’, University of Wisconsin Law School, Legal Studies Research Paper Series, Paper No 1008 (2006). For general assessments of the compatibility with WTO law of the EU’s GSP+ scheme, see Pedros Mavroidis, ‘Così fan tutti [sic]—Tales of Trade and Development, Development and Trade’ (2005) 47 German Yearbook of International Law 2004 39–62; and N Breda dos Santos, R Farias and R Cunha, ‘Generalised System of Preferences in General Agreement on Tariffs and Trade/World Trade Organisations: History and Current Issues’ (2005) 39 Journal of World Trade 638–70. See generally, on the compatibility of the GSP scheme with the WTO rules, Lorand Bartels, ‘The WTO and Positive Conditionality in the European Community’s GSP Program’ (2003) 6 Journal of International Economic Law 507–32. 10 Council Regulation (EC) No 2501/2001 of 10 December 2001 applying a scheme of generalised tariff preferences for the period from 1 January 2001 to 31 January 2004, [2001] OJ L346/1.

106

Generalized Systems of Preferences

EU, India challenged three of these schemes, those referring to labour rights, to environmental standards, and to the fight against drug production and trafficking. In the subsequent proceedings, it then limited its claim to the latter scheme only, presumably because it considered that this was the most legally doubtful and the least popular politically, and because a finding of incompatibility on that scheme would probably also fragilize the others and perhaps lead to the removal of all such conditionalities. At the same time however, this could appear as a strange choice, because the special incentive arrangements to combat drug production and trafficking were in a sense the least suspect of being a form of economic protectionism: while the imposition of labour or environmental conditionalities may be resented as a tool depriving developing countries of a comparative advantage they have in international competition, the same cannot be said of a condition imposing that the country wishing to benefit contribute to the fight against drugs. That is not to say, of course, that the linkage is necessarily justified. Indeed, that was the question the WTO dispute-settlement bodies were left to answer: could the drug arrangements be considered authorized under the 1979 Enabling Clause?11 Paragraph 2(a) of the 1979 Decision states that the waiver applied in particular to ‘preferential tariff treatment accorded by developed contracting parties to products originating in developing countries in accordance with the Generalized System of Preferences’, and a footnote (footnote 3) adds that this refers to the GSP ‘as described in the Decision of the Contracting Parties of 25 June 1971, relating to the establishment of “generalized, non-reciprocal and non-discriminatory preferences beneficial to the developing countries” (BISD 18S/24)’. Footnote 3 to paragraph 2(a) of the Enabling Clause thus requires that the preferences be ‘non-discriminatory’, implying that identical tariff treatment should be available to all similarly-situated GSP beneficiaries. The Appellate Body noted that, as clearly illustrated by the requirement of non-discrimination, ‘one of the objectives of the 1971 Waiver Decision and the Enabling Clause was to eliminate the fragmented system of special preferences that were, in general, based on historical and political ties between developed countries and their former colonies’.12

11 Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries, Decision L/4903 (28 November 1979) GATT B.I.S.D. (26th Supp) at 203 (1980). 12 Appellate Body Report, European Communities—Conditions for Granting of Tariff Preferences to Developing Countries, n 9 above, para 155.

‘Special Incentives’ in the EU GSP

107

Beyond this reminder however, the Appellate Body did not exclude the introduction of any kind of conditionality in the granting of special preferences to developing countries. Instead, it stated— disagreeing on this point with the Panel’s conclusions13—the term ‘non-discriminatory’ should not be interpreted as requiring ‘that preference-granting countries provide “identical” tariff preferences under GSP schemes to “all” developing countries’. To hold such a position (as did the Panel), the Appellate Body noted, would be to assume ‘that allowing tariff preferences such as the Drug Arrangements would necessarily “result [in] the collapse of the whole GSP system and a return back to special preferences favouring selected developing countries”’, a conclusion which the Appellate Body considered to be incorrect: ‘We observe’, it stated, that the term ‘generalized’ requires that the GSP schemes of preferencegranting countries remain generally applicable. Moreover, unlike the Panel, we believe that the Enabling Clause sets out sufficient conditions on the granting of preferences to protect against [a selective use of GSP schemes]. [Indeed,] provisions such as paragraphs 3(a) and 3(c) of the Enabling Clause impose specific conditions on the granting of different tariff preferences among GSP beneficiaries.14

Linkage, therefore—the imposition of certain non-development related conditionalities on developing countries intending to benefit from preferential access to markets—, would not appear to be illegal per se under the Enabling Clause appended to the GATT 1994 agreement.15 The Appellate Body nevertheless found that the Drug Arrangements as included in the EU GSP scheme for 2001–04 (and codified in Council Regulation (EC) No 2501/2001) were in violation of the GATT rules. Indeed, in contrast to the special incentive arrangements for the protection of labour rights or for the protection of the environment, the drug arrangements provided no mechanism under which additional beneficiaries might be added to the list of beneficiaries: instead, the list of 12 countries benefiting from the scheme appeared to be a closed one, and the list could only be extended by amending the Regulation itself.

13 The Panel had expressed the view that ‘the term “non-discriminatory” in footnote 3 [of the 1979 Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries (“Enabling Clause”)] requires that identical tariff preferences under GSP schemes be provided to all developing countries without differentiation, except for the implementation of a priori limitations’ (Panel Report, para 7.161). 14 Appellate Body Report, European Communities—Conditions for Granting of Tariff Preferences to Developing Countries, n 9 above, para 156. 15 See J Harrison, The Human Rights Impact of the World Trade Organisation (Oxford and Portland OR, Hart Publishing, 2005) at 115–17.

108

Generalized Systems of Preferences

The Drug Arrangements were also non-transparent: the Appellate Body remarked that they ‘do not set out any clear prerequisites—or “objective criteria”—that, if met, would allow for other developing countries “that are similarly affected by the drug problem” to be included as beneficiaries under the Drug Arrangements’.16 In sum, the system was prone to being abused, in the absence of clear and transparent criteria guaranteeing to the potential beneficiaries of the scheme that they would be treated in a non-arbitrary fashion.

The main lesson from the case presented to the WTO Appellate Body at the request of India is that ‘any preference should be granted on a nondiscriminatory basis, so that all similarly-situated GSP beneficiaries, who have the same “development, financial and trade needs”, should have access to the scheme’.17 It is discrimination between developing countries with the same ‘development, financial and trade needs’ which is condemned; it is not linkage itself. It is also noteworthy that a scheme such as the EU GSP scheme, that imposes compliance with certain standards in the areas of labour rights and the environment across the whole country (rather than just in the supply chains through which goods are produced that will seek access to the EU market) may, paradoxically perhaps, be easier to justify than a GSP scheme that reaches the export sector alone: although the EU GSP is more intrusive in that respect, it also makes a more important contribution to sustainability in the developing country seeking access to the EU markets, and it is less suspect of being a form of disguised protectionism.18 Following the adoption by the Appellate Body of its report on 20 April 2004, the European Commission adopted a communication defining the principles that the EU’s GSP should follow for the period 2006–15. It noted that the Appellate Body found that WTO Members are in principle allowed to grant different tariffs to products originating in different GSP beneficiaries under the condition that identical treatment is available to all similarly-situated GSP beneficiaries. A WTO Member which intends to grant additional tariff preferences under its GSP

16

Para 183. Para 173. The GSP scheme put in place by the United States adopts a more narrow approach, focusing on the export supply chains. For a more systematic comparison between the GSP schemes adopted respectively by the EU and the US, which cannot be offered here, see Bob Hepple, Labour Laws and Global Trade (Oxford and Portland OR, Hart Publishing, 2005) chapter 4; James Harrison, The Human Rights Impact of the World Trade Organisation, n 15 above, 111–18. For a critique of the US linkage of trade preferences to labour rights, see Philip Alston, ‘Labor Rights Provisions in US Trade Law: “Aggressive Unilateralism”?’ (1993) 15 Human Rights Quarterly 1. 17 18

‘Special Incentives’ in the EU GSP

109

scheme would have to identify on an objective basis the special ‘development needs’ of developing countries which can be effectively addressed through tariff preferences.19

The Commission announced a number of reforms to the GSP scheme. It simplified the scheme by grouping the then three separate types of special incentives (to encourage the protection of labour rights, to encourage protection of the environment and to combat illegal drug production and trafficking) into one single ‘GSP+’ arrangement described as referring to ‘sustainable development’, so as to arrive at three arrangements in total: the general arrangement open to all developing countries;20 the special ‘Everything But Arms’ arrangement for the least developed countries; and the ‘GSP+’ arrangement to encourage sustainable development. As part of the reforms, this latter arrangement itself (the ‘sustainabledevelopment incentive’, as the Commission called it) was redesigned in certain significant ways. Essentially, it would build more than in the past on existing international conventions in the areas of human rights, labour rights, environmental protection (including the protection of endangered species) and the fight against illegal drug protection and trafficking. The countries intending to benefit from the ‘GSP+’ scheme would be subjected to scrutiny, but the advantage of defining the expectations by reference to international instruments was that these instruments included control mechanisms that could be relied upon, and the Commission stated its intention to ‘take account of these evaluations’, as made by the mechanisms established by the relevant conventions, ‘before deciding which of the applicant countries will be selected to benefit from the incentive schemes’.21 The reference to existing international instruments and to the monitoring mechanisms established by these instruments was clearly a reaction to the WTO’s Appellate Body ruling and its insistence that the ‘needs’ of developing countries which GSP schemes should respond to were to be defined objectively, rather than left to the subjective appreciation of the preference-granting country (see Box 17). In addition to these reforms, the Commission announced that the incentive scheme ‘would include a credible suspension clause that can be

19 Commission of the European Communities, Communication to the Council, the European Parliament, and the European Economic and Social Committee, Developing countries, international trade and sustainable development: the function of the Community’s generalised system of preferences (GSP) for the ten-year period from 2006 to 2015, COM(2004) 461 final of 7.7.2004, p 6. 20 At the time of the communication, the EU GSP scheme covered 178 independent countries and territories. 21 Commission of the European Communities, Communication to the Council, the European Parliament, and the European Economic and Social Committee, Developing countries, international trade and sustainable development: the function of the Community’s generalised system of preferences (GSP) for the ten-year period from 2006 to 2015, COM(2004) 461 final of 7.7.2004, p 10.

110

Generalized Systems of Preferences

rapidly activated’: at the initiative of the Commission itself, of the Member States or of the European Parliament, an investigation by the Commission could be triggered ‘which could lead to suspension of the additional benefits if it is established that countries have not honoured their commitments’.22

III. THE THREE LAYERS OF THE CURRENT EU GSP SCHEME

These are the components that define the system, as it has been operating since. It follows that, as regards developing countries that benefit the GSP scheme, some form of linkage between access to market and compliance with labour or environmental standards is already established. The GSP scheme for 2014–24 was established under Regulation (EU) no 978/2012, adopted on the basis of Article 207 of the Treaty on the Functioning of the European Union.23 Consistent with the approach followed since 2004, the current GSP scheme comprises three layers, comprising one general arrangement and two special incentives. A general arrangement is granted to 90 beneficiary countries that are particularly in need of support.24 Under the former scheme, covering the period 2009–14, this arrangement benefited all countries that were not classified by the World Bank as high-income countries and which were not sufficiently diversified in their exports. In total, this meant 177 countries benefited, although the distinction between sensitive and non-sensitive products, and the exclusion from duty-free access, among the latter, of the agricultural components, made the scheme significantly less advantageous to developing countries that were not among the least-developed countries.25 22

ibid. Regulation (EU) no 978/2012 of the European Parliament and of the Council of 25 October 2012 applying a scheme of generalised tariff preferences and repealing Council Regulation (EC) no 732/2009, [2012] OJ L303/1. The new scheme succeeds the GSP scheme established under Council Regulation (EC) No 732/2008 of 22 July 2008, applying a scheme of generalised tariff preferences for the period from 1 January 2009 to 31 December 2011 and amending Regulations (EC) No 552/97, (EC) No 1933/2006 and Commission Regulations (EC) No 1100/2006 and (EC) No 964/2007, [2008] OJ L211/1 (adopted under Art 133 EC). The period of application of Regulation No 732/2008 was extended until 31 December 2013, with a few minor amendments, by the GSP ‘roll-over’ regulation: Regulation (EU) No 512/2011 of the European Parliament and of the Council of 11 May 2011 amending Council Regulation (EC) No 732/2008 applying a scheme of generalised tariff preferences for the period from 1 January 2009 to 31 December 2011, [2011] OJ L145/28. 24 Regulation (EU) no 978/2012, Arts 4–8. 25 Regulation No 732/2008 rather shamelessly stated that, as regards the general arrangement, ‘there should be continued differentiation of the preferences between ‘non-sensitive’ products and ‘sensitive’ products, to take account of the situation of the sectors manufacturing the same products in the Community’: therefore, while tariff duties on non-sensitive products were suspended for the products originating in the countries benefiting from the scheme, duties on sensitive products were reduced—not eliminated—‘in order to ensure a satisfactory utilisation rate while at the same time taking account of the situation of the corresponding Community industries’. See Preamble, Recitals 14 and 15, and Art 6. 23

The Three Layers of the Current EU GSP

111

Thus, 87 countries are removed from the more recent scheme, because they have graduated to achieve a high or upper middle income per capita, according to the classification of the World Bank, or because they already have preferential access to the EU through other means. Under the new Regulation, GSP preferences are intended to be better focused on the countries most in need: noting that, currently, ‘40% of preferential exports are absorbed by the more advanced countries’, the Commission considers that this competition the low-income countries face ‘goes some way to explain the disappointing performance of the poorest’.26 The special incentive (‘GSP+’) arrangement for sustainable development and good governance constitutes the second layer. This scheme benefits 90 vulnerable countries (vulnerable insofar as they are highly dependent on the export of a limited range of products to the EU)27 that have ratified a number of conventions in the areas of human rights, labour rights, and the protection of the environment (see Box 18). Under the GSP scheme established for 2008–13, the countries seeking to benefit from this special incentive undertook ‘to maintain the ratification of the conventions and their implementing legislation and measures’, and to accept ‘regular monitoring and review of [their] implementation record in accordance with the implementation provisions of the conventions [they have] ratified’.28 The Commission was in charge of monitoring the effective implementation of these

26 The EU’s new Generalised System of Preferences—Factsheet, presented on the website of the European Commission (trade.ec.europa.eu/doclib/docs/2013/september/ tradoc_151705.%2013-07%20GSP%20InfoPack%20Update%20Final.pdf, last consulted 22 September 2013). The European Commission explains that ‘even marginal drops in exports by the more advanced, bigger economies can potentially provide significant opportunities for the poorest, whose exports are very small in comparison. To give an idea of the order of magnitude, a drop of 1% in, say, Brazilian exports, is equivalent to more than 16 times Burkina Faso’s total exports to the EU’. 27 For the definition of a ‘vulnerable country’, see Annex VII of Regulation 978/2012. A vulnerable country is one that is highly dependent for its export revenues on its exports to the EU on a limited range of products, showing a relatively little diversified economy (the seven main products it exports to the EU should represent at least 75% of its total exports of the products concerned by the GSP arrangement, on a three-years average), and whose share of the market in the EU for the products concerned is very low (less than 2%). Under Article 4(2) of Regulation No 732/2008, which defined the earlier GSP scheme, three conditions applied: (i) the country seeking to benefit should not be classified as a high-income country during three consecutive years, ie its per capita GNI should not exceed US$ 11.456 according to the World Bank 2007 data; (ii) its five largest sections of GSP-covered imports had to represent more than 75% in value of its total GSP-covered imports to the EU; (iii) finally, the GSP-covered imports into the Community of the products originating in the country had to represent less than 1% in value of the total GSP-covered imports into the Community. Under both schemes therefore, once a vulnerable country increases its exports to the Community above a certain level (in proportion to the total imports from developing countries benefiting from the GSP), it ceases to qualify for the GSP+ special incentive scheme. However, in comparison to the regime in force in 2008–13, the current regime is more flexible as regards the conditions under which a country may be considered as ‘vulnerable’. 28 Regulation No 732/2008, Art 8, para 1(b).

112

Generalized Systems of Preferences

conventions in accordance with the mechanisms established under each of these instruments, using the information collected through such mechanisms;29 and it was expected to assess ‘the relationship between the additional tariff preferences and the promotion of sustainable development’.30 The new GSP scheme (2014–24) further strengthens the mechanisms used to track the implementation of conventions that the countries, having sought and obtained ‘GSP+’ status (and thus benefiting from special incentives for good governance and sustainable development), must ratify and implement.31 Specifically, a country benefiting from the GSP+ arrangement ‘accepts without reservation the reporting requirements imposed by each convention and gives a binding undertaking to accept regular monitoring and review of its implementation record in accordance with the provisions of the relevant conventions’;32 it will be subject every two years (and not, as was the case in the past, every three years) to monitoring by the European Commission, which presents a report to the Council and the European Parliament on the compliance of the country concerned with reporting obligations under the relevant convention as well as on the status of its effective implementation.33 By mid-2014, 13 countries benefited from the ‘GSP+’ scheme.34 Finally, one special arrangement benefits the 48 least-developed countries (LDCs): this third layer is known as the ‘Everything-but-arms’ initiative, because the advantages (essentially, duty-free and quota-free access) apply to all products except those listed under Chapter 93 of the Common Customs Tariff, which concerns arms and ammunition.

29

Art 8, para 3. Preamble, Recital 11. 31 On the procedure for the examination of applications from countries seeking to benefit from the ‘GSP+’ scheme, see Commission Delegated Regulation (EU) No 155/2013 of 18 December 2012 establishing rules related to the procedure for granting the special incentive arrangement for sustainable development and good governance under Regulation (EU) No 978/2012 of the European Parliament and of the Council applying a scheme of generalised tariff preferences, [2013] OJ L48/5. The Commission bases its examination of the application on ‘the most recent available conclusions of the monitoring bodies of the relevant conventions [which the applicant country concerned pledged to remain a party to and to effectively implement, under the control of the supervisory bodies concerned. The Commission] may ask the requesting country any questions which it considers relevant, and may verify the information received with the requesting country or with any other relevant sources’ (Commission Delegated Regulation (EU) No 155/2013, Art 2, para 1). 32 Regulation (EU) No 978/2012, Art 9, para 1(e). 33 ibid, Art 14, para 1. 34 These countries are Armenia, Bolivia, Costa Rica, Cape Verde, Ecuador, El Salvador, Georgia, Guatemala, Mongolia, Panama, Peru, Pakistan, Paraguay, See Commission Delegation Regulation (EU) No 1/2014 of 28 August 2013 establishing Annex III to Regulation (EU) No 978/2012 of the European Parliament and of the Council applying a scheme of generalised tariff preferences, [2014] OJ L1/1; and Commission Delegated Regulation (EU) No 182/2014 of 17 December 2013 amending Annex III to Regulation (EU) No 978/2012 of the European Parliament and of the Council applying a scheme of generalised tariff preferences, [2014] OJ L57/1. 30

The Three Layers of the Current EU GSP

113

Box 18. 27 international conventions related to sustainable development and good governance that countries seeking to benefit from the ‘GSP+’ scheme must ratify and effectively comply with35 Part A. 16 conventions relating to core political, human and labour rights: International Covenant on Civil and Political Rights; International Covenant on Economic, Social and Cultural Rights; International Convention on the Elimination of All Forms of Racial Discrimination; Convention on the Elimination of All Forms of Discrimination against Women; the Convention against Torture and Other Cruel, Inhuman or Degrading Treatment or Punishment; Convention on the Rights of the Child; Convention on the Prevention and Punishment of the Crime of Genocide; Convention concerning Minimum Age for Admission to Employment (No 138); Convention concerning the Prohibition and Immediate Action for the Elimination of the Worst Forms of Child Labour (No 182); Convention concerning the Abolition of Forced Labour (No 105); Convention concerning Forced or Compulsory Labour (No 29); Convention concerning Equal Remuneration for Men and Women Workers for Work of Equal Value (No 100); Convention concerning Discrimination in Respect of Employment and Occupation (No 111); Convention concerning Freedom of Association and Protection of the Right to Organize (No 87); the Convention concerning the Application of the Principles of the Right to Organize and to Bargain Collectively (No 98); and International Convention on the Suppression and Punishment of the Crime of Apartheid. Part B. 11 conventions relating to the environment, good governance and the fight against drug production and trafficking: Montreal Protocol on Substances that Deplete the Ozone Layer; Basel Convention on the Control of Transboundary Movement of Hazardous Wastes and Their Disposal; Stockholm Convention on Persistent Organic Pollutants; Convention on International Trade in Endangered Species of Wild Fauna and Flora; Convention on Biological Diversity; Cartagena Protocol on Biosafety; the Kyoto Protocol to the United Nations Framework Convention on Climate Change; United Nations Single Convention on Narcotic Drugs (1961); United Nations Convention on Psychotropic Substances (1971); United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (988); United Nations Convention against Corruption (Mexico).

35 These instruments are listed in Annex III of Council Regulation (EC) No 732/2008 of 22 July 2008, applying a scheme of generalised tariff preferences for the period from 1 January 2009 to 31 December 2011; and in Annex VIII of Regulation (EU) no 978/2012 of the European Parliament and of the Council of 25 October 2012 applying a scheme of generalised tariff preferences.

114

Generalized Systems of Preferences

In the Generalised System of Preferences established by the EU, the linkage of market access to labour and environmental standards therefore is ensured through two separate mechanisms. The first mechanism consists in the possibility of imposing sanctions for ‘serious and systematic violations’ of human rights or core labour standards: it thus allows the EU to deny preferential treatment to developing countries that flout basic labour rights. The European Commission first announced its intention to include ‘serious and systematic violations’ of core labour standards among the reasons for temporary, full or partial withdrawal of GSP benefits in 2001. These core labour standards are defined by reference to the 1998 ILO Declaration on Fundamental Principles and Rights at Work. As summarized by the Commission in 2001, henceforth all beneficiary countries would thus have the option of the additional incentives, provided that they meet the criteria of effective enforcement of core labour standards. Countries that receive only the general preferences under GSP, may lose temporarily, fully or partly, the benefit of these preferences, only if they are found to seriously and systematically infringe core labour standards.36

That describes, in substance, the sanctions system that was later put in place. Under certain conditions that are now described in chapter V of Regulation No 978/2012,37 any country benefiting from the GSP scheme—whether under the general arrangement or under the other arrangements—may be denied the preferential access to the market, inter alia, if it commits ‘serious and systematic violations of principles laid down in the conventions listed in part A of Annex VIII [relating to human rights and labour rights]’;38 or if it is found that it exports goods made by prison labour.39 In addition, a country may be suspended from the GSP advantages if it fails to adequately control drug trafficking, or to comply with international conventions on combating terrorism or money laundering; if it is guilty of ‘serious and systematic unfair trading practices’, as determined by the WTO; or in cases 36 Commission of the European Communities, Promoting core labour standards and improving social governance in the context of globalisation, COM (2001) 416 final, of 18.7.2001, p 17. 37 For the period 2008–13, the same conditions were specified in chapter III of Regulation No 732/2008. 38 Regulation No 978/2012, Art 19, para 1(a). In Regulation No 732/2008, the equivalent provision went on to say that such ‘serious and systematic violation’ would be assessed ‘judging from the conclusions of the relevant monitoring bodies’ (Regulation No 732/2008, Art 15, para 1(a)). However, Article 19 para 6 of the current Regulation does mention that the European Commission ‘shall seek all information it considers necessary, inter alia, the available assessments, comments, decisions, recommendations and conclusions of the relevant monitoring bodies, as appropriate’. The wording in the current Regulation appears to avoid creating the impression that the Commission would be somehow bound by determinations made by external monitoring bodies: it is for the Commission to assess the information received, and the Regulation makes clear that the Commission may consult whichever information it sees fit. 39 Regulation No 978/2012, Art 19, para 1(b). (For the equivalent provision in the earlier regime, see Regulation No 732/2008, Art 15, para 1(c)).

The Three Layers of the Current EU GSP

115

of ‘serious and systematic infringements’ of the objectives of the international regimes on the conservation and management of fishery resources.40 The Regulation describes in detail the procedure that may lead to such a temporary withdrawal (Box 19). Box 19. The sanctions mechanism for ‘serious and systematic violations’ of human rights and labour rights: the examples of Burma/Myanmar and Belarus Regulation No 978/2012 describes in detail the procedure that shall be followed in cases of ‘serious and systematic violations of principles’ laid down in the human rights and labour rights conventions listed in part A of its Annex VIII.41 Similarly, during the period 2008–13, Article 15 § 1(a), of Regulation (EC) No 732/2008 provided that ‘the preferential arrangements’ provided for in the Regulation ‘may be withdrawn temporarily, in respect of all or of certain products originating in a beneficiary country’, in particular if it is found ‘on the basis of the conclusions of the relevant monitoring bodies’, that the country concerned has committed ‘serious and systematic violation of principles laid down in the conventions listed in Part A of Annex III’ of the Regulations, related to human rights and basic labour rights. Under Regulation No 732/2008 applicable during the period 2008–13, the procedure was as follows. When the Commission or a Member State considered that there were sufficient grounds for an investigation—typically following information received from trade unions or non-governmental organizations—it informed the Generalised Preferences Committee, and consultations took place, in principle within one month.42 The Commission had one month following this consultation to decide whether or not to initiate an investigation.43 If it did launch an investigation, the Commission announced the initiation of the investigation in the Official Journal of the European Union and it notified the country concerned. This allowed any interested party, within a specified deadline, to provide information to the Commission, and it ensured that the country concerned would be given an opportunity to cooperate in the investigation.44 The investigation was to be completed within one year, although the duration of the investigation could be extended if necessary. In the course of the

40 41 42 43 44

Regulation No 978/2012, Art 19, para 1(c) to (e). See Art 19. Art 27, para 1. Art 27, para 2. Art 18, paras 1–2.

116

Generalized Systems of Preferences

investigation, the Commission could seek all the information it considered necessary, including the assessments, comments and decisions of the relevant supervisory bodies of the United Nations, the International Labour Organization and other competent international organizations; it could verify the information with economic operators and the competent authorities of the beneficiary country concerned; and it could hear interested parties.45 Once the investigation was complete, the Commission was expected to report the findings to the Generalised Preferences Committee. If the Commission considered temporary withdrawal unnecessary, it published a notice in the Official Journal, announcing the termination of the investigation and setting out its main conclusions. If, on the contrary, the Commission considered temporary withdrawal to be necessary, it notified the beneficiary country concerned of the decision and published a notice in the Official Journal, announcing its intention to submit a proposal to the Council for temporary withdrawal unless remedial measures were taken. This opened up a period of six months during which the beneficiary country had the possibility of taking the measures necessary to conform with human rights or labour rights conventions referred to in part A of Annex III to the regulation, or of making a commitment to take the measures necessary to conform, within ‘a reasonable period of time’.46 At the end of this period, the Commission submitted a proposal to the Council, which decided within two months by qualified majority.47 The decision entered into force six months later, ‘unless the Council, following an appropriate proposal by the Commission decides before then that the reasons justifying it no longer prevail’.48 The procedure is essentially unchanged under Regulation No 978/2012 for the period 2014–24. The result is that the country whose preferences may be removed because of its serious and systematic violation of the principles of the relevant human rights and labour rights conventions (see conventions listed in part A of Box 18) has in fact a total of at least 12 months in order to amend its domestic legislation or practices, so as to put an end to such violation. The sanctions mechanism is therefore graduated, and the procedure allows for ample opportunity for the country concerned to seek to improve its

45 46 47 48

Art 18, paras 3–5. Art 19, para 3. Art 19, para 4. Art 19, para 5.

The Three Layers of the Current EU GSP

117

record and to make the necessary improvements. There is, of course, a political dimension in the evaluation, with a role for Member States both through the Generalised Preferences Committee and through the Council, which makes the final decision. But this is counterbalanced by the requirement that the evaluation be based on assessments made, not by the institutions alone, but by external monitoring mechanisms, in particular those established by the international conventions themselves: sanctioning a country in the absence of strong evidence, originating from within these mechanisms, that it is in violation of the conventions, will be difficult to justify. In addition, insofar as a political dimension remains to the procedure (and it would be naive to think that it is removed entirely), that may be the price to pay for the necessary flexibility to be built into the system, allowing a ‘carrot-andstick’ approach49 that can put credible pressure on countries without necessarily going to the final step, which is to suspend preferential access to the EU markets. On 24 March 1997, Burma/Myanmar was the first country to be sanctioned under this mechanism. Acting on the basis of a complaint filed jointly by the International Confederation of Free Trade Unions (ICFTU)—since then renamed ITUC, the International Trade Unions Confederation—and the European Trade Union Confederation (ETUC), the Commission found that the country had a ‘routine and widespread’ use of forced labour, and the Council approved its proposal to withdraw access to tariff preferences.50 Although the economic impacts of the measure were minor, since exports to the EU represented at the time only three per cent of the total exports from Burma (only 31 per cent of which were eligible for GSP treatment),51 the political impacts were significant, since this signalled the failure of the policy of ‘constructive engagement’ which had been hitherto followed by the EU.52 Belarus followed a few years later. In this instance too, the procedure was triggered by a complaint from the trade unions, which

49 That is how, quite appropriately, Bob Hepple describes the system: see Bob Hepple, Labour Laws and Global Trade, n 18 above, 102. 50 For an extensive discussion, see M Ewing-Chow, ‘First Do No Harm: Myanmar Trade Sanctions and Human Rights’ (Spring 2007) 5 Northwestern Journal of International Human Rights 153–80. 51 See Stefan Collignon, The Burmese Economy and the Withdrawal of European Trade Preferences, European Institute for Asian Studies, EIAS Briefing Paper no 97/02, April 1997. 52 Burma/Myanmar’s access to GSP tariff preferences was reinstated on 19 July 2013, as a result of the political and economic reforms launched in 2011. The decision to re-establish GSP benefits followed the decision by the Conference of the International Labour Organization to suspend its restrictive resolution on Myanmar in June 2012.

118

Generalized Systems of Preferences

denounced the systematic violation of freedom of association. The unions had already submitted a complaint before the ILO Committee on Freedom of Association, leading the ILO Commission of Inquiry to adopt 12 recommendations in July 2004, outlining specific measures to improve the situation, to be adopted by the Belarusian authorities within the next 12 months.53 Given the failure of Belarus to implement these recommendations, the European Commission considered that a temporary withdrawal was justified. On 17 August 2005, it placed Belarus under monitoring for a period of six months, giving the Belarusian authorities the opportunity to conform with the principles of the ILO Declaration and abide by the Commission of Inquiry’s recommendation by the end of March 2006.54 The responses by Belarus simply denied that they were in violation of their obligations, and contained no concrete commitment towards reform. The Commission ultimately had no choice but to confirm the withdrawal of preferences, particularly after the International Labour Conference held in June 2006 that the non-implementation of the 12 recommendations of the Commission of Inquiry constituted a case of continued failure: on 21 December 2006, the Council removed Belarus from the countries benefiting from the general arrangement of the GSP scheme, setting 21 June 2007 as the date for its entry into force.55 The fact that sanctions have been imposed on Burma and Belarus is an indication that, where violations are indeed ‘systematic and serious’, the pressure may be such on the EU institutions that remaining passive is not an option. At that level of violation, there is a clear consistency between the implementation of the GSP scheme and the hierarchy of sanctions within the ILO. As noted by Jan Orbie and

53 Trade union rights in Belarus, Report of the Commission of Inquiry appointed under Article 26 of the Constitution of the International Labour Organization to examine the observance by the Government of the Republic of Belarus of the Freedom of Association and Protection of the Right to Organise Convention, 1948 (No 87), and the Right to Organise and Collective Bargaining Convention, 1949 (No 98) (Geneva, 2004). The recommendations included the immediate registration of trade union organizations involved in the complaint and the elimination of all obstacles to the right to organize created by current decrees, rules and regulations; guaranteed protection to carry out their activities freely for those organizations that have suffered interference in their internal affairs; and the wide dissemination in Belarus of all its conclusions and recommendations without delay. The Commission of Inquiry was appointed in November 2003 by the ILO’s Governing Body. 54 Commission Decision 2005/616/EC of 17 August 2005 on the monitoring and evaluation of the labour rights situation in Belarus for temporary withdrawal of trade preferences, [2005] OJ L213/16. 55 Council Regulation (EC) No 1933/2006 of 21 December 2006, temporarily withdrawing access to the generalized tariff preferences from the Republic of Belarus, [2006] OJ L405/36.

The Three Layers of the Current EU GSP

119

Lisa Tortell, Burma and Belarus are the only states for which the ILO established a Commission of Inquiry, which is the highest level of reaction available to the ILO. It is therefore fitting that only in relation to Burma and Belarus did the EU institutions adopt the most severe of sanctions—withdrawal from the GSP general arrangement, for systematic and serious violations of the principles of the international conventions concerned.56

The second tool through which the GSP scheme favours a linkage between market access and compliance with labour or environmental standards is the ‘special incentive’ put in place to encourage countries to comply with certain requirements related to sustainable development and good governance, as defined in the 27 international conventions listed in Box 18. Since 2006, the GSP+ scheme requires ratification of these international instruments, and not just incorporation of their substance, as under previous GSP cycles; and the evaluation of compliance explicitly relies on the findings made by the monitoring mechanisms established by those instruments. As a result, the GSP+ scheme increases the relevance of these instruments for the countries, and significantly raises the stakes of the monitoring that the countries are subjected to, for instance in the framework of the UN human rights system or of the ILO. The aim is, clearly, to encourage countries seeking to benefit from preferential market access—in addition to the facilitated access they may seek as developing countries—to comply with certain core obligations in the areas of human rights, labour rights, environmental protection and biodiversity, the fight against corruption, and the fight against drug production and trafficking. In that respect, measured by its own benchmark, the scheme is a success. Scholars who have studied the record of the EU GSP+ scheme since its introduction concluded that the prospect of additional market access under GSP-plus appears to have positively affected ratification of ILO core labour conventions in a number of countries. That is, Bolivia, Colombia, Venezuela, Mongolia, and El Salvador each ratified one or more of the core labour conventions during the period 2005–06, seemingly because, without those ratifications, they would have lost their beneficiary status.57

56 Jan Orbie and Lisa Tortell, The New GSP Plus Beneficiaries: Ticking the Box or Truly Consistent with ILO Findings?, paper prepared for the European Union Studies Association’s 11th Biennal International Conference, Marina del Rey, California, 23–25 April 2009, 16. 57 Orbie and Tortell, The New GSP Plus Beneficiaries, n 56 above, 12.

120

Generalized Systems of Preferences

Perhaps the most visible success in this regard concerns the ratification by El Salvador of ILO Convention No 87 on Freedom of Association and the Protection of the Right to Organise, and Convention No 98 on the Right to Organise and Collective Bargaining on 24 August 2006, in no small part due to the combined pressure of the ILO and of the European Commission.58

Box 20. The ‘special incentive’ for sustainable development and good governance (‘GSP+’) A country seeking to benefit from the EU’s GSP+ scheme submits the application to the European Commission, accompanied with information about the ratification of the instruments listed in part A of Annex VIII of the Regulation No 978/2012 (also listed in Box 18). Under Regulation No 732/2008 applicable to the 2008–13 GSP scheme, following such a request, consultations were to take place both within the Commission, across different Directorate Generals (Trade, External Relations, Justice and Fundamental Rights, Development and Humanitarian Aid) and with the Generalised Preferences Committee, a body composed of Member States’ representatives and chaired by a representative of the Commission that the Regulation tasks with assisting the Commission in the implementation of the GSP. In evaluating the application, the Commission was expected to rely on the findings of the monitoring bodies set up under the conventions that the beneficiary country must ratify and effectively implement;59

58 The process was chaotic: after the Constitutional Chamber of the Supreme Court of Justice of El Salvador declared, on 16 October 2007, that Article 2 of the ILO Convention No 87 (which guarantees a right to workers and employers, ‘without distinction whatsoever’, to establish and join trade unions) was inconsistent with Article 47(1) of the national Constitution (which refers to that right only for the benefit of employees in the private sector), the European Commission decided on 31 March 2008 to launch an investigation concerning El Salvador under Article 18(2) of Regulation (EC) No 980/2005, the instrument which was then applicable to the GSP. In the course of the investigation, El Salvador emphasized its commitment to implementing the ILO Convention No 87 in full, and kept the Commission informed of the steps that were taken in order to amend the Constitution so as to remove the incompatibility found to exist by the Supreme Court. On 14 June 2009, the constitutional reform amending Article 47 of the Constitution of El Salvador entered into force. 59 As regards human rights conventions, this includes the human rights treaty bodies set up under the human rights treaties adopted under the UN framework; and the special procedures established by the UN Human Rights Council (formerly the Commission on Human Rights). As regards the ILO instruments, this refers to the various ILO committees that are set up in order to assess the Member States’ observance of the conventions they have ratified. The Committee of Experts on the Application of Conventions and Recommendations (CEACR) provides technical supervision of the ILO conventions and examines the reports made by individual countries; these reports are then considered by the Conference Committee on the Application of Standards (CAS), a tripartite committee composed of governments and representatives of workers and employers. In addition, the Committee on freedom of association constitutes

The Three Layers of the Current EU GSP

121

in practice, the input from development or human rights NGOs and trade unions played an important, albeit informal, role. If the country is denied the benefit of the scheme, the Commission is under an obligation to provide the reasons, at the request of the country concerned.60 Under Regulation No 978/2012, that applies since 1 January 2014, the European Commission is authorized to examine the request and to grant the status of ‘GSP+’ country, based on its own assessment: although the European Parliament and the Council of the EU are informed, they are not formally involved in making a determination as to the eligibility of the requesting country; nor is the Commission formally required to base its decision on the assessment of monitoring bodies established by the international conventions concerned. Moreover, in contrast to the earlier regime, the Commission is not in principle obliged to justify its decision not to grant ‘GSP+’ status. However, once the status has been granted, the Commission shall keep under review the status of ratification of the relevant conventions and shall monitor their effective implementation, as well as cooperation [by the country concerned] with the relevant monitoring bodies, by examining the conclusions and recommendations of those monitoring bodies.61

It appears therefore that the more recent scheme allows the European Commission a broader margin of appreciation than was the case in the past.

Any country benefiting from the ‘special incentive’ linked to sustainable development and good governance remains liable to the sanctions mechanism described above, which applies across the full GSP scheme. But a country granted entry into the GSP+ scheme is also subject to an additional scrutiny, which may lead to the advantages granted being withdrawn temporarily, in respect of all or some of its products, ‘in particular if the national legislation no longer incorporates [the relevant international conventions] or if that legislation is not effectively implemented’ (as expressed in Regulation No 732/2008) or (as more succinctly described in Regulation No 978/2012) in the absence of ‘effective implementation’ of the conventions concerned.

a specific mechanism set up in order to monitor compliance with freedom of association: it decides upon complaints three times each year. Finally, a Commission of Inquiry (COI) may be set up by the ILO’s Governing Body in relation to individual complaints, on an ad hoc basis. 60 61

Art 10, para 4, of Regulation No 732/2008. Regulation No 978/2012, Article 13, para 1.

122

Generalized Systems of Preferences

The removal of the benefits of the ‘GSP+’ scheme materialized for the first time in February 2010, when the Council of the EU decided to withdraw Sri Lanka from the GSP+ special incentive scheme.62 The decision was based on the findings of an investigation launched by the Commission in October 2008 that it took one year to complete. The investigation relied on reports and statements of the special procedures of the United Nations Human Rights Council, as well as ‘other publicly available reports and information from other relevant sources, including non-governmental organisations’, all of which led the Commission to conclude that Sri Lanka was failing to implement the International Covenant on Civil and Political Rights, the Convention against Torture and the Convention on the Rights of the Child.63 Sri Lanka decided not to cooperate with the investigation. But the implementing regulation withdrawing Sri Lanka from the GSP+ scheme nevertheless insists that information received from Sri Lanka outside the formal context of the investigation ‘has been taken by the Commission fully into account and has contributed to inform its assessment’.64 The decision entered into force in August 2010, six months after its adoption. It is perhaps odd that the decision to temporarily withdraw Sri Lanka from the special incentive for sustainable development and good governance was taken on the basis of violations of civil and political rights alone, since the workers’ unions, through ETUC and ITUC, had expressed their concern about the failure of Sri Lanka to comply with ILO standards, particularly those related to freedom of association, already in March 2008, and these concerns appeared to be shared by the ILO Committee on Freedom of Association.65 This may signal either an unwillingness of the European Commission to remove a country from the GSP+ scheme on the basis primarily of labour rights violations, or an unwillingness to do so, at least, where the said violations are concentrated in particular sectors. There was one additional difficulty: the ‘sweatshop conditions’ denounced by the unions were concentrated in the textile and clothing sector in Sri Lanka. Since this sector exports about half of its production into the EU thanks to the GSP+

62 Implementing Regulation (EU) No 143/2010 of the Council of 15 February 2010 temporarily withdrawing the special incentive arrangement for sustainable development and good governance provided for under Regulation (EC) No 732/2008 with respect to the Democratic Socialist Republic of Sri Lanka, [2010] OJ L45/45. 63 Implementing Regulation, n 62 above, Preamble, Recital 3. 64 Recital 6. 65 See ILO Committee on Freedom of Association, Complaint against the Government of Sri Lanka by the Health Services Trade Union Alliance, the Free Trade Zone and General Services Employees Union, the Jathika Sewaka Sangamaya, the Suhada Waraya Sewaka Sangamaya, the United Federation of Labour, the Union of Post and Telecommunication Officers, the Dumriya Podhu Sewaka Sahayogitha Vurthiya Samithiya, supported by the International Textile, Garment and Leather Workers’ Federation (ITGLWF) and the International Transport Workers’ Federation (ITF), Report No 348, Vol XC, 2007, Series B, No 3, Case No 2519, paras 1113–1146.

The Three Layers of the Current EU GSP

123

incentive, a decision by the EU to remove Sri Lanka from the GSP+ for such violations of labour rights might have been attacked as motivated by protectionist aims, an accusation the EU institutions understandably were unwilling to have to face. The choice to focus on civil and political rights in the case of Sri Lanka was therefore both easiest to justify in legal terms—the case was a clear-cut one—and less risky diplomatically. That also appears to be the pattern in the implementation of the EU’s GSP+ scheme if we consider the range of countries that benefit from the scheme, and the delicate position in which the EU would find itself if it imposed a more exacting scrutiny on their record of compliance with the human rights and labour rights conventions that are listed in part A of Annex VIII of Regulation No 978/2012. As Orbie and Tortell note, the group of countries benefiting from the scheme is a diverse one, with quite variable degrees of compliance, particularly in the area of labour rights: For those countries with positive comments from the ILO committees, it could be argued that inclusion within the GSP-plus scheme was a reward for improvements in their implementation of labour standards. That, however, is clearly not so for all the 15 countries chosen to receive trade preferences under the GSP-plus scheme in 2005. For these countries, membership in the GSP-plus scheme can only be justified as having been intended to provide an incentive to improvement in behaviour.66

However, the level of condemnation of GSP+ beneficiaries has been fairly static, so that ‘the EU GSP-plus scheme has not led to an overall improvement in labour standards implementation in those countries’.67 In contrast to the application to Burma and Belarus of the general sanctions mechanisms for cases of ‘systematic and serious violations’,68 these researchers note, the EU’s granting of GSP-plus incentives is less clearly consistent with a reading of the ILO committees’ reports. The system has been successful in ensuring the full ratification of the eight fundamental labour standards among the beneficiary countries, as exemplified by the case of El Salvador. However, several countries have received GSP-plus trade preferences despite being seriously criticized by the authoritative ILO committees for their implementation of the relevant conventions.69

66 67 68 69

Orbie and Tortell, The New GSP Plus Beneficiaries, n 56 above, 18. Orbie and Tortell, The New GSP Plus Beneficiaries, n 56 above, 19. See above, Box 19. Orbie and Tortell, The New GSP Plus Beneficiaries, n 56 above, 20.

5 Labelling Schemes: Supporting Ethical Consumerism

W

HETHER THEY REFER to compliance with labour rights in the supply chain or whether they relate to environmental standards, labelling schemes raise largely similar issues when considered from the perspective of trade policies and the multilateral trade regime; and a number of influential schemes, including most fair trade labels, in fact integrate both sets of considerations.1 The debates in recent years have focused on environmental labelling, however, because of the spectacular development of ecolabels during the period. It is perhaps telling in this regard that the Ministerial Declaration adopted on 14 November 2001 at the WTO Doha Ministerial Conference mentions labelling requirements for environmental purposes as one area to which the WTO Committee on Trade and Environment should pay greater attention.2 Focusing on labelling for environmental purposes, this chapter first briefly maps the debate on the legitimacy and effectiveness of labelling as a tool to ensure that market access will serve non-trade objectives; it then turns to the question of whether such labelling schemes are compatible with the requirements of WTO Law.

I. THE RISE OF THE DEBATE ON LABELLING SCHEMES

Developing countries have expressed a range of concerns about ecolabelling. They remark, not without reason, that by discouraging the importation of products from developing countries because of their failure to comply with certain environmental standards and, in particular, because of their carbon footprint, rich countries would be committing a historical injustice, as developing countries have contributed far less in the past than industrialized countries to the building up of greenhouse gas emissions in the

1 Indeed, the Global Social Compliance Programme, launched in 2006 to serve as a platform for exchange and mutual recognition of existing certification schemes, and including now 39 major companies, covers both social and environmental issues. See www.gscpnet.com/aboutthe-gscp.html (last consulted on 23 September 2014). 2 WTO doc WT/MIN(01)/DEC/1, para 32, iii.

The Rise of the Debate

125

atmosphere: it would therefore be in violation of the principle of ‘common but differentiated responsibilities and respective capabilities’ included in the Framework Convention on Climate Change—a principle which may be seen as the legal transposition of the argument for climate justice—to deny them growth opportunities because of the need to mitigate climate change. As a researcher from the International Institute for Environment and Development has put it, by reducing demand for imports (particularly in agriculture) from developing countries we place the burden of reducing emissions unfairly on to them … Developing countries are responsible for less than 15 percent of historical carbon emissions and currently emit far less per capita than developed nations (the poorest are just 2 percent of those in the US) and so should not be expected to suffer greater costs from policies aimed at curbing emissions, e.g. reducing demand for products grown in developing countries if they prove to be higher in carbon intensity.3

This is a valid concern, which, as mentioned above, calls for any initiative seeking to reduce the risk of carbon leakage to be combined with transfers of technology and financial resources to developing countries, support to South-South trade and regional integration in the developing world, and measures to tackle overconsumption and waste in rich countries. In other terms, if supporting ecolabelling schemes is considered desirable, it should be seen as part of a much larger package of measures that takes into account the principle of common but differentiated responsibilities and respective capabilities towards climate change mitigation. Though generally expressed in the context of ecolabelling initiatives, the same arguments may be transposed to the debate on social labels: if such labels do indeed make it more difficult for developing countries to export, will they not result in impairing their growth and, thus, their ability to reduce poverty? Beyond this general concern, developing countries may have three separate fears concerning labels.4 Labels will provide information to consumers that would otherwise be unknown to them, or that would at least be very difficult to have access to, concerning the labour standards applicable to the production process or the environmental impacts of how a good was 3 James MacGregor, Carbon Concerns: How Standards and Labelling Initiatives Must Not Limit Agricultural Trade from Developing Countries, ICTSD–IPC Platform on Climate Change, Agriculture and Trade, Issue Brief No 3 (International Centre for Trade and Sustainable Development, Geneva, and International Food & Agricultural Trade Policy Council, Washington DC, 2010) 10. 4 See for instance the summary of the discussions held within the WTO Committee on Trade and Environment, Report of the meeting held on 10 July 2009, WTO doc WT/CTE/M/47 (31 August 2009), para 3 (‘Concerns had been raised by developing countries on the difficulties faced by producers due to the proliferation of different government regulations and private voluntary standards, as well as the high cost of multiple inspection, certification and accreditation requirements’). See also P Brenton, G Edwards-Jones and M Friis Jensen, ‘Carbon Labelling and Low-income Country Exports: A Review of the Development Issues’ (2009) 27 Development Policy Review (Overseas Development Institute, United Kingdom) 243–67.

126

Labelling Schemes: Ethical Consumerism

produced or transported. Thus, these characteristics of the goods sold on markets may influence purchasing practices, potentially making certain goods or services originating in developing countries less desirable and depriving the exporting countries, in part, from what they perceive as their competitive advantage.5 This fear relates directly to the problem of historical (and global) justice referred to above. It is compounded by the fact that labels are often costly to acquire, because of the need to collect information and go through a certification process, and because the costs of the monitoring or auditing procedures in place. The introduction of labels may therefore affect the price of the product at the retail level. Moreover, in addition to creating a potentially important obstacle to trade for products from developing countries, the impacts of labels are differentiated across producers: within producers from developing countries, they may particularly affect small-scale producers, especially small-scale farmers, who are the least well equipped to comply with the requirements imposed for the acquisition of labels and who cannot easily meet the upfront costs of acquiring such labels.6 Indeed, the standards that have emerged in recent years are developed without the participation of stakeholders from developing countries, whether governmental or private: therefore, they generally do not take into account the specific conditions in those countries or the needs of producers within those countries.7 The delegate from Thailand was voicing the concerns of many other governments from the South, when he took the floor at the 10 July 2009 meeting of the Committee on Trade and Environment: Thailand’s experience had been that while big retailers comprising both multinational companies and big Thai conglomerates were able to comply with the 5 A specific fear in this regard, expressed by the Argentinian representative to the WTO in 2009, is that labelling schemes might in the future focus on ‘food miles’, indicating the carbon footprint of the transportation of goods over long distances: ‘unilateral initiatives to calculate greenhouse gases (GHG) emissions in international transport of goods gave cause for concern, since they could weaken the competitiveness of exports from countries that were far away and depended on international transport for exports’ (Committee on Trade and Environment, Report of the meeting held on 10 July 2009, n 4 above, para 10). Though this is an important concern, it should be recalled that most of international trade of goods relies on shipping as its mode of transportation, the levels of emissions of greenhouse gases of which are much lower per volume than transport by road of by air (although within the agrifood sector, the transport by air of fresh fruits and vegetables represents the fastest-growing segment); in addition, insofar as carbon labels are concerns, a life-cycle assessment approach (that would include not only transport but also production, processing, packaging, storage, consumption and recycling) would often work in favor of agricultural products orginating from tropical regions, because of the favorable growing conditions that they benefit from. See Hans-Jürgen Schmidt, ‘Carbon Footprinting, Labelling and Life Cycle Assessment’ (2009) 14 The International Journal of Life Cycle Assessment 6–9. 6 Olivier De Schutter, Competing for standards in global food supply chains, Cridho Working papers series 2012/2. 7 Jason Potts, ‘The Legality of PPMs under the GATT: Challenges and Opportunities for Sustainable Trade Policy’ (Winnipeg, International Institute for Sustainable Development, 2008) 5.

The Rise of the Debate

127

standards, and some of them developed their own private standards and exported their products to major developed markets, for a lot of smaller and medium sized producers, this had not been the case. The main challenges for small and medium sized producers and exporters were the lack of know-how and needed financial investment to comply with these standards. Other problems stemmed from supply chain constraints and from the fact that producers had to continuously chase the trend of private standards that was fast-moving and highly competitive in nature.8

These difficulties are compounded by the fact that there exists a variety of ecolabelling schemes or of labels that aim to ensure that labour rights are guaranteed in the supply chain. The lack of uniformity may be attributed to a number of circumstances. Ecolabels and social labels are generally part of retailers’ supply chain management and corporate social responsibility schemes that are designed at company level, without harmonization at sector level.9 Moreover, on certain issues, including how to measure the carbon footprint of a product using a life-cycle assessment (LCA) approach, there exists no strong scientific consensus to date. In addition, there is no single, multilateral body that can act as standard-setter and design methodologies— the equivalent, for environmental standards or labour rights, of the Codex Alimentarius, jointly set up by FAO and the World Health Organization for food safety standards, or of the International Electrotechnical Commission for electrical and electronic technologies. Although the International Labour Organization has been tasked with setting standards in the area of labour rights and has done so with great effectiveness, it has had no role in designing methodologies for monitoring compliance with such standards in the supply chains or in labelling private actors as compliant. Some private bodies aim at harmonizing social and/or environmental standards applicable to private actors: that is the case for the Global Eco-labelling Network (GEN) and for the International Social and Environmental Accreditation and Labelling Alliance (ISEAL Alliance);10 the International Organization for Standardization (ISO) also has developed standards that could guide ecolabelling efforts. It remains to be seen, however, whether such initiatives can compensate for the lack of harmonization in an intergovernmental forum. For now at least, these processes have not been sufficient to avoid a dispersion of environmental or social labels, often imposed by buyers in what they see as responsible management of the supply chain, responding to the 8 WTO Committee on Trade and Environment, Report of the meeting held on 10 July 2009, WTO doc WT/CTE/M/47 (31 August 2009). 9 The added value of the Global Social Compliance Programme mentioned above (n 1 above) consists in its attempt to bring together a range of initiatives developed unilaterally by companies, especially the major global retailers, with a view to facilitating the mutual recognition of the auditing of suppliers by the design of common reference tools, and thus to facilitate responsible supply chain management. 10 See Shane Baddeley, Peter Cheng, and Robert Wolfe, ‘Trade Policy Implications of Carbon Labels on Food’ (2012) 13 The Estey Centre Journal of International Law and Trade Policy 59–93, at 67–68.

128

Labelling Schemes: Ethical Consumerism

expectations of the end-consumers. The current proliferation of labels, with their associated methodologies and monitoring mechanisms, makes it especially difficult for suppliers, particularly when they are small or mediumsize businesses or family enterprises, to comply. This creates a risk of abuse by the buyers, whose implementation of whatever standards are imposed often lacks transparency and predictability (for a summary of the nature of concerns raised concerning specifically carbon labels, see Table 2).11 The Turkish representative to the WTO noted for instance, at the meeting held on this topic in 2009 by the Committee on Trade and Environment, that There were more than 400 public and private certification bodies in the organic market worldwide. However, mutual recognition and equivalence were limited, and certifying bodies needed multiple accreditation. Multiple certification requirements across different markets and the high cost of certification were among the main challenges for small producers and drove up the cost of organic products for consumers.12

These various fears apply to all labelling schemes, whether they are voluntary or mandatory, established at the request of retailers acting under the pressure of consumers or imposed by governments—or whether, though voluntary, they are endorsed and supported by governments. Indeed, even purely voluntary schemes, provided they lead retailers to grant premiums to the suppliers that comply with certain certifications, can have detrimental impacts on access to markets for developing country producers, and in the agrifood sector, for small-scale farmers in particular. The fears that are expressed, it may be noted, are independent from the question whether consumers’ behaviour is actually influenced by the labels: if the agrifood companies and retailers impose certain certifications as part of their supply chain management, this affects access to markets, whether or not there is a real demand for such information from consumers and whether or not such labels influence purchasing practices by end consumers. At the same time, the pressure for the adoption of labels, especially ecolabels, is rising. In a Gallup Poll conducted in 2009 in the EU-27, 72 per cent of the respondents expressed themselves in favour of mandatory ecolabelling 11 See, for a discussion of these problems in the food sector, ‘Contract farming and inclusive business models in the food chains’, Interim Report of the Special Rapporteur on the right to food, Olivier De Schutter, to the 66th session of the General Assembly, UN doc A/66/262 (4 August 2011); Bill Vorley et al, ‘Business models that are inclusive of small farmers’ in Agroindustries for development (Wallingford, CABI Publishing, 2009) ch 6 (originally prepared for FAO and UNIDO as background to the Global Agro-Industries Forum, New Delhi, 8–11 April 2008, at 19). On standards specifically, see in particular Johan F Swinnen and Thijs Vandemoortele, ‘Trade and the Political Economy of Food Standards’ (2011) 62 Journal of Agricultural Economics 259–80; and Johan F Swinnen, Global supply chains. Standards and the poor (Wallingford, CABI Publishing, 2007). 12 Committee on Trade and Environment, Report of the meeting held on 10 July 2009, n 4 above, para 4.

The Rise of the Debate

129

Table 2. WTO Member concerns on carbon labels, as expressed within the Committee on Trade and Environment (2009–10) Concerns

Members

Lack of uniform criteria or standard for LCA

Argentina, India, El Salvador

Affects developing countries and SMEs disproportionally

New Zealand, Argentina, India, El Salvador, Brazil, Cuba, Pakistan

Most are private standards (unpredictable/costly, de facto barriers, not in WTO jurisdiction)

Brazil, United States, Kenya

Non-product-related production and process methods (nprPPMs)

Argentina, Saudi Arabia

Motives behind labelling/usefulness of labelling

Cuba, United States

Lack of sharing experience across sectors

European Union, OECD

Most important future actions

Members

Harmonization effort (working with standards institutes and firms with methodology expertise)

New Zealand, Switzerland, Korea, Argentina, India, Saudi Arabia, Pakistan

Greater transparency

Korea, Argentina, India

Reducing costs for developing countries/technology and financial transfers

Argentina, India, Saudi Arabia, Cuba, Pakistan

Government monitoring of private standards

Turkey

More sharing experience

Brazil, Cuba, European Union, OECD

Source: Shane Baddeley, Peter Cheng, and Robert Wolfe, ‘Trade Policy Implications of Carbon Labels on Food’ (2012) 13 The Estey Centre Journal of International Law and Trade Policy 59–93, at 80.

schemes indicating the carbon footprint of products (figure 5). The breakdown by country indicated the strongest support in Greece and Croatia, where about 9 out of 10 respondents favoured the mandatory nature of the labelling of carbon footprint; even in countries where comparatively little support went to this proposal, more than half of the respondents were in favour, with the sole exception of the Czech respondents (figure 6). This generally strong support for mandatory ecolabelling has an ambiguous relationship to the concerns expressed above. On the one hand, these figures show

130

Labelling Schemes: Ethical Consumerism 5

8

Yes No, it should be done on a voluntary basis

15

The carbon footprint is of no interest to me

72

DK/NA

Figure 5. Should a label indicating the carbon footprint of a product be mandatory in the future (EU-27 total)? Source: Eurobarometer, Europeans’ attitudes towards the issue of sustainable consumption and production. Analytical report. Flash Eurobarometer 256—The Gallup Organization for the European Commission, DG Environment, 2009 (fieldwork: April 2009) 24.

100

Yes 1 2 4 6 5 3

80

2 2 7

No, it should be done on a voluntary basis 3 1 1 1 6 2 6 5 10 4 5 3 4 5 4 5 4 8 6 6 8 8 11 4 7 7 7 13 7 10 8 16 6 15

60

The carbon footprint is of no interest to me

DK/NA 7 4 15 6 6 3 11 7 4 14 63 2 12 6 10 8 10 11 16 13 12 11 14 15 22 10 17 18 19 20 19 26 13 36 9 28 15 21 27 15 22 25 6 6

90 90 89 88 87 86 84 84 80 80 78 77 75 72 70 68 67 66 66 66 61 60 60 58 55 55 54 52 47 20 40

EE

CZ

FI

NL

LT

PL

AT

SK

DE

DK

HU

LU

BG

BE

LV

SE

EU27

RO

IT

FR

UK

SI

MT

IE

CY

ES

PT

EL

HR

0

Figure 6. Should a label indicating the carbon footprint of a product be mandatory in the future (EU-27, on a country by country basis)? Source: Eurobarometer, Europeans’ attitudes towards the issue of sustainable consumption and production. Analytical report. Flash Eurobarometer 256—The Gallup Organization for the European Commission, DG Environment, 2009 (fieldwork: April 2009) 24.

that consumers in the EU generally wish to be better informed about the ecological impacts of their purchasing choices, despite the barrier this may represent for access to European markets by certain categories of producers, and despite the reduced opportunities this implies for developing countries’ exports in general—although many, of course, could be unaware of these impacts. On the other hand, these figures assess the demand for mandatory labelling of the carbon footprint of product, which may also be indicating a

Compatibility with WTO Law

131

fatigue or an uneasiness with the proliferation of labels of variable quality and reliability: for the consumer, the current fragmentation may be a source of confusion, and may even lead to a ‘Gresham’s Law’ operating, in which the lowest quality labels crowd out the best schemes, in the absence of any harmonization or governmental regulation of the use of such labels.

II. COMPATIBILITY WITH WTO LAW

A different set of questions emerge as we examine the compatibility of ecolabels or social labels with the requirements of WTO law, whether the labels are mandatory (imposed as a condition for access to the EU market) or voluntary (making the products bearing the label more attractive to the consumer). The provisions of WTO law that are the most relevant to labelling schemes are stipulated in the Agreement on Technical Barriers to Trade (TBT Agreement).13 The TBT Agreement applies to all products, whether industrial or agricultural.14 It defines the conditions under which technical regulations or standards can be imposed on products as a condition for their entry into the market. This covers labels that provide information to consumers about the social or environmental conditions under which certain goods were produced, insofar as such schemes may result in obstacles (‘technical barriers’) to trade. Box 21. What are ‘technical regulations’ and ‘standards’ to which the TBT Agreement applies? Annex 1 to the TBT Agreement defines ‘technical regulations’ as any document which lays down product characteristics or their related processes and production methods, including the applicable administrative provisions, with which compliance is mandatory. It may also include or deal exclusively with terminology, symbols, packaging, marking or labelling requirements as they apply to a product, process or production method.

‘Standards’ on the other hand are documents approved by a recognized body, that provides, for common and repeated use, rules, guidelines or characteristics for products or related processes and 13 For more detailed studies, see Ilona Cheyne, ‘Proportionality, Proximity and Environmental Labelling in WTO Law’ (2009) 12 Journal of International Economic Law 927–52; Manoj Joshi, ‘Are Eco-Labels Consistent with World Trade Organization Agreements?’ (2004) 38 Journal of World Trade 69–92. 14 However, ‘purchasing specifications prepared by governmental bodies for production or consumption requirements of governmental bodies are not subject to the provisions of this Agreement but are addressed in the Agreement on Government Procurement’ (TBT Agreement, Art 1:4). On public procurement see Chapter six.

132

Labelling Schemes: Ethical Consumerism

production methods, with which compliance is not mandatory. It may also include or deal exclusively with terminology, symbols, packaging, marking or labelling requirements as they apply to a product, process or production method.

The definition of ‘technical regulations’, and therefore reliance on the TBT Agreement, is restricted to regulations that relate to a product’s characteristics, whether these are physical characteristics or characteristics related to production and process methods. In European Communities—Measures Prohibiting the Importation and Marketing of Seal Products, the Appellate Body disagreed with the Panel’s conclusions that the contested measure as a whole, consisting in the prohibition of the placing on the EU market of seal products except under certain conditions, should be treated as a ‘technical regulation’ applicable to seal products.15 It noted: in the context of the first sentence of Annex 1.1, we understand the reference to ‘or their related processes and production methods’ to indicate that the subject matter of a technical regulation may consist of a process or production method that is related to product characteristics. In order to determine whether a measure lays down related PPMs, a panel thus will have to examine whether the processes and production methods prescribed by the measure have a sufficient nexus to the characteristics of a product in order to be considered related to those characteristics. (para 5.12).

Following that logic, the Appellate Body did not consider that the Panel was justified in treating the EU Seal Regime as imposing ‘technical regulations’: to the extent that the measure regulates the placing on the EU market of pure seal products, which is a part of the integral and essential aspects of the measure, it does not prescribe or impose any ‘characteristics’ on the products themselves … the measure is not concerned with banning the placing on the EU market of seal products as such. Instead, it establishes the conditions for placing seal products on the EU market based on criteria relating to the identity of the hunter or the type or purpose of the hunt from which the product is derived. (para 5.58).

The TBT Agreement is not the only WTO Agreement relevant to ecolabels or labels concerning workers’ rights, however. The provisions of the GATT may also be applicable to labelling schemes: as recalled by the Appellate Body, despite important similarities between those provisions and the 15 European Communities—Measures Prohibiting the Importation and Marketing of Seal Products, WT/DS400/AB/R and WT/DS401/AB/R, 22 May 2014 (Appellate Body Report).

Compatibility with WTO Law

133

provisions of the TBT Agreement, it would be incorrect to assume that the two agreements impose identical obligations.16 Article III:4 GATT is of particular relevance in this regard, since it requires that foreign products be granted ‘no less favourable treatment’ ‘in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use’ (emphasis added).17 This may cover labelling schemes, insofar as such schemes affect the conditions of retail for products. This provision will seldom be invoked in this context, however. First, the TBT Agreement constitutes a lex specialis with respect to technical regulations and standards, and in the event of a conflict between the two regimes, this latter agreement should prevail.18 Secondly, judicial economy implies that where a finding of violation of the TBT Agreement has been made, the Dispute Settlement Bodies of the WTO shall refrain from examining the same measures under the provisions of the GATT. Nevertheless, where a particular measure has been considered consistent with the TBT Agreement, it still may be found inconsistent with the GATT, requiring a separate examination under that agreement. Here, the examination of labelling schemes is focused on the TBT Agreement, and—consistent with the logic of the WTO agreements itself—Article III:4 GATT will only be examined as a subsidiary requirement.19

16 United States—Measures concerning the importation, marketing and sale of tuna and tuna products (‘Tuna/Dolphin II’), WTO doc WT/DS381/AB/R (Appellate Body Report of 16 May 2012), para 405. 17 Article III:4 GATT states: ‘The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use’. 18 General Interpretative Note to Annex 1A (Multilateral Agreements on Trade in Goods) to the Marrakech Agreement establishing the World Trade Organization. 19 Certain labelling schemes can also be addressed under the Agreement on Sanitary and Phytosanitary Measures (SPS), which seeks to ensure that the sanitary and phytosanitary measures that the WTO Members adopt for the protection of human, animal or plant life or health do not arbitrarily or unjustifiably discriminate between Members where identical or similar conditions prevail, and are not applied in a manner which would constitute a disguised restriction on international trade. However, this concerns a narrow range of labelling schemes, and generally would not include ecolabels other than those regarding the use of pesticides or chemical fertilizers. Labels play a relatively marginal role in the disputes that arise under the SPS Agreement. A study that examined all ‘specific trade concerns’ raised between 1995 and 2008 within the WTO that related to labels (as either the primary or the secondary cause of conflict between Members) found that 53 out of 258 specific trade concerns raised under the TBT Agreement related to labels, representing a proportion of 21 per cent; in contrast, only five specific trade concerns out of a total of 277 concerns raised under the SPS Agreement concerned labels, a proportion of two per cent (see Baddeley et al, Trade Policy Implications of Carbon Labels on Food, n 10 above, 73). Labelling schemes should therefore primarily be examined under the TBT Agreement.

134

Labelling Schemes: Ethical Consumerism

A. Different Categories of Labelling Schemes In order to assess whether labelling schemes referring to social or environmental conditions are compatible with the TBT Agreement, two distinctions are relevant. The first distinction is between labelling schemes that are purely private in nature, and schemes that are imposed, endorsed or supported by governmental action. Purely private labelling schemes are outside the scope of WTO law: only where governmental intervention ‘affects the conditions under which like goods, domestic and imported, compete in the market within a Member’s territory’, shall Article 2.1 of the TBT Agreement apply.20 It does not matter whether the market opportunities that foreign products are denied also result from the choices made by consumers who, for instance, may prefer to buy goods that are guaranteed to be free of child labour or that have a lower carbon footprint: provided some measure from the government has facilitated that choice, supporting a particular labelling scheme or monitoring compliance with certain claims, the TBT Agreement shall apply. Conversely, though private voluntary standards can have considerable importance, de facto operating as a condition for market access due to the weight of the economic actors imposing compliance with such standards, their private nature implies that they will not be subject to WTO disciplines. One pre-eminent example is the GLOBALG.A.P. standard for food products. The standard has its origins in the establishment in 1997, by the Euro-Retailer Produce Working Group, of the European Retailers’ Protocol for Good Agricultural Practice (EurepGAP). The protocol, which evolved into GLOBALG.A.P. in 2007, covers the process from farm inputs to the farm-gate. It aims to reassure consumers that the food was produced, at field level, by minimising detrimental environmental impacts of farming, reducing the use of chemical inputs and ensuring a responsible approach to worker health and safety as well as animal welfare. This certification scheme evolved in 2007 into GLOBALG.A.P. It now includes a total of 112,600 producers spread over more than 100 countries, although three quarters of them are still in Europe. The potential obstacle that the standard can represent for access to markets of commodities produced in developing countries, particularly by small-scale producers, has been amply documented.21 Yet, due to its private nature, although European retailers have made compliance with the GLOBALG.A.P. standard the norm, and a key aspect of their

20 Korea—Measures Affecting Imports of Fresh, Chilled and Frozen Beef, WTO doc WT/ DS161/AB/R, WT/DS169/AB/R (Appellate Body Report, adopted 10 January 2001), para 149. 21 See, inter alia, A Graffham and J Cooper, Making GLOBALGAP smallholder friendly, Agrifood Standards project, IIED-NRI-DFID, 2008; IIED (International Institute for Environment and Development) and NRI (Natural Resources Institute), Costs and Benefits of GLOBALGAP compliance for smallholders: synthesised findings, 2008.

Compatibility with WTO Law

135

supply chain management schemes, this potentially important barrier to market access does not fall under WTO rules. The second distinction is between labelling schemes that are mandatory (falling under the category of ‘technical regulations’ in the TBT Agreement) and those that are voluntary (falling under the category of ‘standards’).22 The adoption of technical regulations and the assessment of conformity with such regulations23 should not result in discrimination against foreign products and should not create unnecessary obstacles to trade: therefore, they must pursue legitimate objectives, and be strictly designed so as to avoid creating barriers that go beyond what is required for the fulfilment of these objectives.24 Moreover, the TBT Agreement provides that when such technical regulations are designed, this should include wherever feasible a consultation of the other WTO Members: these other Members should be granted, ‘without discrimination … reasonable time … to make comments in writing, discuss these comments upon request’; and the Member adopting new regulations or standards in turn commits to ‘take these written comments and the results of these discussions into account’.25 Where technical standards follow existing international standards, they are presumed to be valid; in the absence of such international standards however, or where for some reason a WTO Member feels that relying on such standards would be inappropriate, and the technical regulation that is introduced may have a significant impact on the trade of other WTO Members, these other Members should be given advance notification of any technical regulations they intend to adopt and allow a reasonable time for interested parties to comment through the National Enquiry Point.26 Similar requirements are imposed as regards technical regulations adopted by local governments and non-governmental bodies, though in a form that is less strict: central governments are to take ‘reasonable measures as may be available to them’ to ensure compliance by local governments as well as non-governmental bodies.27

22 For a discussion on the respective regimes applying to technical regulations and to (voluntary) standards, see Arwel Davies, ‘Technical Regulations and Standards under the WTO Agreement on Technical Barriers to Trade’ (2014) 41 Legal Issues of Economic Integration 37–63. 23 The rules concerning the assessment of conformity with technical regulations or standards are defined in Article 5 of the TBT Agreement. The principles of non-discrimination and proportionality that are described there are similar to those applying to the design of technical regulations in Article 2 of the TBT Agreement. 24 TBT Agreement, Art 2.1 and 2.2. 25 TBT Agreement, Art 2.9.4. 26 This procedure plays, in practice, a significant role: a total of 17,252 notifications were submitted from January 1995 to December 2013 (see ec.europa.eu/enterprise/tbt/index. cfm?fuseaction=Presentation.viewProcedure5&dspLang=EN (last consulted on 22 September 2014)). 27 TBT Agreement, Art 3.1.

136

Labelling Schemes: Ethical Consumerism

In the adoption and application of voluntary standards, central governments are expected to comply with the Code of Good Practice for the Preparation, Adoption and Application of Standards attached (as Annex 3) to the TBT Agreement. This Code of Good Practice requires that the standardizing body ‘accord treatment to products originating in the territory of any other Member of the WTO no less favourable than that accorded to like products of national origin and to like products originating in any other country’ and that it ‘ensure that standards are not prepared, adopted or applied with a view to, or with the effect of, creating unnecessary obstacles to international trade’.28 Under the Code, standardizing bodies are expected to rely on international standards as the basis for the standards that they develop except where such international standards would be ineffective or inappropriate. The relevance of these distinctions to labelling schemes is illustrated by the second Tuna/Dolphin case (Tuna/Dolphin II) (Box 22).

Box 22. ‘Technical Regulations’ and ‘Standards’ under the TBT Agreement The second Tuna/Dolphin case originated in consultations that Mexico requested, questioning, inter alia, the United States Code of Federal Regulations, Title 50, Section 216.91, which provided for ‘Dolphinsafe labeling standards’. Mexico, later joined by the European Community and by Australia, alleged that by establishing the conditions for use of a ‘dolphin-safe’ label on tuna products and by making the obtention of the label conditional upon providing the US Department of Commerce with documentary evidence that varied depending on the area where tuna is harvested and the fishing method used, the United States had adopted measures inconsistent, inter alia, with Articles I:1 and III:4 of the GATT 1994 and Article 2.1, 2.2 and 2.4 of the TBT Agreement. The Panel found that the provisions concerning the ‘dolphin-safe’ labelling were indeed ‘technical regulations’ within the meaning of Annex 1.1 of the TBT Agreement, as such provisions imposed mandatory conditions for the use of the label, prohibiting any importer not satisfying the conditions stipulated for such use from making similar claims concerning tuna sold in the US. This conclusion was supported, on appeal, by the Appellate Body.29 The Appellate Body based

28

Annex 3 to the TBT Agreement, paras D and E. United States—Measures concerning the importation, marketing and sale of tuna and tuna products (‘Tuna/Dolphin II’), WTO doc WT/DS381/AB/R (Appellate Body Report of 16 May 2012). 29

Compatibility with WTO Law

137

its finding that the scheme was a ‘technical regulation’ (in the specific definition of Annex IA to the TBT Agreement) on the consideration that it was stipulated in a US regulation establishing ‘a single and legally mandated set of requirements for making any statement with respect to the broad subject of “dolphin-safety” of tuna products in the United States’, making it obligatory for any importer of tuna products wishing to make any such claim to comply with the conditions set forth in the legislation.30 The Appellate Body explicitly rejected the view according to which, since importers of tuna were free to choose whether or not to seek to obtain the label, the measure should be described as a (voluntary) ‘standard’ rather than as a (mandatory) ‘technical regulation’. ‘[T]he mere fact that there is no requirement to use a particular label in order to place a product for sale on the market’, the Appellate Body said, does not preclude a finding that a measure constitutes a ‘technical regulation’ within the meaning of Annex 1.1. Instead, in the context of the present case, we attach significance to the fact that, while it is possible to sell tuna products without a ‘dolphin-safe’ label in the United States, any ‘producer, importer, exporter, distributor or seller’ of tuna products must comply with the measure at issue in order to make any ‘dolphin-safe’ claim.31

Therefore, any labelling scheme that imposes a mandatory procedure for those wishing to use a particular label would fall under the rubric of ‘technical regulations’, with the procedural consequences that are attached to such a qualification: such schemes would either have to follow existing international standards; or they would have to be notified to other WTO Members to allow them to provide comments, insofar as they may have significant impacts on trade.

B. The Requirement of Non-discrimination of Foreign Products under Technical Regulations Article 2.1 of the TBT Agreement requires that, with respect to their central government bodies: Members shall ensure that in respect of technical regulations, products imported from the territory of any Member shall be accorded treatment no less favourable than that accorded to like products of national origin and to like products originating in any other country.

30 31

Tuna/Dolphin II, Appellate Body Report, para 193. Tuna/Dolphin II, Appellate Body Report, para 196 (internal footnotes omitted).

138

Labelling Schemes: Ethical Consumerism

In Tuna/Dolphin, the Appellate Body found that the measure adopted by the United States constituted discrimination under Article 2.1 of the TBT Agreement. It recalled in this regard that ‘less favourable treatment’ within the meaning of that provision consists in a particular measure modifying the conditions of competition to the detriment of imported products. Such treatment is prohibited even where it does not represent an insuperable obstacle for the foreign products: in the presence of discrimination (ie, if the contested measure goes beyond what is required to achieve the legitimate objective that the said measure pursues), it is immaterial whether the complainant could have complied with the requirement and thus have penetrated the market concerned.32 What matters under Article 2.1 of the TBT Agreement is that the regulatory distinction is a valid one—that it is ‘even-handed’, rather than resulting in the creation of unnecessary obstacles to the entry of foreign products.33 In Tuna/Dolphin, the Appellate Body found that some fishing techniques, though entailing potential risks to dolphins, were not addressed by the labelling scheme put in place by the US, which instead focused exclusively on the risks presented by the fishing techniques used by Mexican fishing vessels. The scheme therefore resulted in ‘less favourable treatment’ of Mexican tuna products: its design did not exhibit the kind of even-handedness and fairness that would exclude any perception that it could be motivated by a protectionist intent.

C. Restrictions to Trade Justified by Legitimate Objectives Article 2.2 of the TBT Agreement requires that WTO Members ‘ensure that technical regulations are not prepared, adopted or applied with a view to or with the effect of creating unnecessary obstacles to international trade’. It continues: For this purpose, technical regulations shall not be more trade-restrictive than necessary to fulfil a legitimate objective, taking account of the risks non-fulfilment would create. Such legitimate objectives are, inter alia: national security requirements; the prevention of deceptive practices; protection of human health or safety, animal or plant life or health, or the environment. In assessing such risks, relevant elements of consideration are, inter alia: available scientific and technical information, related processing technology or intended end-uses of products.

Though the TBT Agreement does not explicitly mention that the ‘legitimate objectives’ pursued by technical regulations or standards may be 32 Tuna/Dolphin II, Appellate Body Report, para 221 (‘the fact that a complainant could comply or could have complied with the conditions imposed by a contested measure does not mean that the challenged measure is therefore consistent with Article 2.1 of the TBT Agreement’). 33 Tuna/Dolphin II, Appellate Body Report, paras 297–99.

Compatibility with WTO Law

139

‘outward-looking’—related, for instance, to the protection of workers’ rights in the country of origin or to the use of less polluting methods of production at the place of origin—this does seem to be implied by the reference, in the definitions of Annex 1, to such regulations or standards relating to ‘process of production method’. This was confirmed by the conclusions reached by the WTO Dispute Settlement Bodies in the second Tuna/Dolphins case. The Panel found in this case that the objectives of the ‘dolphinsafe’ labelling of tuna were legitimate, as the programme (i) ensured that consumers are not misled or deceived about whether tuna products contain tuna that was caught in a manner that adversely affects dolphins, and (ii) contributed to the protection of dolphins, by ensuring that the US market is not used to encourage fishing fleets to catch tuna in a manner that adversely affects dolphins, taking account of the risks non-fulfilment would create. These findings were not contradicted by the Appellate Body.34 However, the Panel and the Appellate Body disagreed in this case as to whether the United States was committing a form of discrimination against Mexican products, by imposing disproportionate obstacles to trade. In examining the alleged violation of Article 2.2 of the TBT Agreement, the Panel concluded against the US that the scheme went beyond what was necessary to fulfil the objective of protecting dolphins, in violation of that provision. This conclusion was reached on two grounds: first, the US dolphin-safe labelling provisions only partly addressed the legitimate objectives pursued by the United States; and secondly, in the view of the Panel, Mexico had put forward a less trade-restrictive alternative capable of achieving the same level of protection of the objective pursued by the US dolphin-safe labelling provisions. The ‘fit’, in other terms, was not perfect between the objective put forward in favour of the measure and its design. The Appellate Body disagreed with the Panel on the last conclusion. It recalled that ‘the assessment of “necessity” involves a relational analysis of the trade-restrictiveness of the technical regulation, the degree of contribution that it makes to the achievement of a legitimate objective, and the risks non-fulfilment would create’.35 Therefore, in order to assess a contested measure, it is relevant to inquire whether any alternative measure could have fulfilled the same objective while imposing a lesser restriction to trade, and what the risks would be in opting for that alternative instead. Applying that test to the measures adopted by the United States but challenged by Mexico, the Appellate Body—while recognizing that the protection of dolphins constituted a legitimate objective—concluded that the ‘alternative measure’ proposed by Mexico in fact would not protect dolphins to a similar extent, and that therefore the United States had not been acting

34 35

Tuna/Dolphin II, Appellate Body Report, para 342. Tuna/Dolphin II, Appellate Body Report, para 318.

140

Labelling Schemes: Ethical Consumerism

in violation of Article 2.2 of the TBT Agreement.36 This suggests that the adoption of a ‘technical regulation’ may pass the test of Article 2.2, even though it only partly or imperfectly fulfils the objective it is assigned, unless another measure would be available that is at least as effective with regard to the said objective while less restrictive of trade.

Box 23. The EU Ecolabel: an example of linkage through an environmental standard The EU already has an Ecolabel since 1992, symbolized by a flower, and most recently revised in 2010.37 It aims to signal to consumers that the products bearing the label follow the best environmental practices available. The criteria that must be complied with for the award of the label are to be determined ‘on a scientific basis considering the whole life cycle of products’, taking into account: (a) the most significant environmental impacts, in particular the impact on climate change, the impact on nature and biodiversity, energy and resource consumption, generation of waste, emissions to all environmental media, pollution through physical effects and use and release of hazardous substances; (b) the substitution of hazardous substances by safer substances, as such or via the use of alternative materials or designs, wherever it is technically feasible; (c) the potential to reduce environmental impacts due to durability and reusability of products; (d) the net environmental balance between the environmental benefits and burdens, including health and safety aspects, at the various life stages of the products; (e) where appropriate, social and ethical aspects, e.g. by making reference to related international conventions and agreements such as relevant ILO standards and codes of conduct; (f) criteria established for other environmental labels, particularly officially recognised, nationally or regionally, EN ISO 14024 type I environmental labels, where they exist for that product group so as to enhance synergies; (g) as far as possible the principle of reducing animal testing.38

Although it still is not widely known within the public and although a still relatively small number of companies use it—the lack of uptake having been one of the major reasons for its recent revision—the

36

Tuna/Dolphin II, Appellate Body Report, paras 330–31. Council Regulation (EEC) No 880/92 of 23 March 1992 on a Community eco-label award scheme [1992] OJ L99/1; see now Regulation (EC) 66/2010 of the European Parliament and of the Council of 25 November 2009 on the EU Ecolabel, [2010] OJ L27/1. 38 Article 6(3) of Regulation (EC) 66/2010 of the European Parliament and of the Council of 25 November 2009 on the EU Ecolabel, cited above. 37

Compatibility with WTO Law

141

Ecolabel scheme nevertheless has gradually increased its visibility and presence, as shown in figure 7: Total number of licences issued from 1992 to 2011 1600 1357

1400 1200

1064 1015

1000

754

800 600

514 386

400 200 0

0 0 0

53 6 11 33 39

224249

19

9 19 2 9 19 3 9 19 4 9 19 5 9 19 6 9 19 7 9 19 8 9 20 9 0 20 0 0 20 1 0 20 2 0 20 3 0 20 4 0 20 5 0 20 6 0 20 7 0 20 8 0 20 9 1 20 0 11

0

166 95128

Figure 7. Number of licences to use the Ecolabel (1992–2011) Source: ‘Facts and Figures—Ecolabel—EUROPA’, see ec.europa.eu/environment/ecolabel/facts-and-figures.html (accessed on 12 September 2013).

Is the EU Ecolabel scheme compatible with WTO law? It follows from the discussion presented in this section that the major concern may be the weak effectiveness of the scheme, in other terms, its weak ability to influence consumers’ behaviour and to have any significant impact on climate change or on environmental sustainability of the EU consumers’ purchasing practices in general. The disadvantage that such schemes impose on new market entrants or on foreign producers, who need to adapt to such a standard if they want to benefit from the positive image associated with the EU Ecolabel, may therefore not be justified as ‘necessary’ to achieve these objectives, even though the legitimacy of such objectives could hardly be contested. This may result in a finding of violation of Article 2.2 of the TBT Agreement, and it is unclear whether such a measure, if it fails to pass the test of the TBT Agreement, could still be rescued under the General Exception Clause of Article XX GATT.39

39 See Erich Vranes, Climate Labelling and the WTO: The 2010 EU Ecolabelling Programme as a Test Case Under WTO Law (9 March 2010), available at papers.ssrn.com/sol3/papers.

142

Labelling Schemes: Ethical Consumerism

D. The Reference to International Standards Article 2.4 of the TBT Agreement states, again with a view to limiting the adoption of unilaterally designed measures that might hide protectionist motives or disproportionately affect trade, that: Where technical regulations are required and relevant international standards exist or their completion is imminent, Members shall use them, or the relevant parts of them, as a basis for their technical regulations except when such international standards or relevant parts would be an ineffective or inappropriate means for the fulfilment of the legitimate objectives pursued, for instance because of fundamental climatic or geographical factors or fundamental technological problems.

The Appellate Body takes the view that a required element of the definition of an ‘international’ standard for the purposes of the TBT Agreement is the approval of the standard by an ‘international standardizing body’, that is, a body that has recognized activities in standardization and whose membership is open to the relevant bodies of at least all Members’ (emphasis added).40

This includes two separate requirements. First, it is required that the body’s standardization role be ‘recognized’. Such ‘recognition’ is a broad notion that ‘ranges from a factual end (acknowledgement of the existence of something) to a normative end (acknowledgement of the validity or legality of something)’.41 But it does imply ‘at a minimum, that WTO Members are aware, or have reason to expect, that the international body in question is engaged in standardization activities’;42 the fact that a large number of countries take part in the standard-setting process may be seen as an indicator of such a recognition of the forum within which they meet to that effect.43 The second requirement is that the membership of the standardizing body be ‘open’. Any understanding of the notion of an ‘international standardizing body’ that would include bodies whose membership is restricted to only some WTO Members (ie, where participation of some Members may face obstacles, including the veto of some participants already involved in the standard-setting process), would entail the risk of the standards developed by the body in question becoming authoritative despite some WTO Members cfm?abstract_id=1567432 (accessed on 12 September 2014) (taking the view that, while the EU Ecolabel scheme may be difficult to defend as imposing a ‘necessary’ obstacle to trade as required under Article 2.2 of the TBT Agreement, ‘one way of overcoming this problem consists in regarding Article XX of the GATT as an overarching exception clause that may become relevant, as a fall-back clause, also under the TBT Agreement’ (at 21)). 40 41 42 43

Tuna/Dolphin II, Appellate Body Report, para 359. Tuna/Dolphin II, Appellate Body Report, para 361. Tuna/Dolphin II, Appellate Body Report, para 362. Tuna/Dolphin II, Appellate Body Report, para 390.

Compatibility with WTO Law

143

not having been able to influence its position: the margin of appreciation of these Members in setting technical regulations would thus be unjustifiably restricted.44 The two conditions (recognition of the standard-setting role of the international body concerned and open membership) are linked: the reason why it would not be acceptable to restrict the margin of appreciation of WTO Members in adopting technical regulations by obliging WTO Members to refer to standards set by a body that is not ‘recognized’ as having a standard-setting role, is in part because this could take these Members by surprise and result in some standards prevailing over others, set in other fora, that might potentially be equally legitimate and broadly accepted as a source of guidance. These conditions may have implications for the design of social or environmental labelling schemes. As regards labels that refer to labour rights, WTO Members would be expected under Article 2.4 of the TBT Agreement to refer to the norms developed by the International Labour Organization, perhaps focusing in particular on the subset of norms that have been included in the 1998 Declaration on Fundamental Principles and Rights at Work. These core principles and rights are binding on all ILO Members. The legitimacy of the ILO in setting standards related to labour rights is uncontested, and it has been explicitly recognized by the Ministerial Declaration adopted at the 1996 Singapore Ministerial Conference. A reference to these principles and rights, therefore, would appear to be the least suspect of being inspired by protectionist motives. It does not follow that, for the purpose of granting the right to use the label, the assessment of compliance could be based on findings by the bodies of the ILO. Indeed, a major difficulty in opting for such a solution (however desirable it may seem in principle) would stem from the fact that the monitoring mechanisms that are set up within the ILO apply to countries, not to particular products. Yet, almost per definition, a label referring to a country’s compliance with international labour standards would be 44 See, influencing the interpretation of Article 2.4 of the TBT Agreement, Decision of the [TBT] Committee on Principles for the Development of International Standards, Guides and Recommendations with relation to Articles 2, 5 and Annex 3 of the Agreement, in WTO document G/TBT/1/Rev.10, Decisions and Recommendations adopted by the WTO Committee on Technical Barriers to Trade since 1 January 1995, 9 June 2011, 46–48 (see in particular paras 6 and 8 of the Decision: ‘Membership of an international standardizing body should be open on a non-discriminatory basis to relevant bodies of at least all WTO Members. This would include openness without discrimination with respect to the participation at the policy development level and at every stage of standards development … All relevant bodies of WTO Members should be provided with meaningful opportunities to contribute to the elaboration of an international standard so that the standard development process will not give privilege to, or favour the interests of, a particular supplier/s, country/ies or region/s’). The Appellate Body considers that this Decision of the TBT Committee may qualify as a ‘subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions’ within the meaning of Article 31(3)(a) of the Vienna Convention on the Law of Treaties (see Tuna/ Dolphin II, n 16 above, para 372).

144

Labelling Schemes: Ethical Consumerism

overbroad: any individual importer could argue that, despite the generally poor compliance with the ILO standards in the country in which it operates, it has put in place schemes (including, for example, a rigorous monitoring of its suppliers) that ensure compliance in their supply chains. As regards ecolabels, no recognized standard-setting organization open to all WTO Members would seem to exist: though some multilateral fora have been set up with a mandate that relates to environmental protection—that is the case of the United Nations Environment Programme, or of the Secretariat of the United Nations Framework Convention on Climate Change— these are not standard-setting bodies, in which prescriptions are established that should serve to guide the work on standardizing bodies established at domestic level. Nor would organizations such as the Global Ecolabelling Network (GEN) or the International Social and Environmental Accreditation and Labelling Alliance (ISEAL), that were referred to above, qualify as such. GEN is a network of private organizations (26 at the time of writing, plus two observers), not a multilateral intergovernmental negotiating forum with a membership open to all WTO Members. And the various organizations grouped in the ISEAL Alliance, though they aim to develop standards in various areas including climate change mitigation and sustainability more generally, may not be seen as ‘recognized’ by governments as bodies in which such standards are negotiated for the international community. It follows that Article 2.4 of the TBT Agreement does not impose on WTO Members designing an ecolabelling scheme that they align themselves with any of the standards developed by these organizations. Though referring to such standards may be desirable and alleviate fears of discriminatory treatment of foreign products, it is not, as such, a requirement under WTO law.45 However, some international standards developed by the International Organization for Standardization (ISO)—a network of national standards organizations now including 163 full members—may have to be taken into account, in accordance with Article 2.4 of the TBT Agreement (a summary is presented in Table 3). Most recently, in 2013, the ISO has presented a new set of principles for the quantification and communication of the carbon footprint of a product (CFP). This new norm, ISO/TS 14067:2013, is based on International Standards on life-cycle assessment (ISO 14040 and 45 It is also unclear whether a standard such as developed by the FAO for the agrifood systems, defining sustainability criteria for food and agricultural policies that can be used, in the form of a set of Guidelines and indicators, by any actor of the food system, from the producer of raw materials to the retailer, must be followed by a WTO Member setting standards or imposing technical regulations in this domain: indeed, although these SAFA (Sustainability Assessment of Food and Agriculture) Guidelines have been developed within an intergovernmental organisation with a quasi-universal membership, the degree of implication of the member states’ representatives is unclear, and it is also uncertain whether the FAO is seen as ‘recognized’ in its role as standard-setter in this context (on the SAFA Guidelines, see: www. fao.org/docrep/017/ap773e/ap773e.pdf).

Compatibility with WTO Law

145

Table 3. ISO standards relevant for environmental labelling Standard

Description

Type I—Third Party Certified Environmental Labelling: ISO 14024

According to ISO-14024, environmental labelling is ‘a voluntary, multiple-criteria based, third party program that awards a license which authorizes the use of environmental labels on products indicating overall environmental preferability of a product within a particular product category based on life cycle considerations.’

Type II—Self-declared environmental claims: ISO 14021

ISO 14021 specifies requirements for self-declared environmental claims including statements, symbols, and graphics on products. This means that manufacturers, importers, or distributers of products make environmental claims about their goods (eg made from XY% of recycled goods). ISO 14021 requires that all claims have to be backed by bona fide and readily available third-party information. There also has to be an explanatory statement, which explains the reason for the claim.

Type III—Environmental Product Declarations (EPDs): ISO 14025 defines

ISO 14025 defines EPDs as ‘quantified environmental data for a product with pre-set categories of parameters based on the ISO 14040 series of standards, but not excluding additional environmental information.’ Type III labels are awarded based on a full life cycle assessment. The parameters are set by a qualified third party and verified by that or another qualified third party. Type III labels enable the customer to compare between products fulfilling the same function without judging the products. Examples are the Fair Trade label or the Forest Stewardship Council label.

Source: BIO Intelligence Service, Study on different options for communicating environmental information for products, Final report prepared for the European Commission—DG Environment, 2012.

ISO 14044) for quantification and on environmental labels and declarations (ISO 14020, ISO 14024 and ISO 14025) for communication. Is has been the result of a broad, multi-year collaboration between 107 experts across 30 countries. But it remains to be seen whether it will provide an authoritative standard, applicable across countries and in various lines of production, for measuring the carbon footprint of products in a LCA approach.

146

Labelling Schemes: Ethical Consumerism

There is an important exception to the requirement, expressed in Article 2.4 of the TBT Agreement, that reference be made to relevant international standards where such standards exist or where their completion is imminent: such an obligation does not extend to situations where ‘such international standards or relevant parts would be an ineffective or inappropriate means for the fulfilment of the legitimate objectives pursued, for instance because of fundamental climatic or geographical factors or fundamental technological problems’. In the EC-Sardines case, the Appellate Body confirmed that an ineffective means is a means which does not have the function of accomplishing the legitimate objective pursued, whereas an inappropriate means is a means which is not specially suitable for the fulfilment of the legitimate objective pursued … The question of effectiveness bears upon the results of the means employed, whereas the question of appropriateness relates more to the nature of the means employed.46

In other terms, if the objective pursued would not be achieved by referring to the recognized international standard, or if using that standard would not be suitable for other reasons, there shall be no obligation to draft the technical regulation on it. It is notable that the perceptions of consumers may matter in this regard: if the international standard in question were considered insufficiently trustworthy by consumers or not adequate to respond to their concerns, for instance, a Party will be excused for not taking it into account in drafting its technical regulations.47 The convergence of carbon footprint labels towards one single methodology adopting a life-cycle assessment approach, and recognized widely enough to stimulate adoption in both public and private labelling schemes, would certainly be an important and positive step forward. It would be welcomed by many developing countries, which may otherwise be penalized by the use of the ‘food miles’ concept rather than by a full life-cycle assessment taking into account the different phases of the product’s life ‘from cradle to grave’, or by the attitudes of consumers who, while desiring to reduce the carbon footprint of their purchasing practices, take geographical distance as a proxy for the volume of greenhouse gas emissions involved. Convergence towards a single metric would improve transparency, and it would improve the position of producers in developing countries who

46 European Communities—Trade Description of Sardines, WTO doc WT/DS231/AB/R (Appellate Body Report, adopted 23 October 2002), para 285 (quoting from, and approving, the Panel’s interpretation, as it appears in para 7.116 of the Panel’s Report in the same case). 47 European Communities—Trade Description of Sardines, Appellate Body Report cited above, para 289 (‘The capacity of a measure to accomplish the stated objectives—its effectiveness—and the suitability of a measure for the fulfilment of the stated objectives— its appropriateness—are both decisively influenced by the perceptions and expectations of consumers in the European Communities relating to preserved sardine products’).

Compatibility with WTO Law

147

otherwise may have to adapt to a variety of schemes. It could also imply that, in accordance with Article 2.4 of the TBT Agreement, WTO Members wishing to introduce a carbon footprint labelling scheme would have to do so by reference to this metric, at least if the said metric is the result of a standard-setting process open to all WTO Members. As noted by the Colombia delegate to the WTO, the current proliferation of labels ‘made it difficult to comprehend which standards had to be met in order to enter the various markets’, making ‘harmonisation through international efforts’ a priority in order to limit the proliferation of labels.48 Whether such harmonization would suffice is highly doubtful, however. The major obstacles to trade at present result from privately imposed standards, rather than from technical regulations set by governments or officially endorsed voluntary standards. At the same meeting at which Colombia took the floor, the Kenyan representative expressed his impatience: Kenya, he said, ‘had invested heavily in certification and standard-setting on organic products. However, frustration was experienced from time to time in market entry of these products, due to private standards’.49 Indeed, the Colombian delegate stressed the imbalance of power in the setting of such standards: There was no effective participation by producers, in particular small producers, in private standard development, and the procedures did not guarantee that their concerns would be taken into account. Another issue was the duplication of effort. [The proliferation of labels] made it difficult to comprehend which standards had to be met in order to enter the various markets. He believed that there should be a limitation to the proliferation and should be harmonisation through international efforts.50

The same considerations would apply, mutatis mutandis, to labels that guarantee compliance with basic labour rights throughout the supply chain. The future development of ecolabels and social labels should go hand in hand with increased efforts to develop a multilateral approach to this question, with the active participation of WTO Members from developing countries, and organizations of producers from the South. This would strengthen the position of countries wishing to introduce such labels, and it would gradually lead to identify the best way to reconcile trade with ‘non-trade’ concerns.

48 Committee on Trade and Environment, Report of the meeting held on 10 July 2009, n 4 above, para 17. 49 Committee on Trade and Environment, Report of the meeting held on 10 July 2009, n 4 above, para 20. 50 Committee on Trade and Environment, Report of the meeting held on 10 July 2009, n 4 above, para 17.

148

Labelling Schemes: Ethical Consumerism

Box 24. Fair Trade: a bottom-up approach to make trade work for sustainable development: what role for the EU?—by Sergi Corbalan The 2009 Charter of Fair Trade Principles defines fair trade as ‘a trading partnership, based on dialogue, transparency and respect that seeks greater equity in international trade. It contributes to sustainable development by offering better trading conditions to, and securing the rights of, marginalized producers and workers—especially in the South. Fair Trade Organizations, backed by consumers, are engaged actively in supporting producers, awareness raising and in campaigning for changes in the rules and practice of conventional international trade’. The World Fair Trade Organization (WFTO) and Fairtrade International have put in place two complementary Fair Trade systems. The former is an integrated supply chain guarantee system, whereby products are imported and/or distributed by organisations that are 100 per cent committed to Fair Trade. The latter developed a product certification route to guarantee that products have been produced, traded, processed and packaged in line with Fairtrade International standards. These organizations work with approximately two million producers in the Global South. These Fair Trade systems are by and large, a system for and by Southern producers, with the majority of WFTO members coming from Southern countries and 50 per cent of the Fairtrade system being owned by its Producer Networks, the other half by the National Fairtrade Organizations (which are also now present in countries such as South Africa, Brazil and India). Fair Trade still represents a very small part of trade in agricultural commodities, but sales increase every year. 4.8 billion euros’ worth of Fairtradecertified products were sold globally in 2012.51 The high cost of compliance with various social and environmental standards is often referred to as a problem for marginalized producers, in particular given the proliferation of sustainability schemes. To address this, Fairtrade International is working with other sustainability initiatives52 to reduce auditing costs for a set of basic shared core requirements in the context of the United Nations Forum on Sustainability Standards.53 51 More information on the Fair Trade systems and sales of Fair Trade products under: www.wfto.com and www.fairtrade.net. 52 More information on the ISEAL Alliance under: www.isealalliance.org. 53 The United Nations Forum on Sustainability Standards (UNFSS) is a joint initiative of the Food and Agriculture Organization of the United Nations (FAO), the International Trade Centre (ITC), the United Nations Conference on Trade and Development (UNCTAD), the United Nations Environment Programme (UNEP) and the United Nations Industrial Development Organization (UNIDO). More information under: unfss.org.

Compatibility with WTO Law

149

Yet beyond the basic set of shared environmental and social requirements, Fair Trade stands out from other sustainability initiatives by providing better economic conditions to producers,54 by ensuring producers can obtain pre-financing from their buyers and by financial support mechanisms that facilitate access to certification.55 Could the European Union do more to promote the uptake of Fair Trade? What would a ‘European Strategy for Fair Trade’ look like? First and foremost, Economic Partnership Agreements (EPAs) and EU Free Trade Agreements (FTAs) offer opportunities to promote the integrated Fair Trade in the context of trade policy, as shown by commitments to promote Fair Trade in the framework of the implementation of the EU-Cariforum EPA56 and the EU-Colombia FTA.57 EU Development Cooperation can play a key role in this regard, in particular in the EU partner countries of Africa, Asia and Latin America, where Fair Trade production takes place. European development funds (both from the EU itself, but also from the EU Member States whom the EU could encourage to move in this direction) could be earmarked for capacity building and technical assistance of small producers in the South, as well as to give them the knowledge and tools to access Fair Trade markets. This would be consistent with the requirement of the Lisbon Treaty, which sets out as the objectives the EU should pursue ‘in its relations with the wider world’, inter alia, ‘the sustainable development of the Earth, solidarity and mutual respect among peoples, free and fair trade, eradication of poverty and the protection of human rights’.58 Furthermore, the Union is required to take account of the objective of poverty reduction and eradication in all actions likely to affect developing countries59 and has repeatedly committed to Policy

54 The World Fair Trade Organization refers to pre-financing a fair price in its 10 Fair Trade standards; Fairtrade International standards refer to pre-finance, a guaranteed minimum price (for most commodities) and an additional Fairtrade premium. 55 Information on the pre-financing system and Fairtrade Acess Fund is available from www. fairtrade.net/access-to-finance.html. 56 Article 195.5 of the EC-Cariforum Economic Partnership Agreement reads: ‘The Parties recognise the benefits of commerce in fair and ethical trade products and the importance of facilitating such commerce between them’. 57 Article 324 of the FTA explicity refers to promote ‘fair and equitable trade’ (trade.ec. europa.eu/doclib/press/index.cfm?id=694&serie=409&langId=es). The ‘Sustainable Development’ Title IX of the FTA foresees that, once the treaty is applied, bilateral EU-Colombia discussions will take place to increase the ‘sustainable development’ aspects of trade between the EU and Colombia. 58 Article 3.5 of the Treaty on the European Union. 59 Article 208(1) of the Treaty on the Functioning of the European Union.

150

Labelling Schemes: Ethical Consumerism

Coherence for Development.60 In sum, the European Union has the policy framework and legal competences to put in place a coordinated enabling policy environment for Fair Trade, as repeatedly asked by the European Parliament.61 A source of inspiration has been recently provided by the governments of Ecuador and France, which signed in November 2013 a bilateral agreement to promote Solidarity Economy and Fair Trade.62 This example shows that, provided sufficient political will can be gathered, it is possible to use external action to promote trade at the service of sustainable development, rather than to blindly pursue the trade liberalisation agenda as has been done in the past. Fair Trade being based on a voluntary approach, such a European Strategy for Fair Trade should aim at removing obstacles and encouraging those in the European Union that could contribute to the uptake of Fair Trade, if they wish to do so, but may be put off by lack of information or tools. Public procurement represents a major opportunity in this regard (see also chapter VI in this volume). To date, over 1,500 towns in 18 countries have made commitments to increase their sourcing of Fair Trade products as part of the International Fair Trade Towns Campaign.63 Many other examples could be cited in which, with or without explicit legislative authorisation, local authorities rely on Fair Trade criteria in their public procurement policies.64 The EU legal public procurement framework has been recently clarified, both by the European Court of Justice65 and the subsequent

60 EU policies on Policy Coherence for Development available at: ec.europa.eu/europeaid/ what/development-policies/policy-coherence/index_en.htm. 61 In a resolution it adopted on 27 September 2011, the European Parliament ‘recalls that Parliament is committed to free and fair trade—not only the Member States but also the Union as a whole have a social responsibility’ and it ‘reiterates its earlier call on the Commission to ensure coordinated policies in support of Fair Trade’ (European Parliament resolution on a New Trade Policy for Europe under the Europe 2020 Strategy (2010/2152(INI)), P7_TA(2011)0412, op para 35). The current approach to Fair Trade is summarised in the European Commission Communication, Contributing to sustainable development: the role of Fair Trade and non-governmental trade-related sustainability assurance schemes, COM(2009) 215 final, of 5.5.2009. 62 Bilateral agreement between France and Ecuador on Solidarity Economy and Fair Trade available (in Spanish) under: http://comercioexterior.gob.ec/wp-content/uploads/downloads/2014/01/Acuerdo-MIES-Y-MCE-COOPERAC-EN-ECON-SOLIDARIA.pdf. 63 More information on the Fair Trade Towns Campaign under: www.fairtradetowns.org. 64 See Olivier De Schutter, The Power of Procurement. Public Purchasing in the Service of Realizing the Right to Food, Briefing Note No 8 of the UN Special Rapporteur on the right to food (April 2014). 65 Case C-368/10, European Commission v Kingdom of the Netherlands, judgment of 10 May 2012 [2012] ECR I-284. See further below, pp 162–64.

Compatibility with WTO Law

151

amendment to the EU Public Procurement Directive:66 the EU rules now offer an enabling legal framework for the uptake of Fair Trade in procurement (see Box 26). However, this is not enough. A truly proactive strategy to support Fair Trade, which would go further than simply allowing it, would require the EU to provide practical guidance to the growing number of public procurers in the EU that wish to contribute to Fair Trade with their purchasing decisions. Higher prices or lack of suppliers are often cited as barriers to the uptake of Fair Trade Public Procurement. The European Commission could therefore facilitate joint purchasing platforms of public procurers to put together resources and motivate economic actors to supply Fair Trade products, in the context of its innovative procurement strategies. The European Commission could also put in place an award at European level to promote a ‘European Fair Trade Capital’ learning from the successful initiative ‘Hauptstadt des Fairen Handels’67 in Germany, which has been running for 10 years with the support of the German government, encouraging competition between local authorities in the field of Fair Trade. There is also a role for the European Union to pro-actively encourage and give tools to EU consumers and private actors in the EU to support Fair Trade. This could be done for example by ensuring crossEuropean public information campaigns are put in place so that all citizens across the 28 EU Member States have access to a similar level of information on how they can support Fair Trade via their purchasing decisions. A 2010 Eurobarometer report showed that ‘Almost 40% [of EU citizens] are willing to pay more for products if they were produced under certain social and environmental standards or to support a developing country’.68 What is missing, therefore, in particular in Central and Eastern European countries, is not the motivation, but the necessary information and availability of Fair Trade products on the shelves. A more recent Eurobarometer report, issued in April 2014, shows that 45 per cent and 28 per cent of Young Europeans consider that fighting child labour and promoting fair trade, respectively, should be

66 Directive 2014/24/EU of the European Parliament and the Council, of 26 February 2014 on public procurement and repealing Directive 2004/18/EC ([2014] OJ L94/65). 67 More information on the ‘Hauptstadt des Fairen Handels’ (in German) under: www. service-eine-welt.de/hauptstadtfh/hauptstadtfh-start.html. 68 Eurobarometer Report on International Trade (2010), available from: ec.europa.eu/ public_opinion/archives/eb_special_359_340_en.htm.

152

Labelling Schemes: Ethical Consumerism

the top priorities for the European Union in its relations with emerging and development countries.69 The implementation by the EU of the United Nations Sustainable Development Goals succeeding to the Millennium Development goals after 2015 seems to open a window of opportunity. The EU has proven it is possible to put in place a strategy in support of organic agriculture70 next to its ‘conventional’ agriculture policy. The same could be done for the promotion of fair trade. As the Eurobarometer report on International Trade of 2010 had concluded, ‘Europeans cannot be considered passive consumers: social and ethical concerns are among their criteria when buying a product or a service. This may need to be factored into decision-making relating to future trade policy priorities’.

69 ‘European Youth in 2014’, TNS report for the European Parliament, available at: www. europarl.europa.eu/pdf/eurobarometre/2014/youth/eb_395_synthesis_youth_en.pdf. 70 European Commission, Action Plan for the future of Organic Production in the European Union. COM (2014) 179 final. 24 March 2014. ec.europa.eu/agriculture/organic/eu-policy/ european-action-plan/index_en.htm.

6 Public Procurement: The Power of the Purse

A

FINAL TOOL through which trade policies, broadly construed, could be better linked to social and environmental values, is by the use of public procurement. This is a potentially powerful lever through which to achieve change. In OECD countries, governments spend on average 12 per cent of their GDP on public procurement, and the figure is only slightly lower in developing countries.1 Linking social and environmental considerations to public procurements could therefore have a significant impact on economic actors, and on governments in the countries in which they operate. The Government Procurement Agreement (GPA), a plurilateral agreement of the WTO revised in 2011–14,2 imposes certain restrictions on the WTO Members that are parties to this undertaking.3 However, in line with the reference to ‘non-trade values’ in the Preamble to the Marrakech Agreement establishing the WTO, the GPA allows including considerations that are not purely economic in public tenders, even for public contracts that are above the minimum threshold negotiated by each Party and to which,

1 OECD, Government at a Glance 2011 (Paris, OECD Publishing, 2011) 148. Some figures are higher. In 2002, the OECD estimated public procurement (expressed as percentage of 1998 GDP data) to represent approximately 20% of the GDP in OECD countries (US$ 4733 billion) and 14.5% in non-member countries (US$ 816 billion). The UN Department of Economic and Social Affairs estimate for the size of public procurement is between 6 to 10% of countries’ GDP. See Denis Audet, ‘Government Procurement: A Synthesis Report’ (2002) 2 OECD Journal on Budgeting 149–94; UN Department of Economic and Social Affairs, Public Procurement as a tool for promoting more Sustainable Consumption and Production patterns, Sustainable Development Innovation Briefs, Issue 5 (August 2008) 1. 2 On 15 December 2011, the Parties to the current GPA reached a political agreement on the outcomes of the re-negotiations of the 1994 Agreement, which was launched already in 1997. This was confirmed on 30 March 2012 by the formal adoption of the Decision on the Outcomes of the Negotiations under Article XXIV:7 of the Agreement on Government Procurement (GPA/113). The revised WTO Agreement on Government Procurement entered into force on 6 April 2014. 3 The countries parties to the current GPA are the 27 Member States of the European Union, Armenia, Canada, China (and Hong Kong), Iceland, Israel, Japan, Korea, Liechtenstein, the Netherlands with respect to Aruba, Norway, Singapore, Switzerland, Chinese Taipei, and the United States.

154

Public Procurement

therefore, the GPA applies.4 The Parties to the GPA may introduce clauses referring to labour rights or environmental standards in their public procurement schemes, provided this does not lead to discrimination between potential contractors from different countries. Article VI.1 GPA like Article X of the revised text allows procuring entities to lay down technical specifications including process and production methods (PPMs) as long as they do not create unnecessary obstacles to international trade.5 This provision does not make any distinction between product-related and non-product related specifications related to PPMs. Moreover, the revised text contains an important new provision (Article X.6) which explicitly allows public authorities to adopt technical specifications to promote the conservation of natural resources or the protection of the environment. Though Article X.6 does not specifically mention any other ‘secondary’ policy objective, the wording leaves no doubt that other such objectives, including the protection of labour rights, could also be taken into account. Article VI.2(b) GPA and Article X.2(b) of the revised text provide that technical specifications shall, where appropriate, be based on international standards. Such standards must also be specified in terms of performance rather than design or descriptive characteristics.6

Box 25. The Massachusetts Burma Law There have been few opportunities for the WTO Dispute Settlement Bodies to shed light on the meaning of the most contested provisions of the GPA. On one occasion, however, a case related to the inclusion of human rights concerns in public procurement came close to adjudication under the WTO. In 1998, the European Communities and Japan filed a complaint against the United States after the State of Massachusetts enacted a statute restricting access to government contracts by corporations doing business with Burma.7 The EC and Japan requested the establishment of a WTO Dispute Settlement Panel, alleging that the Massachusetts Myanmar Act violated the obligations of the

4 Specific thresholds have been negotiated by each party and range between 130,000 SDR (Special Drawing Rights) and 15 million SDR (between approximately US$ 202,800 and US$ 23.4 million at the exchange rate at the time of writing). 5 Indeed, the revised GPA defines a ‘technical specification’ as a requirement that ‘lays down the characteristics of goods or services to be procured, including quality, performance, safety and dimensions, or the processes and methods for their production or provision’ (Art I(u)(i)), clearly allowing such considerations related to production or process methods to play a role in the award of public contracts. 6 In addition, and quite understandably, they may not specify particular brand names, producers or suppliers, except where there is no other intelligible way of describing the procurement requirements and words such as ‘or equivalent’ are inserted appropriately in the tender. 7 An act regulating contracts with companies doing business with or in Burma (Myanmar), ch 130, 1996 Session Laws, Mass Gen Laws Ann, Ch 7 223 (West 1997).

Public Procurement

155

United States under the GPA in four respects: 1) a violation of Article VIII(b) on the basis that it imposed conditions on a tendering company which were not ‘essential to ensure the firm’s capability to fulfill the contract’; 2) a violation of Article X which prohibits the imposition of qualification criteria that are political rather than economic in nature; 3) a violation of Article XIII:4(b) which requires the award of contracts to be based on economic rather than political criteria; 3) a violation of Article III prohibiting discrimination. Japan also issued a formal complaint to the US alleging violations of Articles III:2, VIII(b), X, and XIII:4 GPA. However, the US Supreme Court struck down the Massachusetts Act on US constitutional grounds before the dispute could be heard.8

The GPA prohibits any discrimination between suppliers of the Parties to the Agreement. The Parties commit to accord immediately and unconditionally to the goods and services of any other Party and to the suppliers of any other Party offering the goods or services of any Party, treatment no less favourable than the treatment the Party, including its procuring entities, accords to: (a) domestic goods, services and suppliers [national treatment principle]; and (b) goods, services and suppliers of any other Party [most-favoured nation principle].9

In addition, Article VIII:1 of the revised GPA states, with respect to the qualification of suppliers, that: A procuring entity shall limit any conditions for participation in a procurement to those that are essential to ensure that a supplier has the legal and financial capacities and the commercial and technical abilities to undertake the relevant procurement.

In the original GPA, this condition was included in broader terms.10 Article VIII(b) GPA 1994 stated that ‘any conditions for participation in tendering procedures shall be limited to those which are essential to ensure the firm’s capability to fulfil the contract in question’. This provision was

8 Crosby v National Foreign Trade Council, 530 US 363 (2000). For comments on this episode, see Shawna Fullerton, ‘State Foreign Policy: The Legitimacy of the Massachusetts Burma Law’ (Summer 1999) 8 Minnesota Journal of Global Trade 249; Erika Moritsugu, ‘The Winding Course of the Massachusetts Burma Law: Subfederal Sanctions in a Historical Context’ (2002–03) 34 George Washington International Law Review 435. 9 Article IV.1 of the revised GPA. 10 For a comparison between these formulations, see Arie Reich, ‘The New Text of the Agreement on government Procurement: An Analysis and Assessment’ (2009) 12 Journal of International Economic Law 989–1022.

156

Public Procurement

the core of the complaint by the EU and Japan against the US concerning the Massachusetts Myanmar Act (see Box 25). The complainants were suggesting a narrow reading of this clause, which would imply that conditions pertaining to the technical and commercial competence of firms are the only proper considerations procurement authorities may bear in mind. The EU and Japan asserted that the fact that a firm may have interests in Myanmar does not bear upon any of these factors, and that such a condition therefore would be improper. This argument is premised, however, on a narrow view of the purposes of government contracts. Their objectives may be broader than simply acquiring a good or a service at the lowest cost possible, and they may genuinely—ie, without a protectionist motive being present—seek to further certain social aims. Even though the conditions for participation in tendering procedures imposed on suppliers appear to be defined in more restrictive terms in the revised text, it remains the case today that contracting authorities may find essential the ability to supply products that respect certain social criteria.11 Nothing in the text of Article VIII(b) GPA (1994) and Article VIII:1 of the revised GPA seems to prohibit governments from pursuing these social policies through their procurement schemes, provided the notions of a firm’s ‘capability’ (the 1994 version) or ‘legal and technical capacity’ (the revised text) are read in the light of the current practice of governments.12 With respect to the award criteria, Article XV:5 of the revised GPA specifies that procurers may decide to award the contract either to the ‘most advantageous’ tender, or to the tender with the lowest price, ‘where price is the sole criterion’. This clearly shows that non-economic considerations may legitimately play a role in the selection: the procuring entity may consider the value of the tender to be influenced by social and ethical concerns, and the term ‘most advantageous’ must be construed to allow the inclusion of award criteria of non-economic nature. Finally, ethical procurement schemes may be justified by incorporating ethical considerations as conditions of the contract.13 Returning to the example of the Myanmar Act, the Massachusetts State Legislature could have simply provided that the winning contractor would have to divest itself of all interests in Myanmar for the duration of the contract.14 Similarly,

11 Cristoph Spennemann, ‘The WTO Agreement on Government Procurement—A Means of Furtherance of Human Rights?’ (2001) 4 Zeitschrift für Europarechtliche Studien 43–95. 12 This is also supported by Article VIII.4 of the revised GPA, which lists grounds for exclusion of certain tenderers. The list is explicitly not limitative (‘grounds such as…’), the key requirement here being one of transparency in order to avoid any arbitrariness or discrimination in the choice of suppliers. 13 Christopher McCrudden, Buying Social Justice. Equality, Government Procurement, and Legal Change (Oxford, Oxford University Press, 2007) 488–91. 14 ibid, 489.

Public Procurement

157

a condition may be stipulated requiring compliance with labour rights or certain environmental conditions for the duration of the contract, or for the production of goods or provision of services required for the fulfilment of the contract. It has sometimes been suggested that this might constitute a circumvention of the obligations stipulated under the GPA.15 However, the GPA should be read as restricting the discretion of governments only with respect to the technical specifications, supplier qualifications and award criteria, and not with respect to the conditions of the contract, for the reason that such conditions really pertain to the purpose of the contract.16 Indeed, it cannot lightly be assumed that the parties to the GPA intended to give up this power, because many of them, such as the US and the EU, had in place extremely politically sensitive procurement plans in operation at the time of contracting, including the highly symbolic Executive Order 11246 (1965), by which the US has instituted affirmative action policies in employment for government contracts. Moreover, Article III of the revised GPA (as well as, formerly, Article XXIII GPA 1994) provides exceptions for actions taken for national security reasons, and, as long as they ‘are not applied in a manner which would constitute arbitrary or unjustifiable discrimination between countries where the same conditions prevail or a disguised restriction on international trade’, also for measures necessary to protect public morals, order or safety, human, animal or plant life or health or intellectual property, inter alia. In the absence of any case law on Article XXIII GPA, guidance will have to be drawn from the Panel and Appellate Body’s jurisprudence on the Article XX GATT, which is broadly similar, but makes no mention of ‘public order’ or ‘public safety’. As seen above, the references to ‘public morals’ or to the ‘protection of human, animal or plant life’, may justify derogations from the rules otherwise stipulated in the GPA, unless this leads to discrimination.

15 Sue Arrowsmith, ‘Public Procurement as an Instrument of Policy and the Impact of Market Liberalisation’ (1995) 111 Law Quarterly Review 235–84, at 281. However, she has since resiled from this line of thought: see S Arrowsmith, Government Procurement in the WTO (Kluwer Law International, 2003) 340 at fn 49. She now argues that social policy linkages ‘that are non-discriminatory have only a limited effect in restricting access to markets, since an interested supplier can often adapt its practices for the contract—although it is true that this is not always possible’. Moreover, she acknowledges that objections to linkages as contract conditions based on concerns about transparency are ‘not convincing’, that governments have a ‘legitimate concern not to be closely associated with practices of which they disapprove’, and that ‘qualification conditions are the only really effective method for enforcing secondary conditions’. As such, there is ‘insufficient reason to preclude their use’. 16 Bernard M Hoekman and Pedros C Mavroidis, ‘Basic Elements of the Agreement on Government Procurement’ in B Hoekman and P Mavroidis (eds), Law and Policy in Public Purchasing: Studies in International Trade Policy (Ann Arbor MI, University of Michigan Press, 1997) 134.

158

Public Procurement

Box 26. The use of public purchasing for sustainable development in the European Union There is a long history in the European Union of using public procurement as a tool to further non-purely-economic objectives.17 The question of whether this was compatible with the European rules on the award of public contracts first arose in 1988 under what was then Council Directive 71/305/EEC18 in the case of Gebroeders Beentjes BV. Following the publication of an invitation to tender for a public works contract in connection with a land consolidation operation, the offer by Beentjes had been rejected by the Dutch Ministry of Agriculture and Fisheries, despite the fact that the offer was the lowest of those received. The Ministry considered that Beentjes lacked sufficient specific experience for the work in question, that its tender appeared to be less acceptable and that it did not seem to be in a position to employ long-term unemployed persons. Whereas the first two criteria cited above were provided for in the Uniform Rules on Invitations to Tender published in 1971 by the Dutch government, to which the contested invitation to tender referred, the condition regarding the employment of long-term unemployed persons was expressly set out in the invitation to tender. In its judgment of 20 September 1988, delivered in answer to a request for the interpretation of Council Directive 71/305/EEC submitted by the Dutch court presented with the case, the European Court of Justice considered that this latter condition ‘is compatible with the directive if it has no direct or indirect discriminatory effect on tenderers from other Member States of the Community’, as would be the case for instance if it appeared ‘that such a condition could be satisfied only by tenderers from the State concerned or indeed that tenderers from other Member States would have difficulty in complying with it’.19 In other terms, it is not necessarily incompatible with the requirements of the Directive to include social considerations in public tenders, provided this is done transparently and does not result in discrimination towards tenderers from other EU Member States.

17 See, inter alia, Sue Arrowsmith and Peter Kunzlik (eds), Social and Environmental Policies in EC Procurement Law: New Directives and New Directions (Cambridge, Cambridge University Press, 2009). 18 Council Directive 71/305/EEC of 26 July 1971 concerning the coordination of procedures for the award of public works contracts (OJ, English Special Edition 1971 (II), p 682). 19 Case C-31/87, Gebroeders Beentjes BV v State of the Netherlands, [1988] ECR 4635, judgment of 20 September 1988, paras 30 and 37.

Public Procurement

159

The Court confirmed this approach a few years later, in a case concerning France. In 1995, the French Region of Nord-Pas-de-Calais published a call for tenders concerning the building and renovation of schools in the region over a period of three years. The notices stated that the tenders would be assessed by taking account of various award criteria, including the ‘quality/price ratio of the technical response and the services’, the ‘time-limit for completion of the works of construction and renovation excluding maintenance, and the mode of action’ as well as an ‘additional criterion relating to employment’. The European Commission filed an action for infringement of Community law against France on a number of grounds following this procedure. In particular, the Commission took the view that, ‘in expressly setting forth as an award criterion in a number of contract notices a condition relating to employment linked to a local project to combat unemployment, the French authorities have infringed Article 30 of Directive 93/37’. This directive had succeeded Council Directive 71/305/EEC at issue in Beentjes. Article 30 of Directive 93/37 sets out that public contracts shall be awarded on the basis of: ‘(a) either the lowest price only; (b) or, when the award is made to the most economically advantageous tender, various criteria according to the contract: eg price, period for completion, running costs, profitability, technical merit’.20 While the Commission acknowledged that, following the ruling of the Court in Beentjes, employment-related conditions may be imposed as part of the performance requirements of a public contract, it sought to distinguish that case from the conditions set out by the Region of Nord-Pas-de-Calais for the renovation of schools insofar as, ‘in the present case, that possibility was characterised as an award criterion in the contract notices in question’.21 The Court disagreed. It took the view that the distinction between the two cases was artificial, and reiterated that Article 30 of Directive 93/37 does not preclude all possibility for the contracting authorities to use as a criterion a condition linked to the campaign against unemployment provided that that condition is consistent with all the fundamental principles of Community law, in particular the principle of non-discrimination flowing from the provisions of the Treaty on the right of establishment and the freedom to provide services.22

20 Council Directive 93/37/EEC of 14 June 1993 concerning the coordination of procedures for the award of public works contracts, [1993] OJ L199/54 (repealing Council Directive 71/305/EEC). 21 Case C-225/98, Commission of the European Communities v French Republic, judgment of 26 September 2000, [2000] ECR I-7445, para 46. 22 ibid at para 50.

160

Public Procurement

In other terms: provided the conditions for the award of public contracts are set out transparently and do not result in discrimination against tenderers from other EU Member States, they should be allowed to include conditions related to the fulfilment of social objectives. Although France had violated its obligations in other respects, the Court therefore did not consider that that particular condition could not be included in the call for tenders. In deciding to which tenderer the contract should be awarded, the Region of Nord-Pasde-Calais could legitimately take into account the contribution the tenderer would make to combating long-term employment in the region. The use of environmental conditions in public procurement policies of EU Member States was also intensely debated during the same period.23 Again, it was the Court of Justice, rather than the European Commission, that appeared most willing to allow the national public authorities to go beyond a purely economic approach, based on the lowest price proposed, in the award of public contracts. In 1997, the city of Helsinki decided to call for tenders for the operation of the urban bus network. Its call for tenders specified that the contract would be awarded to the undertaking whose tender was economically most advantageous overall to the city, and that this would be assessed based on three criteria: the overall price asked for operation, the quality of the bus fleet, and the operator’s quality and environment programme. Concordia Bus Finland Oy Ab, which ranked second following the evaluation of the tenders, challenged the attribution of points based on environmental criteria—in that case, since the competitor of Concordia Bus Finland proposed gas-powered buses, it could boast lower levels of emissions of nitrous oxide (below 2 g/kWh) and of noise (below 77 dB). The question of interpretation of Council Directive 92/50/EEC relating to the coordination of procedures for the award of public service contracts24 was referred to the European Court of Justice after Concordia Bus Finland challenged the decision of the municipality to award the contract to a competitor. In a judgment of 17 September 2002, the Court decided that the Court of Justice ruled that, where the contracting authority decides to award a contract to

23 Indeed, in 2001, the European Commission published two interpretative communications, respectively on social and environmental conditions in public procurement, in order to provide guidance to the EU Member States. See Interpretative communication of the Commission on the Community law applicable to public procurement and the possibilities for integrating social considerations into public procurement, COM(2001) 566 final, [2001] OJ C333/27; and Interpretative Communication on the Community law applicable to public procurement and the possibilities for integrating environmental considerations into public procurement, COM(2001) 274 final of 4.7.2001. 24 [1992] OJ L209/1.

Public Procurement

161

the tenderer whose tender is the most economically advantageous, it may take ecological criteria into consideration, provided that those criteria: are connected with the subject-matter of the contract; do not give the contracting authority an unrestricted freedom of choice; are expressly mentioned in the contract documents or the tender notice; and comply with all the fundamental principles of Community law, in particular the principle of non-discrimination.25 The position of the Court as expressed in the Helsinki bus case was confirmed later by the European legislator, when it inserted references to environmental conditions in the two directives concerning public procurement that were adopted in 2004.26 In other areas however, some uncertainties remained as to how much freedom the national authorities could be allowed in defining either conditions for the qualification of tenderers, or criteria for the award of contracts. The debate was relaunched in 2008, after the Dutch province of Groningen issued a public tender for the supply and management

25 Case C-513/99, Concordia Bus Finland Oy Ab (previously Stagecoach Finland Oy Ab) v Helsingin Kaupunki, judgment of 17 September 2002, [2002] ECR I-7312. For a comment, Pablo Charro, (2003) 40 Common Market Law Review 179–91. 26 Directive 2004/18/EC of the European Parliament and the Council of 31 March 2004 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts ([2004] OJ L134/114) (see article 53(1)(a)); and Directive 2004/17/EC of the European Parliament and the Council of 31 March 2004 coordinating the procurement procedures of entities operating in the water, energy, transport and postal services sectors ([2004] OJ L134/1) (see article 55(1)(a)). The clarification brought about by the directives was especially welcome given the hesitations of the Court of Justice on this issue. In the Wienstrom case (Case C-448/01, EVN AG und Wienstrom GmbH v Republik Österreich, judgment of 4 December 2003, [2003] ECR I-14527), the Austrian authorities had launched a call for tenders specifying that bidders should supply electricity from renewable energy sources. Bidders had to prove that they had disposed of or would dispose of a minimum amount of electricity per year from renewable energy sources equivalent to the estimated annual consumption of the Austrian Federal Republic’s offices. In addition however, the Austrian authorities chose to give an important weight (of 45%), in the decision to award the contract, to the ability of the bidder to supply electricity from renewable sources of energy in excess of the AFR’s estimated requirements, ie, beyond what the execution of the contract required. The Court took the view that ‘it is open to the contracting authority when choosing the most economically advantageous tender to choose the criteria on which it proposes to base the award of contract, provided that the purpose of those criteria is to identify the most economically advantageous tender and that they do not confer on the contracting authority an unrestricted freedom of choice as regards the award of the contract to a tenderer’ (para 37). Hence, whereas the Court found it acceptable to make use of ecological award criteria, even in the absence of an immediate economic benefit for the contracting authority, it would not be acceptable to use an award criterion which is based on the total amount of electricity from renewable sources which can be provided in excess of the amount required under the contract, since this is not linked to the subject-matter of the contract and could lead to unjustified discrimination against bidders who are fully able to meet the contract requirements. Award criteria—such appears to be the lesson from the case—must be related specifically to the subject-matter of the contract, and not to the general capacity of the economic operator.

162

Public Procurement

of automatic coffee machines. The tender stipulated, inter alia, that the coffee had to be produced by smallholders, who would be paid a minimum price, alongside a premium price for social development. The tender referred to products bearing the EKO and Max Havelaar labels. Douwe Egberts protested that these requirements effectively excluded them from the tender, because their coffee, certified by the UTZ label, did not fulfil all the stipulated conditions. The Dutch court found in favour of the province. It took the view that Groningen was free to pursue ethical and sustainability goals under both Dutch and EU public procurement law,27 in particular as specified in the 2004 Directive on public contracts.28 It also noted that the conditions were laid down in a manner that was transparent and open.29 Finally, there were 20 other producers in the Netherlands who could have complied with those conditions, meaning that it did not restrict the field to just one producer.30 In other words, social and ethical linkages did not appear to violate the fundamental principles of public procurement.31 The European Commission appeared to disagree with this assessment. In 2010, it filed infringement proceedings against the Netherlands. In a judgment of 10 May 2012 however, the Court of Justice of the European Union expressly confirmed that the inclusion of fair trade and organic agriculture criteria in public procurement was compatible with the requirements of EU law. The Court limited its criticism to the use of labels to achieve that end, ruling that the underlying criteria were not sufficiently precise and objective.32 The new EU Directive on public procurements (2014/24/EU) adopted on 26 February 2014 (repealing Directive 2004/18/EC)33 does not merely confirm this case-law; it was in fact specifically designed

27 Douwe Egberts Coffee Systems Nederland BV v Provincie Groningen (2007), Voorzieningenrechter Rechtbank Groningen, 97093/KG ZA 07-320, at para 4.4. 28 Directive 2004/18/EC, cited above. 29 ibid at para 4.3. 30 ibid at para 3.3. 31 See the similar case also brought by Douwe Egberts against the Dutch municipalities of Den Helder and Alkmaar, recently handed down by a court in Alkmaar, Netherlands on April 2010. Douwe Egberts Coffee Systems Nederland BV v Gemeente Den Helder & Gemeente Alkmaar (2010), Voorzieningenrechter Rechtbank Alkmaar, 117231/KG ZA 10-44. 32 Case C-368/10, European Commission v Kingdom of the Netherlands, judgment of 10 May 2012, [2012] ECR I-284. For more information on the inclusion of green, social and fair trade criteria into European tenders, see: European Fair Trade Association, State of Play of Fair Trade Public Procurement in Europe, September 2010, 25–33; and ClientEarth, Identifying Opportunities for Sustainable Public Procurement. Briefing No 2: Horizontal Objectives in Public Procurement, October 2011, 8–11. 33 Directive 2014/24/EU of the European Parliament and the Council, of 26 February 2014 on public procurement and repealing Directive 2004/18/EC ([2004] OJ L94/65).

Public Procurement

163

to allow greater use of public procurements in supporting other policy objectives of the Europe 2020 agenda.34 Indeed Directive 2014/24/ EU aims to be a positive instrument tailored to allow greater use of public procurements in the support of a set of ‘common societal goals such as protection of the environment, higher resource and energy efficiency, combating climate change, promoting innovation, employment and social inclusion and ensuring the best possible conditions for the provision of high quality social services’.35 It does so in two ways: (i) beyond the setting of thresholds defining its scope of application which de facto favours smaller-size suppliers, it contains measures aimed at facilitating the access of small-and-medium size enterprises to public procurements—such as the possibility for public authorities to divide up large contracts into lots of a size more manageable by such suppliers; and (ii) it widens the range of criteria that may be included both in defining the object of the procurement and in awarding the contract. Public authorities are specifically authorized to adopt a life-cycle approach to the product, service or work object of the procurement, and include environmental externalities in the analysis of the most ‘economically advantageous’ tender.36 (i)

Directive 2014/24/EU recognizes the ‘strong trend emerging across Union public procurement markets towards the aggregation of demand by public purchasers, with a view to obtaining economies of scale, including lower prices and transaction costs’,37 but warns on the negative effects of such practices for small and mediumsize suppliers. Public procurers are therefore encouraged ‘to divide large contracts into lots’38 on a quantitative or qualitative basis, so that contracts can better correspond to the capacities of small-scale enterprises.39 A procedure is also prescribed

34 See in particular Recital 2; and see, among others, ClientEarth, Providing an enabling legal framework for sustainable public procurement, Key points for the revised Directive, November 2012; ClientEarth, The EU’s commitment to sustainable development. Time to progress from Green Public Procurement to Sustainable Public Procurement?, Februrary 2012; ClientEarth, Identifying Opportunities for Sustainable Public Procurement. Briefing No 2: Horizontal Objectives in Public Procurement, October 2011. 35 Proposal for a Directive of the European Parliament and of the Council on public procurement, COM (2011) 896 final, p 2. 36 See Directive 2014/24/EU, Arts 42 and 68. 37 Directive 2014/24/EU of the European Parliament and the Council of 26 February 2014 on public procurement and repealing Directive 2004/18/EC, [2014] OJ L94/65 (Preamble, Recital 59). 38 Directive 2014/24/EU, Preamble, Recital 78. 39 See also Directive 2014/24/EU, Preamble, Recital 20: ‘For the purposes of estimating the value of a given procurement … it should be allowed to base the estimation of the value on a subdivision of the procurement only where justified by objective reasons. For instance, it could

164

Public Procurement

to allow the awarding of lots to different producers or service providers and therefore ensure the effectiveness of the system.40 (ii) The criteria used to design the procurement and to award the contract have been extended to allow for the inclusion of environmental, social and labour requirements. Quite notably characteristics may … refer to the specific process or method of production or provision of the requested works, supplies or services or to a specific process for another stage of its life cycle even where such factors do not form part of their material substance provided that they are linked to the subjectmatter of the contract and proportionate to its value and its objectives.41

The notion of ‘life-cycle’ introduced refers to the steps ‘from raw material acquisition or generation of resources to disposal, clearance and end of service or utilisation’.42 The same variety of criteria may also be used to assess the tenders and award the contracts.43 Remarkably ‘qualitative, environmental and/or social aspects’44 including environmental externalities may be taken into account when assessing which of the tenders is most ‘economically advantageous’.45

be justified to estimate contract values at the level of a separate operational unit of the contracting authority, such as for instance schools or kindergartens, provided that the unit in question is independently responsible for its procurement’. 40 See Directive 2014/24/EU, art 46. According to paragraph 4, Member States may render obligatory for public authorities to divulgate the reasons for not dividing the contract into lots. 41 Directive 2014/24/EU, art 42 § 1, sub 2. The lessons of the Douwe Egbert case regarding labels have been integrated in art 43 of the Directive. 42 Directive 2014/24/EU, art 2 § 1(20). 43 See Directive 2014/24/EU, art 67–69. 44 Directive 2014/24/EU, art 67 § 2. 45 See Directive 2014/24/EU, art 68.

7 Conclusions

T

HERE ARE A variety of ways through which trade could be put in the service of sustainable development, by strengthening the links between market access and progress in the protection of labour rights and in environmental protection, including the adoption of measures to reduce greenhouse gas emissions. A distinction should be made between the general regime that applies to measures through which a WTO Member seeks to impose certain restrictions on the imports of goods or services that do not comply with certain labour rights or with certain environmental standards (or that are produced in countries not complying with such rights or standards) (Chapter two), and the specific regimes that apply to border tax adjustments (Chapter three), to the EU’s Generalised System of Preferences in favour of developing countries (Chapter four), to environmental or social labelling schemes (Chapter five), or to the use of government procurement (Chapter six). Here, I briefly review the conclusions arrived at above, and I draw some implications.

I. ‘SANCTIONS’ FOR NON-COMPLIANCE WITH LABOUR RIGHTS OR ENVIRONMENTAL STANDARDS

Chapter two examined the regime applicable to import tariffs or quantitative restrictions (‘import bans’) sanctioning countries or products for a failure to comply with labour rights or with environmental standards. The General Agreement on Tariffs and Trade (GATT), applicable to trade in goods, imposes a number of disciplines which have been replicated in similar form in the General Agreement on Trade in Services (GATS). Restrictions to trade that are based on considerations related to labour rights or to environmental standards are generally seen as particularly difficult to justify, both because they target production or process methods (PPMs), rather than the product itself (its physical characteristics), and because they are ‘outward-looking’: their main objective is not to protect certain important values within the EU (in the importing region), but to encourage the countries exporting to the EU and the producers located in these countries to pay greater attention to these standards. However, that is not to say that such measures cannot be justified. Both under GATT 1994 and

166

Conclusions

GATS, WTO Members may not discriminate either between ‘like’ goods from different countries (most-favoured nation clause) or between foreign goods and domestic goods (national treatment); nor may they impose quantitative restrictions, for example restricting market access through a system of quotas. If a WTO Member were to impose certain restrictions on goods or services produced in violation of certain labour rights or not complying with certain environmental standards, it would have to demonstrate that these measures constitute neither a form of discrimination prohibited under the most-favoured nation and national treatment clauses, nor a quantitative restriction prohibited under Article XI of the General Agreement (and its equivalent provision, Article XVI, in GATS). If it fails to provide this demonstration, it will have to justify the particular restriction imposed by relying on the General Exceptions Clauses of Article XX GATT or Article XIV GATS. Indeed, the General Exceptions Clauses may have a particularly important role to fulfil in this regard since there has been a tendency in the jurisprudence of the WTO Dispute-Settlement Bodies to treat regulatory requirements that concern PPMs, when extended to foreign goods, as a quantitative measure, comparable to a quota or an import ban, to be examined under Article XI GATT. Article XI:1 GATT forbids quantitative restrictions without allowing for measures that take that form to be justified: therefore, leaving aside the narrow exceptions of Article XI:2, where a quantitative restriction is imposed, it can only be allowed by the successful invocation of the General Exception Clause of Article XX GATT, which contains a closed set of admissible justifications to otherwise prohibited measures. The General Exceptions Clauses may allow the adoption of trade-restrictive measures that would otherwise be prohibited, under a set of strictly defined conditions. We distinguished above between measures aiming at protecting the atmosphere by encouraging the mitigation of climate change through the reduction of greenhouse gas emissions in the production of goods, and measures that aim to protect labour rights. The General Exception Clauses will be generally much easier to invoke to justify environmental conditions, imposed as a means to ensure the ‘conservation of exhaustible natural resources’ (Article XX(g), GATT), than to justify conditions related to labour rights. This is in part because of the wording of the respective provisions. But it also is because measures aiming to encourage the preservation of the environment in the exporting countries, though ‘extraterritorial’ in their intent, at the same time typically seek to protect resources that are common to both the exporting countries and the Members imposing the condition: this is the case, in particular, for measures aiming at the preservation of the ozone layer or of the atmosphere, in the context of the fight against climate change. Strong arguments may be put forward to justify the legality of both sets of measures under the respective General Exceptions Clauses, however. As

‘Sanctions’ for Non-Compliance

167

already mentioned, measures aiming to reduce greenhouse gas emissions may be allowed under Article XX(g) GATT. This exception may be invoked insofar as the trade-restrictive measure seeks to preserve an ‘exhaustible natural resource’ under this provision, provided, first, equivalent measures are taken at domestic level within the jurisdiction of the WTO Member concerned to curb the emissions resulting from production or consumption there; and secondly, the measures are not discriminatory and are not a disguised restriction on trade. Similar measures targeting services rather than goods may be less easy to justify under Article XIV GATS, because of the absence of any reference, in this latter instrument, to the ‘conservation of exhaustible natural resources’. However, to the extent that climate change may be seen as threatening ‘human, animal or plant life or health’, measures restricting the trade in services could be justified as ‘necessary’ to the protection against such a threat, provided such measures are neither discriminatory nor a disguised restriction on trade. There exists a consensus across the international community that climate change is a serious threat that demands to be addressed by Governments, and climate change produces a range of human rights impacts that WTO Members cannot ignore: therefore, a flexible interpretation of the GATT and GATS agreements recommends itself, to allow for the adoption of such measures. As to the measures restricting trade in order to encourage an improved protection of the rights of workers in the exporting country, they may be justified as ‘necessary to protect public morals’. This wording appears in both Article XX(a) GATT and Article XIV(a) GATS. It may be considered to include the need to protect internationally recognized labour rights, including at least the basic labour rights that appear in the 1998 ILO Declaration on Fundamental Principles and Rights at Work. However, even a trade-restrictive measure that would in principle be justified as ‘necessary to protect public morals’ under a reading that would include ‘basic labour rights’ under this expression would be prohibited if it appeared to be discriminatory and to result in a disguised restriction on international trade. The more a WTO Member resorts to measures that are unilateral to bring about change, however, the more it will be important to do so keeping in mind the need to pursue objectives that are shared by the international community as a whole: this is what we called a multilateralism of ends. Whether they aim to encourage compliance with environmental standards, particularly in the area of climate change, or whether they seek to encourage compliance with basic labour rights, measures adopted unilaterally by a WTO Member will be easier to justify if they are strictly based on the existing international consensus in favour of combating climate change and of protecting basic labour rights, and if accompanied by appropriate burden-sharing towards developing countries. If it is considered desirable to take trade policy measures that encourage policy choices in favour of the environment or in favour of labour rights in the exporting countries, using

168

Conclusions

the General Exception Clauses, it will be important, both for legal and for political reasons, to avoid the perception that such measures are protectionist in nature, and a means to deprive developing countries of what they may see as their comparative advantage. Seeking inspiration, in part, from the GSP established by the EU, confidence-building measures may consist in (i) reference to universally recognized standards, rather than standards imposed unilaterally by the EU; (ii) assessment of compliance with these standards by independent monitoring bodies, rather than by the EU alone; (iii) a phased application of the measures, leaving time for consultations and for improvements to be made in the exporting country concerned, before any disadvantages are imposed; (iv) a use of any funds collected as a result of an increase in import tariffs aiming to encourage compliance with environmental or labour standards, for the benefit of programmes supporting reforms in developing countries, including through the transfer of technologies and capacity-building, or (as proposed in the conclusions to Chapter two in the form of a Global Fund for Social Protection) by financing the establishing of standing social protection schemes.

II. ‘CARBON EQUALIZATION’ THROUGH BORDER TAX ADJUSTMENTS: LEVELLING THE PLAYING FIELD

Border tax adjustments aim to compensate for differences between the respective taxation systems of the exporting and the importing countries: these taxation systems shall be ‘equalized’ by ensuring that the taxes that are paid are those applicable in the country of destination of the goods (ie, where the final products are bought by the end consumer), rather than in the country of origin. Article II:2(a) of the General Agreement allows WTO Members to apply a charge on imports equivalent to an internal tax provided that such a charge complies with the national treatment principle, in other terms, provided the charge is not ‘in excess of those applied … to like domestic products’. Thus, border tax adjustments are authorized in principle, provided they are taxes on products rather than direct taxes on producers compensating, for instance, for different costs of labour in the respective countries. ‘Carbon equalization measures’, compensating for the carbon taxes imposed on domestic production by adjustments at the border or obliging the importer of foreign goods to join an emissions trading system, would therefore in principle be allowed. Three methods would be available to determine the level at which the tax on the imported goods should be set. Under the ‘applied technology’ method, the importing country would need to be informed about the production methods used, in order to tax the emissions caused during the production as if that production had taken place under that country’s jurisdiction. Though perhaps desirable on paper, this is a highly unpractical method, and it will

The EU Generalized System of Preferences

169

be unrealistic to seek to apply it in most cases. Under the ‘predominant method of production’ criterion, the tax would be set assuming that the imported good is produced in accordance with such methods of production as are predominant in the importing country. Finally, under the ‘best available technology’ method, foreign products are taxed at a level that assumes that they rely on the cleanest technologies available. A BTA system relying on such a presumption is at once the most practical to implement and the least contestable from the point of view of its legality. This method does not incentivize the foreign producers to switch to better technologies, however; nor does it encourage the country of origin to improve its climate change mitigation regime, since whatever those producers and that country do, their access to the EU markets will not improve. In contrast, positive changes may be triggered if the introduction of carbon equalization measures were complemented by increased efforts by the EU to finance climate change mitigation and adaptation strategies in developing countries, a policy that would be made possible with the revenues that would accrue from the introduction of BTAs. BTAs could therefore become more than a tool to equalize conditions of competition in the presence of different taxation systems that may lead to carbon leakage as a form of ‘environmental dumping’: they would form the basis of a positive policy encouraging reform under the jurisdiction of the trading partners of the WTO Member adopting such measures, and accelerating the adoption of cleaner technologies. Again, a unilateralism in the tools may have to be combined with a multilateralism of the ends in order to effectively serve the objective of sustainable development.

III. THE EU GENERALIZED SYSTEM OF PREFERENCES: MAKING PREFERENCES CONDITIONAL

The EU’s Generalized System of Preferences was established in favour of developing countries, in accordance with the 1979 ‘Enabling Clause’ adopted under the General Agreement, to accelerate the integration of developing countries into the international trading system. It includes both sanctionsbased (‘negative’) and incentives-based (‘positive’) measures: it provides for the possibility of imposing sanctions for ‘serious and systematic violations’ of human rights or core labour standards, as well as for a special incentive (‘GSP+’) arrangement for sustainable development and good governance. The GSP+ scheme benefits vulnerable countries that have ratified a number of conventions in the areas of human rights, labour rights, and the protection of the environment and that accept to be monitored for their effective implementation of these conventions. The GSP scheme thus established is compatible with WTO law provided it complies with the strict authorization of the 1979 ‘Enabling Clause’. According to the WTO Appellate Body, the key requirement is that any preference should be granted on a non-discriminatory

170

Conclusions

basis, so that all similarly-situated GSP beneficiaries, who have the same ‘development, financial and trade needs’, should have access to the scheme under the same conditions. In this as in other areas, the key concern of the WTO Dispute-Settlement bodies is not with the very idea of linking trade to non-trade issues: it is with the risk of abuse that such a linkage may imply, where conditions are not designed or implemented in full transparency, and may hide prohibited discrimination between trading partners.

IV. LABELLING SCHEMES: SUPPORTING ETHICAL CONSUMERISM

Ecolabels, including labels that provide indications about the carbon footprint of products, as well as social labels, have proliferated in recent years, often at the initiative of retailers that seek to ensure that their suppliers comply with certain environmental and social standards. While purely private labelling schemes are outside the scope of WTO law (though they may represent significant obstacles to market access), where governments impose, endorse, or implement such labelling schemes, the Agreement on Technical Barriers to Trade (TBT Agreement) applies (as well as Article III:4 GATT, but in a subsidiary position). The key requirement under Article 2:1 TBT is that the adoption of schemes that are mandatory (‘technical regulations’) and the assessment of conformity with such regulations should not result in discrimination against foreign products and should not create unnecessary obstacles to trade. Similar (but less strict) requirements apply to schemes that are voluntary (‘standards’). Therefore, technical regulations such as mandatory labelling schemes must pursue legitimate objectives, and be strictly designed so as to avoid creating barriers that go beyond what is required for the fulfilment of these objectives. Article 2:2 TBT provides that ‘technical regulations shall not be more trade-restrictive than necessary to fulfil a legitimate objective, taking account of the risks non-fulfilment would create’. The adoption of a ‘technical regulation’, we have seen, may pass the test of Article 2:2, even though it only partly or imperfectly fulfils the objective it is assigned, unless another measure would be available that is at least as effective with regard to the said objective while less restrictive of trade. Finally, Article 2:4 of the TBT Agreement provides that, where an international standard is available or where its completion is imminent, a WTO Member should take guidance from that standard for the adoption of technical regulations provided the standard was elaborated by an ‘international standardizing body’, that is, a body that has recognized activities in standardization and whose membership is open to the relevant bodies of at least all Members. As regards the development of social labels, this calls for a systematic reference being made to the instruments adopted within the International Labour Organization. As regards ecolabels, this calls for

Government Procurement

171

greater convergence in approaches, to overcome the current diversity, both for environmental standards in general and for the assessment of the carbon footprint of products using a life-cycle analysis in particular. The future development of ecolabels and social labels should go hand in hand with increased efforts to develop a multilateral approach to this question, with the active participation of WTO Members from developing countries, and organizations of producers from the South. This would strengthen the position of countries wishing to introduce such labels, and gradually lead to identify the best way to reconcile trade with concerns about workers’ rights and the environment.

V. GOVERNMENT PROCUREMENT: THE POWER OF THE PURSE

We have seen, finally, that the Government Procurement Agreement (GPA) allows the inclusion of considerations that are not purely economic in public tenders. Specifically, the Parties to the GPA may introduce clauses referring to labour rights or environmental standards in their public procurement schemes, provided this does not lead to discrimination between potential contractors from different countries. Governmental procuring entities are allowed to lay down technical specifications including process and production methods (PPMs), provided such specifications do not result in unnecessary obstacles to international trade. Indeed, when the GPA was revised in 2012, a new provision was inserted (Article X:6) which now (‘for greater certainty’) explicitly allows public authorities to adopt technical specifications to promote the conservation of natural resources or the protection of the environment: natural resources conservation or the protection of the environment are mere examples, however, of the kind of ‘non-purely economic’ considerations that governments may take into account in shaping their public procurement policies. The new EU Directive on public procurements (2014/24/EU) adopted on 26 February 2014, follows this trend: it allows the inclusion of environmental, social and labour requirements among the criteria to be relied on in the award of public contracts. Abandoned to its own logic, trade liberalization may discourage countries whose exports are essentially made of raw materials or of labour-intensive manufactured products from raising environmental and social standards. It could also weaken the bargaining position of the least qualified workers, in an increasingly competitive context in which the reduction of transport costs and the lowering of barriers to trade allow investors to relocate production plants with relative ease. This is true to a certain extent in developing countries, where workers can be discouraged from demanding higher wages and improved levels of protection if they are convinced that much of the competitiveness of the country depends on keeping both low. But it is true especially in rich countries—the so-called ‘industrialized’ countries,

172

Conclusions

whose growth now increasingly depends on the tertiary and quaternary sectors—on the services and information sectors—where the least qualified segment of the workforce has the most to lose from globalization as it has been proceeding hitherto. Nowhere is the gap between the promises of trade and the goals of sustainable development more striking than in the area of climate change mitigation. The more trade expands, the less likely it is that countries will adopt robust climate change mitigation strategies, and the less effective such strategies will be. Trade favours higher levels of consumption and thus larger volumes of greenhouse gas emissions: the exact opposite of what we need to avoid the massive disruptions that will result from global warming and other impacts of climate change. The economic growth of developing countries and their accelerated adoption of clean technologies should be promoted, therefore, by means other than international trade with industrialized countries. These means include the diversification of the economies of developing countries, increased levels of foreign direct investment in these countries, the transfer of clean technologies, regional integration and South-South trade. Such development pathways move away from the current post-colonial pattern of resource exploitation in which Southern countries provide natural resources or raw commodities and Northern countries produce higher added-value and knowledge-intensive products. The rapid pick up of resource-efficient technologies in developing countries should be combined with massive technology transfers, for instance by the establishment of a fund in which clean technologies could be treated as global public goods, financed by OECD countries. Indeed, the revenues that would be raised from the imposition of import tariffs on goods produced through polluting methods, or that would be paid by the exporters required to join a cap-and-trade scheme (should such a border tax adjustment measure be imposed to that effect), should go toward supporting climate change mitigation strategies in developing countries, thus accelerating their transition to more sustainable forms of development. Trade can be made fair. The inclusion in trade policies of conditions based on labour rights and environmental standards can contribute to reconciling trade with the sustainable development agenda of the international community. But such unilateral measures should only be seen as a solution if they are not a pretext for protectionist policies, and if they fit within a broader set of policies, that include strong support to the development objectives of poor countries.1 In contrast to the current fragmentation, linking access to 1 For a detailed attempt to identify the institutional conditions that could ensure that the linkage of trade policies to labour standards will benefit the poorer countries, by increasing the rewards for improving such standards, and the most disadvantaged groups, by increasing the incentives for their governments to design policies that will benefit them, see Christian Barry and Sanjay G Reddy, International Trade and Labor Standards. A Proposal for Linkage (New York, Columbia University Press, 2008).

Government Procurement

173

markets to the improvement of workers’ rights and to the adoption of strong environmental standards (including more robust policies aimed at curbing greenhouse gas emissions) can channel trade towards sustainable development. WTO law generally allows for such linkages to be established. This would ensure a greater consistency between the social justice, the climate change and the trade agendas. It would support the least well organized and weakest segments of the workforce in all countries to obtain a better share of the benefits of whatever growth trade may serve to stimulate. Contrary to common perception, it would also contribute to climate justice: in the current situation, lifestyles in affluent societies can go unchallenged because they are fuelled by the expansion of trade flows—and it is the poorest countries that will be most affected by the consequences of our collective myopia.

Afterword Linking Trade to Social and Environmental Standards: An Answer to the Challenges of Globalization ARNAUD ZACHARIE

I

N THE CONTEXT of globalization, both developing and developed countries have to face social, environmental and tax dumping created by the strategies of location of transnational corporations motivated by short-term financial profits. This results, on the one hand, in a new industrial order that benefits a few emerging economies that have joined the supply chains of advanced economies companies, and on the other hand, in some challenges related to de-industrialization and deterioration of working conditions in developed countries, extreme poverty in poor countries, tax evasion and growing social inequalities. Measures are therefore necessary to guarantee the respect of social and environmental standards and to fight tax evasion and social inequalities. Today’s trade policy is a question of standards rather than tariffs, because tariffs are already low. While it’s important to use European market access as a leverage to encourage trading partners to implement effective environmental and social standards, this has to be done in a mutually benefiting way for both developing and developed countries. Taking into account development asymmetry, a solution is to target companies rather than countries, in order to initiate a ‘race to the top’ dynamic instead of the current ‘race to the bottom’.

I. GLOBALIZATION AND THE NEW INTERNATIONAL DIVISION OF LABOUR

Global economy experienced a triple mutation that transformed, between the mid-80s and the end of the 90s, the geography of world production and the configuration of international trade. First, financial and trade liberalization policies allowed transnational companies to move capital, goods

The New International Division of Labour

175

and services freely across borders. Secondly, the doubling of the available workforce in the world labour market, following the arrival of 1.5 billion additional workers from former closed-economies of the USSR and emerging economies like China or India, allowed transnational companies to have access to an abundant low-cost workforce. Thirdly, the development of new information and communication technologies (ITC) caused a technological revolution lowering the cost of coordinating activities from a distance and allowing transnational companies to geographically separate the different stages of the production process. These three shifts have been combining their effects to facilitate the international decomposition of the production processes, as the result of the strategies of location of transnational companies. During the ‘first globalization’ of the end of the nineteenth century, steamships, railways and telegraph made it feasible to geographically separate production from consumption. The current globalization made it feasible to geographically separate manufacturing stages to unbundle the factories. Globalization made it easier for companies of developed countries to combine high technologies at home and low-wage workers abroad. The strategy of transnational companies is to locate subsidiaries in low-wage countries or to outsource the manufacturing stages of the product that will be traded at the end of the global value chain in the territory where the clients are targeted. The international dispersion of production process allowed transnational companies simultaneously to reduce the labour costs per unit of production, and to avoid the uncertainty of the global markets. The relocated units have been export-oriented and produced intermediate goods and components traded along the global value chain. These relocated units are simple affiliates, dispersed in various countries depending on their advantages in terms of unit labour cost. World trade is characterized by global value chains in which intermediate goods are traded between the various affiliates of a same value chain, allowing parent companies to determine the price of intermediate goods traded inside the value chain. These intra-firm trade strategies have been shaping a growing part of world trade: transnational companies-coordinated global value chains account for some 80 per cent of today’s global trade.1 As a consequence, traded goods are now produced by complex production processes dispersed all over the world. According to Suzanne Berger, if 20 years ago most of international trade was referred to as imports and exports across borders, today most goods should be called ‘made in world’.2 Consequently, official international trade data show a false view of the reality: for instance, 1 UNCTAD, World Investment Report 2013, Global Value Chains: Investment and Trade for Development, United Nations. 2 S Berger, How We Compete: What Companies around the World is doing today’s Global Economy (Doubleday Broadway, 2005).

176

Afterword

the iPod, iPad and iPhone of the US company Apple are officially ‘made in China’ and the totality of the added value of these high-tech goods are credited to China, whereas these products are simply assembled in China by the Taiwanese company Foxconn and China just brings the workforce for assembling the components. As noted by Yuqing Xing, official data give a false idea of world trade: ‘China, a developing country, became the main exporter of manufactured high tech goods, while developed countries like the United States or Japan import products which were designed by their own companies’.3 The strategies of location of transnational corporations have been motivated by the financial strategies of private financial institutions—pension funds and other institutional investors—that became major shareholders and imposed an average return on equity of 15 per cent. According to Jean Peyrelevade: ‘Excessive profitability standards led CEOs to be the first agents of a borderless globalization and to locate their activities where they can find a lower unit labour cost’.4 As a consequence of this financialization of transnational companies, industrial assets are assimilated to financial assets and the management of the companies is aligned on the short-term management strategies of investment funds’ portfolios. On the one hand, the point of relocations are no longer new trade opportunities at the end of the product life, but financial profitability growth, by outsourcing the assembly operations in low-wage countries and jettisoning less profitable activities. On the other hand, the dispersion of the production process allowed transnational companies to create affiliates in tax heavens and to manipulate transfer prices, in order to report profits in offshore centres and avoid the equivalent of hundreds of billions of Euros in taxes every year.5 Moreover, growing amounts of assets are used by companies to buy their own shares in order to increase the shareholder value, leading to a lack of financing for productive and labourintensive investments. At the same time, as noted in Chapter one of this book, the relocation of the manufacturing stages to emerging economies means that a growing part of greenhouse gas emissions has been outsourced to these countries by developed countries. OECD countries can therefore make progress towards meeting their reduced emissions targets with almost no impact on consumption levels. They simply displace emissions overseas as their companies outsource the most polluting types of production to ‘carbon heavens’ that have weak carbon-constraining environmental policies in order to attract carbon-intensive industries. 3 Y Xing, ‘Les exportations chinoises de haute technologie: mythe et réalité’ in L’Economie Politique, n° 56, octobre 2012, 41. 4 J Peyrelevade, Le capitalisme total (Paris, Seuil, 2005) 9. 5 OECD, Addressing Base Erosion and Profit Shifting (Paris, OECD Publishing, 2013) 17.

The New International Division of Labour

177

According to Pierre-Noël Giraud, global economy is characterized by a ‘double competition’: on the one hand, a competition between the territories to attract foreign direct investments of transnational companies, and on the other hand, competition between transnational companies to attract shareholders.6 This new world trade configuration creates a new international division of labour reflecting the hierarchy of global economy. At the centre of global economy, ‘headquarter economies’ are industrialized countries of the North, concentrating the main part of capital, technology and parent companies and assuming the functions of design and commercialization of the products. At the semi-periphery of global economy, ‘factory economies’ are emerging in countries of the South and the East that attract transnational companies searching for competitive locations to decrease their production costs for assembly operations. Robert Baldwin7 identifies three major ‘factory economies’ that are regional rather than global, because necessary interventions of managers and key personnel across the global value chain mean that proximity still matters: ‘Factory Asia’ including East Asian countries (China, Thailand, Malaysia, Indonesia, Vietnam etc) that transmuted in the course of a decade from poor countries to world-class exporters with high growth rates after joining the global value chains; ‘Factory Europe’ including Central and Eastern European countries joining supply chains and exporting components and intermediate goods to western Europe and Asia; ‘Factory North America’, with Mexico joining the North American supply chain and implementing maquiladoras in the context of the NAFTA into force since 1994 with the United States and Canada. Finally, at the periphery of global economy, ‘commodity economies’ including most of developing countries that are specialized in low added value commodities exports. This new international division of labour was supported by free trade agreements, first negotiated at the multilateral level in the WTO and secondly through bilateral free trade agreements since the 2000s. WTO agreements, which have been in force since 1995, involved goods and services trade, agriculture and intellectual property rights. Developing countries challenged the fairness of these agreements, and they sought to join forces to try to reform them. However, despite the adoption of the Doha Development Agenda in 2001, developed countries never followed upon their commitments, which brought multilateral negotiations to a standstill. In reaction, the United States, Japan and European Union have negotiated bilateral trade agreements, the amount of which rose from 60 to more than 300 between 1995 and today. The new generation of agreements that

6 P-N Giraud, La mondialisation. Emergences et fragmentations (Auxerre, Sciences humaines Editions, 2008) 39. 7 R Baldwin, ‘Trade and Industrialisation After Globalisation’s 2nd Unbundling: How Building and Joining a Supply Chain Are Different and Why It Matters’, NBER Working Paper 17716, December 2011.

178

Afterword

sprung up during the 2000’s generally concerned North-South bilateral free trade agreements—a way for developed countries to press for concessions collectively refused by developing countries in the multilateral framework of the WTO. At the same time, internationally dispersed production processes caused a surge of foreign direct investments (FDI) in ‘factory economies’. The BRICs group (Brazil, Russia, India, China) concentrated in 2012 more than 50 per cent of total developing countries’ FDI inflows, while developing countries absorbed more FDI than developed countries for the first time ever (accounting for 52 per cent of total FDI flows).8 In addition, hundreds of international investment agreements (IIE) were concluded: at the end of 2012, 3.196 bilateral and regional treaties had entered into force.9 These agreements are increasingly regional ones, as a consequence of regional value chains.

II. ECONOMIC, SOCIAL AND ENVIRONMENTAL IMPACTS OF GLOBALIZATION

The growth of global value chains and the dispersion of production processes has led to a situation in which the traceability of ‘made in world’ products has become more complex, leading to a lack of transparency about compliance with social and environmental standards. It has become increasingly difficult for the average consumer today to ascertain whether social and environmental rights were respected along the whole global supply chain of the product he or she wants to buy. In addition, because of how it was managed, globalization as it has proceeded over the past 20 years has produced three major effects. First, within OECD countries, it has led to accelerated de-industrialization and to the deterioration of working conditions for the least qualified workers. Since the beginning of the 90s, OECD industrialized countries are facing a decrease in the absolute numbers of industrial jobs10 and the share of the industrial sector in the GDP has been shrinking. Until the beginning of the 2000s, this de-industrialization process was caused by productivity gains 8 UNCTAD, World Investment Report 2013. Global Value Chains: Investment and Trade for Development (Geneva, United Nations Conference on Trade and Development, 2013). 9 UNCTAD, World Investment Report 2012, Towards a New Generation of Investment Policies (Geneva, United Nations Conference on Trade and Development, 2012). See also Olivier De Schutter, Johan F Swinnen and Jan Wouters (eds), Foreign Direct Investment and Human Development. The Law and Economics of International Investment Agreements (London and New York, Routledge, 2012). 10 Between 1991 and 2010, industrial jobs decreased by 41.1% in the UK, 32.3% in Japan, 30.7% in Germany, 28.7% in the US, 28.6% in France, 24.2% in Sweden, 16.7% in Italy and 9.1% in Spain. Alternatives Economiques, Comment sauver l’industrie?, Hors-Série n° 93, 3e trimestre 2012.

The Impacts of Globalization

179

following technical progress and outsourcing of services formerly integrated into industrial companies. Except for a few countries, like the UK or Italy, this at first didn’t imply a decrease of the absolute weight of industrial production. Since the global crisis of 2008, however, the volume of industrial production has also decreased; in the EU Member States, this decrease represented 10 per cent on average. This de-industrialization process is partly caused by the competition from emerging economies with lower costs per unit of labour. The international decomposition of the production processes and the new international division of labour created a new industrial order in favour of a couple of emerging countries. From 2000 to 2004, China gained 7 million industrial jobs, while OECD countries lost 7.3 million (3.7 million in the United States, 2.2 million in Japan and 1.2 million in the EU).11 However, contrary to the conventional wisdom reigning in Europe, North-South industrial relocations explain only a marginal share of industrial jobs losses in OECD countries: according to ILO, the manufacturing industries that are most exposed to competition from low labour cost countries only represent 4 per cent of total employment in OECD countries.12 Moreover, OECD countries that are ‘headquarter economies’ have continued concentrating almost three quarters of the world’s added value. For emerging economies, it makes industrialization easier, because it simply requires a transnational company to arrive and build an export-oriented factory, but at the same time, it makes industrialization less meaningful, because it means ‘technology lending’ rather than ‘technology transfer’. Industrialization simply means that a country is located along a particular segment of a global value chain. As a consequence, the technology lending is likely to be relocated to another more competitive country. Hence, developing countries are also victims of dumping. Furthermore, most developing countries continue to be specialized in low added value commodities exports. In fact, although competition from low-labour-cost emerging countries is a reality, other, more significant factors explain the de-industrialization process of EU and OECD countries. Such factors include dumping, austerity measures and strategies of transnational companies that increasingly favour short-term financial profits over industrial objectives. Transnational companies now focused on maximizing shareholders’ profits take advantage of the change of scale caused by globalization that allows them to use ‘employment blackmail’ to require lower labour costs. Companies have the capacity to relocate factories to encourage governments to reduce social, tax and environmental standards. As noted by Suzanne Berger, if a company 11 G Duval, ‘Le nouvel ordre industriel mondial’ in Alternatives Economiques, n° 251, octobre 2006. 12 International Labour Office, Changing Patterns in the World of Work, International Labour Conference, 95th session 2006, Report I(C), 12.

180

Afterword

wants to make wages in the US to decrease, it doesn’t need to hire Mexican workers or to relocate its factory to Mexico: ‘It simply needs to be able to do it, to threaten to do it’.13 The global competition between states to attract foreign direct investments by lower labour costs creates a ‘race to the bottom’. According to UNCTAD: ‘Home countries may attempt to slow the trend towards relocation of production abroad by deregulating the labour market, while host countries may believe that more flexible labour markets will attract additional FDI’.14 In addition, the configuration of the new international division of labour leads companies to search for the lowest costs for each segment of the global value chain. This is why competition mostly takes place within each category of the economy: it is within headquarter, factory and commodity economies that competition is the most important, and competition occurs primarily within world regions rather than between them. Thus, according to Arnaud Parienty: ‘Developed countries are competing amongst themselves and the risk for France, instead of the Chinese fantasy, is to have headquarters relocated in the Netherlands and factories in Eastern Europe’.15 Belgium provides an apt illustration: Ford Genk was relocated in Spain and meat-cutting activities were relocated in Germany. The main problem is therefore intraEuropean dumping caused by the asymmetry between the free and undistorted competition principle on the one hand and the lack of social and tax harmonization on the other hand. The competition caused by the financial strategies of transnational companies searching for lower labour costs and higher shareholder value drives governments and trade unions to make concessions leading to social dumping, a shortage of productive investments, fewer industrial jobs and tax holidays. By creating a single market and a common currency without social and tax harmonization, without European fiscal policy and with a European Central Bank focused on price stability, the European Union gave up policy space to implement industrial policies. Domestic imbalances and austerity plans have worsened the phenomenon after the global financial crisis of 2008 and the sovereign debt crisis of 2009–10. A second major consequence of globalization as it has proceeded is the replacement of industrial strategies of firms by primarily financial strategies. The financialization of shareholder value-oriented transnational companies led to a primacy of short term financial profits and strategic decisions taken in order to maximize such profits. Companies have been led to give up less

13 S Berger, Made in Monde. Les nouvelles frontières de l’économie internationale (Paris, Seuil, 2006) 57. 14 UNCTAD, Trade and Development Report 2012. Policies for Inclusive and Balanced Growth, United Nations, 2012, 90. 15 A Parienty, ‘Pourquoi les entreprises délocalisent?’ in Alternatives Economiques, n° 268, avril 2008.

The Impacts of Globalization

181

profitable activities and to reduce unit labour costs in order to reach the objective of 15 per cent of return on equity. To ensure that the interests of the managers are aligned on shareholders ones, a growing share of their revenue came from stock-options and other types of bonus related to shareholder value. As a consequence, the share of wages in GDP decreased in almost all countries, while financial profits rose. A third consequence, the result of the two first consequences combined, is the increase of inequalities in most developed and developing countries since the beginning of the 1980s.16 Inequalities increased also in emerging countries where, despite the industrialization, the majority of the poor in the world are located: in 2010, 58 per cent of the poor in the world lived in G20 Member States and almost three-quarters of the poor in the world were in middle-income countries.17 Although macroeconomic, financial, industrial and social policies play a decisive role in domestic income distribution, key external explanatory factors are technological innovation and globalization. On the one hand, productivity gains caused by technological innovation increased the gaps between skilled and unskilled workers: the remuneration of unskilled labour decreased, while that of highly productive skilled labour increased.18 On the other hand, globalization exacerbated the phenomenon: giving more power to capital at the expense of labour, it fostered capital revenue, created instability in labour market and encouraged less progressive tax policy, causing important economic and social costs.19 It is therefore incorrect to assume simply that poor countries benefited from globalization and the new international division of labour. According to Daniel Cohen, for poor countries with weak infrastructure, education and health, transnational companies are not very useful: ‘They simply go elsewhere’.20 Moreover, WTO rules reduced policy space for agricultural and industrial policy: on the one hand, trade policies used in the past by Western and East-Asian countries to support industrialization are prohibited (as are quantitative restrictions on imports and the imposition of performance requirements on foreign investors); on the other hand, they make local farmers compete with more competitive agribusiness companies, which exacerbates rural poverty and malnutrition. This phenomenon is magnified by hundreds of bilateral trade agreements that are in majority North-South free trade agreements.21 16 B Milanovic, ‘More or Less. Income Inequality Has Risen over the Past Quarter-Century Instead of Falling as Expected’, Finance & Development, September 2011. 17 See P-N Giraud, n 6 above, 2008, 42; and E Mawdlsey, From Recipients to Donors. Emerging Powers and the Changing Development Landscape (London/New York, ZED Books, 2012) 20 and 213. 18 J-M Cardebat, La mondialisation et l’emploi (Paris, La Découverte, 2002). 19 J Stiglitz, The Price of Inequality (New York, WW Norton, 2012). 20 D Cohen, Trois leçons sur la société post-industrielle (Paris, Seuil, 2006) 55. 21 UNCTAD, Trade and Development Report 2007, Regional Cooperation for Development, United Nations, 2007.

182

Afterword III. PROPOSALS TO ENSURE THE RESPECT OF SOCIAL AND ENVIRONMENTAL STANDARDS AND TO PROMOTE TAX JUSTICE

Against the background described above, a number of proposals have been made to steer globalization towards human development. The most promising proposals are the following: (i) Imposing social and environmental standards to transnational companies and financing a global fund to promote these standards in developing countries. The most appropriate political response to tackle social and environmental dumping is to make standards binding globally for all transnational companies, in order to make trade serve decent work and sustainable development. In other words, the objective is to create a ‘global social and environmental floor’ in order to ensure a level playing field to transnational companies without sacrificing social and environmental rights. The best theoretical option would be to add a Dispute Settlement Body to ILO, in order to make binding its standards. The creation of a World Environment Organization could play a similar role in terms of environmental standards. In anticipation of such a complex global political agreement, the European Union could unilaterally adopt an intermediate solution. Trade policy today has become less a question of free trade or protectionism between states, since tariffs are already low,22 and more a question of regulating the conduct of transnational firms, or abstaining from doing so. Moving towards ‘qualified market access’ by imposing strict standards on economic actors seeking to have access to the EU markets presents three advantages: it avoids ‘employment blackmail’ (the threat to relocate in order to obtain concessions from workers’ unions), as the respect of the standards is a condition to have access to the European market; it imposes standards that are de facto binding for transnational companies (as none of them can dispense with the first market in goods and services consumption in the world); and is consistent with the WTO rules: the measure cannot be said to be discriminatory since the restrictions apply to all companies in the world; moreover, as demonstrated by De Schutter in this volume, the ‘General Exceptions Clause’ in Article XX GATT allows unilateral measures addressing ‘production or process methods (PPMs)’. This type of solution is politically sensitive, however. It may be viewed as protectionist by developing countries, who may suspect, understandably, that the objective is to require them to adopt European standards. 22 On average in 2012: 3.4% in the US, 5.5% in the EU, 4.6% in Japan, 9.6% in China, 7.6% in South Africa, 10% in Russia, 13.5% in Brazil and 13.7% in India. Alternatives Economiques, L’état de l’économie 2014, Hors-Série, 2e trimestre 2014, 69.

Ensuring Respect of Standards

183

Development asymmetry must therefore be taken into account and developing countries must benefit from a special and differential treatment. Furthermore, a global fund to promote social and environmental standards in developing countries should be implemented. It could be financed by the retrocession of the fine paid by companies that do not comply with the minimum standards. Such measures could simultaneously impose core standards on companies and improve living standards in developing countries. It could create a ‘race to the top’ instead of the ‘race to the bottom’ that we currently witness. As noted also by De Schutter, such an option would be easier to justify in both legal and political terms if it were accompanied by confidencebuilding measures, in addition to the establishment of a global development financed by the revenue collected by the qualified access system: such measures include reference to internationally recognized standards (as ILO’s core standards for social standards) rather than to European ones; entrusting control over standards compliance to an independent body (such as the ILO Commission of Inquiry); and giving developing countries more time to implement the standards, consistent with the principle of special and differential treatment. Another, complementary route is that suggested by Dani Rodrik, who proposes that a ‘social and environmental safeguards’ agreement may be concluded within the WTO, in order to allow developing countries to impose their own standards on transnational companies operating within their jurisdiction, standards that would then be recognized by importing countries as providing an equivalent protection to those they would have imposed themselves as a condition for market access: ‘Rich and poor countries could exchange policy space rather than access to market’.23 If a trade or investment flow didn’t comply with democratically adopted standards, developing countries could impose certain restrictions, with a periodic review to avoid permanent protectionism. Policy space is crucial for developing countries to promote the implementation of social and environmental standards. (ii)

Imposing a country-by-country reporting on transnational companies, including their activities, sales, profits and taxes paid. A solution to tackle tax avoidance created by transfer pricing is to impose on transnational companies a country by country reporting—including their activities, sales, profits and tax—in order to make it easier to identify and regulate tax avoidance mechanisms. Such a measure was voted by the European Parliament for banks. It could be expanded to all types of companies.

23 D Rodrik, Nations et mondialisation. Les stratégies nationales de développement dans un monde globalisé (Paris, La Découverte, 2008) 32.

184

Afterword

(iii)

Implementing a European corporate tax and a European minimum wage. A solution to address tax competition caused by intra-European tax dumping is to implement a European corporate tax. Fiscal competition within the EU led to a decrease of the average European corporate tax from 37 per cent to 25 per cent between 1995 and 2011. It’s therefore essential to harmonize European tax policy and to implement a European corporate tax. At the same time, social harmonization could begin with the implementation of a European minimum wage. (iv) Making finance serve the real economy and creation of jobs. Giving priority to industrial strategies over financial strategies means to ensure that the financial system serves the real economy and to reform the reward system of managers. On the one hand, it means to separate retail banking from investment banking activities and to implement tax measures in order to ensure profits are reinvested in the real economy rather than simply increase returns to shareholders. It also implies limiting stock-options by making them conditional upon longer-term outcomes and allocating voting rights at the shareholders’ annual meetings in accordance with the holding period for the shares. (v) Guaranteeing social and environmental traceability of the marketed products. In order to improve the transparency of the information consumers have access to about the social and environmental conditions under which ‘made in world’ goods are produced, labelling along the whole global supply chain could be made mandatory. Consumers would therefore be able to know the origins of the products and to ensure they consume goods made by socially and environmentally friendly production methods. (vi) Implementing a European industrial strategy and a socio-ecological transition. An effective European industrial strategy requires public investments in infrastructure (in research, innovation, energy, telecommunications and transport), ideally financed by European Project Bonds. It also requires an appropriate exchange rate policy (in order to avoid overvalued exchange rate that makes export sectors less competitive), a better coordination of economic policies (to escape from domestic imbalances) and an employment-friendly monetary policy (implying a reform of the ECB mandate that is currently only focused on price stability).24 Such a strategy must integrate both the social and environmental agendas, in order to operate a socio-ecological transition, to reduce the bill of energy imports and to build a low-carbon economy. On the one hand, it means an energy transition based on renewable energy and low-carbon patterns of 24 Report on an Industrial Policy for the Globalised Era (B Lange, rapporteur) (2010/2095 (INI)), adopted on 3 February 2011 by the European Parliament.

Ensuring Respect of Standards

185

production and consumption, in order to reduce greenhouse gas emissions and the energy bill that rose from 84 to 488 billion EUR between 1999 and 2011—the cost of 17 million jobs (and this, at a time when there are 26 million unemployed persons in the EU). On the other hand, an economic paradigm shift is needed to make manufactured goods more sustainable and easily recyclable. The new paradigms of ‘circular economy’ (recycling natural resources at the end of the product’s lifetime), ‘economy of functionality’ (selling the use of the product instead of the product itself in order to encourage companies to increase the lifetime of products and to make them more repairable) and ‘cradle to cradle economy’ (designing biodegradable products and considering the waste as a resource) are new business models based on sustainable and inclusive innovations and leading to new solutions rather than new products. These new sustainable and low-cost business models may create new technologies, new economic activities, new jobs and new way of wealth. Finally, social and redistributive policies are needed to address social dumping, inequalities and poverty. In the European Union, a Social European Treaty including social convergence criteria, following the model set by the EU when economic convergence criteria were set by the 1992 Treaty of Maastricht in preparation of the economic and monetary union, could be an answer to the risk of social dumping. In developing countries, the implementation of social protection systems may reduce poverty and inequalities, but it may also increase competitiveness. Hence, contrary to the received conventional wisdom, social protection is not an excessive cost, but ‘a major element of competitiveness’,25 according to the former WTO Director-General Pascal Lamy. Indeed, the ILO identifies a positive correlation between social spending and productivity.26 (vii) Guaranteeing a special and differential treatment to developing countries. Special and differential treatment for developing countries could make trade more development-friendly. This principle already exists in the WTO rules, but as currently conceived, its implementation is limited to derogations and additional time for least developed countries to liberalize their economy. As noted by Joseph Stiglitz however, high-technology industrial sectors development in developing countries calls for a protection of the domestic companies until they will be able to compete with transnational companies, although protection of particular interests must be avoided. He advocates for an ‘infant economy’ which economic logic is the same as for ‘infant industry’ argument, but with less room for manoeuvre for particular interests.27 25 P Lamy, ‘La protection sociale, antidote au protectionnisme’ in Alternatives Economiques, Comment sauver l’industrie?, Hors-Série n° 93, 3e trimestre 2012, 61. 26 International Labour Office, Changing Patterns in the World of Work, see n 12 above, 44–47. 27 J Stiglitz, Making Globalization Work (New York, WW Norton, 2006).

186

Afterword

Such a broad based special and differential treatment would allow the current ‘commodity economies’ more policy space to implement agricultural and industrial policies that were used with success in the past by industrialized countries, but are now forbidden by WTO rules—as quantitative restrictions and performance requirements on foreign investors that are forbidden by the Agreement on Trade-related Investment Measures (TRIM), selective subsidies for export promotion and import substitution that have been affected by the Agreement on Subsidies and Countervailing Measures (SCM), or agricultural subsidies that have been eliminated in lots of developing countries while they still exist in developed countries.

IV. CONCLUSION

The changes in the world economy have resulted in a new international division of labour and reconfigured international trade. World trade is now dominated by the transnational companies’ strategies of international decomposition of the production processes, aimed at reducing the labour costs per unit and to maximize the return on equity of the shareholders. The freedom to operate for companies is supported by the WTO rules and hundreds of bilateral trade and investment agreements. While they have benefited a few emerging economies, these transformations have led to several political challenges: the de-industrialization and deterioration of working conditions in OECD countries; the primacy of financial instead of industrial policies; an increase of social inequalities inside each country; a lack of transparency in terms of social and environmental traceability of the ‘made in world’ products; and, finally, extreme poverty in developing countries. A solution to address these challenges and to initiate a ‘race to the top’ dynamic instead of the current ‘race to the bottom’ is to target companies rather than countries in order to make international standards binding for all companies. It is to this broader development agenda that the set of proposals made by Olivier De Schutter in his discussion on how to channel trade towards sustainable development should contribute.

Index Page numbers in italics refer to information in figures and those in bold refer to information in tables. Agreement on Subsidies and Countervailing Measures, 186 Agreement on Technical Barriers to Trade, see Technical Barriers to Trade Agreement Agreement on Trade-related Investment Measures, 186 Barcelona Traction case, 35 bilateral free trade agreements, 177–78 social and environmental clauses, 3 border tax adjustment (BTA) measures, 5, 27, 28–29, 85–86, 165 carbon equalization, 88–92 applied technology method, 98, 100, 168–69 best available technology method, 99–100, 100, 169 predominant method of production, 99, 100, 169 determining the level: applied technology method, 98, 100 best available technology method, 99–100, 100 predominant method of production, 99, 100 EU Emissions Trading Scheme (EU ETS) and, 94, 95–96 export rebates, 87 GATT, 46, 92–98 import tariffs distinguished, 92 import taxes, 86–87 indirect taxes, 92–93 physical characteristics of a product, 93–94 process of production, 93–94, 97–98 products/producers, 92 unilateral measures, 69–70 US Superfund Tax case, 97–98 VAT and, 94—95 WTO law, under, 92–98 cap-and-trade schemes, 85–86, 99, 172 carbon equalization, 88–92, 100–01 applied technology method, 98, 100, 168–69 best available technology method, 99–100, 100, 169

predominant method of production, 99, 100, 169 carbon leakage, 22, 125 carbon equalization, 88–92 environmental dumping, 101, 169 risks, 25 trends, 23 climate change: border tax adjustments and, 85, 87, 89 General Exceptions Clauses of GATT and GATS and, 58–59, 76 international instruments, 26 international response, 16–21 mitigation, 15, 18, 65–66, 89, 101, 166–69, 172–73 regulation of trade and, 25 United Nations Framework Convention on Climate Change (UNFCCC), 17, 19–20, 125 cap-and-trade schemes, 85–86 carbon taxes, 85–86 ‘common but differentiated responsibilities’, 19 objectives, 17–18 see also Kyoto Protocol Code of Good Practice for the Preparation, Adoption and Application of Standards, 136 country-based trade-related measures, 28–29, 31 discrimination between like goods from different countries, 45–47, 57, 67–68, 71, 155, 157 see also non-discrimination requirement Doha Development Agenda, 70, 177–78 EC-Asbestos case, 49, 50–51, 52 EC-Sardines case, 146 eco-labelling schemes, 5, 28, 124, 165 carbon labels, 129 consumer demand, 129–31 life-cycle assessment, 146 categories: private labelling schemes, 134–35 technical regulations, 135, 136–37 voluntary standards, 136–37

188

Index

compliance, 128 concerns from developing countries, 124–26 impact on small producers, 126 principle of common but differentiated responsibilities and respective capabilities, 125 consumer demand, 128–29 carbon labels, 129–31 EU Ecolabel, 140–41 harmonization of standards, 127, 146–47 lack of uniformity, 127 standards: International Organisation for Standardization, 144, 145 lack of uniformity, 127 use of international standards, 142–43 exception to, 146 TBT Agreement, 28, 131–34 categories of labelling schemes, 134–37 fulfilment of legitimate objectives, 138–39 limiting unilateral measures, 142–47 non-discrimination requirement, 137–38 respect for international standards, 142–47 WTO compatibility: GATT, 132–33 TBT Agreement, 131, 170–71 standards, 131–32, 136–37 technical regulations, 131, 132, 135, 136–37 see also Fair Trade emissions reduction: cap-and-trade schemes, 85–86 carbon equalization, 88–92 carbon taxes, 85–86 export rebates, 87 import taxes, 86–87 Kyoto Protocol, 20 emissions trading schemes, see European Union Emissions Trading Scheme (EU ETS) environmental dumping, 31, 182 carbon leakage, 101, 169 environmental standards in a trade context, 3, 14–16, 39–41, 75–77 carbon emissions, 22–24 trading, 14 climate change mitigation and 22–26 international agreements, 26 international response to climate change, 16–21 public procurement and, 5 virtual emissions, 22

see also linkage of trade and non-trade issues ethical consumerism, see eco-labelling schemes European Union Emissions Trading Scheme (EU ETS), 14, 25, 88 border tax adjustments and, 94, 95–96 obligation to join, 95–96 European Parliament: compatibility of trade, labour and environmental agendas, 4 GSP+ compliance, 112, 121 activation of GSP+ scheme suspension clause, 109–10 unilateral trade measures, 4 European Union: carbon emissions trading system, 14 EU Ecolabel, 140–41 implementation of UN Sustainable Development Goals, 152 public procurement for sustainable development, 158–64 Directive 2014/24/EU, 162–64, 171 ‘virtual emissions’, 22–23 export bans, 46 see also quantitative restrictions export rebates, 87 Fair Trade, 148 cost of compliance, 148 EU promotion of Fair Trade, 149–52 provision of public information, 151 public procurement and, 150–51 fragmentation of international regimes, 2–3, 130–31 special preference regimes, 106 free trade zones, 3 see also bilateral free trade agreements; regional free trade agreements General Agreement on Tariffs and Trade (GATT), 2 discrimination between like goods from different countries, 45–47 eco-labelling schemes, 132–33 violations of TBT Agreement and, 133 General Exceptions Clause of Art. XX, 46, 57 environmental protection and, 58–71 labour rights and, 71–77 legal framework applicable to trade in goods, 5 most-favoured nation (MFN) clause, 46, 75 national treatment for foreign products, 46, 75 quantitative restrictions, 46–47, 55, 75 role, 9–10

Index see also General Exceptions Clauses; Technical Barriers to Trade Agreement; World Trade Organization (WTO) General Agreement on Trade in Services (GATS), 5 discrimination between like goods from different countries, 45–47 General Exceptions Clause of Art XIV, 46, 57 most-favoured nation (MFN) clause, 46, 75 see also General Exceptions Clauses General Exceptions Clauses, 57–58, 75–78, 165–66 environmental protection and: ‘arbitrary or ‘unjustifiable discrimination between countries where same conditions apply, 67–71 ‘conservation of exhaustible natural resources’, 58–67 ‘disguised restriction on international trade, 67–71 ‘made effective in conjunction with restrictions on domestic production or consumption, 67 protection of ‘human, animal or plant life or health’, 58–67, 76 EU Seal Regime, 70–71 non-discrimination requirement, 69–70 protection of labour standards, 71–72 condition of ‘necessity’, 74–75, 76 ‘public morals’, 72–74, 77, 167 protectionist purposes, 67–71 unilateral measures, 69–70 Generalized Systems of Preferences (GSP), 5, 27, 27–28, 165, 168 discrimination between developing countries, 108, 169–70 GSP+ arrangements, 103–04 compatibility with WTO law, 105–08 challenges from India, 106–08 everything-but-arms initiative, 112 sanctions for ‘serious and systematic violations’, 114–17 Belarus, 117–19 Burma/Myanmar, 117, 118–19 sustainable development and good governance, 111–12, 119–22 international conventions related to, 113 layers of the current scheme, 110 everything-but-arms initiative, 112 general arrangement, 110–11 special incentive arrangement for sustainable development and good governance, 111–12 origins, 102–03 reforms: sustainable development incentive, 109–10

189

special incentive provisions, 103–04 challenges from India, 106–08 compatibility with WTO law, 105–08 everything-but-arms initiative, 112 removal of benefits, 122–23 sustainable development and good governance, 111–12, 119–22 international conventions related to, 113 Global Eco-labelling Network (GEN), 127, 144 Global Fund for Social Protection, 78, 79, 168 GLOBALG.A.P. standard, 134–35 globalization: competition from emerging economies, 179–80 de-industrialization, 178–79 deterioration of working conditions, 178, 179–80 ‘double competition’, 177 impact, 174–75 financialization of industry, 180–81 increasing inequalities, 181 production processes, 175, 178 factory economies, 178 transnational companies, 175–76 relocation of manufacturing, 176–77 inequalities, 181 proposals to promote tax justice, 183–85 proposals to promote the respect of social and environmental standards, 182–83 Government Procurement Agreement (GPA): ethical procurement schemes, 156–57 exceptions: actions taken for national security reasons, 157 measures necessary to protect public morals, 157, 167 protection of human, animal or plant life or health, 157 protection of intellectual property, 157 inclusion of non-economic considerations in tenders, 153–54 prohibition of discrimination between suppliers, 155–56 Massachusetts Burma Law, 156 restrictions of WTO members, 153 technical specifications: PPMs, 154 see also public procurement greenhouse gas emissions, see climate change; emissions reduction; EU Emissions Trading Scheme GSP+ arrangements: challenges from India, 106–08 compatibility with WTO law, 105–08 everything-but-arms initiative, 112

190

Index

removal of benefits, 122 violation of civil and political rights, 122–23 sustainable development and good governance, 111–12 international conventions related to, 113 import bans, 28, 46, 66, 76, 166 PPMs and, 55–57 see also quantitative restrictions Intergovernmental Panel on Climate Change (IPCC), 16 International Labor Organization (ILO), 2, 10–11 Declaration on Fundamental Principles and Rights at Work, 77 Declaration on Social Justice for a Fair Globalization, 11 eco-labelling, 143–44, 170–71 establishment, 7–8 globalization of social protection, 80–83 objectives, 9 setting standards for labour rights, 127 role, 8–9 International Organisation for Standardization (ISO), 127, 144, 145 International Social and Environmental Accreditation and Labelling Alliance (ISEAL), 127, 144 Kimberley Process Certification Scheme, 29–31 Kyoto Protocol, 20–21, 26, 69–70, 91 GSP+ scheme and, 113 reporting of GHG emissions, 22 labelling schemes, see eco-labelling schemes labour rights in a trade context, 3, 39–41, 77–84 background: GATT, 9–10 ILO, 7–9 Declaration on Social Justice for a Fair Globalization, 11 North American Free Trade Agreement (NAFTA), 12 WTO, 10–11 public procurement, 5 social protection, 77–80 globalization of, 80–83 see also linkage of trade and non-trade issues liberalization of trade, 2, 150, 171, 174–75 linkage of trade and non-trade issues, 174 border tax adjustments, 26,27, 28–29 country-based measures: general and targeted measures distinguished, 28

product-based measures distinguished, 29–30 sanctions and incentives, 29, 31 environmental standards, 14–26 general, country-based and targeted measures distinguished, 28 Generalized Systems of Preferences (GSP), 27–28, 114 incentive for sustainable development and good governance, 119–22 sanctions for ‘serious and systematic violations’, 114–17 Belarus, 117–19 Burma/Myanmar, 117, 118–19 international agreements, 26 labelling, 28 labour rights, 7–14 outward-looking/inward-looking (measures linking trade to non-trade concerns), 31–32 distinction, 32–35 human rights considerations, 33–35 promotion of sovereign interests, 35 WTO Agreements, 33–34 product-based measures, 29–30 proposals to promote tax justice, 183–85 implementing an EU corporate tax, 184 implementing an EU minimum wage, 184 tackling tax avoidance, 183 proposals to promote the respect of social and environmental standards, 182–83 guaranteeing social and environmental traceability, 184 implementing an EU industrial strategy, 184 public procurement, 153 redistributive policies, 185–86 sanctions, 27, 29, 31 Massachusetts Burma Law, 156 most-favoured nation (MFN) clause, 46–47, 57, 75, 155, 166 national treatment for foreign products: GATT, 46, 75 non-discrimination requirement, 29, 45–49, 53 GSPs and, 103, 169–70 public procurement, 159, 161 scope, 51 Tuna/Dolphin case, 52–53, 137–38 unilateral measures and, 68, 69–70 ‘non-trade’ issues: environmental standards, 14–26 labour rights, 7–14 see also environmental standards in a trade context; labour rights in a trade context; linkage of trade and non-trade issues

Index North American Free Trade Agreement (NAFTA), 12 physical characteristics of a product, 29, 50–51, 76, 165 border tax adjustments, 93–94 discrimination between like goods from different countries, 45–48 see also product/process distinction process of production, 29, 48 border tax adjustments, 93–94, 99 consumer preference, 48, 50–51 discrimination between like goods from different countries, 45–48, 54 see also product/process distinction product/process distinction, 48–57 product-based trade-related measures, 29, 31 Kimberley Process Certification Scheme, 29–31 production or process methods (PPMs), 48–49, 76 Government Procurement Agreement (GPA), 154 impact of globalization, 175–76 likeness to import bans, 55–57, 165 unilateralist nature, 54 proposals to promote tax justice, 183–85 implementing an EU corporate tax, 184 implementing an EU minimum wage, 184 tackling tax avoidance, 183 proposals to promote the respect of social and environmental standards, 182–83 guaranteeing social and environmental traceability, 184 implementing an EU industrial strategy, 184 public procurement, 153, 165, 171–73 compliance with labour rights and environmental standards, 5 ethical procurement schemes, 156–57 sustainable development in the EU and: case law, 158–64 Directive 2014/24/EU, 162–64, 171 transparency of conditions, 160 see also Government Procurement Agreement (GPA)

191

General Exceptions clauses, 57–58 protection of labour standards, 71–75 protection of the environment, 58–71 import bans, 5, 46, 165 PPMs and, 55–57 quantitative restrictions, 48–57 serious and systematic violations, 114, 115–17 Belarus, 117–19, 123 Burma/Myanmar, 117, 118–19, 123 see also quantitative restrictions Shrimp/Turtle dispute, 56–57, 64, 68 social dumping, 12–14, 31, 72, 180, 185 special incentive provisions, see GSP+ arrangements sustainability impact assessments, 38–39 role, 41–44

regional free trade agreements, 2, 3, 177–78 North American Free Trade Agreement (NAFTA), 12 see also bilateral free trade agreements

Technical Barriers to Trade (TBT) Agreement: eco-labelling, 28, 131, 170 compatibility with requirements of TBT Agreement, 131–34 categories of labelling schemes, 134–37 fulfilment of legitimate objectives, 138–39 limiting unilateral measures, 142–47 non-discrimination requirement, 137–38 respect for international standards, 142–47 TBT standards, 131–32, 136–37 TBT technical regulations, 131, 132, 136–37 non-discrimination requirement, 53, 137–38 restrictions to trade justified by legitimate objectives, 138–40 use of international standards, 142 conditions, 142–43 see also General Agreement on Tariffs and Trade (GATT); World Trade Organization (WTO) ‘technology effect’ of international trade, 15–16 Tuna/Dolphin case: eco-labelling, 52–53, 136–37, 139 General Exceptions Clause, Art XX GATT, 60–64 non-discrimination of foreign products, 52–53, 137–38 PPMs and, 55–56 TBT Agreement and, 136–39

sanctions to encourage compliance, 5,10, 27, 45–46, 75–84, 165–68

unilateral trade measures, 3–6, 167–69, 172 border tax adjustments, 69–70

quantitative restrictions, 45 GATT, 46–47, 55–56, 75–76, 165–66 quotas, 25, 28, 46–47, 55, 71, 75–76, 166 see also quantitative restrictions

192

Index

General Exceptions Clauses and, 69–70, 182 linkage of trade and non-trade issues, 31, 34, 38–39 non-discrimination requirement and, 68, 69–70 PPMs, 54 TBT Agreement and, 142 United Nations Environment Programme (UNEP), 17, 144 EU implementation of UN Sustainable Development Goals, 152 United Nations Framework Convention on Climate Change (UNFCCC), 17, 19–20, 125 cap-and-trade schemes, 85–86 carbon taxes, 85–86 ‘common but differentiated responsibilities’, 19 eco-labelling, 144 Kyoto Protocol, 21 objectives, 17–18 US-Reformulated Gasoline case, 59, 65, 68 US-Superfund Tax case border tax adjustments, 93–94, 97–98, 100 ‘virtual emissions’, 22–23 World Trade Organization (WTO), 2–4 border tax adjustments and, 92–98 compatibility of sustainability measures, 43 discrimination between like goods from different countries, 45–47 product/process distinction, 48–49 Dispute Settlement Bodies, 34

EU Seal Regime, 70–71 Government Procurement Agreement (GPA), 154 Massachusetts Burma Law, 154–55 PPMs and, 55, 76 Tuna/Dolphin case, 52–53, 63 US-Reformulated Gasoline case, 65 eco-labelling compatibility and, 134–35, 141, 142–44, 147 GATT, 132–33 TBT Agreement, 131 standards, 131–32 technical regulations, 131, 132 establishment, 9–11 General Exceptions Clauses, 57–78, 165–67 Government Procurement Agreement (GPA), 153–57 GSP+ arrangements and, 105–08 international human rights and WTO Agreements, 36–38, 73–74 Kimberley Process Certification Scheme, 30, 31 most-favoured nation (MFN) clause, 46–47, 57, 75, 155, 166 national treatment for foreign products, 46, 75 non-discrimination requirement, 53 outward-looking/inward-looking trade policies, 33–34 public procurement, 153–57 special incentives and, 105–08 unilateral trade measures, 4, 69–70 see also General Agreement on Tariffs and Trade (GATT); Government Procurement Agreement (GPA); Technical Barriers to Trade (TBT) Agreement