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The turn to managed interdependence: a glimpse into the future of international economic law?

Published on August 14, 2018        Author: 
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Beyond the unpredictability injected into the international order in the wake of policies adopted by the current US administration, a trend seems to be taking shape: the management of interdependence. The belief whereby increased global integration and connectivity would bring peace, stability and prosperity has never been as challenged as presently, when links between states are occasionally “weaponized” in the pursuit of goals that increasingly blur the economic, political and strategic divides.

This scenario pre-dates the Trump period. It was described in an influential 2016 publication by the European Council on Foreign Relations as one where interdependence “has turned into a currency of power, as countries try to exploit the asymmetries in their relations”. In reaction, states are reassessing their exposure to an interdependent global order, seeking to mitigate perceived vulnerabilities that might stem from connectivity and openness.

International law is likely to be transformed if this trend gains traction. A number of international rules and institutions were premised on – and, in fact, harnessed – the interdependence that marked the post-Cold War environment. This article offers insights into possible implications of managed interdependence for international economic law, an area where states are increasingly resorting to “economic statecraft” in order to advance strategic interests. As explored below in the example of investment screening regulations, some of these interests — as national security – are pursued by the management of interdependence.

The emergence of managed interdependence

The intensification of the US-China rivalry has made salient the drivers of managed interdependence. In what possibly amounts to one of the most consequential shifts in global politics, the US has decided to change its approach to China. According to the 2017 National Security Strategy, the US needs to “rethink the policies of the past two decades—policies based on the assumption that engagement with rivals and their inclusion in international institutions and global commerce would turn them into benign actors and trustworthy partners.“

In the context of the change in policy, calls are emerging for the US to manage its economic interdependence with China. In the defense establishment there seems to be a growing sentiment that it is necessary to untangle the economic links between the two countries in order to safeguard US national security. Leading China experts in the US are advocating “ways to protect ourselves against (…) Chinese activity that’s intended to exploit our openness.” And think tanks are suggesting to build “diversity and redundancy in critical supply chains” to limit China´s leverage over the global economy.

The US case with respect to China offers a compelling manifestation of the push to manage interdependence, but it is not an isolated instance. China, for its part, is rolling out its own network of interdependence, partially as a result of the lesson “that overdependence on the West in trade and economy is dangerous”, as argued by a Chinese scholar. Likewise, friends and allies of the US are taking due note of the cost President Trump is seeking to extract from interdependence in the form of trade concessions under the guise of alleged national security. While these states often have little wiggle room to counteract at present, they might be looking for options in the future, as analysts recognize. The private sector too is adjusting to managed interdependence by means of a redesign of global supply chains. Finally, it could also be argued that domestic anti-globalization pressure can induce governments to limit their economies’ exposure to interdependence.

International economic law in times of managed interdependence

Underlying these developments is the perception that, in a context of great power competition, economic policies might be enlisted in a larger set of tools aimed at advancing strategic interests. The 2017 US National Security Strategy acknowledges that this dynamic is currently at play when it states that “American prosperity and security are challenged by an economic competition playing out in a broader strategic context.“ The combination of strategic goals and economic policies is the essence of the notion of “economic statecraft”.

In many instances, economic statecraft in all its expressions is enabled by economic interdependence. Economic statecraft is often associated with the imposition of (formal or informal) economic sanctions, and with the leveraging of state clout to advance national economic interests, as the opening of foreign markets. What became more frequent at present, though, is another brand of economic statecraft, namely the deployment of economic tools to push forward strategic state interests such as access to raw materials and the acquisition of relevant technologies. The fact that the strategic rationale behind some state measures might be debatable does not take away their nature as economic statecraft. When the US decides to manage its interdependence with a NATO ally such as Turkey by crippling bilateral economic ties, this is no less an example of economic statecraft – although some could be left wondering what the strategic logic for this decision is.

The “international law of economic statecraft” differs from international economic law in critical ways. First, states often possess more discretion to act, as a number of economic statecraft measures fall under exceptions to international rules, as national security carve-outs. Second, economic statecraft decisions are inspired by a strategic rationale, which not necessarily privileges the efficient allocation of resources. Indeed, these decisions might confound the market, as when the US government vetoed the takeover of the American chip manufacturer Qualcomm by Singaporean company Broadcom.

As exceptions to rules are more frequently invoked, legal uncertainty is introduced into global economic regimes, and the rule of law is impaired. As a reaction, states are likely to opt for some sort of managed interdependence in order to ensure a degree of predictability.

One area of economic regulation where increased managed interdependence can be identified are the disciplines for investment screening. These rules allow states to scrutinize – and occasionally discourage or veto – transactions taking place in their jurisdictions.

The dissemination of foreign investment screening as management of interdependence

Developments in the investment field offer interesting insights on what international economic law might look like in a context of managed interdependence.

Increased interdependence brought about by rules that liberalized investment flows expanded the global outward stock sixfold between 1997 and 2017, from US$ 5.5 trillion to US$ 30.8 trillion, according to UNCTAD.

More recently, though, that same agency noted that, as a consequence of “concerns about national security and foreign ownership of land and natural resources (…) investment screening procedures are becoming more common”. Whereas investments tended to be by and large welcomed in the past, they are now viewed with slightly more caution.

Tellingly, national security is a concept in expansion. This affords state authorities more leeway to review investment transactions. As the OECD documented in a 2016 report, “the reference to strategically important industries and critical infrastructure is nowadays much more frequent than some six years ago when national security was defined in a much narrower sense”.

Other developments also point to an increased management of interdependence in this area. Of particular relevance is the fact that new actors are adopting investment screening legislation – most notably the European Union, where a regulation is expected to be in force in the short term. Additionally, states with established mechanisms are reinforcing the powers held by national authorities to scrutinize foreign investments, as evidenced in the reform of the Committee on Foreign Investment in the United States (CFIUS), whose bill should be signed into law soon.

The current stage of investment screening regulation also hints at possible roles for international institutions and cooperation in this area. Accordingly, the US Congress has directed the President “to urge and help allies and partners of the United States to establish processes that parallel the [CFIUS] to screen foreign investments for national security risks (…)”. For their part, trade ministers of the US, EU and Japan have agreed on the need to work on best practices to stop governments from “the systematic investment” aimed at acquiring foreign technologies.

China, in its turn, has advocated that the WTO examine, as a possible measure of investment facilitation, to “[e]ncourage the establishment of clear and consistent criteria and procedures for investment screening, appraisal and approval (…)”.

As these examples suggest, managed interdependence does not necessarily inhibit some level of internationalization. However, they also expose different views of internationalization, one pushing for the dissemination of national rules and the other for an international control over the application of these rules.

Conclusion

To be sure, interdependence has never been complete, as states have always enjoyed varying degrees of flexibility to implement international rules. What stands out today is the risk of unravelling the interdependence that has been achieved, which generated positive results despite the shortcomings that still need fixing.

Managed interdependence is not a given. It is only emerging and its dissemination depends to a certain degree on whether more states will resort to it or not.

A world of more managed interdependence would mean an unfortunate step backwards. It undercuts the rule of law, produces regime duplication and ultimately promotes the rise of competing legal orders.

While the reasons for increased resort to economic statecraft – by all actors – might be understandable in a context of global power shift, managed interdependence testifies to the incapacity to find agreements. Rather than parting ways, efforts should instead be placed on producing commonly acceptable solutions.

*The views expressed above are personal to the author and do not represent the official views of the Government of Brazil.

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Balancing between Trade and Public Health Concerns: The Latest Step in the Plain Packaging Saga

Published on August 8, 2018        Author:  and
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The Australian Tobacco Plain Packaging (TPP) measures raised the classic issue of balancing between competing interests. While aiming at improve public health by putting plain packaging requirements on tobacco products, Australia revived an important debate in international economic law concerning whether international obligations have become too intrusive for the State’s policy space, asphyxiating the sovereign right to protect essential interests or values.

On the one hand, Australia’s measures seem to have been encouraged by public health concerns and the Framework Convention on Tobacco Control (FCTC), which is a component of a juridical strategy that purports to construct a consensus in the international legal community on the need to fight the tobacco epidemic. As the preamble to the Convention clearly states, the parties were ‘determinedto give priority to their right to protect public health’. On the other hand, the judicial contestation of the TPP measures nevertheless showed the diversity of competing interests at stake, which made the topic a perfect example of those multifaceted litigations raised before a plurality of international courts and tribunals.

The need to determine a balance between the right of the State to legislate to protect public health and the rights of tobacco companies had appeared already in the case law of the European Court of Human Rights(ECtHR Hachette Filipacchi presse automobile et Dupuy v. France,). Investment arbitration has also been another setting for this sort of litigation, most notably after Philip Morris introduced two claims contesting that the Australian and Uruguayan legislation restricting the presentation and sale of cigarettes was in violation of its rights stemming from BITs. In both cases, these requests remained unsuccessful. The ICSID tribunal used the systemic integration principle of Article 31(3)(c) VCLT to operate a balancing test between the investment protection obligations under the BIT and the State’s right to regulate, established in customary international law, together with its corollary, the police powers doctrine (Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay, award, para 290).

Ever since the introduction of the complaints in 2012, the question that remained was whether the WTO adjudicatory bodies would have interpreted trade obligations in keeping with this line of reasoning. In an earlier post on the Panel report, Margherita Melillo reflected on how the Panel used the FCTC for evidentiary purposes. This blog post continues this reflection by looking at how the Panel resolved conflicting interests of public health and trade.

Balancing in international trade law

Concerns about the treatment of tobacco control measures under international trade law date back at least to the 1990 GATT case Thailand – Restrictions on importation and internal taxes on cigarettes. While tobacco control measures have also been the subject of two recent trade disputes (i.e. Dominican Republic — Import and Sale of Cigarettesand US — Clove Cigarettes), neither of these disputes drew as much attention to these concerns as Australia – Plain Packaging. At the heart of this dispute was the sharp conflict between the trade interests of the complainants and the public health concerns of Australia. International trade law normally addresses such conflicts through a system of ‘rule and exception’, set out to strike a balance between trade and non-trade interests. However, the two agreements at issue in Australia – Plain Packaging, namely the TBT Agreementand the TRIPS Agreement, do not contain a general ‘exception clause’ equivalent to GATT Article XX. The balancing of competing interests (trade and public health) in this dispute thus took place in the context of determining the consistency, or otherwise, of the TPP measures with Article 2.2 of the TBT Agreement and Article 20 of the TRIPS Agreement.

More trade restrictive than necessary?

The complainants alleged that the TPP measures were more trade restrictive than necessary to achieve their legitimate objective, contrary to Article 2.2 of the TBT Agreement. This provision allows Members to adopt technical regulations that achieve legitimate objectives, insofar as they are not more trade restrictive than necessary to fulfil those legitimate objectives. Parties to the dispute agreed that the objective of the TPP measures, as the Panel put it, was ‘to improve public health by reducing the use of, and exposure to, tobacco products’ (para 7.232). They also accepted that such objectives are legitimate within the meaning of Article 2.2 (para 7.248). Their disagreement was over the trade restrictiveness of the measures and their contribution to the public health objective they pursue. The complainants contended that the measures were more trade restrictive than necessary and proposed four alternative measures that would have been, in their view, reasonably available and less trade-restrictive while making an equivalent contribution to the realization of the legitimate objectives.

Since the objective of the measures at issue was undisputed and such objectives fall within the illustrative list of legitimate objectives under Article 2.2, the main task of the Panel was to determine whether these measures were indeed trade-restrictive but nevertheless contributed to the legitimate objectives. Taking the evidence before it in its totality, the Panel concluded that ‘the TPP measures, in combination with other tobacco-control measures maintained by Australia […], are apt to, and do in fact, contribute to Australia’s objective of reducing the use of, and exposure to, tobacco products’ (para 7.1025). The Panel also found that ‘the TPP measures are trade restrictive, ‘insofar as, by reducing the use of tobacco products, they reduce the volume of imported tobacco products on the Australian market, and thereby have a “limiting effect” on trade’ (para 7.1255).

Having found that the TPP measures are trade-restrictive but make a significant contribution to the protection of public health, the Panel had to weigh and balance the trade and public health interests at stake to determine whether they are more trade-restrictive than necessary to achieve their public health objectives. In doing so, the Panel first considered the risk of non-fulfilment of the objectives and then the reasonable availability of alternative measures that are less trade-restrictive while making an equivalent contribution to the achievement of those objectives. On the ‘risks of non-fulfilment’, it found that ‘the public health consequences of not fulfilling [the] objective are particularly grave’ (para 7.1322). It then examined the proposed alternative measures and found that the complainants failed to demonstrate their proposed alternative measures (individually or collectively) constituted a less trade-restrictive alternative to the TPP measures with an equivalent contribution to Australia’s objective (paras 7.1362-7.1723). Against this background, the panel concluded that the TPP measures are not more trade-restrictive than necessary to achieve their legitimate objective of improving public health (para 7.1732).

Unjustifiable encumbrance?

The complainants also alleged that the TPP measures constitute special regulations that unjustifiably encumber the use of trademarks in the course of trade, contrary to Article 20 of the TRIPS Agreement. The threshold issues here were whether the measures in question constitute ‘special regulation’ and ‘encumbrance’ within the meaning of Article 20. The parties to the dispute agreed that the measures indeed constituted special regulations, but they disagreed over the precise scope of the term ‘encumbrance’. While the complainants argued that it covers all kinds of hindrances and impediments, Australia insisted that it covers only limitations on the use of trademarks. Australia was of the view that a total prohibition on the use of trademarks is outside the scope of Article 20. The Panel agreed with the complainants that it would be ‘counterintuitive’ to consider that a measure that restricts the use of a trademark would be subject to the disciplines of Article 20 while a more far-reaching measure to prohibit such use would not’ (para 7.2238). This consideration has led the Panel to conclude that ‘encumbrances arising from special requirements within the meaning of Article 20 may range from limited encumbrances, […], to more extensive encumbrances, such as a prohibition on the use of a trademark in certain situations’ (para 7.2239). This finding settles the debate over the meaning of the term ‘encumbrance’ in Article 20. While scholars such as Pires de Carvalho have argued that the degree of encumbrance is not to be taken into account for the applicability of the provision, others, most notably McGrady, have argued that a prohibition falls outside the scope of application of Article 20 because the provision deals with whether the trademark could be used and not how it may might be used. The position of Pires de Carvalho seems to have prevailed over the one of McGrady in the eyes of the Panel. On this point, it is also interesting to note that a similar discussion took place concerning what constitutes a technical regulation within the meaning of the TBT Agreement. The Appellate Body in EC – Asbestos reversed the conclusion of the Panel,stating that an absolute prohibition does not qualify as a technical regulation.

Having passed the threshold issues, the Panel then had to determine whether such an encumbrance was unjustified within the meaning of Article 20. No definition or guidance as to what constitutes ‘unjustifiable encumbrance’ exist under the TRIPS Agreement. Nor there is case law on the subject. The Panel had to appreciate the justifiability in concreto, balancing the two conflicting interests.

In the absence of an agreed upon definition or jurisprudence, the Panel interpreted what constitutes ‘unjustifiably’ encumbering the use of trademarks in light of the object and purpose of the TRIPS Agreement. Here the Panel relied mainly on Article 8.1 of the TRIPS Agreement and the Doha Declaration on the TRIPS Agreement and Public Health. Having found that these two provisions authorize WTO Members to take measures for the protection of public health, the Panel concluded that the complainants have not demonstrated that the TPP measures unjustifiably encumber within the meaning of Article 20 (para 7.2605). That is to say that although the measures at issue encumber the use of trademarks within the meaning of Article 20, the encumbrance is justified by virtue of its public health objective. This conclusion resonates with the conclusion of scholars like M. Abbott who have argued  that an interpretation of Article 20 consistent with Article 8 and the Doha Declaration would have acknowledged and given effect to the ‘right to protect public health’ in any implementing action under the TRIPS Agreement and in any dispute settlement proceeding.

In arriving at this conclusion, the Panel also considered the fact that the TPP measures are ‘in line with the emerging multilateral public health policies in the area of tobacco control as reflected in the FCTC and [its] guidelines’ (para 7.2604). The Panel was of the view that the fact FCTC (a non-WTO agreement) endorses the TPP measures reinforces their justifiability. This raises the longstanding question of whether WTO adjudicatory bodies could use non-WTO agreement as an interpretative key. Although the Appellate Body has used such instruments to interpreting WTO agreement in the past, the jurisprudence is far from settled on this matter. This is why Honduras highlighted this issue in its notification of appeal.

A parallel could be made with the Brazil – Tyrescase. Here, the Appellate Body adopted a holistic approach and stressed that, because of their nature, health protection measures had to be analyzed in the larger framework of the State policy action. Looking at the measure as a whole would allow for a clearer overview of the objectives pursued by the State to be identified, in order to facilitate a more accurate balancing. Moreover, the analysis of the effectiveness of the measure had to take a chronologically larger standpoint; the effectiveness of a public policy can in fact take time to emerge (paras 151 and 182). This holistic approach, elaborated in the framework of Article XX GATT, seems to be reiterated in the framework of Articles 20 and 8 TRIPS: the unjustifiability of the encumbrance has be examined in light of all the contextual elements that lead to the adoption of the public health measure, including the reliance on the FCTC and the customary right to regulate. Here we find a strong similarity with the balancing operated in the Philip Morris case, based on an intersystemic and holistic approach.

Conclusion

The WTO Panel’s recent report is the last step in a long saga. This saga has allowed different international courts and tribunals to test the flexibility of international obligations with regard to the State’s regulatory space in health issues. The plain packaging report confirms a general trend in WTO case law, whereby the telosof the measure serves to justify the interference within free-trade obligations. In fact, the Appellate Body had floated an ‘unspoken sympathy for well-intentioned health and safety measures’, an unspoken sympathy that is based on the axiological importance attributed to the policies at stake. This kind of ‘smell test’, as Hudec notoriously defined it, reflects Robert Alexy’s idea of weight formula, intrinsic in the balancing operation operated in different fora. The Panel has extended this technique to two areas of WTO law where its scope of application was doubtful.  

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UK Extraterritorial Financial Sanctions: Too Much, Too Little, Too Late?

Published on July 17, 2018        Author: 
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The US practice of the extraterritorial application of sanctions was criticised for years as, at best, the illegitimate abuse of its particular position in the world’s economy. Despite its fully comparable position in international finance, the United Kingdom was shielded from such criticism predominantly thanks to the transfer of respective decision-making to Brussels. The nature and scope of sanctions were delineated by EU laws. As the UK prepares its (financial) sanctions regime for Brexit, could it draw criticism similar to the US for both giving too broad discretionary powers to the government and preventing it from meeting UK international obligations at the same time? I suggest the new regime for the extraterritorial application of sanctions possibly opens the UK to international liability for, both, the lack of a legal basis for a legal restriction upon states as well as inevitable omissions to prevent gross violations of international law.

Since analysis of legal sanctions under international law is a very complex, multi-stage exercise, I focused on relatively easier cases of discretionary goals of foreign policy and extraterritorial sanctions, where the legal threshold for an internationally wrongful act is lower. Accordingly, I highlight the normative basis for adopting financial sanctions against third-state persons not covered by exceptions, British BITs, or the most relevant multilateral treaties. As for possible breaches of international law by omission, I focus on tolerating the provision of financial services contributing towards gross violations of international law. Because of length limitations, I do not discuss anti-money laundering per se, which is subject to yet another chapter of the law in question.

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Lessons from the WTO Plain Packaging reports: The use of the evidence-based WHO Framework Convention on Tobacco Control as evidence in international litigation

Published on July 16, 2018        Author: 
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Introduction

The WTO Plain Packaging reports have finally been published. The four reports (merged in a single document) contain the findings of the WTO panel in the disputes launched in 2012-2013 by Honduras, Dominican Republic, Cuba, and Indonesia. The disputes were directed against some tobacco control measures adopted by Australia – so-called ‘the plain packaging’ (TPP) laws. In a nutshell, TPP mandates that all tobacco products be sold in unattractive standardised packaging, thereby curtailing the use of colours, design and trademarks by tobacco manufacturers. As it was already leaked one year ago, the panel has ruled in favour of Australia.

The 884 pages of the final reports contain a lot of food for thought, and will keep many of us busy for long. This post focuses on a relatively narrow issues, namely the role of the Framework Convention on Tobacco Control (FCTC) in the case.  Despite being often overlooked in mainstream international scholarship, the FCTC is a remarkable treaty. It is the first (and so far, only) treaty ever negotiated under the auspices of the World Health Organization (WHO). Adopted by the World Health Assembly in May 2003, it has now reached the massive number of 181 ratifications. The FCTC is also a living treaty: it established a set of institutions, including a Conference of the Parties (COP) that meets biannually and has adopted 9 sets of guidelines.The FCTC was conceived in the ‘90s as an ‘international regulatory strategy’ to ‘promote national action on tobacco control’ (in the words of one of its main promoters, Allyn Taylor), in the face of the growing tobacco epidemic. To this end, the treaty (and later its guidelines) have been developed as ‘evidence-based’ instruments, i.e. as texts that require the adoption of tobacco control measures whose effectiveness has been established by evidence (see Taylor and Bettcher 2000). The set of measures is a comprehensive one, encompassing measures for the reduction of supply and measures for the reduction of demand of tobacco products. TPP measures are also part of this comprehensive set; specifically, they are recommended by the Guidelines to Article 11 and in the Guidelines to Article 13 of the FCTC.

In addition to their role in domestic implementation, the FCTC and its guidelines have proved to be useful instruments in the international disputes launched against the tobacco control measures adopted by its parties (see my earlier report as well as the more recent article by Zhou, Liberman and Ricafort). In some cases, the FCTC and its guidelines have been relied upon for their evidential value, while in others they have been considered ‘evidence’ by reason of their ‘evidence-based’ nature. The TPP reports prepared by the WTO panel are the latest cases in this series. The following sections review the approach taken by the panel on the role of the FCTC, and briefly compare it to the previous international disputes.

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Déjà vu? Investment Court Proposals from 1960 and Today

Published on May 15, 2018        Author:  and
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It is not business as usual in investment dispute resolution these days. In late April 2018 in New York, governments and experts met under the auspices of UNCITRAL Working Group IIIto continue vigorously debating how investor-state dispute settlement (ISDS) should be reformed or replacedby an investment court. This is not the first investment court proposal, however.

In the 1950s and 1960s, eminent international lawyers from around the world — Martin Domke, George Haight, F A Mann, Gunnar Lagergren, Elihu Lauterpacht, Raisa Khalfina, and Ignaz Seidl-Hohenveldern, to name a few — discussed an international investment court, notably at International Law Association conferences in 1958, 1960, and 1962. In 1960, ILA participants compared a court and arbitration directly, discussing “Draft Statutes of the Arbitral Tribunal for Foreign Investment” and “Draft Statutes of the Foreign Investments Court.”

Views in 1960, like today, varied sharply. No expert consensus existed that arbitration was better than a court for resolving investor-state disputes. This lack of consensus echoed even earlier debates: in 1905, when ASIL was founded, it was directed “exclusively to the interests of international law as distinct from international arbitration” (as Mark Mazower notes, page 92) because arbitration involved a compromise between interests rather than fidelity to the law. For ASIL founder Elihu Root, arbitration was an advance toward peace, but “the next advance to be urged along this line is to pass on from an arbitral tribunal…to a permanent court composed of judges who devote their entire time to the performance of judicial duties.” (Root might smile if he could see European officials coming to ASIL to discuss why an investment court should replace arbitration.) Unlike ASIL’s founders, arbitration’s supporters in 1905 praised the modesty of its procedures and goals—it was imperfect but feasible.

Feasibility was emphasized again in the 1960s, by attendees at the 1960 ILA conference and at the ICSID Convention’s drafting a few years later. This perception of feasibility stemmed in large part from assumptions made about arbitration in the 1960s, including that arbitral tribunals would not be agents of legal development, that appointing arbitrators was simple, and that arbitration was low cost. One can no longer make these assumptions about investor-state arbitration.

Today, reforming arbitration and creating a court are not mutually exclusive, nor are they only options under consideration at UNCITRAL. They are “elephants in the room” at UNCITRAL, however, so it’s interesting to compare how these two dispute resolution mechanisms look to participants today with how they looked in 1960. In this post, we cover three issues: legal development, appointments, and costs. Read the rest of this entry…

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Crimea Investment Disputes: are jurisdictional hurdles being overcome too easily?

Published on May 9, 2018        Author: 
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In February-March 2014, Crimea experienced what is here neutrally referred to as a ‘change of effective sovereign’ (as conceded by Ukraine itself). Subsequent events have given rise to at least nine investment claims by Ukrainian nationals against Russia in connection with their investments in Crimea made prior to the ‘change of effective sovereign’. Substantively, all cases pivot on alleged violations of the expropriation and FET (fair & equitable treatment) clauses of the 1998 Russia-Ukraine BIT. Before getting there, however, a series of jurisdictional hurdles need to be overcome. Firstly, whether the scope of the BIT covers also de facto (as opposed to de jure) territory. Thus, whether under the BIT, Crimea may be understood as Russian territory. Secondly, the BIT’s temporal and personal ambit of application. That is to say, whether Ukrainian nationals and their businesses existing in Crimea prior to the ‘change of effective sovereign’ may qualify, respectively, as foreign Ukrainian investors and investments in Russia. It is doubtful that these questions which, are inevitably intertwined with the public international issue of the legality of the ‘change of sovereign’, can be satisfactorily answered through ‘effective interpretations’ and/or drawing analogies from human rights law. The scope and rationale of investment law differs from that of the latter; the promotion and protection of bilateral business is pursued for the benefit of economic growth, while the protection of fundamental rights and freedoms of persons is undertaken for the good of human kind.  In fact, it is reflected in the standard dispute settlement mechanism envisaged i.e. private ad hoc arbitration v standing international court.

Jurisdictional decisions in five proceedings have recently been rendered. To date, none of these have been made public. Nevertheless, important passages of their reasoning have been uncovered by trusted sources. These allow for a preliminary review of the tribunals’ assessment of the key legal issues involved. Read the rest of this entry…

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China leans in on international adjudication: Why Beijing’s answer to defeat will be more forceful engagement

Published on May 2, 2018        Author: 
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This year China might suffer the third in a string of stinging defeats at international tribunals that would then cover trade, investment, and law of the sea matters. Contrary to persistent expectations in some policy circles, China’s leaders will not opt for withdrawal. They have resolved to make existing mechanisms work for China, and shape global governance by doubling down on engagement. In line with different degrees of Chinese integration into these systems, Beijing will respond by ratcheting up litigation (trade), upgrading bilateral treaties (investment), and pushing for favourable state practice through diplomacy (law of the sea). The international community will have to deal with a newly powerful legal actor who is very much on the offense.

Failure and Frustration

In two ways, trade law could this year deliver the third bombshell setback in China’s recent engagement with international adjudication. Firstly, there is China’s soon to be decided WTO complaint against the EU’s retention of a distinct (although modified) antidumping methodology for (states like) China. A similar case against the United States is in the consultation stage. Beijing had expected that its Accession Protocol would deliver automatic ‘market economy status’ including more favourable antidumping treatment 15 years after it joined the WTO.

Secondly, a major trade law standoff is unfolding between China and the US, involving the mutual adoption of tariffs and filing of WTO complaints, which could come to a head this year. The US filed a complaint on China’s protection of intellectual property (IP) rights alleging TRIPS Agreement violations. At the same time, the US Trade Representative (USTR) proposed tariffs following a Section 301 US Trade Act of 1974 investigation into Chinese IP practices. Beijing already responded with a WTO complaintalleging that such tariffs would violate the GATT, and its own list of proposed tariffs. Less crucially, China initiated another case alleging GATT and Safeguards Agreement violations through US tariffs on steel and aluminium products.

Previously, giant life insurer Ping An became the first Chinese company to lose an investment arbitration, when its $1 billion claim against Belgium over the Fortisbank nationalization was rejected in 2015. A year later, China suffered an almost total defeat against the Philippinesin an Annex VII UNCLOS law of the sea arbitration on South China Sea issues in July 2016.

Such setbacks trigger angry reactions in China against allegedly biased international institutions that might never give China a fair shake. Many commentators decried China’s supposed second-class membership in the WTO, when the EU decided against granting market economy status, while recent US trade actions are termed severe violations and ‘typical of unilateralism and trade protectionism’ by the Chinese government. Chinese officials were stunned when the investor in Ping Anlost over the ‘technicality’ of whether to rely on the older or the more recent bilateral investment treaty (BIT) between China and Belgium. Following the South China Sea case, it was mooted that Beijing could ‘denounce’ the UN Convention on the Law of the Sea (UNCLOS) to be safe from other states’ attempts to ‘exploit’ the system ‘for political reasons’.

Doubling Down

Yet China is not going to withdraw, and Western governments, as guardians of the current system, will be surprised by how forcefully it will instead lean in to shape existing legal regimes. Tools will differ, but trade litigation, investment treaty making and law of the sea diplomacy to influence state practice serve the same purpose: align the rules further with China’s interests.

This effort is part of the more assertive foreign policy outlined by China’s president Xi Jinping, who just consolidated his power at the First Session of the 13th National People’s Congress. In a major shift, Xi has declared that China will no longer just participate in the international system, but provide ‘guidance’ towards a ‘new international order’. A recent treatise in the People’s Daily confirmed the ambition to seize the ‘historic opportunity’ to shape a new order while US policies under President Trump leave a leadership vacuum.

An underestimated driver of such strategic decisions is a policy elite of Chinese international lawyers who overwhelmingly favour playing offense. Prominent academics and legal counsels to the Chinese leadership have argued that with WTO dispute resolution, just showing up is half the battle. They have called for China to develop the litigious ‘mind set’ and investment treaty framework to go with its new status as major global investor. Lastly, they want China to go around the South China Sea award and influence the law of the sea by shaping state practice through diplomacy.

Bespoke Strategies

After China was refused ‘market economy status’, its Ministry of Commerce immediately struck back at the EU with a complaint at the WTO. Should it now lose the case, its appeal will already be prepared, as will be fresh complaints tackling the broader issue from different angles. At the same time, Beijing encourages Chinese companies to more proactively ‘prove’ to regulatory agencies abroad that they operate under market conditions, and contest adverse decisions at local courts.

Similarly, the Chinese government very quickly responded to recent (partly only proposed) US tariffs, with two fresh complaints. The current overall dispute with Washington will see a Chinese leadership that is more open to negotiated solutions than on antidumping methodology. Should there be any adverse decisions, though, China would again immediately appeal and file further complaints.

Flanking its litigation strategy, China continues massive diplomatic lobbying. Firstly, this serves to gain recognition as a market economy. More than 80 countries have already complied by explicitly providing such recognition, and FTA negotiations in line with theBelt and Road Initiative are to increase that number. President Xi has called for hastened implementation of China’s free trade strategy to strengthen its position in writing global trade rules, after failed Western efforts with TPP and TTIP left the field open.

Secondly, Beijing is actively portraying itself as defender of the WTO trade regime against a protectionist Trump administration onslaught. While many governments share US concerns about IP rights in China, Beijing uses (potential) US tariff implementation without WTO decisions, especially where broadly targeted such as on steel and aluminium, to position itself as the better trade citizen. China’s aim is not only to offset pressure concerning domestic legal changes, but also to shape future coalitions of states in international trade law reform (or rather in blocking reform where existing frameworks suit China).

On investment law, the investor’s defeat in Ping An spurred the Chinese government to quickly improve its investment treaties and seek influence on global investment rules harmonization. Beijing wants to get new investor-friendly treaties in place that include improved transitional clauses, and grant broad access to international arbitration, as well as, quite unusually, appellate bodies. Chinese lawyers argue that such mechanisms may improve legal predictability, but perhaps more importantly they would give the Chinese side another chance in case of defeat.

Wanting to make use of the full arsenal of available measures, the Chinese leadership also acts on the multilateral level. On the path towards a common worldwide investment law system that looks more like the WTO in the trade area, Beijing seeks to set the agenda and touts the ‘Guiding Principles for Global Investment Policymaking’, adopted at the 2016 G20 Summit in Hangzhou, as a first step. The non-binding principles are infused with Chinese wording and interpretations of principles such as legal predictability, transparency, and effective dispute resolution.

Finally, in the third issue area of the law of the sea, after the stunning loss on South China Sea claims, Beijing decided to undermine the award’s authority with a diplomatic push to underline contradictory state practice. Chinese officials aim to prevent the arbitrators’ restrictive interpretations of ‘historic rights’ and ‘island’ status from becoming international customary law. They point out, for example, that the United States and Japan use tiny rocks to make extensive maritime claims, and lobby states worldwide to support China’s interpretation of its islands’ entitlements. Some scholars point out the potential for further UNCLOS implementation agreements(as on deep seabed mining), which could clear up ambiguity in terms favourable to China and override the tribunal’s decisions.

While China may strictly reject compliance with the South China Sea award, it needs UNCLOS to protect its interests and gain influence on maritime governance. Beijing aims to secure a large UNCLOS-sanctioned continental shelf in the East China Sea, based on favourable geography vis-à-vis Japan. It wants Chinese companies to be in a prime position for the coming International Seabed Authority-sanctioned mining bonanza under the high seas worldwide, and it intends to have a seat on the table regarding Arctic governance issues. Indicative of its strategic choice to shape the system from within, China now adopts more UNCLOS-like language for its South China Sea claims and backs away from the ‘Nine-dash Line’.

The Future of China and International Law

So, in a nutshell, what should we expect China to do? Its approach has already evolved considerably. The focus shifted from the international legal order’s ‘hardware’ – joining institutions and equipping them with Chinese judges and staff – to its ‘software’. Now the Chinese leadership wants more influence on the treaties and customary law behind the system. In a parallel process, once it feels confident enough in a particular field, China gradually but inevitably boots up participation at court.

Prominent voices in China, including Prof. Yi Xianhe, member of the Foreign Ministry Consultative Committee on International Law, have argued that China must be a ‘leader country’ on international law, if it is to consolidate economic and political gains. That includes actively engaging with international tribunals. Such statements represent an emerging consensus among Chinese international lawyers that forward-leaning engagement will on balance be a positive for China, and the best protection of its national interests.

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Protean ‘National Security’ in Global Trade Wars, Investment Walls, and Regulatory Controls: Can ‘National Security’ Ever Be Unreviewable in International Economic Law?

Published on April 2, 2018        Author: 
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National security seems to be the protean norm du jour in international economic law these days.  On 23 March 2018, the United States’ Trump Administration imposed a 25% tariff against around US$60 billion of imports from China, 15 days after the United States imposed tariffs on imports of steel and aluminum (25% on steel imports, and 10% on aluminum imports) from around the world.  US President Trump accused China of “economic aggression”, and is leaving the door open for negotiations with all States to force them to take measures to eliminate the United States’ “$800 billion trade deficit with the world”.  Chinese President (for life) Xi Jinping’s administration subsequently announced preliminary retaliatory tariffs against over $3 Billion in American products such as apples, steel, and pork, even as US Treasury Secretary Steve Mnuchin stated that the tariff wars are part of the United States’ negotiation strategy with China. (Both sides are reported to be quietly negotiating, even amid the climate of mutually announced tariffs. China has started making concessions, such as relaxing its foreign investment rules and expanding imports of US semiconductors.)  Even as World Trade Organization (WTO) Director General Roberto Azevedo cautioned against the impact of such a trade war on the global economy, the WTO did not deny that under GATT Article XXI(b)(iii) (Security Exceptions), the United States could take “any action which it considers necessary for the protection of its essential security interests…taken in time of war or other emergency in international relations.”  President Trump’s two presidential proclamations declaring tariffs against aluminum imports and steel imports heavily refer to the impairment of the United States’ national security interests as the basis for imposing tariffs.  The United States provisionally exempted NAFTA partners Canada and Mexico from the steel and aluminum tariffs, using the bludgeoning effect of threatened tariffs in the pending NAFTA renegotiations.  Last weekend, South Korea acceded to the United States’ demands to revise their KORUS Free Trade Agreement, which US President Trump is now tying to the outcome of its forthcoming summit with Kim Jong Un of North Korea. Trade is now more deliberately leveraged as a national security issue.

Significantly, no State in the international community seriously challenges that the security exception in GATT Article XXI is a self-judged matter that takes a governmental measure out of the ambit of WTO law. (Qatar’s pending complaint against the United Arab Emirates (UAE) at the World Trade Organization – previously featured here – seeks review of any Member’s assertion of national security under GATT Article XXI, but it appears other Members such as the United States have taken the opposing view that “national security issues are political and not appropriate for the WTO dispute system.”)  Even the European Union, which threatened tariffs against the United States if it was not exempted from the US tariffs on steel and aluminum (it eventually got the exemption for all EU Members), did not challenge the factual basis behind the United States’ use of the national security justification in its presidential proclamations on tariffs against steel and aluminum imports.  The United States had invoked, as its factual basis for invoking national security, the supposed “weakening of (its) internal economy, leaving the United States almost totally reliant on foreign producers…that is essential for key military and commercial systems”.  Considering that President Trump had just boasted about the tremendous strength and independence of the United States economy at the World Economic Forum in January 2018, it was baffling that the United States made this seeming volte face to invoke GATT Article XXI.  The Trump administration has also invoked the President’s self-judged discretion to decide when national security is impaired in the case of foreign investment into the United States, most recently to block Singaporean company Broadcom’s US$117 billion takeover of Qualcomm, thereby increasing the number of blocked proposed acquisitions of United States businesses (by countries such as Germany, China, and Singapore) on national security grounds. 

And yet, it is not only the United States that has resorted to national security reasons in the past year for retaliatory trade measures, investment restrictions, and other international economic measures.  The European Commission anchors its new proposal to tax digital business activities; the forthcoming implementation of the General Data Protection Regulation (GDPR) (ensuring data privacy and protection rules applicable to all companies processing data of EU nationals, whether located in the EU or elsewhere); as well as the recently opened investigation of the massive data leak from Facebook and Cambridge Analytica, ultimately on the Commission’s many concerns about EU Members’ regional, national, and economic security.  China has set up its own national security review of foreign investments into China, mirrored by Australia’s recently strengthened national security review of foreign investments (China-sourced or otherwise) into critical infrastructure.  India and Sri Lanka have also raised national security concerns over China’s One Belt, One Road (OBOR) program.  Nigeria demurred from joining the recently-launched 44-member African Continental Free Trade Area, citing economic and security implications of the agreement.

Such muscular and frequent assertions of ‘national security’ as justifications for international economic measures does bring to the forefront the timeless debate on whether international courts and tribunals can review a State’s assertion of ‘national security’.  In this post, I maintain my key argument in 2012 that modern international law still does not subscribe to the classical view of ‘national security’ as a Schmittian exception – e.g. one that takes a measure justified by national security outside of the purview of any law – but instead continues to regulate the safety-valve functions of national security or national emergency clauses as exceptions, to the point that the mere assertion of national security cannot completely take out an economic measure from the purview of international economic regulations either.  Whether a State invokes ‘national security’ to impose or threaten measures for bargaining leverage in negotiations or to force reductions of trade deficits; or to impose new economic regulations, review, or restrictions against foreign businesses – the current framework of international law and international economic law has at least developed to the point that there will be some review of a State’s asserted national security justification, even if it is only for international tribunals to preliminarily decide whether they have jurisdiction over the disputes before them.  I refer to dispute settlement under the WTO, foreign investment arbitral tribunals, international investment court proposals such as China’s investment court for OBOR projects and the EU’s multilateral investment court, as well as traditional court adjudication under the International Court of Justice.

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Achmea: The principle of autonomy and its implications for intra and extra-EU BITs

Published on March 27, 2018        Author: 
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On 6 March 2018, the CJEU issued its judgment in Case C-284/16 Achmea, where it opined that intra-EU BITs and in particular their ISDS provisions are incompatible with the principle of autonomy of EU law. In a rather brief judgment, the Court found the ISDS provision under the Netherlands-Slovakia BIT has an adverse effect on the autonomy of EU law, as the latter in enshrined in Articles 344 and 267 TFEU. With this judgment the Court gave a definitive answer to a long-awaited controversial issue as to whether international investment treaties between EU Member States are compatible with EU law. Yet, Achmea does not provide conclusive answers as to the interaction between EU law and international investment law, neither with regard to intra-EU BITs, nor for extra-EU BITs. Considering that the compatibility of ISDS under CETA with EU law is challenged by Belgium and is the subject matter of a pending Opinion, Achmea adds a, admittedly important, piece to the puzzle.

In finding an incompatibility between an intra-EU BIT with EU law, the Court focused exclusively on the ISDS mechanism and its effects on the autonomy of EU law. Although the parties to the dispute and in particular the Commission argued about the existence of incompatibilities on other grounds as well, the most important being non-discrimination, the Court chose to address only the autonomy concerns. Referring to its landmark judgment on autonomy, Opinion 2/13, the Court confirmed the key role that autonomy plays for identifying the compatibility of international dispute settlement with EU law. The argument used is easy follow: the principle of autonomy protects the full effectiveness and consistency of EU law, which entails the uniform interpretation of EU law. Article 19 TEU guarantees autonomy by providing exclusive jurisdiction to the CJEU to offer authoritative interpretations of EU law and enabling a judicial dialogue with national courts via Article 267 TFEU. Investment arbitration under intra-EU BITs can have an adverse effect on autonomy, as investment tribunals a) can decide matters of EU law and b) are not subject to the CJEU’s control.

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A New Legal Framework for the Enforcement of Settlement Agreements Reached through International Mediation: UNCITRAL Concludes Negotiations on Convention and Draft Model Law

Published on March 26, 2018        Author:  and
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Introduction

On February 9, 2018, the United Nations Commission on International Trade Law’s (“UNCITRAL”) Working Group II concluded negotiations on a convention and model law on the enforcement of settlement agreements reached through international commercial conciliation or mediation. Although the instruments still need to be finalized by UNCITRAL and then ratified by States, the completion of the drafting stage marks an important development in international commercial dispute resolution.

Given the debate regarding the increasing costs and time involved in international arbitration, greater attention has been paid to mediation as a method of dispute resolution. The flexibility involved in mediation eliminates many of the hurdles of arbitration, including bypassing disclosure. However, once a mediated agreement is reached, there is no comprehensive legal framework for the enforcement of international settlement agreements. The result is that parties are forced to attempt to enforce such agreements in domestic courts, typically as an ordinary breach of contract claim.

As a result, when a party to a mediated settlement agreement reneges on its obligations or otherwise refuses to uphold the terms of the agreement, the other party has had to commence separate proceedings in court or through arbitration to enforce the agreement. This has essentially meant initiating a new dispute after resolving the underlying one, adding increased costs and delay.

Through the creation of clear and uniform framework for the recognition of settlement agreements resulting from mediation – akin to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (“New York Convention”) – the new draft convention and the draft amended model will increase the predictability of settlements achieved through international mediation.

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