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Trade Talks and Attorneys General: Moving Forward, Backwards, or Just Sideways – And Why Should We Care?

Why should we trade at all?[1] From the time the first village that learned to make superior arrowheads made contact with a village that had invented a better fishhook, and they agreed to make an exchange, trade has been viewed by economists as a way to provide each group with better benefits at a lower overall cost than either could achieve on their own. Nevertheless, it is still likely that the fishhook makers in village one and the arrowhead makers in village two were skeptical that these trades were a good idea. These same concerns and trade-offs between getting better products at lower costs for society as a whole with inflicting potential losses on small groups who lose their existing business have continued to play out ever since.

In the present day, as trade negotiations have moved beyond merely removing protectionist tariffs and expanded wide-ranging efforts to facilitate commerce by removing barriers and standardizing regulations, those initial concerns have been overlaid with issues that echo many of the federalism debates that resonate at a national level. Will pressures for uniformity create a “race to the bottom?” How are regulatory and business concerns to be balanced in setting standards? And how, when, and where should regulated parties be able to challenge the regulations? Each of these long-standing debates has its counterparts in current trade negotiations and, as the parties charged with enforcing state regulatory measures, attorneys general may find many points of interest and concern in the present debates, including tobacco.

History of Trade Negotiations

A bit of history can help to set the stage. A series of trade liberalization talks began after World War II. The first five rounds of negotiations, which produced the General Agreement on Trade and Tariffs (GATT) and subsequent amendments thereto, took place between 1947 and 1960; involved between 13 and 38 countries; dealt only with tariffs, and took between five and 11 months each to negotiate. Thereafter, the size of the negotiating groups and the topics at issue began to expand. Not surprisingly, the timing for completion of each round also began to expand with each new round. The sixth round began in 1964, involved 62 countries, including the members of the European Economic Community as the forerunner of the European Union (EU), covered tariffs and anti-dumping measures, and took 37 months to negotiate.

The seventh round began in 1973, involved 102 countries, took 74 months to negotiate and covered not only tariffs but also a variety of non-tariff trade barriers. It did result in huge reductions in tariffs, some $300 billion compared to $40 billion in the sixth round and about $5 billion in the fifth round. The eighth (Uruguay) round began in 1986, lasted 87 months, involved 123 countries and resulted in the creation of the World Trade Organization (WTO), which has grown to 159 members since its establishment in 1995. It dealt with both tariffs and non-tariff measures relating to goods ranging from machinery to intellectual property, textiles, agriculture, and more, and created dispute settlement mechanisms between governments. Another accomplishment of the Uruguay round was the creation of the General Agreement on Trade in Services (GATS) which had the same goal of removing barriers to trade in services as had previously been done with respect to trade in goods.

After resting from those labors for a few years, the WTO members initiated a ninth round of negotiations in November 2001, known as the Doha Round. This round sought to tackle tariffs and non-tariff measures in areas ranging from agriculture to automobiles, patents to pharmaceuticals, textiles to tobacco, and everything in between; as well as setting standards for labor and environmental protection (to keep standards in more regulated countries from being dragged down by competition from less protective economies); and prescribing provisions for protecting competition, investment, encouraging transparency in regulatory provisions and much more. The countries belonging to the WTO span the entire range of development from the most advanced economies in the United States, Canada, and the EU to recently emerging and fragile economies in Africa and Asia. As a result, it was recognized that concessions that the former could make easily might not be possible in the short term for the latter economies and would have to be phased in, adding further complexity to the process of trying to reach a consensus that 160 diverse entities could accept.

Not surprisingly, in light of the history above, the Doha Round, which will have been in progress for 156 months by this November, is nowhere near reaching an agreement. Substantial progress has been made in numerous areas, but a full agreement, spanning the great range of topics to be covered and the full range of countries involved, has been stymied time after time. Each country’s perceived needs to protect its own internal, parochial interests has, at one point or another, precluded its ability to take the final steps towards agreement. Indeed, even when the parties decided to step back in December 2013 and just try to implement a set of procedural accords intended to help facilitate the processing of goods whose import and export had already been agreed to (such as agreeing on a common documentation protocol or common provisions for how regulations would be published), that agreement foundered when India refused to allow it to go into effect in July 2014 pending resolution of some of its other substantive concerns.

Other Agreements

The net result of this gridlock on making further progress at the full international stage has been a plethora of negotiations of smaller bilateral, multilateral, and regional agreements between various countries around the world. The North American Free Trade Agreement (NAFTA), which shortly predated the WTO, was one of the first such. Since then, the United States has negotiated a number of “Free Trade Agreements” (FTAs) with other countries including Singapore, Korea, Chile, Columbia Australia, and New Zealand as well as the Central American Free Trade Agreement (CAFTA). While these agreements have become somewhat more standardized, each represents a major amount of negotiating time and a separate approval process in Congress. Moreover, because agreements may often have “most favored nations” clauses, it is difficult to agree to a narrowly-tailored concession in one agreement because it may have effects on other agreements. Plus, proceeding on a one-by-one basis can leave U.S. exporters facing pressures in countries where the United States has not yet reached agreements but its competitors, such as India, China, Japan, or others have. To date, the efforts, while useful, have only resulted in agreements that go beyond the existing GATT and GATS provisions with a relative handful of countries, many of which are not the largest trading partners for the United States.

Current Negotiations

Accordingly, there are several major efforts going on at this point. One, the “Trans-Pacific Partnership” (TPP) has been in progress since 2010, and includes eight other countries in Asia as well as on the western rim of South America. It initially did not include Canada, Mexico, or Japan, but they all asked to be included during the negotiations and have since been added to the process. The second, the “Transatlantic Trade & Investment Partnership” (T-TIP) was begun between the United States and the EU in mid-2013. In both cases, it was hoped that the relatively smaller number of countries and the fact that there are already existing agreements with some of the negotiating partners such as Australia, Chile, Singapore, Canada and Mexico in the TTP, for instance or that regulatory standards were relatively similar (between the United States and the EU) could make agreement more attainable. If those agreements are reached, it is likely that others will seek to join them over time such as India, Indonesia, Thailand, and the like for the TPP or Turkey for the T-TIP. In addition, there is a separate effort to negotiate an agreement just on services known as the Trade in Services Agreement (TISA) with Australia, Canada, Chile, Colombia, Costa Rica, Hong Kong, Iceland, Israel, Japan, Lichtenstein, Mexico, New Zealand, Norway, Pakistan, Panama, Paraguay, Peru, South Korea, Switzerland, Taiwan, Turkey, the United States and the EU. This total of 51 countries represents two-thirds of the world trade in services.

Overarching Issues

While the benefits of wider trade agreements would seem to make it logical that they would be agreed to, it is still far from clear whether any or all of those agreements will ever come to fruition. There are numerous specific issues holding up overall agreements, such as opening Japan’s market to U.S. automobiles, tariffs or quotas on textiles coming from Vietnam and the like, but there are three overarching issues that appear to come up over and over again as reasons why many of those on the outside of the negotiations – whether in or out of government – continue to be concerned. Those issues in turn are ones that may bear on the interests of the attorneys general as such. They are:

1. Concerns over the transparency of the negotiating process and the ability of citizens to weigh in on and/or control the final outcome. Trade agreements have long been negotiated behind closed doors. That is perhaps because they are viewed as being more akin to confidential commercial contract negotiations or because the possibilities of reaching compromise are difficult enough without continued attacks at every sign of movement. That is particularly true when one is trying to balance the interests of numerous competing parties (internal and external) and grows more difficult as the group of negotiating parties expands. And, by the same token, when a delicately balanced agreement is finally reached and works only by virtue of all of its constituent parts, it is not difficult to see why the negotiators are not anxious to have each ratifying party begin to qualify its agreement or seek “just a few minor changes.”

Yet, it is equally clear that when changes of this magnitude are being proposed, which can have dramatic effects on people’s lives and well-being, that “trust me” and “just vote yes” are not the most reassuring ways of proceeding. The Affordable Care Act, for instance, has been controversial enough – how much more so would it have been, if all of its terms were kept secret until the final package was presented, and it was then presented to Congress to be voted on a “take it or leave it” basis? In truth, of course, much of what is being negotiated in trade agreements is continually leaked to interested groups as time goes by, but that is far from the normal full and open debate that accompanies other legislative changes.

It is not clear exactly how much can be done to open up the process further but this remains one of the persistent concerns. The Office of the U.S. Trade Representative has begun to take some useful steps, though, in this regard in recent months. Postings on its website gives a full summary of both the TPP and TTIP negotiations in terms of their general goals and objectives, the financial benefits for the United States, and the specific goals and objectives in a variety of areas, such as textiles, services, labor, environment, investment, state-owned enterprises, e-communications, government procurement and more. See http://www.ustr.gov/ttp/summary-of-US-objectives and http://www.ustr.gov/about-us/press-office/press-releases/2014/March/US-Objectives-US-Benefits-In-the-TTIP-a-Detailed-View

for introductions to both sets of negotiations. A report on the status of TTIP negotiations from the European perspective at the end of July is available at http://trade.ec.europa.eu/doclib/docs/2014/july/tradoc_152699.pdf.

2.Concerns over the standardization of regulatory regimes. The second primary concern is one that often arises when business, rightfully so in many cases, complains about the difficulty in dealing with different regulatory regimes. In one recent article, for instance, the head of the German Engineering Association wrote about the problems its members faced in trying to sell their machines in Europe where a particular part of the wiring was required to be blue, while in the United States, the same wiring was required to be white. It is highly unlikely that there is any regulatory reason why blue is inherently more protective than white or vice versa (as opposed to the principle of requiring particular types of wires to always be the same color to avoid confusion). Surely, everyone can agree that there should be some mechanism by which both groups can settle on the same color and use it henceforth.

But many issues are not so susceptible to the “just make a choice” approach and the differing regulatory approaches of separate countries can be extremely difficult to reconcile. Where the facts are rarely fully settled and where one country’s or group’s premium on applying a precautionary principle may be viewed by another group as protectionist “junk science,” finding common ground can be difficult if not impossible. In the United States, our federalist system often has a federal uniform standard being a floor for state action; at other times, it sets a ceiling; and at other times, no standard applies and the states act on their own.

Picking which approach to take has never been an easy process within the United States and such disputes provide fodder for Supreme Court decisions on a regular basis. The issues can be even more difficult in the context of trade talks, since negotiators are pulled back and forth by the concerns of their own business interests which would generally always prefer less regulation and are happy to have trade negotiations be a basis for removal of restrictions; and the competing concerns of the regulators who not only seek to defend their own standards but also often cast envious glances at more stringent requirements that have been achieved elsewhere and hope the talks can be used to standardize upwards.

While all of the negotiating parties insist that valid regulatory concerns will not be cast aside in the name of trade, and the trade agreements do frequently refer to protecting the right to regulate, such assurances are inevitably caveated with language such as “so long as the provisions are not a disguised barrier to trade” or similar words that arguably take back as much as they give. At a minimum, they give businesses room to contend that the health and safety provisions are not really protected under the trade agreements. When one multiplies the question of blue versus white wire – and should we regulate the color at all – a thousand times over, it is not hard to see why progress is slow. When one moves to more controversial areas such as whether genetically modified crops or limitations on using geographically associated food names (such as “champagne”) should be allowed, the reasons for gridlock are obvious.

Tobacco

Tobacco is one current area where trade issues, under current law, are being raised as ways of attacking regulatory efforts for reasons that are far from the original goals of lowering tariffs, or even the more recent goals of protecting foreign investors from being discriminated against. There are a number of areas that have been contested but the most significant currently has to do with the so-called “plain packaging” movement. Australia has, for instance, mandated that graphic cigarette warnings must cover 75 percent of the front and 90 percent of the back of packages, that the packages must all be the same color, and that the brand name can appear in only a small, uniform font. The result is that, instead of the bright cacaphony of brand names and logos on packages, one sees only a sea of brown, interrupted with horrific pictures of diseased lungs and gangrenous feet.

Philip Morris has sued Australia, by way of its Hong-Kong subsidiary, arguing that Australia is violating a treaty between itself and Hong Kong with respect to the proper treatment of investors.[2] In that investor state dispute settlement (ISDS) suit, it is arguing that Australia has “expropriated” its trademark because it has prohibited Philip Morris from using the mark, even though Australia is not using the mark itself nor allowing any other entity to use it. In short, Philip Morris is contending that it has an inalienable right – protected by the trade agreements – to use its trademark even if regulators believe that barring its use and requiring the current form of packaging would produce health benefits. (The data to date shows that smoking in Australia fell at its fastest pace in two decades after the plain packaging was introduced.) Philip Morris is seeking substantial damages from Australia based on its lost sales. It has also sued Uruguay, which also passed a strong packaging law in 2009 that required health warnings over 80 percent of the packages. That ISDS suit sought $25 million from Uruguay which expected to have to spend at least $8 million to defend the law. Other suits have been filed against packaging limits in the EU, and New Zealand, which was poised to follow Australia’s lead, has been holding back to see the outcome of the litigation.

In light of these suits, Malaysia has proposed that tobacco be carved out of the TPP negotiations altogether in light of its unique status, i.e., a product that has no uses that do not cause adverse health effects. The United States did not support that proposal, proposing instead (according to leaked text) language that would first make explicit that an exception in the TPP for measures necessary to protect human health applied to tobacco health measures and second require that there be mandatory consultations between the regulators of the two countries before governmental challenges were initiated. That proposal, however, would not limit the types of ISDS challenges noted above.

Much of the opposition to Malaysia’s proposal was based on the argument that it would create a “slippery slope” that would make a precedent for carving out other undesirable products from the TTP coverage, despite the supporters’ argument that it would be a “tobacco only” provision. On the other hand, many outside parties argued that the United States’ position was too weak in that a) there was really no dispute that tobacco regulations raised health issues but investors could still attack the regulation, and b) a mere consultation requirement for regulators with no mandated action after those discussions gave no assurances that this would have any protective effect. A NAAG letter signed by 48 attorneys general was sent to the U.S. Trade Representative Michael Froman on Feb. 5, 2014, making those points, http://www.naag.org/assets/files/pdf/signons/2014-02-05%20TPP%20Final%20Letter1.pdf. To date, nothing further has been decided in this regard with either the Malaysia proposal or the U.S. language appearing to have gained much traction. In view of the ongoing efforts in this country to deal with packaging changes pursuant to the U.S. Food and Drug Administration’s (FDA) regulatory authority, the issue of whether such changes, if viable under U.S. law could still be attacked under the trade agreements remains a concern.

3. Investor-State Dispute Settlement (ISDS) Provisions. This remains one of the most controversial areas in the various proposals and is one in which it appears the U.S. position may be losing support. This provision, unlike the general dispute settlement provisions in the WTO agreements, does not involve actions between the sovereign signatories to the agreements. Under the WTO, an aggrieved company (such as Boeing or Airbus, both of whom asserted they were hurt by subsidies granted by the government of the other party), must convince the government to decide whether to litigate or negotiate the issues. Under ISDS, however, private companies are allowed to assert their own rights – as third-party beneficiaries – of the FTAs. The suits are brought before private ad hoc arbitration panels, whose members may at other times represent the same or similar parties as those they are currently judging. The members serve on a one-time basis (i.e., they have no form of judicial tenure); decisions do not have express precedential value; and there is no over-arching appellate body that can bring uniformity to the results. While there have been improvements with respect to the transparency of the hearings, the mechanisms to screen out frivolous claims, and the ability of the process to be open to outside parties, it remains a private dispute resolution mechanism, not a system of true judicial review.[3]

The original argument was that this process was needed because businesses were operating in countries that did not have well-developed and reliably functioning judicial systems. As such, it was argued that the arbitration process was needed to protect investors by ensuring that they had a viable place in which to bring their claims. One argument against the use of outside arbitrators, though, was that, exempting foreign investors from any need to deal with the internal court system relieved any pressure on those systems to improve. There was also a great deal of concern expressed, from the beginning, about allowing such a process for foreign investors in the United States where there clearly is a fully functioning court system but the argument was always that this was needed for U.S. businesses in those less-developed judicial systems and it would not be agreed to if it were not reciprocal.

In the negotiations for the stand-alone Australia FTA, however, Australia refused to agree to include ISDS provisions and the United States agreed to go along with that refusal. However, rather than signaling any change in the U.S. position, it returned to insisting on this provision, not only in the other FTAs agreed to since then, but also in the TPP and T-TIP negotiations. The latter, in particular, has raised some eyebrows since one again would normally assume the courts in the EU were functional and adequate to handle these issues (especially since those courts already handled disputes between different members of the EU). The explanation from the Office of the U.S. Trade Representative, though, has subtly morphed in recent years. The issue now, it is argued, is not that the courts are inadequate but rather there is a concern about favoritism or preference for the local government that exists wholly apart from the adequacy of the courts. Under this analysis, it makes no difference how advanced the court system is; the ISDS procedures are still necessary to assure foreign businesses that they will be treated fairly.

This leaves aside the question of whether a local business would not face the same concerns about the fairness of the state courts, for instance, when it is suing the state in those courts, or why a foreign investor should have more rights than that local business. But, even assuming there was some added degree of potential prejudice and concern – somewhat akin to the nature of the concerns about suits between citizens of different states that resulted in placing diversity clause jurisdiction in the neutral federal courts – the question remains whether ISDS is the proper way to approach this. That is particularly true when the ISDS procedures are totally open-ended and have no sunset date. At least when the argument was that some court systems were not advanced enough, one could argue that a particular system passed the bar now or would do so in the future and these “special treatment for foreign investor” provisions should phase out eventually. But, under the new approach, there would never be a court system that would pass muster and the ISDS rights would never terminate.

Judges

An alternative approach, though, that might better address the concerns about a permanent non-judicial regime for foreign investment litigation against government regulations might be to work towards establishment of a “Court of International Trade” with designated permanent judges with life-time tenure or at least extended terms of office who would not be subject to conflicts of interest and who could produce a body of precedents for others to rely upon, as well as a “Supreme Court of International Trade” that could hear appeals from the individual judges or panels and produce uniform results. That would serve the twin goals of providing a deciding body that was not beholden to any one country, while still being an independent judiciary, not just an ad hoc arbitration system.

The EU put the investor protections part of the negotiations (including the ISDS provisions) on hold earlier this year while it engaged in a public consultation process and received almost 150,000 comments, with some 99 percent coming from individuals. That process closed at the end of July 2014 and the EU is busily engaged in analyzing them now. Until that process is completed, it will not be known if the EU will support or reject these types of provisions, but it is clear that a number of members of the European Parliament have spoken out against such provisions and questions have been raised by legislators in this country as well. In any case, this is clearly one of the significant areas of concern in these agreements – deciding how challenges to regulations will be resolved may turn out to be a major factor for the parties in trying to decide the substance of those regulatory measures.



[1]There are a large number of articles written over the years with titles that are a variation on “Why Trade Matters.” The most recent such, which has an excellent summary of general trade principles, a description of the historic background of the trade agreements, and a discussion of the current status of negotiations was put out by the Brookings Institute in August 2014 (http://www.brookings.edu/research/papers/2014/09/why-trade-matters-sapiro).

[2]That form of suit – the so-called “investor state dispute settlement” mechanism – is the third overarching area of concern and will be in the article's third point. Five other tobacco-producing countries--Honduras, Cuba, the Dominican Republic, Ukraine, and Indonesia--have also sued Australia under the existing WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (or TRIPS) making somewhat similar arguments. One of the most controversial aspects of the suit against Australia was that Philip Morris reorganized its business just before bringing suit so as to place its Australian sales under the Hong Kong subsidiary – which did have a treaty with Australia – unlike the parent, which is based in Switzerland which does not have any such treaty. This has been attacked as “treaty shopping,” and compared to the forum shopping that courts routinely denounce.

[3]Much the same process (and criticism) applies to the arbitrations under the WTO process between governmental entities, but there is a greater freedom for the governments to accept or refuse to abide by the decisions of the WTO panels albeit there may be certain consequences for a failure to do so. The ISDS decisions are directly enforceable against the sovereign government if it loses.

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