COVID-19 – WTO report on medical goods; FAO report on food security

The World Trade Organization has a page on its website that is dedicated to COVID-19 including references to statements from various governments, international organizations, business groups, information from the WTO itself including a compilation of notifications by Members of actions (whether trade limiting or trade expanding) taken in response to COVID-19, and links to a range of websites providing important information on the pandemic. Joint statements are also included. See today’s joint statement between the WTO and the World Customs Organization, https://www.wto.org/english/news_e/news20_e/igo_06apr20_e.htm.

Last Friday, April 3rd, the WTO released a sixteen page note entitled “Trade in Medical Goods in the Context of Tackling COVID-19”. https://www.wto.org/english/news_e/news20_e/rese_03apr20_e.pdf. The note is very useful in terms of providing some definition to a range of products relevant to handling the COVID-19 crisis, identifying major importers and exporters of various product types and providing information on tariffs on the product categories for all WTO Members. The note identifies the following “key points”:

“• Germany, the United States (US), and Switzerland supply 35% of medical products;

“• China, Germany and the US export 40% of personal protective products;

“• Imports and exports of medical products totalled about $2 trillion, including intra-EU trade, which represented approximately 5% of total world merchandise trade in 2019;

“• Trade of products described as critical and in severe shortage in COVID-19 crisis totalled about $597 billion, or 1.7% of total world trade in 2019;

“• Tariffs on some products remain very high. For example, the average applied tariff for hand soap is 17% and some WTO Members apply tariffs as high as 65%;

“• Protective supplies used in the fight against COVID-19 attract an average tariff of 11.5% and goes as high as 27% in some countries;

“• The WTO has contributed to the liberalization of trade medical products in three main ways:

“➢ The results of tariff negotiations scheduled at the inception of the WTO in 1995;

“➢ Conclusion of the plurilateral sectoral Agreement on Pharmaceutical Products (“Pharma Agreement”) in the Uruguay Round and its four subsequent reviews;

“➢ The Expansion of the Information Technology Agreement in 2015.”

As is true with any analysis of data, the reader needs to understand what is covered and what is not and how good a fit the data provided have with the topic being discussed.

For example, the note reviews four categories of products relevant to the world addressing the COVID-19 pandemic (page 1):

  • “medicines (pharmaceuticals) – including both dosified and bulk medicines;
  • “medical supplies – refers to consumables for hospital and laboratory use (e.g., alcohol, syringes, gauze, reagents, etc.);
  • “medical equipment and technology; and
  • “personal protective products -hand soap and sanitizer, face masks, protective spectacles.”

While the four categories are, of course, relevant to addressing the COVID-19 pandemic, the products covered by the tariff schedule categories are both over- and underinclusive if one is trying to understand the size of global trade in medical products directly relevant to the global efforts to address COVID-19.

The report’s data are overinclusive because the Harmonized System of Tariffs used by most nations is only harmonized to the six-digit level of specificity. The categories included in the WTO note cover both COVID-19 related products and many others. Stated differently, nearly all of the product categories identified in Annex 1 to the note include at least some items that are not germane to the current pandemic. This is a limitation on the usefulness of the data flowing from the lack of more specific classifications that all countries adhere to. As the six-digit data are all that are available with a consistent definition around the world, it is not surprising that the WTO relied on the data. Arguably better, but not uniform data could have been derived by reviewing the 8-, 9- or 10-digit statistical data for imports and exports of at least major Members, but that was not done.

Similarly, the product coverage is underinclusive as recognized in the WTO note (page 2). “It should be noted that this note focuses solely on the final form of these products and does not extent to the different intermediate products that are used by global value chains in their production. The protective garments for surgical/medical use are not included in the analysis, because it is impossible to distinguish them from general clothing product in the HS classification.”

As governments and companies have articulated over the last several months, many of the key final products (e.g., ventilators) require a large number of inputs which are often sourced from a variety of suppliers around the globe. For example, one ventilator company which assembles the ventilators in the United States is reliant on circuit boards from its facility in China to maintain or increase production. Other companies bring various inputs in from Canada or Mexico or other countries as well as shipping U.S. components to other countries for final assembly. The same reality is obviously true for producers of medical goods in other countries as well. Thus, an inability to cover inputs significantly understates global trade volumes of products relevant to addressing the COVID-19 pandemic.

Similarly, there are shortages in many countries of the protective garments for which no data are included. These are important products traded that are directly relevant to the world’s ability to respond to COVID-19. The lack of coverage of those products understates the importance of personal protective products to the total and understates global trade.

The above is simply to say, the sections of the WTO note that look at trade patterns (imports, exports, leading players) are helpful in identifying possible breaks between products and possible major players but the data may be significantly off from the actual split among products or role of major players if complete data limited to products relevant for addressing COVID-19 were available. It may also understate the importance of keeping markets open even if there are relatively few imports of finished products.

To explore how overstated data may be, if one looks at the HS categories shown in Annex 1 for personal protective products and looks at the United States U.S. imports for consumption for 2019 at the 10-digit HTS level of detail, the top seven 10-digit categories by customs value accounted for more than 72% of the $17 billion in imports. Yet each of the categories would contain many products not actually relevant to efforts to address COVID-19. In fact five of the seven categories are basket categories.

3926.90.9990OTHER ARTICLES OF PLASTIC, NESOI
6307.90.9889OTHER MADE-UP ARTICLES NESOI
3824.99.9297CHEMICAL PRODUCTS AND PREPARATIONS AND RESIDUAL PRODUCTS OF THE CHEMICAL OR ALLIED INDUSTRIES, NESOI
9004.90.0000SPECTACLES, GOGGLES AND THE LIKE, CORRECTIVE, PROTECTIVE, NESOI
3926.90.7500PNEUMATIC MATTRESSES & OTHR INFLATABLE ARTICLES,NESOI
3824.99.3900MIXTURES OF TWO OR MORE INORGANIC COMPOUNDS
3926.90.4590OTHER GASKETS AND WASHERS & OTHER SEALS

Similarly, the analysis of applied tariff rates is useful in showing rates for product groupings and the rates for individual countries for those product groupings but may be less useful in identifying the assistance tariff reductions would have in the present time of the pandemic. Obviously, tariff reductions by any Member that imposes them on imported products relevant to the pandemic would reduce the cost for the importing country of the needed materials. But the extent of assistance varies significantly depending on the Member as the data in Annex 2 show.

As the EU/EEA/United Kingdom and the United States account for 73.9% of the confirmed cases in the world as of April 6, 2020, a review of the applied rates for those countries would identify likely benefit from tariff reductions by the countries with the major outbreaks at the moment. The EU has an average applied rate of 1.5%, the U.S. an average applied rate of 0.9%, Norway 0.6% and Switzerland 0.7%. These rates don’t include any special duties, such as US duties on China flowing from the Section 301 investigation (with some products being subject to potential waiver of additional duties). Thus, for the vast majority of current cases, the importing countries’ applied rates are very low and hence not a significant barrier to trade.

https://www.ecdc.europa.eu/en/geographical-distribution-2kistan019-ncov-cases; https://www.ecdc.europa.eu/en/cases-2019-ncov-eueea

Other countries where the reach of the pandemic may intensify typically have much higher applied tariffs. As case loads intensify in other countries or in anticipation of such potential eventualities, countries with higher tariffs should be exploring autonomous duty reductions to make imported products more affordable. India has an average applied tariff of 11.6%; Pakistan an average rate of 10.0% and Malaysia a rate of 11.7% to flag just three Members with rates at or above 10%.

The WTO note is embedded below.

rese_03apr20_e

Food security and the FAO analysis of current agricultural product availability

In a prior post, I reviewed the compounding problems during the COVID-19 pandemic of some countries starting to impost export restraints on selected products (e.g., rice, wheat) to protect food supplies. Countries reported to be imposing export restraints on food had been Russia, Ukraine, Kazakhstan and Vietnam. A series of articles in Asian and European press have noted that Malaysia, the Philippines, Thailand, Indonesia, Myanmar and Cambodia have also introduced various restraints as well. Major agricultural groups in Asia are warning that disrupting movement of food (including movement of workers to help harvest, etc.) could lead to food shortages in Asia and have reviewed that Asian countries import some 220 million tons of agricultural products which underlines the need to keep markets open. See, e.g., https://www.scmp.com/week-asia/politics/article/3078376/coronavirus-food-security-asias-next-battle-post-covid-world; https://www.dairyreporter.com/Article/2020/03/30/Major-food-shortages-possible-in-Asia-says-FIA#.

While fear can lead to panic and various border measures, the actual situation globally as laid out by the Food and Agriculture Organization of the United Nations (“FAO”) in a recent paper is that there are more than sufficient supplies of food. The key is minimizing disruptions to production and distribution. This is not a period where major disruptions from drought or floods have caused shortages of products. Specifically, the FAO’s Chief Economist prepared a document entitled “COVID-19 and the risk to food supply chains: How to respond?” which was released on March 29. http://www.fao.org/3/ca8388en/CA8388EN.pdf. The paper starts with a section entitled “What we know”:

“Countries have shut down the economy to slow the spread of the coronavirus. Supermarket shelves remain stocked for now. But a protracted pandemic crisis could quickly put a strain on the food supply chains, a complex web of interactions involving farmers, agricultural inputs, processing plants, shipping, retailers and more. The shipping industry is already reporting slowdowns because of port closures, and logistics hurdles could disrupt the supply chains in coming weeks.

“In order to avoid food shortages, it is imperative that countries keep the food supply chains going. Unlike the 2007-2008 global food crisis, scarcity is not an issue this time. The supply of staple commodities is functioning well, and the crops need to be transported to where they are needed most. Restricting trade is not only unnecessary, it would hurt producers and consumers and even create panic in the markets. For high-value commodities that require workers (instead of machines) for production, countries must strike a balance between the need to keep production going and the need to protect the workers.

“As countries combat the coronavirus pandemic, they must also make every effort to keep the gears of their food supply chains moving.”

The paper then goes on to identify five actions needed to minimize the likelihood of food shortages arising during the pandemic. These actions are:

“Expand and improve emergency food assistance and social protection programs

“Give smallholder farmers support to both enhance their productivity and market the food they produce, also through e-commerce channels

“Keep the food value chain alive by focusing on key logistics bottlenecks

“Address trade and tax policies to keep the global trade open

“Manage the macroeconomic ramifications”.

With the number of countries already taking actions that are inconsistent with keeping global markets open for the movement of food supplies, the world is at risk of having a major complication added to the extrordinary economic shocks already being felt to address the health needs of the COVID-19 pandemic. Such a major complication would, as it did in 2007-2008, directly harm developing and least developed countries, countries least able to absorb additional shocks.

The report and a powerpoint from FAO are embedded below.

COVID-19-and-the-risk-to-food-supply-chains_-How-to-respond_

ca8308en

COVID-19, Recommendations from the ICC and from Global Services Coalition

As the toll from COVID-19 exceeds 51,000 deaths and one million confirmed cases, most of the attention globally has been on the health dimension of the pandemic, while governments struggle with inadequate global supplies for a rapidly growing crisis. With a lack of a vaccine and with the virus having reached most countries in the world, the focus of governments has understandably been on trying to “flatten the curve” to reduce the challenges to national health systems and the likely death rates.

But the need to engage in social distancing, usually reflected in stay at home recommendations or orders, is causing extreme disruption to many economies. The country with the largest number of confirmed cases, the United States, has witnessed roughly 10 million people filing for unemployment in just the last two weeks with many more likely in the coming weeks. The United States has passed three pieces of legislation to address various aspects of a national response to COVID-19 to address the economic challenges from the shutdown of large parts of the economy with a cost of more than $2 trillion (the Administration has used a figure of more than $6 trillion). Other countries are passing emergency legislation to deal with the human costs and extraordinary nature of the crisis. More than $5 trillion has been teed up globally by governments trying to help their economies and citizens survive the lockdown situations being imposed on many to stop the spread of the disease. That figure will certainly increase in the coming months as the full scope of the economic challenge becomes clear and hot spots shift from current locations to other countries.

Because of the extraordinary ramp up in infections in global “hot spots,” demand for medical equipment and supplies has outstripped prior global supply and inventories, leading a number of countries to push their industries to ramp up additional production in the hope of being able to get supplies up to demand levels and avoid the situation seen in some countries of medical staff having inadequate supplies and needing to determine who will get life saving equipment (e.g., ventilators) and who won’t because of shortages. Ability to meet local demand is complicated by export restraints, travel restrictions, lack of information (in some cases) and the level of coordination of government actions.

Prior posts have looked at various aspects of the COVID-19 crisis including communications from the G20 countries and the growing number of countries imposing restraints on export of agricultural products out of concerns for food safety.

This post looks at recommendations for government actions made by two global groups of businesses, the ICC and the Global Services Coalition. There can be little doubt that getting through the crisis requires not only action by governments but a strong relationship between business and governments to identify practical consequences on businesses and their employees and the ability of businesses to contribute to the needs of society.

The International Chamber of Commerce

On April 2nd, the World Trade Organization’s Director General Roberto Azevedo and the International Chamber of Commerce’s Secretary-General John Denton issued a joint call for greater communication with the business community to ensure government policies are effective in addressing COVID-19 while reducing damage to economies. https://www.wto.org/english/news_e/news20_e/igo_02apr20_e.htm.

“JOINT STATEMENT

“2 April 2020

“Heads of ICC1/ and WTO call for increased action on trade to ensure an effective response to COVID-19 pandemic and announce virtual business roundtable to provide concrete advice to governments.

“We are profoundly saddened by the suffering and loss of life the COVID-19 pandemic is causing around the world. This health crisis is also becoming a social and economic crisis, and we support governments’ efforts to mitigate the pandemic’s effects on jobs and growth, and lay the foundations for a strong and inclusive recovery.

“G20 leaders have clearly recognised the need for the international community to step up global cooperation in response to this crisis. The business community is—and will continue to be—an important partner in this response.

“Trade and trade rules have a crucial role to play in both the health and economic response to the crisis. We welcome the G20’s endorsement of this view, including their assertion that any pandemic-related trade measures should be ‘targeted, proportionate, transparent, and temporary.’

“We also underscore the importance of ‘actively working to ensure the flow of vital medical supplies, critical agricultural products, and other goods and services across borders,’ as well as the G20’s broader commitment to ‘minimise disruptions to trade and global supply chains’.

“We deeply share the G20’s concern about the impact of the pandemic on the most vulnerable, including developing and least developed countries, and on workers and businesses, including micro-, small-, and medium-sized enterprises (MSMEs).

“We are concerned about the severe disruptions to value chains in many sectors—with major implications for employment and the supply of goods, especially essential medical and food supplies. Bold and urgent leadership is required to keep trade moving and to secure jobs.

“Now is the time for concrete measures to respond to the economic dimensions of the pandemics. Business can play a key role in signalling where trade flows and production chains are being affected, helping to identify solutions that maximize health outcomes while minimising economic damage.

“It is increasingly clear that the economic downturn caused by the pandemic will necessitate a significant rebuild of domestic policies—and of international cooperation. In this time of uncertainty, leadership requires not only responding to the crisis at hand but providing a clear vision for the future. On-going efforts to improve and strengthen the global trading system, including the WTO, must therefore continue.

“With a view to providing additional concrete business recommendations to governments, ICC will work with its partners, supported by the WTO, to host an extraordinary virtual business roundtable. This virtual session will look to provide constructive recommendations to governments on trade policy measures that can be readily deployed to speed the response to the COVID-19 pandemic in the immediate and mid-term.

“1/ The International Chamber of Commerce is the institutional representative of over 45 million businesses. ICC’s recommendations on
trade policy and post-pandemic rebuilding were sent to governments and international agencies in a 28 March letter available here.”

The ICC in its 28 March 2020 letter to governments and international agencies had identified ten actions they recommended should be taken. https://iccwbo.org/content/uploads/sites/3/2020/03/g20-trade-ministers-letter-280320.pdf.

Specifically, the ICC made the following recommendations, the last three of which look to the future of the trading system versus dealing with the immediate challenges of COVID-19:

  1. “Eliminate tariffs on essential products
  2. “Expedite trade facilitation for essential products
  3. “Eliminate export curbs on essential products
  4. “Suspend all national public procurement regulations and state-required localisation measures that frustrate the cross-border sourcing of essential medical supplies
  5. “Keep cargo and transport moving
  6. “Extend timeframes for payments of duties and fees
  7. “Keep trade finance flowing
  8. “Comprehensively reform the WTO
  9. “Speed up the transition to digitally enabled trade
  10. “Enable digital trade through standardisation.”

Many businesses have suffered from reduced cash flow, reduced access to key inputs flowing from export restraints, and service challenges from travel restrictions. Government actions may address the health crisis but exacerbate the business challenges.

Some of the challenges to business may depend on technology developments/deployment, improved national and global information on medical supplies and equipment availability especially in light of ramped up production.

For example, Abbott Laboratories has developed a test that can be applied with results available within 15 minutes. Understandably, the early deployment of the tests are to hospitals anxious to have greater capacity for testing patients. But until there is greater availability of such time efficient tests and coordination with trading partners on testing crews of cargo planes, ships and other modes of transport, it is hard to see how countries with raging infection rates and general stay-at-home or lockdown requirements will be comfortable with the type of liberalization for transport personnel necessary to maximize keeping transportation avenues open.

The same types of concerns for wholesale testing, along with adequate personal protection equipment may be the key to ensuring farm labor and other labor shortages because of border restrictions can be addressed without jeopardizing health needs.

So hopefully the wealth of experience from the business community will be able to dialogue with governments not only on governmental needs and business recommendations on trade policy options to consider, but also on how business can help governments achieve important objectives where major impediments currently exist in terms of dealing with the health emergency.

Global Services Coalition

In an interconnected world, many service providers are in fact essential to addressing the COVID-19 pandemic both on the healthcare side and on supporting economic and other activity critical to the functioning of societies. Transport, food processing, distribution, grocery stores, information and technology communication services, financial services, installation and service workers for medical equipment would be some obvious examples.

On April 1, 2020, the Global Services Coalition issued a document urging governments to ensure the continued operation of essential services to address the COVID-19 challenges. https://www.thecityuk.com/assets/2020/Reports/100bfdd80d/Ensuring-resilience-of-global-supply-of-essential-services-in-combating-COVID-19.pdf.

So much of the public attention has been and continues to be on the availability of goods (medical or agricultural), but little public attention has actually focused on the broad role of service providers in helping countries address the national and global needs during the COVID-19 Pandemic. The full statement from the Global Services Coalition is provided below. Just as was true for the ICC recommendations, the important points raised by the Global Services Coalition do not address what is needed to help governments in fact support essential services while protecting the public health and control the spread of COVID-19. That said, the role of services is critical to understand for those considering actions at the national, local or global level.

“Ensuring Resilience of Global Supply of Essential Services in Combating COVID-19

“1 April 2020

“As the world continues to grapple with the global COVID-19 pandemic, the members of the Global Services Coalition wish to express solidarity with the work of governments and international institutions to combat its spread. As associations representing all segments of the services industry, we call on governments to take a range of critical measures to maintain resilience in the supply of essential services during this time of crisis.

“Financial services, ICT services, retail and distribution, and transportation and logistics services are all examples, though not exhaustive, of critical enablers of trade in goods and agri-food products, as well as services that enhance social welfare. As governments curtail commercial activity and social interaction to fight the global pandemic, it is critical for them to allow for continuation of these and other essential services, while of course ensuring the health and safety of the personnel involved.

“Cargo flights must be able to continue in order to move critical life-saving medical equipment and supplies, as well as other goods that consumers rely for daily sustenance. It is crucial that governments work together to develop standards that ensure – within reasonable safeguards – that cargo pilots are not subject to mandatory 14-day quarantine periods. Government should also consult about facilitating greater use of passenger aircraft for essential deliveries of critical supplies.

“Sophisticated medical equipment and therapies cannot be put in place without key medical services. For instance, the work of individual service suppliers, such as technicians that service (e.g. maintenance & repair services) critical medical equipment, is also crucial to fighting the pandemic. Governments should therefore ensure that travel restrictions justifiably put in place do not have unintended consequences that inhibit the cross-border movement of critical services.

“Banks, insurers, reinsurers, electronic payment service suppliers, mutual funds and pensions, and related professions supporting them, including call centre and in-person customer support functions, must be allowed to facilitate the purchase and delivery of those goods and food supplies. These are services that citizens and businesses rely on and ensure stability in global financial markets. Proposals in some markets to retroactively add coverage for pandemics and other causes of loss not included in existing insurance policies – and therefore not funded by premium payments – risk the stability of the insurance industry and should be avoided.

“Information and communications technology (ICT) services are crucial and must remain available so that essential supply chains can continue to function and “digital” options can help governments and citizens to overcome the challenges of “lock-downs” and “social distancing”, It is these business services that will allow continuous access to the goods and services that are needed to protect against COVID-19.

“Some ICT services are especially critical. They include: remote exchanges among research teams to fight against the virus and look for medicines and vaccines; e-health services to allow daily medical services be delivered to millions of patients; e-learning services to allow teachers to continue the education of millions of pupils and students; teleworking facilities to allow workers to stay at home but continue to sustain economic activity; and connectivity services that minimize the adverse affects of social distancing. Free flow of anonymous medical/health data among trusted partners should be ensured in this context.

“It is therefore vital that countries cooperate multilaterally to avoid constricting the global supply of these essential enabling services through an uncoordinated patchwork of country lockdowns. There have been public statements highlighting the need for international cooperation in facilitating delivery of essential goods. But governments need to focus equally on the critical role of essential enabling services. The evolution of the crisis has demonstrated the resilience and innovative capacity of the global services sector, which has made rapid shifts in work practices and supply-chain adaptation. Governments must broaden their approach to recognise essential services as systemically critical to the smooth functioning of the global economy at this time.

“Lastly, the necessary measures to respond to COVID-19 cannot become cover for countries to introduce unjustifiable protectionist measures further disrupting the global economy. This is the time for building bridges, not barriers. We wholly support the World Trade Organization Director-General in his appeal of 24 March for governments to be transparent about the measures that they are taking nationally to respond to COVID-19, including in services sectors. We also support the G20 Summit statement of 26 March. An open, coordinated and transparent approach can only reinforce the spirit of global collaboration that is essential to combat this pandemic.”

Conclusion

The COVID-19 pandemic requires an “all hands on deck” approach. Governments and international organizations need the input and benefit of the real world experience of businesses who can explain the challenges that particular government policies present to achieving what are governmental objectives of beating the health crisis and minimizing the harm to the economy (whether local, national, regional or global). Examples of business engagement, such as that by the ICC and the Global Services Coalition, are useful in themselves and should be embraced by governments and international organizations. The recommendations would be more useful if coupled with an articulation of how governments achieve some of the recommendations with the very real limitations that exist on supplies, tests and equipment.

An ongoing dialogue between stakeholders and governments along with the efforts to expand capacities, find innovative solutions to existing needs and pursue research and development of a vaccine are all part of the all hands on deck global needs. May the dialogue intensify and speed the ultimate resolution.

Food security – export restraints and border controls during the COVID-19 pandemic

While COVID-19 is first and foremost a health crisis, efforts to control the fallout from the virus have led to border controls on farm workers and encouraged some countries to impose export restraints on particular agricultural products. While the border control dimension to the problem is new, the world has in recent years gone through a number of situations where large numbers of countries have imposed export restraints on core agricultural products in an effort to ensure adequate supplies at home. The results are never positive for the global community and particularly harm the least developed countries and those dependent on imported food products.

For example, in 2007-2008, there were dozens of countries that imposed export restraints on specific items such as rice or wheat leading to massive price spikes and shortages of product available to countries dependent on imports. The nature and extent of the problem was outlined in a paper I prepared back in 2008 which is embedded below.

GDP

The crisis led to coordinated efforts by the various UN organizations to find solutions and ways of avoiding repeats moving forward. A policy report from multiple UN agencies was released on 2 June 2011, Price Volatility in Food and Agricultural Markets: Policy Responses.

igo_10jun11_report_e

Unfortunately, a number of countries in reacting to the COVID-19 pandemic have introduced export restraints on certain food products. Russia, Ukraine, Kazakhstan, and Vietnam are some of the countries identified so far as introducing export restraints on selected agricultural products. In the past, export restraints by some have led to export restraints by many. The possibility of rapidly expanding restraints by trading nations is obviously a major concern and major complication to the global response to COVID-19.

Equally troubling are the potential challenges to agricultural product availability in countries that rely to some extent on temporary foreign labor to harvest produce and other products where border measures are restricting access of foreigners to reduce the potential spread of COVID-19. Coupled to that are concerns about whether imported agricultural products meet health and quality needs and any changes in approach to those issues during the pandemic.

As one example of the farm labor concern, the United States is a country that relies on temporary farm workers from outside of the country and has significant restrictions on the entry of foreign nationals from many areas at present. U.S. farmers have raised concerns about the availability of sufficient migrant labor to harvest the fields when product is ready. How the issue gets resolved in the United States is not yet clear. But the same or similar challenges will apply in any country where imported farm labor is important to the harvesting, processing or transporting of agricultural products.

That these multiple potential issues on agricultural goods trade are escalating can be seen in yesterday’s joint statement from the WTO, WHO and FAO. The joint statement is available on the WTO webpage, https://www.wto.org/english/news_e/news20_e/igo_26mar20_e.htm, and is reproduced below:

“Joint Statement by QU Dongyu, Tedros Adhanom Ghebreyesus and Roberto Azevêdo, Directors-General of FAO, WHO and WTO

“Millions of people around the world depend on international trade for
their food security and livelihoods. As countries move to enact measures
aiming to halt the accelerating COVID-19 pandemic, care must be taken
to minimise potential impacts on the food supply or unintended
consequences on global trade and food security.

“When acting to protect the health and well-being of their citizens,
countries should ensure that any trade-related measures do not disrupt
the food supply chain. Such disruptions including hampering the
movement of agricultural and food industry workers and extending
border delays for food containers, result in the spoilage of perishables and increasing food waste. Food trade restrictions could also be linked
to unjustified concerns on food safety. If such a scenario were to
materialize, it would disrupt the food supply chain, with particularly
pronounced consequences for the most vulnerable and food insecure
populations.

“Uncertainty about food availability can spark a wave of export
restrictions, creating a shortage on the global market. Such reactions can
alter the balance between food supply and demand, resulting in price
spikes and increased price volatility. We learned from previous crises
that such measures are particularly damaging for low-income, food-deficit
countries and to the efforts of humanitarian organizations to procure food for those in desperate need.

“We must prevent the repeat of such damaging measures. It is at times like this that more, not less, international cooperation becomes vital. In the midst of the COVID-19 lockdowns, every effort must be made to ensure that trade flows as freely as possible, specially to avoid food shortage. Similarly, it is also critical that food producers and food workers at processing and retail level are protected to minimise the spread of the disease within this sector and maintain food supply chains. Consumers, in particular the most vulnerable, must continue to be able to access food within their communities under strict safety requirements.   

“We must also ensure that information on food-related trade measures, levels of food production, consumption and stocks, as well as on food prices, is available to all in real time. This reduces uncertainty and allows producers, consumers and traders to make informed decisions. Above all, it helps contain ‘panic buying’ and the hoarding of food and other essential items.

“Now is the time to show solidarity, act responsibly and adhere to our common goal of enhancing food security, food safety and nutrition and improving the general welfare of people around the world.  We must ensure that our response to COVID-19 does not unintentionally create unwarranted shortages of essential items and exacerbate hunger and malnutrition.”

Conclusion

There is little doubt that COVID-19 is placing extraordinary strains on countries, their peoples, their economies and the ability and willingness to act globally as opposed to locally. The strains and how the world reacts will shape the world going forward and determine the magnitude of the devastation that occurs in specific markets and the broader global community.

The UN report released yesterday, Shared responsibility, global solidarity: Responding to the socio-economic impacts of COVID-19, and the statement from UN Secretary-General Antonio Guterres outline the enormity of the global challenges and a potential path to a better future. See https://news.un.org/en/story/2020/03/1060702; https://reliefweb.int/sites/reliefweb.int/files/resources/sg_report_socio-economic_impact_of_covid19.pdf.

The global health emergency is significantly worsened by the introduction of food security issues. Despite a better understanding of the causes and necessary approaches to minimize food security issues, the world has a poor track record on working for the collective good in agriculture when fears of food availability arise. An eruption of export restraints at the time of the global COVID-19 health crisis could indeed undermine societal stability.

COVID-19 and the G20 Response

With the COVID-19 pandemic ramping up its reach and severity in many parts of the world and with the global economy reeling as a result, there is an understandable hope for a coordinated response from the major countries in the world to minimize the effect of the pandemic, ensure availability of medical supplies and equipment, and chart a path back to growth for all.

In the last week there has been both a virtual Extraordinary Meeting of the G20 leaders (March 26) and a virtual meeting of trade ministers (March 30). Both meetings issued joint communiques intended to express the commitment of the G20 countries to keep markets open, minimize trade restrictions, share information and work to defeat COVID-19. See https://g20.org/en/media/Documents/G20_Extraordinary%20G20%20Leaders%E2%80%99%20Summit_Statement_EN%20(3).pdf; https://www.wto.org/english/news_e/news20_e/dgra_30mar20_e.pdf. The two joint communiques are embedded below. They were followed by a joint meeting of finance ministers today (March 31).

G20_Extraordinary-G20-Leaders’-Summit_Statement_EN-3

G20-Trade-and-Investment-Ministerial-Statement-March-30-2020

However, each of the leaders’ and trade ministers’communiques has been criticized by some analysts for not having specific commitments (e.g., agreeing to a standstill on export restraints or agreeing to temporarily reduce tariffs on certain medical supplies and equipment). Indeed, such concrete actions have been urged by not only various analysts but also by the World Bank. See https://www.worldbank.org/en/news/statement/2020/03/30/statement-by-mari-pangestu-managing-director-for-development-policy-and-partnerships-the-world-bank-at-the-virtual-meeting-of-g20-trade-ministers. The specifics urged by the World Bank at the G20 trade ministers meeting included the following:

“We suggest G20 Trade Ministers decide on concrete actions to mitigate the pandemic and speed up recovery. G20 Members could immediately undertake the following actions whilst advocating parallel action by all World Trade Organization Members.

“Refrain from new export restrictions on critical medical supplies, food or other key products. Where such emergency measures are applied, they should be targeted, transparent, proportionate with the emergency needs, and time-bound.

“Eliminate or reduce tariffs on imports of COVID-19 products, as well as lower or temporarily suspend tariffs and export taxes on food and other basic goods to safeguard household incomes and business activity.

“Ensure that vital products can cross borders safely, by ensuring continuity of border agency clearance for critical supplies and essential transport and logistics.

“Secure continued access to capital and trade financing to medium, small and micro enterprises (MSMEs).”

For some analysts, the failure to provide specific action steps reflects a claimed lack of leadership among the G20 leaders (in particular to a lack of leadership by the U.S.). Those raising concerns compare the communiques to those that came out from the financial crisis in 2008-2009 which contained some specific commitments including a standstill on trade restrictive measures.

Differences between the COVID-19 pandemic and the 2008-2009 financial crisis

While both events, the COVID-19 pandemic and the 2008-2009 financial crisis, can be described as major crisis moments for the global community, there is the very real difference of the COVID-19 pandemic threatening human life directly. WTO commitments have understandable carveouts for Members to address public health crises through deviations from their WTO commitments.

Politically, it is hard to imagine countries suffering major outbreaks of COVID-19 not having an initial primary commitment to address the internal needs of their citizens. This has led to many countries seeking at least temporarily to secure critical medical supplies and equipment to address the surge in illness that has followed the spread of the virus in individual countries. This includes both major developed countries like the members of the EU and major countries like China (in the early stages of the outbreak there). The daily pleas from governors and mayors across the United States for more supplies and equipment show the internal pressures for governments to secure supplies and equipment critical to the short-term needs.

This does not mean that proposals for joint action aren’t meritorious or that some actions by individual countries can be harmful to overall global welfare as well as their own short-term interests. Rather the internal challenges will differ for different countries or territories and may make joint actions at a given point in time less doable. In such situations, individual country actions can be important with joint actions undertaken where possible. For example, in the U.S. and in other countries, there is an effort to ramp up production of critical supplies and equipment. Such individual action can have important positive effects on the global response to COVID-19.

While many countries sent supplies to China back in January-February when China was going through its peak needs and ramping up its production, China has been exporting supplies to various countries as its internal needs recede and external demand ramps up. Press accounts, for example, indicate that the U.S. has procured 10 plane loads of medical supplies from China, the first of which arrived in the last several days in New York.

Similarly, the U.S. has been working with companies in the United States to increase production of medical personal protection equipment and of ventilators as part of its effort to address the surge in demand that is occurring in individual U.S. hot spots. Ramp up of production is also important in light of the global shortage of some of the items during periods of heightened demand. President Trump in a recent press conference indicated that it was likely that as production increased on ventilators in the U.S., there would be excess volume at some point that could be shared with other countries without sufficient supplies.

Thus, individual country actions can have important longer term benefits for other countries around the world.

Actions by the World Bank and International Monetary Fund to Assist Developing and Least Developed Countries Are Supported by G20 Members

G20 members are important players in both the World Bank and the IMF. As reviewed in statements by each organization in yesterday’s trade ministers meeting (World Bank) and today’s finance minister’s meeting (IMF), each organization is taking aggressive actions to provide assistance to developing and least developed countries to help in addressing COVID-19 and the recovery of economies after the pandemic. Such action is possible because of the support of the major economies in those organizations.

For example, the World Bank reviewed the following actions it is taking to respond to COVID-19 at yesterday’s trade ministers meeting:

“The WBG is providing fast, flexible responses to lessen the impact of COVID-19 on developing countries. The $14 billion Fast Track Facility approved on March 17 assists countries and companies in their efforts to prevent, detect, and respond to the rapid spread of COVID-19. We have emergency operations for 60 countries already underway and more to come.

“We are entering into the next phase of our response to further address the broader economic and social impact. The WBG will deploy $160 billion over 15 months to:

“Protect the poor and vulnerable through social safety net programs.
O􀃠er World Bank facilitated procurement to help clients access needed medical supplies and equipment, for no fee, to address the significant disrutption in supply chains.

Support businesses and their employees, especially MSMEs, through IFC trade and credit lines.

Strengthen economic resilience and speed of recovery through budget support and sectoral interventions, including in trade and investment.

“We and the IMF are also calling on all official bilateral creditors to suspend debt payments from IDA countries that request forbearance.”

Similarly, below is the statement by the IMF from today’s finance ministers meeting:

“March 31, 2020

“Washington, DC – International Monetary Fund (IMF) Managing Director Kristalina Georgieva made the following remarks today during an extraordinary conference call of G20 Finance Ministers and Central Bank Governors:

“Thank you to the Saudi G20 presidency for calling this extraordinary meeting.

“Outlook

“‘We welcome the decisive actions many of you have taken to shield people and the economy from COVID-19, that led to a decline in volatility in major financial markets in recent days. Nonetheless we remain very concerned about the negative outlook for global growth in 2020 and in particular about the strain a downturn would have on emerging markets and low- income countries.

“Our forecast of a recovery next year hinges on how we manage to contain the virus and reduce the level of uncertainty.

“Thus, we support an ambitious G20 action plan to strengthen the capacity of health systems to cope with the epidemic; to stabilize the world economy through timely, targeted and coordinated measures; and to pave the way towards recovery.

“IMF reforms

“And we will do our part. In fact, we got a strong mandate last Friday from our governing body, the International Monetary and Financial Committee (IMFC), on reforms to strengthen our crisis response.

“In particular, it endorsed initiatives to:

“· Enhance access to our emergency facilities, as now some 85 countries indicate they rely on them for financial support;

“· Build up our capacity to serve our poorest members; and

“· Help countries experiencing foreign exchange shortages, including possibly by short-term liquidity line.

“We also have good news on IMF resources.

“The U.S. recently approved (https://www.imf.org/en/News/Articles/2020/03/26/pr20109-usa-statement-on-the-unitedstates-congress-move-to-strengthen-the-imfs-resources) the doubling of the New Arrangements to Borrow, and our Executive Board yesterday agreed https://www.imf.org/en/News/Articles/2020/03/31/pr20123-imf-executive-boardapproves-framework-for-new-bilateral-borrowing-agreements) on a new round of bilateral borrowing to secure the IMF’s
$1 trillion lending capacity.

“Debt relief

“Lastly, I would like to direct your attention to the issue of debt of low-income countries.

“Starting with their debt obligations to the IMF, I am pleased to report that our Executive Board last Thursday approved (https://www.imf.org/en/News/Articles/2020/03/27/pr20116-imf-enhances-debt-relief-trust-to-enable-support-foreligible-lic-in-wake-of-covid-19) a reform of the Catastrophe Containment and Relief Trust (CCRT) that allows our poorest member countries to invest in crisis response rather than repay the Fund. I want to thank G20 members who have pledged financial support for the CCRT and call on others to join.

“And I support the G20 to urgently work on further easing the debt burden of our poorest members.

“At a time the world economy is at a standstill, official bilateral creditors could make a major contribution by offering a debt standstill to IDA-eligible countries, as World Bank Group President David Malpass and I proposed
(https://www.imf.org/en/News/Articles/2020/03/25/pr20103-joint-statement-world-bank-group-and-imf-call-to-actionon-debt-of-ida-countries) during our last meeting.

“It will also be important for other creditors to do their part, and I count on the G20 to help build consensus on a way forward for our poorest members.”

https://www.imf.org/en/News/Articles/2020/03/31/pr20124-remarks-md-kristalina-georgieva-conference-call-g20-finance-ministers-central-bank-governors.

Thus, the G20 through their involvement in multilateral organizations like the World Bank and the IMF are taking collective action to address various aspects of the COVID-19 pandemic and global recovery whether or not there are specific G20 actions taken outside of those organizations.

Additional Challenges and Opportunities For G20 Members

  1. access for transport moving goods

One of the unusual challenges flowing from COVID-19 is dealing with concerns about movement of people with the need for the movement of goods across borders. For example, many countries have imposed travel restrictions from certain offshore locations to try and control the spread of COVID-19. Even where there is not an outright ban on entry from certain foreign countries, there may be requirements for mandatory quarantine of people travelling from certain countries. The International Air Transport Association (IATA) has a webpage following measures taken by governments related to COVID-19. As of today, IATA shows 179 measures having been taken by countries around the world. See https://www.iata.org/en/programs/safety/health/diseases/government-measures-related-to-coronavirus/. IATA has urged countries to develop approaches that permit international transport to access countries without staff being quarantined. The consequences for the rapid movement of medical supplies and equipment if transport personnel can’t enter and exit in ways that are acceptable to receiving countries should be obvious. But the solution will potentially differ by each importing country’s risk profile compared to each exporting country’s risk profile. It is unclear what actions G20 countries are taking to address these concerns/needs. Transparency and a task force to identify current and best practices could be helpful in the short term on this critical issue.

2. transparency issues

G20 countries have agreed to support transparency of measures taken to address COVID-19, and the WTO has a webpage which is tracking notices provided by WTO Members. To date relatively few notices have been provided to the WTO (just 18 as of March 31, 2020). See https://www.wto.org/english/tratop_e/covid19_e/covid19_e.htm.

But transparency goes beyond WTO notifications and deals with issues such as transparency on developments in individual countries on the spread of the disease, research into possible vaccines, best practices in reducing the spread of the virus, information on potential medical supplies and equipment and on potential demand among countries (including efforts at expanding production).

While there is seemingly reasonably good information on the spread of the disease in many countries and at least basic information on research ongoing around the world, it is not clear that there is a clearinghouse for information on supplies or on anticipated demand. If not, this could be an area where business associations and governments could work collectively to develop information that could be useful in maximizing availability of products where and when needed, to identify likely bottlenecks in supply and permitting governments to incentivize expanded production. There is also the question of surges in needs for medical personnel that outstrip availability even in developed countries. Transparency on availability of personnel (active, retired, etc.) willing to move intracountry and internationally would be an extraordinarily important data base and could help countries with needs determine ability to handle temporary medical help.

3. Research and Development of Vaccines and Intellectual Property Issues

There are many businesses, government entities and research groups looking for a vaccine for the COVID-19. The greater the exchange of information, the greater the likelihood of an early breakthrough. Many issues arise around any bteakthrough in terms of intellectual property rights, global needs and affordability. How those issues are addressed will be an important part of any longterm global recovery and the human costs that will be incurred going into the future from the virus. A recent Congressional Research Service paper looks at certain possible TRIPs and subsidy issues. While the discussion in the paper isn’t necessarily accurate in terms of WTO implications in all instances, it provides a list of questions that G20 members and the broader global community will need to consider.

CRS-March-30-2020-COVID-10-International-Trade-and-Access-to-Pharmaceutical-Products

Conclusion

COVID-19 is an extraordinary challenge to the global community with the ability to overwhelm health systems in advanced economies in a matter of weeks to say nothing of the potential for harm to less advanced economies.

The G20 has called for coordinated action and stated the objectives of keeping markets open, limiting restrictions on trade, exchanging information and assisting developing and least developed countries. The individual countries who are part of the G20 have also been taking action through the World Bank and IMF to help other countries address challenges from COVID-19.

At the same time, major G20 players — US, EU countries, China — have faced major challenges in their territories which have required a focus on how to address national challenges effectively and quickly. Other countries and territories have also faced various levels of spread of COVID-19 and have focused on actions they have needed to minimize the spread and help their citizens. More countries are likely to be hot spots in the coming months.

The WTO and the GATT before it have recognized that obligations undertaken must have escape clauses when there are emergencies involving human health.

Thus, the art of the possible with COVID-19 may be the articulation of aspirational objectives by leaders or international organizations or by outside analysts, the exchange of information to permit better decisions, and individual or group action where possible within the context of domestic political realities.

March 27, 2020 Agreement on Interim Arbitration Process by EU and 15 other WTO Members to Handle Appeals While Appellate Body is Not Operational

With the reduction in members of the Appellate Body from three to one after December 10, 2019, the WTO’s Appellate Body has not been in a position to handle new appeals nor to complete a range of other appeals that were pending where no hearing had occurred. The United States has blocked consideration of replacements while solutions to its substantive and procedural concerns with the actions of the Appellate Body are developed. As it is unlikely that U.S. concerns will be resolved in the near term, a number of WTO Members have been searching for alternative approaches to maintain a second stage review in disputes where one or more parties desires that second stage review.

Specifically, a number of WTO Members have wanted to establish an arbitration framework for disputes between Members willing to abide by such a framework. The European Union has been one of the most outspoken on the topic and had completed agreements with Canada and Norway ahead of Davos this year.

On the sidelines of Davos, a significant number of countries indicated a desire to find a common approach on arbitration to address the lack of Appellate Body review until such time as the operation of the Appellate Body was restored.

On March 27, 2020, a Multi-Party Interim Appeal Arbitration Arrangement Pursuant to Article 25 of the DSU was agreed to by to the following WTO Members — Australia, Brazil, Canada, China, Chile, Colombia, Costa Rica, the European Union, Guatemala, Hong Kong, Mexico, New Zealand, Norway, Singapore, Switzerland and Uruguay. The text of the arrangement is here, https://trade.ec.europa.eu/doclib/docs/2020/march/tradoc_158685.pdf. The arrangement is open to other Members should they opt to join at a future date.

As stated in the Ministerial Statement released yesterday, https://trade.ec.europa.eu/doclib/docs/2020/march/tradoc_158684.pdf

“Further to the Davos statement of 24 January 2020, we, the Ministers of Australia; Brazil; Canada; China; Chile; Colombia; Costa Rica; European Union; Guatemala; Hong Kong, China; Mexico; New Zealand; Norway; Singapore; Switzerland; and Uruguay, have decided [1] to put in place a Multi-party Interim Appeal Arbitration Arrangement (MPIA) on the basis of the attached document. This arrangement ensures, pursuant to Article 25 of the WTO Dispute Settlement Understanding, that any disputes among us will continue benefitting from a functioning dispute settlement system at the WTO, including the availability of an independent and impartial appeal stage.

“We believe that such WTO dispute settlement system is of the utmost importance for a rules-based trading system. The arrangement is open to any WTO Member, and we welcome any WTO Member to join.

“We wish to underscore the interim nature of this arrangement. We remain firmly and actively committed to resolving the impasse of the Appellate Body appointments as a matter of priority and urgency, including through necessary reforms. The arrangement therefore will remain in effect only until the Appellate Body is again fully functional.

“We intend for the arrangement to be officially communicated to the WTO in the coming weeks.

“1/ Subject to the completion of respective domestic procedures, where applicable.”

The European Commission reviewed the significance of yesterday’s group decision in a press release:

“The EU and 15 other members of the WTO today decided on an arrangement that will allow them to bring appeals and solve trade disputes among them despite the current paralysis of the WTO Appellate Body. Given its strong and unwavering support for a rules-based trading system, the EU has been a leading force in the process to establish this contingency measure in the WTO.

“Commissioner for Trade Phil Hogan said: ‘ Today’s agreement delivers on the political commitment taken at ministerial level in Davos in January. This is a stop-gap measure to reflect the temporary paralysis of the WTO’s appeal function for trade disputes. This agreement bears testimony to the conviction held by the EU and many other countries that in times of crisis working together is the best option. We will continue our efforts to restore the appeal function of the WTO dispute settlement system as a matter of priority. In the meantime, I invite other WTO Members to join this open
arrangement, crucial for the respect and enforcement of international trade rules.’

“The Multiparty Interim Appeal Arbitration Arrangement mirrors the usual WTO appeal rules and can be used between any members of the Organisation willing to join, as long as the WTO Appellate Body is not fully functional.

“Today’s agreement underscores the importance that the participating WTO members – Australia; Brazil; Canada; China; Chile; Colombia; Costa Rica; the European Union; Guatemala; Hong Kong, China; Mexico; New Zealand; Norway; Singapore; Switzerland; and Uruguay – attach to a functioning two-step dispute settlement system at the WTO. Such a system guarantees that trade disputes can be resolved through an impartial and independent adjudication, which is essential for the multilateral trading system based on rules.

“We expect the Multiparty Interim Appeal Arbitration Arrangement to be officially notified to the WTO in the coming weeks, once the respective WTO Members complete their internal procedures, after which it will become operational.”

https://ec.europa.eu/commission/presscorner/detail/en/IP_20_538.

The Interim Appeal Arrangement

Led by the European Union, the interim appeal arrangement looks a lot like an appeal to the Appellate Body and that is by design. As stated in paragraph 3 of the arrangement, “3. The appeal arbitration procedure will be based on the substantive and procedural aspects of Appellate Review pursuant to Article 17 of the DSU, in order to keep its core features, including independence and impartiality, while enhancing the procedural efficiency of appeal proceedings.” Many parts of practice and procedure of the Appellate Body are incorporated into the appeal arbitration procedures (Annex 1) and included in the text of the arrangement itself.

Arbitrations will be heard by three members of a standing pool of 10 appeal arbitrators who may be current or former Appellate Body members or other qualified individuals. See Annex 2. Such current and former AB members are not subject to any additional vetting if nominated by one of the signatories. Selection for serving on an appeal arbitration, similar to the Appellate Body, will be subject to rotation.

The participating Members are looking to the WTO Secretariat to provide “appropriate administrative and legal support”, that such support “will be entirely separate from the WTO Secretariat staff”. Stated differently, the participating Members are seeking the maintenance of something like the Appellate Body Secretariat but as an interim appellate arbitration group or secretariat.

The participating Members are permitting arbitration to be completed in 90 days (subject to extension approved by the parties) and give arbitrators authority to streamline proceedings to accomplish the 90 day timeline (page limits, time limits, etc.).

The full text of the interim arrangement and two appendices is embedded below.

3-27-2020-multi-party-interim-appeal-arbitration-arrangement-pursuant-to-Article-25-of-the-DSU

Approach of Other WTO Members

Time will tell the success of the interim appeal arbitration arrangement both among the existing participants and on any future participants.

The United States and many other Members are not presently participants in the interim agreement though that could, of course change as the arrangement is open to additional Members joining. Existing Members not participating in the arrangement include Japan, South Korea, India, Indonesia, Thailand, Malaysia, Argentina, South Africa, Saudi Arabia, Russia, Ukraine and many others.

Where a Member does not participate in the interim agreement, there are a wide range of options for the resolution of disputes including a bilateral agreement between the parties either during consultations or during the panel process, agreement to adopt the panel report without appeal or separate arbitration procedures agreed by the parties to a dispute. The U.S. and India in a pending dispute have also simply agreed to hold up any appellate review until such time as the Appellate Body is functioning again. Time will also reveal how well alternative dispute resolution approaches work for WTO Members.

What is certain is that absent a resolution of the underlying concerns raised by the United States over the last several years, the WTO dispute settlement system will be in a period of uncertainty with various approaches possible to resolve disputes but no clarification of the proper role of dispute settlement within the WTO.

Will the Interim Arrangement Promote Resolution of Long-Standing Problems with WTO Dispute Settlement?

While the participating Members to the interim agreement all state a commitment to pursue the prompt resolution to the WTO dispute settlement system challenges, the reality on the ground does not appear to match the rhetoric. While the U.S. has presented detailed information on its concerns and asked for engagement by Members to understand the “why” of the current situation, many Members have limited their engagement to suggesting modifications of the existing Dispute Settlement Understanding that do little more than repeat existing requirements – requirements which have been routinely flouted by the Appellate Body. Nor have Members advanced either an understanding or approaches for resolving the large number of instances where the Appellate Body has created rights or obligations not agreed to by Members. Thus, there has not been meaningful forward movement in recent months on the long-standing problems identified with the WTO dispute settlement system. Nothing in the interim arrangement augurs for an improved likelihood of resolution.

Moreover, the adoption of an interim arrangement that cloaks itself in much of the Appellate Body rules and procedures and is likely to have a number of former Appellate Body members in its pool of arbitrators is likely to create additional challenges as time goes by particularly in terms of the relevance of arbitral awards other than to the parties to the arbitration, whether existing problems are perpetuated through the interim appeal arbitration process, etc. There may also be short term challenges to the propriety of arbitrators being supported by a separate group of staff and who will pay for such services.

Conclusion

For WTO Members liking the past operation of the Appellate Body and wanting a second phase review of disputes that approximates the Appellate Body approach under the DSU, the interim appeal arbitration agreement will provide an approach while the Appellate Body itself is not functional. The WTO Members who are participating are significant users of the WTO dispute settlement system. More may join in the months ahead.

At the same time, other approaches to resolving disputes continue to be available to WTO Members and used by various Members.

There is nothing wrong with multiple approaches for handling resolution of disputes.

At the same time, nothing in the interim agreement or the actions of the participants to that agreement in the first quarter of 2020 provides any reason to believe the participants are working any harder to reach a resolution on the longstanding concerns of the United States on the actual operation of the Appellate Body.

Rule of law issues include seeing that the dispute settlement system operates within the confines of the authority defined by the Dispute Settlement Understanding. That has not been the case for many actions by the Appellate Body as well documented by the United States.

There won’t be meaningful forward movement in WTO reform or restoration of the two-step dispute settlement system until Members are able to both understand why the Appellate Body has deviated so widely from its limited role and fashion solutions that will ensure a properly functioning dispute settlement system that supports the other functions of the WTO and doesn’t replace or handicap them. Yesterday’s announcement of the interim agreement does nothing to advance those underlying needs.

Export restraints vs. trade liberalization during a global pandemic — the reality so far with COVID-19

The number of confirmed coronavirus cases (COVID-19) as of March 26, 2020 was approaching 500,000 globally, with the rate of increase in cases continuing to surge in a number of important countries or regions (e.g., Europe and the United States) with the locations facing the greatest strains shifting over time.

In an era of global supply chains, few countries are self-sufficient in all medical supplies and equipment needed to address a pandemic. Capacity constraints can occur in a variety of ways, including from overall demand exceeding the supply (production and inventories), from an inability or unwillingness to manage supplies on a national or global basis in an efficient and time responsive manner, by the reduction of production of components in one or more countries reducing the ability of downstream producers to complete products, by restrictions on modes of transport to move goods internationally or nationally, from the lack of availability of sufficient medical personnel or physical facilities to handle the increased work load and lack of facilities.

The reality of exponential growth of COVID-19 cases over weeks within a given country or region can overwhelm the ability of the local health care system to handle the skyrocketing demand. When that happens, it is a nightmare for all involved as patients can’t be handled properly or at all in some instances, death rates will increase, and health care providers and others are put at risk from a lack of adequate supplies and protective gear. Not surprisingly, shortages of supplies and equipment have been identified in a number of countries over the last three months where the growth in cases has been large. While it is understandable for national governments to seek to safeguard supplies of medical goods and equipment to care for their citizens, studies over time have shown that such inward looking actions can be short sighted, reduce the global ability to handle the crisis, increase the number of deaths and prevent the level of private sector response that open markets would support.

As we approach the end of March, the global community receives mixed grades on their efforts to work jointly and to avoid beggar-thy-neighbor policies. Many countries have imposed one or more restraints on exports of medical supplies and equipment with the number growing rapidly as the spread of COVID-19 outside of China has escalated particularly in March. Indeed, when one or more countries impose export restraints, it often creates a domino effect as countries who may depend in part on supplies from one or more of those countries, decides to impose restraints as well to limit shortages in country.

At the same time, the G-7, G-20 and others have issued statements or other documents indicating their political desire to minimize export restraints and keep trade moving. The WTO is collecting information from Members on actions that have been taken in response to COVID-19 to improve transparency and to enable WTO Members to identify actions where self-restraint or roll back would be useful. And some countries have engaged in unilateral tariff reductions on critical medical supplies and equipment.

Imposition of Export Restraints

The World Customs Organization has developed a list of countries that have imposed some form of export restraint in 2020 on critical medical supplies. In reviewing the WCO website today, the following countries were listed: Argentina, Bulgaria, Brazil, Colombia, Ecuador, European Union, India, Kazakhstan, Kyrgyzstan, Russia, Serbia, Thailand, Ukraine and Vietnam. Today’s listing is copied below.

List-of-Countries-having-adopted-temporary-export-control-measures-Worl.._

While China is not listed on the WCO webpage, it is understood that they have had some restrictions in fact at least during the January-February period of rapid spread of COVID-19 in China.

While it is surprising to see the European Union on the list, the Official Journal notice of the action indicates that the action is both temprary (six weeks – will end around the end of April) and flows in part from the fact that sources of product used by the EU had been restricting exports. The March 15, 2020 Official Journal notice is attached below.

EC-Implementing-Regulation-EU-2020-402-of-14-March-2020-making-the-exportation-of-certain-products-subject-to-the-production-of-an-export-authorisation

Professor Simon Evenett, in a March 19, 2020 posting on VOX, “Sickening thy neighbor: Export restraints on medical supplies during a pandemic,” https://voxeu.org/article/export-restraints-medical-supplies-during-pandemic, reviews the challenges posed and provides examples of European countries preventing exports to neighbors — Germany preventing a shipment of masks to Switzerland and France preventing a shipment to the U.K.

In a webinar today hosted by the Washington International Trade Association and the Asia Society Policy Institute entitled “COVID-19 and Trade – A WTO Agenda,” Prof. Evenett reviewed his analysis and noted that the rate of increase for export restraints was growing with 48 of 63 actions occurring in March and 8 of those occurring in the last forty-eight hours. A total of 57 countries are apparently involved in one or more restraints. And restraints have started to expand from medical supplies and equipment to food with four countries mentioned by Prof. Evenett – Kazakhstan, Ukraine, Russia and Vietnam.

Efforts to keep markets open and liberalize critical medical supplies

Some countries have reduced tariffs on critical medical goods during the pandemic and some countries have also implemented green lane approaches for customs clearance on medical supplies and goods. Such actions are clearly permissible under the WTO, can be undertaken unilaterally and obviously reduce the cost of medical supplies and speed up the delivery of goods that enter from offshore. So it is surprising that more countries don’t help themselves by reducing tariffs temporarily (or permanently) on critical medical supplies and equipment during a pandemic.

Papers generated by others show that there are a large number of countries that apply customs duties on medical supplies, equipment and soaps and disinfectants. See, e.g., Jennifer Hillman, Six Proactive Steps in a Smart Trade Approach to Fighting COVID-19 (graphic from paper reproduced below), https://www.thinkglobalhealth.org/article/six-proactive-steps-smart-trade-approach-fighting-covid-19

Groups of countries have staked out positions of agreeing to work together to handle the pandemic and to keep trade open. For example, the G20 countries had a virtual emergency meeting today to explore the growing pandemic. Their joint statement can be found here and is embedded below, https://www.wto.org/english/news_e/news20_e/dgra_26mar20_e.pdf.

dgra_26mar20_e

There is one section of the joint statement that specifically addresses international trade disruptions during the pandemic. That language is repeated below:

“Addressing International Trade Disruptions

“Consistent with the needs of our citizens, we will work to ensure the flow of vital medical supplies, critical agricultural products, and other goods and services across borders, and work to resolve disruptions to the global supply chains, to support the health and well-being of all people.

“We commit to continue working together to facilitate international trade and coordinate responses in ways that avoid unnecessary interference with international traffic and trade. Emergency measures aimed at protecting health will be targeted, proportionate, transparent, and temporary. We task our Trade Ministers to assess the impact of the pandemic on trade.

“We reiterate our goal to realize a free, fair, non-discriminatory, transparent, predictable and stable trade and investment environment, and to keep our markets open.”

The WTO Director General Roberto Azevedo participated in the virtual meeting with the G20 leaders and expressed strong support for the commitment of the G20 to working on the trade related aspects of the pandemic. https://www.wto.org/english/news_e/news20_e/dgra_26mar20_e.htm.

Separately, New Zealand and Singapore on March 21st issued a Joint Ministerial Statement which stated in part,

“The Covid-19 pandemic is a serious global crisis.

“As part of our collective response to combat the virus, Singapore and New Zealand are committed to maintaining open and connected supply chains. We will also work closely to identify and address trade disruptions with ramifications on the flow of necessities,”

https://www.thestar.com.my/news/regional/2020/03/21/new-zealand-works-closely-with-singapore-to-maintain-key-supply.

The Joint Ministerial Statement was expanded to seven countries (Australia, Brunei Darussalam, Canada, Chile, Myanmar, New Zealand and Singapore), on March 25th and is reportedly open to additional countries joining. See https://www.mti.gov.sg/-/media/MTI/Newsroom/Press-Releases/2020/03/updated-joint-ministerial-statement-25-mar.pdf

Conclusion

When a pandemic strikes, many countries have trouble maintaining open trade policies on critical materials in short supply and/or in working collaboratively to address important supply chain challenges or in taking unilateral actions to make critical supplies available more efficiently and at lower costs.

The current global response to COVID-19 presents the challenges one would expect to see – many countries imposing temporary restrictions on exports — while positive actions in the trade arena are more limited to date with some hopeful signs of a potential effort to act collectively going forward.

Time will tell whether governments handling of the trade dimension of the pandemic contributes to the equitable solution of the pandemic or exacerbates the challenges and harm happening to countries around the world.

Coronavirus (COVID-19) and trade, how bad will declines get?

What started as a novel coronavirus in China at the end of 2019/beginning of 2020 has transformed into a global pandemic. Data compiled as of this morning (March 20, 2020) shows a tripling of confirmed cases globally in the last fifteen days from 102,123 cases to 305,225. The number of countries and territories reporting at least one confirmed case now stands at 177 — -41 in Africa, 36 in the Americas, 39 in Asia, 55 in Europe and 7 in Oceania. See European Centre for Disease Prevention and Control, Situation update worldwide, as of 22 March 2020, https://www.ecdc.europa.eu/en/geographical-distribution-2019-ncov-cases

The spread of COVID-19 in China has dramatically slowed in the last fifteen days. While there had been 80,759 confirmed cases of COVID-19 fifteen days ago in China (79.1% of the global totals), in the last fifteen days, China has reported only 731 additional confirmed case (0.36% of the new cases over the last fifteen days) with China’s share of global cases to date dropping sharply to 26.7% as of March 22. The European Union has shot into the number one slot for most confirmed cases and highest number of deaths. Data for the EU/EEA and UK show confirmed cases as of March 22nd at 141,858 (46.48% of global total) and with deaths at 7,319 (56.55% of the global total of 12,942). See European Centre for Disease Prevention and Control, Situation update for the EU/EEA and the UK, as of 22 March 2020, https://www.ecdc.europa.eu/en/cases-2019-ncov-eueea The United States is also finding a rapidly growing number of confirmed cases, numbers that are likely to grow dramatically higher as widespread testing abilities become available in the coming days and weeks. As of March 22, US confirmed cases were 26,747, 98.7% of which were identified in the last fifteen days.

With the rate of growth of the number of people infected with COVID-19 still accelerating in many parts of the world and with no currently available vaccine, a number of countries have taken increasingly stringent measures to try to control the spread of the virus. Moreover, many countries are facing growing challenges in terms of availability of testing supplies and ventilators, protective equipment (gloves, masks, etc.), medical facilities capable of handling severe cases, and simple workload for medical providers. Lockdowns of countries or cities or states/provinces for other than essential personnel has grown in an effort to flatten the number of cases and prevent medical systems from being overwhelmed. The wholesale closure of schools, restaurants, sports facilities and other venues is having high economic costs and obvious major challenges for significant parts of the populations in some countries. So too, travel restrictions first internationally and even in country have expanded. Social distancing is being mandated. Quarantining of individuals returning from foreign travel or who have been in contact with someone who has tested positive has disrupted lives for hundreds of thousands of people.

As reviewed in a recent Congressional Research paper entitled “COVID-19: An Overview of Trade-Related Measures to Address Access to Medical Goods,” some countries have implemented export restraints on medical supplies. Others have been reducing or eliminating tariffs on specific products in short supply in country. See, e.g., https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/march/ustr-response-coronavirus-crisis. Some countries have also been modifying import procedures to permit expedited clearance of critical medical goods. And some countries have been prioritizing domestic production of items deemed critical. The March 20, 2020 CRS paper is enclosed below.

CRS-March-2020-COVID-19-an-overview-of-trade-related-measures-to-addr.._

While there may be questions of WTO-compatibility of some of the actions being taken, the severity of the problem of the spread of coronavirus is leading to a wide range of actions by those nations hard hit by the virus as they attempt to safeguard the health and safety of their citizens.

International organizations like the World Trade Organization, businesses and governments are all having to rethink what can be done remotely, postponed or cancelled while efforts are ongoing to address the pandemic. The 12th Ministerial Conference that was to be held in Kazakhstan in June 2020 has been postponed for an unknown period of time. Meetings in the WTO have been cancelled for several weeks and efforts at virtual meetings are facing challenges. While efforts continue to make progress on fisheries subsidies talks, the challenges flowing from the pandemic may subconciously reduce the collective will to achieve a meaningful result (or any result) in the remainder of 2020.

Because of the severity of the virus on large portions of the population and the lack of a vaccine (with likely availability still a year or more away), efforts to estimate the effect of the virus on national or global economies has been an exercise in chasing a moving target. A March 4 release from UNCTAD looked at likely reductions in global trade from COVID-19 where the major disruption was in China and to supply chains dependent on Chinese inputs. A reduction in trade of $50 billion was estimated. https://unctad.org/en/PublicationsLibrary/ditcinf2020d1.pdf?user=1653. The March 4 estimate is dwarfed when one includes the collapse of the global airline industry, the harm to tourism in China, Europe and the US (and other countries) and the shuttering of sectors in major markets like Europe and the United States (e.g., restaurants and bars, sporting events, entertainment facilities (theme parks, movies, theater, etc.). In a March 9 statement from UNCTAD, concerns about reduced global growth (but still positive) put the likely cost of COVID-19 at $1 trillion with a worst case of $2 trillion. https://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=2300.

A mid-term update to the OECD’s economic forecast released in early March revised estimated global growth down from 2.9% to 2.5% and if widespread problems in Asia, Europe and the United States, a decline to a growth rate of just 1.5% due to COVID 19. But the interim projections had the EU and the US still with some GDP growth in 2020. 2 March 2020, OECD Interim Economic Assessment, Coronavirus – The World Economy at Risk, https://www.oecd.org/economic-outlook/.

A more recent estimate by Goldman Sach’s predicts an extraordinary 2nd quarter 2020 contraction in the U.S. GDP of more than 24% and a full year 2020 contraction in GDP of 3.8%. See, e.g., Markets Insider, “Goldman Sachs now says US GDP will shrink 24% next quarter amid the coronavirus pandemic – which would be 2.5 times bigger than any decline in history,” March 20, 2020, , https://markets.businessinsider.com/news/stocks/us-gdp-drop-record-2q-amid-coronavirus-recession-goldman-sachs-2020-3-1029018308.

Governments are taking aggressive steps to try to address the potential economic damage from their efforts to slow the spread of the coronavirus. The U.S. Congress has passed one piece of legislation last week and will likely pass a second where the collective costs may exceed $2 trillion as Congress and the Administration try to deal with the challenge to millions of Americans suddenly unemployed, to the collapse of many small businesses and the challenges to major industries like the airline industry.

Similarly, the European Union is looking at actions that would involve hundreds of billions of Euros to address many of the same challenges.

With the collapsing of demand in major developed economies in Europe and the U.S. while these extraordinary measures restricting movement are in place, global trade has been and will continue to be significantly impacted. Articles indicate that China’s exports in January and February were reduced by 17.2% from prior year levels due in large part to COVID-19 (imports into China were down 4%) with spillover effects to many other countries who use Chinese inputs for further manufactured goods. See, e.g., Bloombergs, China’s Exports Slump As Coronavirus Forces Shutdown, March 6, 2020, https://www.bloomberg.com/news/articles/2020-03-07/china-s-jan-feb-exports-fall-17-2-y-y-in-dollars-est-16-2. While China has embarked on efforts to spur economic growth and growth in exports now that the number of cases seems to be under control in China, the rebound in China’s trade will certainly be slowed by the challenges being experienced in other major markets, particularly in the EU and the United States.

While G-7 leaders have indicated the importance of keeping trade flowing and many restrictions specifically exclude coverage of legitimate trade (e.g., US-Canada and US-Mexico recent agreements on restricting cross-border movements), there is little doubt that 2020 will be a challenging year for global trade whether the country engaged in trade is experiencing serious challenges from coronavirus or not. See, e.g., G7 leaders’ statement on COVID-19, https://www.consilium.europa.eu/en/press/press-releases/2020/03/16/g7-leaders-statement-on-covid-19/ WTO DG welcomes G&7 leaders’ statement on COVID-19, https://www.wto.org/english/news_e/news20_e/dgra_17mar20_e.htm.

Still, any efforts of major trading nations to support the global trading system and limit restrictions as possible in these extraordinary circumstances is important, as are efforts of business associations to collaborate to address challenges to business operations from the virus.

Because past outbreaks appear to be poor examples of either the severity of the problems being faced by a number of countries or the length of time disruption will occur before economies hard hit can start to rebound, an air of uncertainty of unique dimensions is likely to continue to overhang global markets for a number of months and potentially longer. The best that may be possible in the global trade field is a substantial slump in traffic without major long-term barriers being introduced.

Here’s hoping that the “invisible enemy” that COVID-19 has been called by some proves addressable in the near term. Billions of people are watching and attempting to cope with lives often seriously disrupted. Helping the people of the world survive the health challenges posed by COVID-19 is obviously job one for governments around the world confronting rapidly increasing numbers of confirmed cases. Trade can assist in some important ways during such a crisis. Unfortunately, trade actions can be used in times of crisis to promote beggar-thy-neighbor actions which can make dependence on global supply chains and foreign sources of key products politically untenable. We are seeing both sides of how trade is perceived playing out in countries at the present time.

Trade liberalization with Africa – notice of intent from US to start negotiations with Kenya

The United States Trade Representative on March 17, 2020 provided notice to the U.S. Congress of the Administration’s intention to enter negotiations for a trade agreement with Kenya which would hopefully provide a model trade agreement for use with other countries in Africa. See, e.g., https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/march/trump-administration-notifies-congress-intent-negotiate-trade-agreement-kenya. Yesterday’s press release indicates that –

“’Under President Trump’s leadership, we look forward to negotiating and concluding a comprehensive, high standard agreement with Kenya that can serve as a model for additional trade agreements across Africa. Kenya is an important regional leader, a strategic partner of the United States, and a commercial hub that can provide substantial opportunities for U.S. trade and investment,’ said Ambassador Lighthizer.”

Kenya is one of 38 countries in Sub-Saharan Africa covered by the U.S. trade preference program for Africa, the African Growth and Opportunity Act enacted in 2000 (though individual countries have been removed or added back based on market developments in country). See https://legacy.trade.gov/agoa/index.asp. The 38 countries included within U.S. trade data for AGOA 2020 are the following (listed in order of U.S. trade balance in 2019, from largest trade deficit to largest trade surplus):

South Africa
Nigeria
Madagascar
Cote d`Ivoire
Angola
Congo-Brazza
Lesotho
Kenya
Mauritius
Botswana
Ghana
Malawi
Chad
Rwanda
Guinea-Bissau
Comoros
Sao Tome & Prin
Zambia
Eswatini
Gabon
Cabo Verde
Uganda
Cen African Rep
Niger
Namibia
Liberia
Gambia
Sierra Leone
Mozambique
Mali
Burkina Faso
Senegal
Djibouti
Guinea
Tanzania
Benin
Ethiopia
Togo

In 2019 the 38 AGOA countries exported $20.423 billion to the United States (U.S. imports for consumption) with Kenya being the 7th largest exporter of the group with 2019 exports of $667 million (or 3.27% of the total imports for consumption to the U.S. from the 38 countries). Most of Kenya’s exports to the U.S. consist of apparel products (16 of the top 22 6-digit HS categories of US imports for consumption from Kenya are clothing). South Africa was the largest source of U.S. imports from the 38 countries with $7.634 billion in 2019 (37.35%), and Nigeria was second with $4.966 billion (23.32%).

Kenya was the seventh largest importer of U.S. exports (U.S. domestic exports) in 2019, with the U.S. exporting $375 million to Kenya or 2.33% of the $13.717 billion total U.S. domestic exports to the 38 countries. The largest 6-digit HS category of U.S. domestic exports to Kenya for the 2015-January 2020 period was HS 8800.00, civilian aircraft, engines and parts, but U.S. exports declined from $620.2 million in 2015 to $50.3 million in 2019. South Africa and Nigeria are the two largest of the 38 countries receiving U.S. exports, with South Africa in 2019 receiving $4.645 billion (33.86%) and Nigeria $3.085 billion (22.49%).

The U.S. has run a trade deficit with the 38 countries collectively and with Kenya individually in the 2015-2019 time period. In 2019, the U.S. trade deficit (domestic exports – imports for consumption) was $6.706 billion with all 38 countries and $292 million with Kenya (8th largest deficit, 4.25% of total). Again South Africa (deficit of $2.989 billion, 44.57%) and Nigeria (deficit of $1.881 billion, 28.05%) were the largest two countries within the 38 in terms of U.S. trade deficit.

While U.S. trade with Kenya and other countries in Sub-Saharan Africa is relatively small compared to U.S. trade with other major areas of the world, there is significant interest in expanding trade relationships with Kenya and other countries in Sub-Saharan Africa within the business community and politically in the United States. Business interest flows from the rapid growth that is ongoing in Sub-Saharan Africa. For example, the World Bank data on Gross Domestic Product and GNI per capita (in current dollars) shows the total Sub-Saharan Africa area as having very rapid growth since 2000. Total GDP went from $372.5 billion in 2000 to $1.831 trillion in 2014 (+391.5%) before declining to $1.71 trillion in 2018 (+359.1% from 2000). Similarly GNI/capita went from $552.868 in 2000 to $1,809.31 in 2014 (+272.6%) and $1,517.054 in 2018 (+ 174.4%) . See https://data.worldbank.org/region/sub-saharan-africa?view=chart.

While the per capita GNI and total GDP in Sub-Saharan Africa are far lower than comparable figures in other regions of the world, the rate of growth over the last two decades in Sub-Saharan Africa is significantly higher, making the area an important area for trade negotiations for the U.S. For example, World Bank data show growth in the Europe and Central Asia area as being 130.0% for GDP between 2000 and 2018 and 94.3% for GNI/capita. See https://data.worldbank.org/region/europe-and-central-asia?view=chart. Thus, the growth rate in Sub-Saharan Africa is three times as fast for GDP and more than twice as fast for GNI/capita when compared to Europe and Central Asia.

A Challenging 2020 for New FTA Negotiations

The U.S. has a very challenging agenda for 2020 before adding new negotiations with Kenya – a phase two agreement with China and one with Japan; ongoing negotiations with the EU; negotiations with the United Kingdom; and negotiations with India. There is thus what looks like a full agenda already in place for the United States which, of course, has elections this fall which may cut the level of engagement at least in the later months of the year.

Add the global complications from the worldwide coronavirus (covid-19) pandemic, and it could be a challenge for government personnel in both Kenya and the United States to be able focus attention and resources on negotiating an ambitious free trade agreement in 2020. The short-term challenge may be greater for the U.S. with its large and rapidly growing number of covid-19 cases than for Kenya where to date there are only seven covid-19 cases confirmed (all flowing from travellers coming from countries with significant numbers of cases). See, e.g., https://www.nation.co.ke/news/Kenya-coronavirus-cases-rise-to-seven/1056-5495482-meafutz/index.html; https://www.bbc.com/news/world-africa-51917920.

That said, talks with Kenya are an important opportunity to improve trade relations with a significant country in Sub-Saharan Africa and potentially create a blueprint for regional efforts for the current or future Administrations. Moreover, with the recently completed USMCA, the Trump Administration has an agreement it views as the model for the future with other trading partners. One would expect the U.S. to present many of the chapters from USMCA as applicable to any FTA with Kenya. Depending on Kenya’s willingness to enter into an ambitious FTA, there could be a path to a deal with the U.S. or at least the possibility for significant progress in 2020. Let’s hope meaningful progress can be made in the coming months despite the health and other challenges that are present.

China in the WTO – The U.S. View of China’s Compliance With Its Obligations

China became a member of the WTO on December 11, 2001. Because of the enormous differences in economic systems and the distance of needed reforms in China to make it a market economy, the Protocol of Accession and Working Party Report are exceptional in terms of topics covered, areas where China had significant work before being WTO compliant and the inclusion of special provisions to protect the interests of other WTO Members while China continued on its path of reform.

Because of China’s size and importance globally, the U.S. Congress passed legislation which includes a requirement for the U.S. Trade Representative to provide an annual report on the U.S. view of China’s Compliance with its WTO obligations. On March 6, 2020, USTR released its 18th report on China’s WTO compliance, a one hundred and ninety-two page document. The report consists of a executive summary, a section reviewing the U.S. assessment of China’s WTO membership, a section reviewing prior U.S. efforts to address trade distortions caused by China’s policies, a section on the new U.S. strategy to address China’s trade distortions, a section reviewing the mechanisms used to engage China, a section reviewing U.S. ongoing concerns and a lengthy appendix that provides greater detail on many issues. See 2019 Report to Congress on China’s WTO Compliance, https://ustr.gov/sites/default/files/2019_Report_on_China%E2%80%99s_WTO_Compliance.pdf.

The report provides a very good overview of the wide range of issues on which the United States has ongoing concerns about China’s actions and compliance with WTO obligations. While some of the concerns are supposed to be addressed in the Phase 1 Agreement the United States and China have entered into, many of the concerns are not yet addressed by China. Some of these remaining issues will be subject to upcoming negotiations on a Phase 2 Agreement. Others may be addressed through bilateral consultations, through specific dispute settlement cases , or through possible modifications to WTO rules or by other actions by the United States.

Executive Summary

The U.S. Administration views China as having a poor record on compliance with many parts of its WTO obligations. The Administration views such non-compliance and the continued nonmarket economic system in China as posing major distortions for China’s trading partners. The Executive Summary of this year’s report (pages 4-5) provides an overview of the concerns and actions being taken by the United States:

“In our 2017 and 2018 reports, we provided the Administration’s assessment of China’s WTO membership, the unique and very serious challenges that China’s trade policies and practices pose for the multilateral trading system and the effectiveness of the strategies that had been pursued to address the China problem in prior years. We also identified the critical need for new and more effective strategies – including taking actions outside the WTO where necessary – to address the challenges presented by China’s non-market economic system. In this year’s report, we focus on the positive outcomes to date of the Administration’s new and more effective strategy for engaging China, which has led to the signing of an historic trade agreement with China. We also highlight the important issues that remain to be addressed in our trade relationship with China.

“As we previously documented, China’s record of compliance with WTO rules has been poor. China has continued to embrace a state-led, mercantilist approach to the economy and trade, despite WTO members’ expectations – and China’s own representations – that China would transform its economy and pursue the open, market-oriented policies endorsed by the WTO. At the same time, China’s non-market approach has imposed, and continues to impose, substantial costs on WTO members.

“Over the past nearly two decades, a variety of bilateral and multilateral efforts were pursued by the United States and other WTO members to address the unique challenges presented by China’s WTO membership. However, even though these efforts were persistent, they did not result in meaningful changes in China’s approach to the economy and trade.

“In our past reports, we identified and explained the numerous policies and practices pursued by China that harm and disadvantage U.S. companies and workers, often severely. We also catalogued the United States’ persistent yet unsuccessful efforts to resolve the many concerns that have arisen in our trade relationship with China. We found that a consistent pattern existed where the United States raised a particular concern, China specifically promised to address that concern, and China’s promise was not fulfilled.

“The costs associated with China’s unfair and distortive policies and practices have been substantial. For example, China’s non-market economic system and the industrial policies that flow from it have systematically distorted critical sectors of the global economy such as steel and aluminum, devastating markets in the United States and other industrialized countries. China also continues to block valuable sectors of its economy from foreign competition, particularly services sectors. At the same time, China’s industrial policies are increasingly responsible for displacing companies in new, emerging sectors of the global economy, as the Chinese government and the Chinese Communist Party powerfully intervene on behalf of China’s domestic industries. Companies in economies disciplined by the market cannot effectively compete with both Chinese companies and the Chinese state.

“Faced with these realities, this Administration announced two years ago that it would be pursuing a new, more aggressive approach to the United States’ engagement of China. We explained that the Administration would defend U.S. companies and workers from China’s unfair trading practices and would seek to restore balance to the trade relationship between the United States and China. As part of these efforts, the United States would take all appropriate actions to ensure that the costs of China’s non-market economic system are borne by China, not by the United States. The United States also would continue to encourage China to make fundamental structural changes to its approach to the economy and trade consistent with the open, market-oriented approach pursued by other WTO members, which is rooted in the principles of non-discrimination, market access, reciprocity, fairness, and transparency. As we explained, if undertaken by China, these changes would do more than simply ease the growing trade tensions with its trading partners. These changes would also benefit China, by placing its economy on a more sustainable path, and would contribute to the growth of the U.S. economy and the global economy.

“The Administration based this new approach on the following assessments: (1) WTO membership comes with expectations that an acceding member not only will strictly adhere to WTO rules, but also will support and pursue open, market-oriented policies; (2) China has failed to comply with these expectations; (3) in recent years, China has moved further away from open, market-oriented policies and has more fully embraced a state-led, mercantilist approach to the economy and trade; and (4) China’s market-distorting policies and practices harm and disadvantage its fellow WTO members, even as China reaps enormous benefits from its WTO membership.

“Consistent with this more aggressive approach to China, the Administration is now using all available tools – including domestic trade remedies, bilateral negotiations, WTO litigation, and strategic engagement with like-minded trading partners – to respond to the unique and very serious challenges presented by China. But, the goal for the United States remains the same. The United States seeks a trade relationship with China that is fair, reciprocal, and balanced.

“Over the past year, the United States’ new approach to China began to demonstrate key progress with the signing of a “Phase One” economic and trade agreement in January 2020. This historic agreement requires structural reforms and other changes to China’s economic and trade regime in the areas of intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange. The agreement also includes a commitment by China that it will make substantial additional purchases of U.S. goods and services in the coming years. Importantly, the agreement establishes a strong dispute resolution system that ensures prompt and effective implementation and enforcement.

“Because the Phase One agreement does not cover all of the United States’ concerns, the United States will turn to Phase Two of its trade negotiations with China in order to secure resolutions to important outstanding issues. These discussions will focus on intellectual property, technology transfer, and services market access issues that were not addressed in the Phase One agreement as well as critical issues in areas such as excess capacity, subsidies, state-owned enterprises, cybersecurity, data localization and cross-border data transfers, pharmaceuticals and medical devices, competition law enforcement, regulatory transparency, and standards.”

Key U.S. Concerns

The bulk of the report lays out key U.S. concerns on a wide range of topics where China’s laws, regulations, policies and actions either deviate from WTO requirements or create significant market distortions. A list of the topics covered follows (pages 30-54 of the report) broken into six main topics and subtopics:

Industrial Policies including (1) Made In China 2025 Industrial Plan; (2) Subsidies; (3) Excess Capaciy; (4) Technology Transfer; (5) Indigenous Innovation; (6) Investment Restrictions; (7) Export Restraints; (8) Value-added Tax Rebates and Related Policies: (9) Import Ban on Remanufactured Products; (10) Import Ban on Recyclable Materials; (11) Standards; (12)
Secure and Controllable Policies; (13) Encryption; (14) Government Procurement; (15) Trade Remedies.

Intellectual Property Rights including (1) Trade Secrets; (2) Bad Faith Trademark Registration; (3) Pharmaceuticals; (4) Online Infringement; (5) Counterfeit Goods.

Agriculture including (1) Agricultural Domestic Support; (2) Tariff-rate Quota Administration; (3) Agricultural Biotechnology Approvals; (4) Food Safety Law; (5) Poultry; (6) Beef; (7) Pork; (8) Horticultural Products; (9)
Value-added Tax Rebates and Related Policies.

Services including (1) Banking Services; (2) Securities, Asset Management, and Future Services; (3) Insurance Services; (4) Electronic Payment Services; (5) Internet-enabled Payment Services; (6) Telecommunications Services; (7) Internet Regulatory Regime; (8) Voice-over-Internet Protocol Services; (9) Cloud Computing Services; (10) Theatrical Films; (11) Audio-visual and Related Services; (12) Online Video and Entertainment Software Services; (13) Express Delivery Services; (14) Legal Services; (15) Cross-border Data Transfers and Data Localization.

Transparency including (1) Publication of Trade-related Measures; (2)
Notice-and-comment Procedures; (3) Translations.

Legal Framework including (1) Administrative Licensing; (2) Competition Policy.

Most of the topics are longstanding areas of concern for U.S. businesses and the current and prior Administrations. Some are being addressed at least in part in the Phase 1 Agreement.

The mere fact that so many issues remain on the U.S. agenda with China despite years of high level meetings, WTO disputes and other engagements is a reflection of the challenges the U.S. and many other WTO Members have had with China honoring commitments it has made as a Member of the WTO.

Consider the electronic payment services topic as just one example of the areas of interest for the U.S. China made commitments to open this sector by 2006. Yet, despite consultations, a dispute at the WTO, a subsequent commitment by China to comply in 2013, the market remains closed to foreign service suppliers to the present time. China has new commitments to open the market as part of Phase 1 Agreement. Below is the USTR write-up in this year’s report (pages 48-49):

“In 2019, China continued to place unwarranted restrictions on foreign companies, including major U.S. credit and debit card processing companies, which have been seeking to supply electronic payment services to banks and other businesses that issue or accept credit and debit cards in China. In a WTO case that it launched in 2010, the United States argued that China had committed in its WTO accession agreement to open up this sector in 2006, and a WTO panel agreed with the United States in a decision issued in 2012. China subsequently agreed to comply with the WTO panel’s rulings in 2013, but China did not take needed steps even to allow foreign suppliers to apply for licenses until June 2017, when China’s regulator – the PBOC – finalized the establishment of a two-step licensing process in which a supplier must first complete one year of preparatory work before even being able to apply for an actual license.

“Currently, as of January 2020, over six years after China had promised to comply with the WTO’s rulings, no U.S. supplier of electronic payment services has been able to secure the license needed to operate in China’s market due largely to delays caused by PBOC. Indeed, at times, PBOC refused even to accept applications to begin preparatory work from U.S. suppliers, the first of two required steps in the licensing process.

“Throughout the time that China has actively delayed opening up its market to foreign suppliers, China’s national champion, China Union Pay, has used its exclusive access to domestic currency transactions in the China market, and the revenues that come with it, to support its efforts to build out its electronic payment services network abroad, including in the United States. This history shows how China has been able to maintain market-distorting practices that benefit its own companies, even in the face of adverse rulings at the WTO.

“In the U.S.-China Phase One agreement, China committed to ensure that PBOC operates an improved and timely licensing process for U.S. suppliers of electronic payment services so as to facilitate their access to China’s market. The United States will closely monitor PBOC’s licensing process going forward to ensure China’s compliance with its commitments in the Phase One agreement.”

Conclusion

The largest bilateral trade deficit (goods or goods and services) in the world is the U.S. deficit with China. For many years, the U.S. government has catalogued a large number of areas where the deficit is driven or exacerbated by distortions created by Chinese policies. Eighteen years after China’s becoming a WTO Member, the scope of the problems experienced by U.S. businesses attempting to export to China or participate in the Chinese market remains breathtaking.

China has a long history of promising reform that hasn’t occurred as documented in the 2019 and prior USTR reports to Congress on China’s WTO Compliance.

The current Administration has a lot of hope that the Phase 1 Agreement will address specific distortions in a wide range of areas and expand U.S. exports to China. The Administration believes that the enforcement provisions in the agreement will help avoid the lack of implementation by China that has characterized prior efforts.

A great deal more needs to be pursued to achieve true reciprocity with China. Some of the issues that need to be addressed are teed up for the Phase 2 negotiations but will be challenging to achieve agreement on as was reflected in China’s change of position on those same topics in 2019 which resulted in a partial agreement (Phase 1) being pursued instead of a comprehensive one.

The U.S. is actively pursuing WTO reform, working with other trading partners on certain items or going solo in raising major topics for discussion and reform. Unfortunately, China has shown little or no interest in addressing some of the core issues of concern to the U.S. with China’s economic system and policies at the WTO. For example, the U.S. is concerned about distortions created by non-market economies to the functioning of global trade for market economies. The U.S., EU and Japan are addressing the need for new rules to address distortions created by such economies (massive subsidies, state-owned or state-invested enterprises, creation of excess capacity, etc.). The U.S. has flagged the need to change how special and differential treatment works to reflect the changed market situation for countries like China and many others.

The coronavirus global challenge complicates the ability of the WTO or its major Members to pursue reform of the WTO or to achieve completion of negotiations on pending topics (e.g., fisheries subsidies). Concerns about the spread of the virus has led to the postponement of the 12th WTO Ministerial Conference which had been scheduled for early June in Kazakhstan. Restrictions on meetings in Geneva and travel from capitals will presumably slow down progress at the WTO.

One should expect the United States to continue to push major reforms at the WTO in 2020. Progress is unlikely to be meaningful in 2020 and some have estimated a reform timeline measured in years (e.g., 2025). Where the WTO is unable to address reform expeditiously, the United States, like other Members will pursue other avenues to address trade concerns. The United States will also pursue bilateral negotiations with China aggressively, seek timely enforcement of existing commitments and use U.S. laws to obtain movement where the other approaches are not delivering results.

As stated in the Executive Summary to this year’s report, “The United States seeks a trade relationship with China that is fair, reciprocal, and balanced.” The current relationship with China meets none of those characteristics in the view of the U.S. Administration. If such a relationship cannot be accomplished through the WTO, this Administration will pursue changes bilaterally or unilaterally if needed.

Impasse on the WTO Appellate Body – Any Progress Likely by the 12th Ministerial?

The last Appellate Body decision is supposed to be issued by the end of March 2020, involving the cases challenging Australia’s plain packaging requirements for tobacco products. After that there will be no Appellate Body functioning until/unless there is a resolution of the many concerns that have been raised by the United States over the last two decades.

A significant number of active dispute settlement users are working through an arbitration process pursuant to Article 25 of the Dispute Settlement Understanding that they can use for disputes between each other and hope to have worked out the process by June. Other countries have found one-off approaches (such as agreeing to postpone right to appeal til a second tier review is reestablished) or have agreed not to take an appeal from a panel decision. All such actions are intended to be temporary in duration, but may be in place far longer than many Members think simply because of the failure to fully engage in understanding how the problems arose in the first place.

The United States has not only presented its case to the Dispute Settlement Body and the WTO General Council over the last several years but has also released a detailed report on the WTO Appellate Body last month which reviews the problems and costs to the U.S., as covered in a recent post. See https:://currentthoughtsontrade.com/2020/02/14/ustrs-report-on-the-wto-appellate-body-an-impressive-critique-of-the-appellate-bodys-deviation-from-its-proper-role/.

While many WTO Members hope for a quick resolution to the Appellate Body’s situation, the United States has indicated repeatedly that any resolution can only occur after Members come to grips with why the Appellate Body deviated from the mandate of the Dispute Settlement Understanding on so many issues and with such frequency. While the U.S. has opined about possible reasons for the deviation, there has been little discussion to date among the Members on the reasons why.

A very interesting speech was given by one of the Appellate Body members whose term expired on December 10, 2019 at this year’s Georgetown University Law Center’s International Trade Update on March 5, 2020. The speech by Thomas Graham provides his personal views based on his time on the Appellate Body. The speech adds a different perspective on some possible reasons for why the problems identified by the United States developed over time. Because of the importance of the views of a former Appellate Body member on the core issues facing the WTO Members in finding a path forward on dispute settlement, the speech in its entirety is attached below.

T.Graham.GreenwaldLecture.FINAL_

Mr. Graham (pages 8-9) identifies aspects of performing his function as an Appellate Body member that struck him as leading to the problems identified by the U.S. and others:

(1) “the degree of control by the Appellate Body staff leadership”;

(2) “an over-emphasis on ‘collegiality’ that shaded into peer pressure to conform”;

(3) “an excessive striving for consensus decisions coupled with a discouragement of dissents”;

(4) “a sense of infallibility — ‘It’s right because we say it’ – and of entitlement, to stretch the words of agreed texts, and to stretch decisions beyond merely resolving a particular dispute”;

(5) “an undue adherence to precedent”, baking in mistakes’.

“Together, these characteristics amounted to the Appellate Body acting like a court that was not accountable to anyone.”

Because the WTO Members had no practical means of correcting appellate decisions and were unable to negotiate modifications to the rules and because Appellate Body decisions are automatically adopted absent a negative consensus, the Appellate Body was not accountable to the Membership or to the Dispute Settlement Body.

The above aspects of the operation of the Appellate Body and the practical constraints on Members or the DSB in being able to correct actions by the Appellate Body coupled with the refusal of WTO Members to take U.S. concerns seriously has led to the current crisis.

While other former members of the Appellate Body may disagree with Mr. Graham’s view of the internal operation of the Appellate Body and how the issues flagged led to the Appellate Body deviating from its limited role, the speech is an important contribution to the discussion that needs to occur within the WTO about the proper function of any second stage review system, why the Appellate Body deviated from that function/role and what steps Members need to agree upon to ensure the second stage review system is limited to the role Members assign the system.

WTO Reform – U.S. Objectives from 2020 Trade Policy Agenda

The United States Trade Representative annually releases the Administration’s Trade Policy Agenda and prior year’s Annual Report. The report is released during February each year. On February 28, 2020, USTR released the 2020 Trade Policy Agenda and 2019 Annual Report of the President of the Untied States on the Trade Agreements Program. https://ustr.gov/sites/default/files/2020_Trade_Policy_Agenda_and_2019_Annual_Report.pdf.

This year’s trade policy agenda reviews activities at the WTO, including certain important disputes (pages 9-11), a review of where the U.S. perceives it led efforts to change the World Trade Organization (pages 13-15), and identifies priorities for 2020 at the WTO. Such priorities include pursuing disputes through the WTO where appropriate and pushing “for a WTO that reflects current economic realities and strengthens free-market economies”. Pages 18-19. As stated in the report,

“The United States will continue to lead the effort on WTO reform. In addition to addressing the Appellate Body, seeking a new fisheries agreement, pursuing a digital commerce agreement, enforcing notifications
obligations, and seeking reform of ‘special and differential treatment’ for “developing” countries, the United States will advocate for other changes at the WTO that will have the WTO working for its Members. A number of features at the WTO reflect out-of-date assumptions and do not reflect current realities. The United States has already submitted papers focused on market access and tariff issues with the intent of updating our understanding of the current state of agriculture trade and the challenges farmers are facing today. Through our agriculture ‘reset’ efforts, the United States is trying to break the bad habit of taking the same entrenched positions and expecting a different outcome.

“The United States will also explore a broader reset at the WTO. The WTO currently locks-in outdated tariff determinations that no longer reflect deliberate policy choices and economic realities. As a result, many countries that have large economies that have developed significantly over the past two decades continue to maintain very high bound tariff rates, far in excess of the rates applied by the United States or to which the United States is bound. For example, the U.S. average bound tariff rate and applied Most Favored Nation rate are both 3.4 percent. In comparison, Brazil’s bound tariff rate is 31.4 percent, and its applied rate is 13 percent. India’s bound and applied tariff rates are 48.5 percent and 17 percent, respectively.
Members need to fundamentally rethink tariffs and their role, recognizing that commitments on tariffs should reflect current economic conditions.

“In addition, the United States will continue to push for a close review of the WTO’s budget, which, as demonstrated by egregious Appellate Body member salaries, requires greater scrutiny. The WTO must ensure that there is accountability and that expenditures reflect the priorities of its Members.

“Finally, the United States will advocate for changes that allow for additional and more effective plurilateral agreements. There is an urgent need for a new political and legal understanding at the WTO that enables
the pursuit of less-than-fully multilateral outcomes while preserving the characteristics of the WTO.”

The importance of the U.S. focus on a “broader reset” to the functioning of the WTO should be obvious. The GATT and WTO have worked on a system of periodic enlargement of liberalization with members undertaking specific additional obligations through tariff bindings or service sector commitments or through changes to agreements. The U.S. is seeking a fundamental modification in the approach to obligations, one which reflects changing capacities of the members and one which reflects the organizing principle of agreements among market economies. In a consensus-based system, any of the fundamental reforms that the U.S. has been seeking are not achievable without a major crisis and most likely not even then.

The WTO dispute settlement system is in the throes of a crisis over the proper functioning of the Appellate Body. The United States has provided a detailed review of the problems over the last two years, the history of when problems developed and how the problems identified constitute deviations from the purpose and structure of the Dispute Settlement Understanding. Despite some efforts by other WTO Members, resolution of the impasse seems a long way off based on the different positions of major players.

Similarly, that the GATT and WTO are premised on market-based economies is hardly controversial. Yet, the rise in importance of nonmarket or state-directed economies as Members has created distortions in the functioning of markets and challenges the viability of the WTO and certainly the adequacy of current WTO rules. The issue of different economic systems within the WTO has created a second crisis in fact.

While the United States, the European Union and Japan have been working on proposals to address certain drivers of the distortions created by nonmarket economies, the recent General Council meeting shows the challenge to having movement even on the rules needed to address such distortions. Compare statements of the United States and China from the General Council meeting of March 3, 2020. https://geneva.usmission.gov/2020/03/03/statements-by-ambassador-dennis-shea-at-the-march-3-2020-general-council-meeting/ (agenda item 9); http://wto2.mofcom.gov.cn/article/chinaviewpoins/202003/20200302941477.shtml.

U.S. Views on the WTO at 25 and What are the U.S. Interests

The 2020 Trade Policy Agenda and 2019 Annual Report from USTR contains an important chapter, “The World Trade Organization at Twenty-Five and U.S. Interests”, which reviews the Trump Administration’s views of whether U.S. interests have been served by the WTO as it has functioned and what is needed to make the WTO function as intended. The sixteen page section of the report provides a concise review of U.S. concerns with the WTO and the Administration’s objectives for WTO reform. A lengthy excerpt (pages 4-8) follows:

2. Straying from the Original Mandate

“The past quarter century has demonstrated that the WTO fails to act in accordance with its aspirational goals and is incapable of dealing with many of the major challenges facing the modern international trading
system. This is due in large part to the difficulty the organization has faced when it has attempted to negotiate improvements to the system since the Uruguay Round in 1994.

“Under the GATT system, between 1947 and 1994, there were eight negotiating rounds – each of which led to lower tariffs and fewer trade barriers among all GATT Members. But in the twenty-five years since the
WTO began operation—though there have been some positive agreements that address discrete aspects of trade—Members have not reached a significant new multilateral market access agreement. As a result, most of the fundamental rules that govern global trade were negotiated before the WTO even came into existence.

“The last major effort to modernize these rules under the WTO – the Doha Round – started to collapse in 2008, and has now been dead for more than a decade. Despite all of the dramatic changes that have taken place in the last quarter century – the rise of China, the evolution of the Internet, and the emergence of new, potentially disruptive technologies – the WTO is still largely operating under the same framework from the early 1990s. This has resulted in several major failures of the WTO to live up to its mandate.

“a. Failure to Converge: The Challenge of Non-Market Economies

“The political, economic, and trade landscape in 2020 differs greatly from those that existed in 1994. At the time the WTO came into existence, many in the West hoped that most nations of the world would coalesce around a model of open societies, free markets, and democratic values. It was hoped that such a movement would usher in an era of relative peace in which geopolitical considerations would become less of a factor, and competition would exist primarily at the commercial rather than the political level. This optimism prevailed in Washington and other Western capitals despite warning signs that some nations were not committed to openness.

“Twenty-five years later, a starker reality has come into view as non-market economies like China continue to perceive advantages in maintaining state-directed economic policies. The growing influence of these non-market economies in world trade amplifies the need for the WTO to update its rulebook with new disciplines on industrial subsidies, state-owned and state-influenced enterprises, forced technology transfer, and intellectual property theft. The WTO must also meaningfully address issues like digital trade and labor and environmental standards.

“The WTO’s failure to keep pace with new developments in the global economy has resulted in significant advantages for non-market economies to the detriment of market economies like the United States. As just one example, scholars estimate that China’s accession to the WTO has contributed to the loss of millions of jobs in the United States, primarily in the manufacturing sector.

“Moreover, the establishment of the WTO has ushered in an era of massive global trade imbalances. While neutral market factors contribute to these long-running imbalances, that the imbalances remain unchanged for decades, despite varying periods of growth and recession, indicates there are other, non-market factors at play. Unfortunately, the global trade system under the WTO currently enables these distortions and imbalances, and the benefits enjoyed by some countries at the expense of others under the current system create serious barriers to reform.

“While China is not the only country that has benefitted from the WTO’s deficiencies, it remains the primary example of the non-market economies thriving under the current system. China’s economic practices are incompatible with the norms the WTO sought to establish at its founding,
and the organization has demonstrated an inability to respond effectively to the challenges it poses.

“b. Failure to Develop: Outdated Standards and Rules for Developing Countries

“No one expected in 1994 that the Uruguay Round and Marrakesh Agreement would be the final word on world trade policy. As with the previous era of world trade under the General Agreement on Tariffs and Trade of 1947, parties assumed there would be additional rounds of agreements to update rules and address new challenges in world trade over time. This process has not occurred, leaving in place outdated rules that have failed to keep pace with the changing world.

“The significant advantages some countries enjoy over others under the current system have completely undermined incentives for Members to agree to meaningful changes and reforms. While there are several examples of these unfair advantages, many stem from two structural issues.
First, current WTO rules allow large and advanced economies to claim special and differential treatment as “Developing Countries” during negotiations. Second, the bound tariff rates established at the time Members entered the agreement are essentially permanent under current rules.

“i. Treatment of Advanced Economies as “Developing Countries”

“Despite the substantial growth of the global economy since 1994, the WTO continues to rest on an outdated and oversimplified dichotomy between developed and developing countries. This framework has allowed some WTO Members to maintain unfair advantages in the international trade arena.

“Under the current system, countries merely need to self-declare as “developing” – regardless of their GDP or role in global trade – to seek flexibilities under WTO rules. This special and differential treatment can take the form of generous transition periods, higher tariff bindings, and the ability to use prohibited subsidies, among others.

“Today, nearly two-thirds of WTO Members claim developing-country status, arguing they are entitled to blanket special and differential treatment as a matter of right. While some developing-country designations are certainly legitimate, many are entirely unreasonable in light of current economic circumstances. For example, advanced economies like China,
India, Mexico, Saudi Arabia, South Africa, and Turkey continue to insist they are automatically entitled to special and differential treatment. A similar claim is made by some of the richest nations in the world, including Brunei, Kuwait, Qatar, and the United Arab Emirates.

“The clear purpose of special and differential treatment is to help truly disadvantaged countries ease their economies into the global trade system. This does not work if large or wealthy countries abuse this framework and seek to take advantage of benefits meant for countries whose economies are truly just getting off the ground.

“The lack of differentiation among self-declared developing countries has also severely hampered the WTO’s ability to achieve meaningful negotiated outcomes that expand market access, as certain large and advanced economies feel entitled to claim exemption from new rules, avoid engagement on substantive issues, and maintain outdated asymmetries that work to their advantage.

“ii. Permanent Disparate Tariff Rates

“The WTO has failed to harmonize tariffs over time. As a result, many significant global traders continue to have very high bound tariff rates, far in excess of U.S. bound or applied tariff rates.

“The U.S. average bound tariff rate and applied most-favored-nation (MFN) rate are both 3.4 percent. In comparison, Brazil’s bound tariff rate is 31.4 percent, and its applied rate is 13 percent. India’s bound and applied tariff rates are 48.5 percent and 17 percent, respectively.

“Under current WTO rules, these rates are locked in place with no sunset clause or meaningful mechanism to allow the United States and other Members to address enormous differences. It is not reasonable to accept that because the United States agreed to such disparities many years ago, when economic and geopolitical conditions were very different, that the United States should tolerate them in perpetuity. Commitments on tariffs should keep pace with the realities of the global economy rather than locking certain countries into nonreciprocal rates.

“c. Failure to Enforce: A Breakdown in the Rules as Originally Agreed

“The WTO has strayed from the system agreed to by WTO members and has appropriated to itself powers that WTO Members never intended to give it. This drift has primarily taken place in relation to transparency require- ments and the dispute settlement system.

“i. Transparency

“All WTO Members undertake significant commitments to provide regular notifications of subsidy programs and other information critical to assessing trade conditions around the world. Despite these clear obligations, many U.S. trading partners – including significant economies like China and India – choose to ignore them. As of December 2019, more than 70 percent of Members had not submitted their most recent questionnaire on their import licensing procedures, and over a quarter of agriculture notifications from 1995-2016 were outstanding. This poor adherence to notification obligations has created a lack of transparency at the WTO, which has led to the failure of many Members to implement
existing commitments and the breakdown of negotiations. When countries cannot adhere to these most basic of existing obligations, it is unsurprising that they cannot achieve consensus on new, more ambitious commitments.

“ii. The Dispute Settlement Process

“The United States signed on to the Uruguay Round Agreements with the understanding that its sovereignty would be respected and its existing domestic laws dealing with unfair foreign trade practices would remain fully effective. Instead, the WTO’s Appellate Body has imposed new rules never agreed by the United States or approved by the Congress, dramatically undermining this understanding.

“Article 3.2 of the Dispute Settlement Understanding plainly states, ‘Recommendations and rulings of the Dispute Settlement Body cannot add to or diminish the rights and obligations provided in the [WTO] covered agreements.’ In other words, the dispute settlement process was never intended to make new rules that would become binding on Members. It
was instead designed to help Members resolve specific disputes among themselves about the application of existing rules, as set out in the text of the agreements. These limitations remain vital to U.S. sovereignty because they ensure the United States does not become bound by obligations that Congress has not approved.

“Over the last quarter century, the United States has become the chief target of litigation at the WTO, and has at least partially lost the overwhelming majority of cases brought against it. 155 disputes have been filed against the United States, while no other Member has faced even a hundred disputes. According to some analyses, up to 90 percent of the disputes pursued against the U.S. have resulted in a report finding that a U.S. law or other measure in question was inconsistent with WTO agreements. This averages out to five or six successful WTO disputes against the United States every year.

“In other words, the WTO has effectively treated one of the world’s freest and most open economies – with an enormous and growing trade deficit – as the world’s greatest trade outlaw. In so doing, the WTO’s Appellate Body has repeatedly created new obligations from whole cloth. For example:

“ The Appellate Body has attacked U.S. countervailing duty laws, making it easier for other countries to provide market distorting subsidies through non-market policies and practices.

“ The Appellate Body has interpreted WTO rules in a manner that puts the U.S. tax system at an unfair and illogical disadvantage compared to that of many trading partners.

“ The Appellate Body has interpreted the Agreement on Safeguards – an agreement critical to addressing global import surges that can overwhelm a particular industry – in a manner that significantly limits the ability of Members to use that vital provision.

“ The Appellate Body has interfered with the appropriations process by limiting Congress’s ability to spend money collected through antidumping and countervailing duties.

“In many cases, the Appellate Body’s interpretations of WTO rules would prevent the United States from taking action to address unfair trade practices that hurt U.S. workers In this sense, it has also usurped the U.S. government’s accountability to those who are truly sovereign – the American people.

“For many years, U.S. Administrations under both parties have warned trading partners of the harm resulting from Appellate Body activism. The Appellate Body simply cannot be allowed to flaunt basic rules of operation to which all Members have agreed. Thus far, U.S. concerns have largely been ignored.

“These lapses have incentivized WTO Members to rely on litigation through the Appellate Body to get results rather than negotiation. This, in turn, has greatly undermined the negotiating process at the WTO because countries now believe they can obtain better outcomes through litigation than through negotiation, especially with the United States. Such countries have no incentive to negotiate in good faith if they believe there are easier
avenues to pursue their interests.

“Furthermore, in its day-to-day operations, the Appellate Body has developed a troubling pattern of ignoring mandatory deadlines for deciding appeals, dragging some – such as those in the U.S.-EU Large Civil Aircraft disputes – out for over a year each; making impermissible findings on issues of fact, including fact-finding related to Member’s domestic laws; issuing unnecessary advisory opinions rather than facilitating negotiations
between parties; treating prior Appellate Body interpretations as binding precedent for dispute settlement panels; extending Appellate Body members’ terms without authority; and compensating Appellate Body members excessively and opaquely.

“These actions represent a tendency by the Appellate Body to both institute rules to which WTO Members have not agreed and ignore or evade existing rules written in plain language. This has led to a significant decline in trust in the Appellate Body, which has opened the entire dispute settlement system to serious vulnerabilities. The WTO simply cannot claim to stand for a rules-based trading system if its own institutions fail to follow clear and explicit rules. Any action beyond these rules undermines the WTO’s role as a negotiation forum, lacks legitimacy, and usurps Members’ sovereignty.

3. Summary

“Despite the serious challenges facing the World Trade Organization, the United States values the WTO and is working diligently within the organization to find solutions. For example, the United States is actively engaged in negotiations to discipline harmful fishing subsidies and to develop new rules to govern digital trade. The United States has called attention to unequal bound and applied tariff rates, and continues to press other Members for additional market access. The United States has also offered specific proposals to improve transparency, address the lack of compliance with existing notification obligations, and promote greater differentiation among self-declared developing countries. The United
States continues to press longstanding concerns with the Appellate Body and the dispute settlement system, including its lack of transparency. The United States has taken each of these steps in an attempt to ensure that the WTO retains its relevance to trading nations.”

Chances for Meaningful Reform are Slim at Best

Many WTO Members recognize that WTO reform is important. The WTO Director-General and his team have noted the need for reform and the fact that reform has become an important topic in the last year or so. See, e.g., DDG Wolff: An update of multilateral trade rules is needed to increase their relevance, https://www.wto.org/english/news_e/news20_e/ddgaw_03mar20_e.htm;

However, few, if any, Members other than the United States, have expressed the view that fundamental reform is needed to ensure the relevance of the WTO going forward. The U.S. objectives for reform are sweeping and would require many Members to accept broader liberalization, rules on nonmarket economy distortions, loss of historic privileges based on changed economic situations and a return to a system largely focused on negotiations to achieve changes in the status quo. Under rules of consensus and the views expressed by many Members, it is unlikely that the collective will for fundamental reform exists even if there is agreement that some reform is desirable.

For the Trump Administration fundamental reform is critical to making the WTO a viable organization and ensuring that trade relationships under multilateral rules are fair in an ongoing sense. What the U.S. seeks is an ambitious reform outcome. The USTR conclusion to its review of the WTO’s first 25 years (page 16, provided below) summarizes the concerns and indicates a continued U.S. commitment to the WTO. The U.S. is certain to continue to use all tools at its disposal to pursue meaningful reform or obtain reciprocity bilaterally. The message from the U.S. is clear. Let’s hope that meaningful reform will occur even if the likelihood of such reform seems remote.

CONCLUSION

“It is difficult now, twenty-five years after its inception, to declare the WTO a success for American interests. Indeed, the organization in many ways ignores and enables unbalanced trade and unfair trade practices. If the WTO is to be credible as a vibrant negotiating, implementation, and dispute settlement forum, it must be limited to its original mandate and address areas in need of structural reform. This means Members must recognize and reaffirm that the WTO is an organization committed to promoting the adoption of market-based policies by its Members. The goal of the organization must continue to be a greater convergence around market-based principles, not the co-existence of radically different economic systems. The WTO – and its dispute settlement system – must also respect the rules as agreed to by Members, embrace its role as a negotiating forum rather than a litigating entity, and stop its infringement on the sovereignty of the United States and other Members.

“Looking ahead to the Twelfth Ministerial Conference this year, the United States believes that Members must identify opportunities to make meaningful progress on these objectives. To remain a viable institution
that can fulfill all facets of its work, the WTO must also find a means of effectively pursuing negotiations between Ministerial Conferences, focus its work on structural reform, and adapt to address new challenges to the 21st Century world trade system. The United States looks forward to continuing its leadership role in advancing these changes and the broader mission of the World Trade Organization.”

Agriculture Reform and Liberalization — What is Likely for the WTO’s 12th Ministerial this June?

Agriculture is a critical subject for many WTO Members. Liberalization in agriculture at the GATT and now the WTO has lagged far behind that on industrial goods, a fact readily seen when comparing tariff levels on agricultural goods vs. industrial goods, with agricultural tariffs typically twice or more as high as the bound industrial rates with much higher individual tariffs and with products subject to tariff rate quotas. See, e.g., https://www.wto.org/english/tratop_e/tariffs_e/tariff_data_e.htm

The critical importance of agriculture for human survival for many makes agricultural trade different from trade in manufactured goods. The history of starvation flowing from natural and manmade events make nations reluctant to become too dependent on imported agricultural products. Moreover, most of agriculture is subject to significant variability based on weather conditions and changes. While industrial goods production can be subject to natural events, production tends to be far less dependent on the vagaries of nature.

When the Uruguay Round agreements included initial liberalization in agriculture, there was also agreement to restart talks by 2000 on the next round of liberalization. There were many aspects in the agriculture negotiations during the Doha Development Agenda aimed at achieving increased liberalization, and there have been some achievements in improving liberalization in agriculture over the first twenty-five years of the WTO. Agreement by developed countries to eliminate export subsidies is one important example.

However, the very ambitious agenda during the Doha Round on agriculture has largely not been resolved, and so a range of issues continue to be pursued by various Members or groups of Members within the Special Session of the Agriculture Committee. Which of these items will potentially lead to progress at the upcoming 12th Ministerial Conference in Kazakhstan this June is an important part of the ongoing activities in Geneva.

Unfortunately, despite what has been true throughout most of the twenty- five years of the WTO where most documents presented for consideration in negotiations have been made available to the public, the Agriculture Committee Special Session has seen huge numbers of documents, even from the Chair of the Special Session treated as JOB or RD (room) documents with the result that the documents are typically not released to the public. Thus, a document recently released by the Chair entitled “Elements and processes for a possible outcome in agriculture at MC12” (JOB/AG/180) is not public. However, the WTO write-up of the meeting provides an overview of topics explored and identifies topics likely to be manageable by the 12th Ministerial. See “Eyeing MC12 for an outcome, agriculture negotiators focus on doable elements and processes”, WTO news, 24 February 2020, https://www.wto.org/english/news_e/news20_e/agri_24feb20_e.htm.

The topics discussed include most of the topics covered under the Doha Development Agenda including domestic support levels, market access, cotton, export competition, export restrictions, public stockholding and special safeguard mechanism.

Press accounts indicate that, inter alia, transparency improvements have a chance of obtaining agreement by MC 12. In that connection, the United States submitted a paper which was discussed this week that addressed “Notification of Select Domestic Support Variables in the WTO”. The U.S. paper reviewed issues Members had repeatedly raised relevant to the level of domestic support. The U.S. demonstrated that what was supplied in notifications were often viewed as insufficient or were unclear. Thus, the U.S. documented a number of areas where greater transparency would improve the process for all Members being able to understand compliance by trading partners. JOB/AG/181 (19 February 2020)(this job document was released publicly).

Paragraphs 1.3 -1.5 of the U.S. submission provides a summary of where a review of past activities within the Committee on Agriculture (“CoA”) show a need for further transparency and that the U.S. paper is intended to help Members have a technical discussion on transparency in notifications:

“1.3. The United States has identified several areas within the domestic support pillar where CoA discussions are driven by inquiries seeking to gain further transparency in relation to notifications. These areas include: (1) market price support (MPS) (specifically eligible production, adjustments
to the fixed external reference price, and product basis); (2) negative support levels; (3) classification and non-notification; (4) currency and inflation, and (5) value of production (VoP) data. This list is not exhaustive.

“1.4. For each area, this paper attempts to summarize what information has been provided through notifications and what has had to be discerned from questions posed in the CoA. This summary is based primarily on a review of notifications submitted by Members covering the 2005 to 2018 notification years, as well as responses to CoA questions dating back to 1995. Additional Members and years were drawn upon in a limited number of circum- stances to provide a fuller illustrative discussion.

“1.5. This paper is intended to support Members’ ability to engage in a technical discussion regarding transparency in notifications.”

The U.S. paper does an excellent job of laying out important impediments to Members’ understanding core elements of the domestic support information supplied by Members in their notifications. The paper is available below.

JobsAG181

As reviewed in earlier posts, increased transparency is an important part of the WTO reform agenda that the U.S. is seeking more broadly. Within agriculture, the failure to have full and timely transparent notifications (including in some instances by the U.S.) handicaps the ability to make substantive progress in other areas. For example, in cotton, the U.S. has long raised the concern that major cotton subsidizers haven’t reported full information on the size of subsidies provided making resolution of the cotton issues unacceptable where major contributors to the problem are not participating.

Other issues being discussed within the Committee on Agriculture’s Special Session are long standing and arguably can’t be quickly resolved without trade offs in other areas. Public stockholding is one such area, although the peace clause introduced at the 10th Ministerial Conference provides interim protection for countries’ support programs in this area. Transparency, limits on what can be done and where product can be sold are all relevant topics within the area of public stockholding. But for agriculture exporting countries, there has been a strong desire for expanded market access which has not happened since the start of the WTO. Public stockholding issues pose a reduction of market access. While the Chair has teed up a suggested solution on public stockholding, it is hard to see any final resolution without expanded liberalization/market access being addressed as well.

Conclusion

While agriculture is important to nearly all WTO Members, the strong divisions between Members and the long term lack of full transparency of programs, subsidies and other issues makes any significant movement over the next few months unlikely. Hence, agriculture will likely have a minor role in the 12th Ministerial Conference in Kazakhstan in early June.

Potential U.S.-U.K. Free Trade Agreement — Potential Upside issues for the United States

The Trump Administration alerted Congress in 2018 of its intention to negotiate a free trade agreement with the United Kingdom at such time as the U.K. withdrew from the European Union. Letters of October 16, 2018 to Congress, https://ustr.gov/sites/default/files/20181017004930805-3.pdf. In February 2019, USTR released its intended negotiating objectives for an FTA with the U.K. See https://ustr.gov/sites/default/files/Summary_of_U.S.-UK_Negotiating_Objectives.pdf. While a working group has been in place for the last several years between the two countries, with the U.K. withdrawal from the EU last month, there is significant interest in both countries in moving the talks forward.

With the U.K. leaving the EU, the U.K. is obviously anxious to secure trading relationships with its major trading partners on its own terms as quickly as possible. While the U.K. has announced continuation of FTAs under the same terms as the EU had negotiated with a few countries, 2020 will see great focus on its negotiations with the EU and with the United States.

For the United States, a free trade agreement with the United Kingdom would not only be important as the U.K. is the fifth largest economy in the world, the 8th largest source of imports into the U.S. and fifth largest export market for the U.S., but also an important opportunity to address challenges in the trading relationship that were not addressable while the U.K. was part of the EU. To the extent that the U.S. seeks to address such issues, doing so ahead of any EU-U.K. agreement will probably be critical to ensuring the U.K. can commit to regulatory and other issues meeting U.S. needs or objectives.

In the WTO last week, the EU had its 14th Trade Policy Review. On February 18th, the United States outlined a series of concerns with EU policy that will certainly be a focus of U.S. negotiations with the U.K. to see such policies are not continued by the U.K. in its independent trade policy. Excerpts from Ambassador Dennis Shea’s comments are provided below reviewing U.S. concerns with the EU trade policies:

“First, the United States remains deeply concerned by unjustified EU barriers to our agricultural exports. Recently, dozens of WTO Members have expressed concerns in the SPS and TBT Committees and in the Council on Trade in Goods regarding EU pesticide policy, which restricts trade without scientific justification or benefit to human health.

“Beyond pesticides, we are equally troubled by the EU’s unjustified non-tariff barriers that impede the use of modern agricultural tools and technologies such as biotechnology, veterinary drugs and pathogen reduction treatments, all of which help to ensure a safe, sustainable food supply.

“More disturbing, the EU is foisting its misguided domestic policy on other countries through regional trade agreements and development assistance initiatives. This approach will have global consequences, including impeding the ability of least developed and African countries to modernize their agricultural systems to feed a booming population and develop their
economies.

“With respect to dairy, despite efforts to reform EU policy by eliminating milk production quotas, the Commission’s market intervention actions during the 2016-2019 period interfered with market adjustments and had a serious impact on the price of skim milk powder on the world market. These market interventions reduced export revenue and domestic milk prices for the United States and other dairy-exporting countries. As it considers further changes in its Common Agricultural Policy, we encourage the EU to avoid programs that distort world markets to the detriment of other exporters.

“Second, as we regularly raise in the TBT Committee and the Council on Trade in Goods, the United States also has concerns about the proliferation of EU TBT measures that affect U.S. manufacturers and producers in a wide range of sectors, including medical devices, chemicals and high tech products.

“These barriers derive in large part from the EU’s TBT policies that result in a closed, regional approach that discriminates against U.S. – and other foreign – manufacturers by relying on regional, instead of international standards, and by requiring local testing of products.

‘Even worse, the EU exports trade-restrictive elements of its own standards and regulatory system to countries with which it negotiates trade preferences and to which it provides technical assistance. The EU also presses these policies in international organizations, such as the International Laboratory Accreditation Cooperation (ILAC), which will undermine those organizations and the benefits they have for the international trading system.

“Third, we are deeply troubled that EU member states’ fisheries subsidy policy is heading in the wrong direction. Last year, the European Parliament not only voted to reintroduce subsidies for fishing vessel construction, but also increased fisheries funding by more than one billion euros annually– totaling close to 8 billion euros over a six-year period and placing the EU in the #2 slot as the world’s largest subsidizer of its fisheries.
European Council Ministers then upped the ante by proposing to subsidize as much as half the value of these new fishing vessels. This is particularly concerning. Just as the WTO is seeking to finalize a multilateral agreement to constrain capacity-enhancing fisheries subsidies, the EU is not only proposing ways to maintain and even increase these subsidies without limits, but also suggesting that the WTO should explicitly label them as ‘green.’

“Likewise, the EU’s newly announced ‘green deal’ is also cause for serious concern. The combination of legislative and nonlegislative so-called ‘green’ policy initiatives creates a strong risk of additional trade restrictions in the EU market. These policies, while citing laudable environmental objectives, risk disrupting global supply chains.

“Fourth, regarding services, the United States is extremely disappointed that a number of governments in the EU have adopted or are moving closer to adopting unilateral digital services taxes (“DSTs”) that appear designed to tax revenues earned by particular U.S.-based firms.

“The United States conducted a formal investigation of the French DST, and we concluded that this measure is discriminatory due to the selection of services covered and the revenue thresholds for applicability. It also contravenes a number of prevailing international tax principles.

“Countries that enact a unilateral DST are jeopardizing the OECD effort to reach consensus on a multilateral solution for new international tax rules. We strongly support the OECD process. But in the event a country moves outside the OECD process and unilaterally imposes a DST, the United States will take all appropriate action to defend our interests.”

https://geneva.usmission.gov/2020/02/18/u-s-statement-at-the-eu-trade-policy-review/

Addressing these types of issues are part of the U.S. negotiating objective with the U.K. and are important for U.S. agricultural and industrial sectors and for U.S. digital service providers.

Outside of agriculture where existing tariffs can be significant and products can be subject to tariff rate quotas, most of the additional liberalization will be through addressing non-tariff barriers, addressing regulatory differences through mutual recognition agreements or harmonization, by further liberalization in services and adopting agreed rules on e-commerce.

For example, U.S. imports from the U.K. in 2019 resulted in duties being collected in the amount of $628.6 million, roughly 1% on imports for consumption of $63.2 billion. Close to 40% of the ordinary customs duties collected on imports from the U.K. are on autos entered under HS 8703, a category of sensitivity to the United States based on its Section 232 investigation in 2018.

Based on the EU statements on negotiations with the U.K. going forward, any desire by the U.K. to not comply with a wide range of EU regulatory regimes will likely lead to a different type of free trade agreement being offered to the U.K. than a broad FTA. The U.K.’s size and proximity have led members of the EU Parliament and the EC Trade Commissioner to indicate that FTA models such as those between Canada and the EU will not be available to the U.K. absent an acceptance of core regulatory approaches used by the EU. At the same time, the U.K. has indicated that it does not intend to comply with all EU regulations going forward. The interplay between the two sets of negotiations (EU-U.K.; U.S.-U.K.) will present challenges and opportunities for both the U.K. and the United States.

An Opportunity for the United States Not Likely to Be Pursued

USTR’s February 2019 summary of negotiating objectives for talks with the United Kingdom did not include any objectives addressing treatment of border taxes. In the Bipartisan Congressional Trade Priorities and Accountability Act of 2015, there was a principal negotiating objective on border taxes which focuses on negotiations at the World Trade Organization:

“(18) BORDER TAXES.—The principal negotiating objective of the United States regarding border taxes is to obtain a revision of the rules of the World Trade Organization with respect to the treatment of border adjustments for internal taxes to redress the disadvantage to countries relying primarily on direct taxes for revenue rather than indirect taxes.”

19 U.S.C. 4201(b)(18).

While the U.S. has state sales taxes, the United Kingdom, like nearly every other major country in the world relies heavily on value added taxes (VAT) (or their counterpart) on goods and services. Such VATs are 20% in the U.K. on most goods, are rebated on export from the U.K. and are assessed on imports upon entry into the U.K. The United States is one of the few major countries without a national value added tax. In the early days of the GATT, it was agreed that the rebate of indirect taxes like VATs or sales taxes was not an actionable subsidy but that the rebate of direct taxes (income taxes) was an actionable subsidy. This differentiation has discriminated against countries with a direct tax orientation and eventually licensed massive subsidies that cannot be addressed for countries principally relying on indirect taxes. The assessment of the tax on importation also has imports effectively covering a significant part of the importing country’s revenue needs. The Johnson Administration back in the 1960s made a major effort to get GATT Contracting Parties to eliminate this bias in its rules but without success. Every trade promotion/fast track legislation enacted since then has included a negotiating objective similar to what is contained in 19 U.S.C. 4201(b)(18).

The United States could pursue with the United Kingdom a change in the U.K. system, not to eliminate the use of VATs or to reduce the VAT rate, but rather to introduce flexibility in how it applies VAT to imported goods from other countries and what, if any VAT it rebates on export. For example, it could apply its VAT up to the level of indirect taxes rebated by the exporting country and it could limit the rebate to the level of indirect taxes that would be imposed on importation by third countries. Such a change in approach could be a template for other trade negotiations by the United States.

The U.S. could also have the correction of the distinction between direct and indirect taxes addressed as part of the current WTO reform discussions, but has not to date introduced such a proposal in Geneva.

The history of the distinction between direct and indirect taxes and the efforts of the United States to address the distortions to U.S. trade was compiled in a paper prepared for the U.S.-China Economic and Security Commission back in 2007.

TLAG-Report-Discrimination-on-Taxation

If the Administration is serious about addressing the massive trade deficit, within the trade arena, the damage to the U.S. from the distinction between direct and indirect taxes if addressed would likely have a far larger effect on U.S. trade flows than other actions that have been taken by the Administration.

Conclusion

Both the U.K. and the U.S. want a trade deal now that the U.K. has withdrawn from the EU. Each is an important trading partner to the other, and both want to advance from the relationship when the U.K. was part of the EU.

While the agenda presented by USTR in February 2019 addresses many of the core issues included in 19 U.S.C. 4201, the U.K. will be struggling between its desire to be free from EU regulations, the importance of the EU market to U.K. exporters, and its desire to do a comprehensive agreement with the U.S. which will want the U.K. to modify its approach from past EU approaches on a number of important issues. The possibility of achieving a good agreement in a reasonably short period of time is certainly there although the time to conclude a deal with the EU for the U.K. will be a challenge to what it can or will do with the U.S. The sooner the U.S. concludes a deal with the U.K., the more likely that the U.K. will accept obligations on regulatory and other issues important to the U.S. Such obligations will be contrary to EU existing regulatory approaches. The EU has made clear that it will be pushing the U.K. to maintain EU regulatory policies for the best EU-UK deal.

Moreover, the U.S. has not teed up what is arguably the most important trade liberalization issue between the U.S. and the U.K. (and with any country with a significant VAT tax), and based on its actions to date is unlikely to do so either bilaterally or within the WTO.

Achieving reciprocal trade involves ensuring that all forms of discrimination are addressed along with internal domestic policies that don’t support global competitiveness. While economists argue that the discrimination based on the direct-indirect tax difference in treatment is corrected by currency movements, observers of the mounting U.S. deficit during a period when more and more countries have shifted to indirect taxes and many have increased their indirect tax rates would argue the theory doesn’t hold up.

So look for 2020 to be an interesting year in our trade relationship with the United Kingdom.

Trade between the United States and the European Union – What Will 2020 Bring?

There have been strong trade and investment ties between the United States and the European Union for decades. Now that the United Kingdom is outside of the EU (with an interim status quo during 2020), the EU (27 countries) is still the largest trading partner of the United States in goods ($719.6 billion in total trade in 2019), followed by Mexico ($614.5 billion), Canada ($612.1 billion) and China ($552.8 billion). China is the largest source of U.S. general imports ($452.2 billion) compared to the EU which is a close second at $451.7 billion. Canada is the largest destination for U.S. total exports i($292.4 billion in 2019), the EU is second at $267.9 billion.

While this post does not look at services trade, the US and EU are also major trading partners in services, and services are subject to negotiations at the WTO and in ongoing bilateral talks.

Both the U.S. and the EU are major players in the World Trade Organization. Since both the U.S. and the EU are leading developed countries with huge investments in each other, one would expect relations to be close and the opportunity for joint leadership in trade liberalization and addressing distortions in global markets to be the normal course. That has been true to some extent in the past and even today, but there has been a larger focus on differences in regulatory regimes, different views of the role of dispute settlement, different approaches to addressing major distortions in global markets and a decades-old concern in the U.S. about EU agricultural policies and efforts to keep U.S. agriculture out of the EU markets. More recently there has been conflict over France’s efforts to impose a tax on digital services (a move being reviewed by other countries within the EU and elsewhere), action that the U.S. strongly objects to and has threatened retaliation if adopted.

For the EU, the current US Administration’s use of Section 232 of the Trade Expansion Act of 1962, as amended, to impose or threaten to impose large tariffs on significant manufacturing sectors of trading partners have been viewed as unilateral actions contrary to WTO obligations. The U.S. willingness to use aggressive tactics to obtain leverage on trading partners and the U.S. willingness to enter partial trade agreements and/or to agree with trading partners for minimum purchases are viewed as threatening to the global trading system. Moreover, the withdrawal of the U.S. from the Paris Climate Agreement runs contrary to EU efforts to speed up actions to address climate change and the EU’s current policy of having new agreements include a chapter addressing climate change.

While there is agreement between the U.S. and the EU that state-directed, nonmarket economies are creating major distortions in global markets (massive industrial subsidies, role of state-owned enterprises, forced technology transfer, excess capacity in many sectors driven by state planning and subsidies), the U.S. and EU have been at loggerheads on the need for reform of the WTO dispute settlement system. There are broad areas of agreement on e-commerce with the exception of privacy rules. However, there has been long-term disagreement between the U.S. and the EU on the consistency of actions by each other and subcentral governments in supporting various aspects of their major civil aircraft manufacturers — Boeing and Airbus.

The U.S. has imposed tariffs on steel and aluminum products from the EU and many other countries pursuant to the national security statute, Section 232 of the Trade Expansion Act of 1962, as amended, and has recently imposed duties on various EU products following WTO disputes on Airbus subsidies and whether changes made by the EU brought the EU into compliance. While the U.S. has the argument that Section 232 investigations are covered by GATT Art. XXI, the EU has retaliated on the theory that the U.S. action was a safeguard. It has adopted other provisions to permit the EU to retaliate against actions that it considers unjustified. On the civil aircraft dispute, the EU has stated that it is seeking negotiations but believes the U.S. is waiting until the final decision on the Boeing case is issued this summer and has threatened its own retaliation on the U.S. when the decision is issued.

The July 2018 Joint Statement on US-EU trade negotiations (goods and services)

Faced with increased tariffs on steel and aluminum and the threat of automotive products, the EU had a meeting with President Trump in July 2018 and issued a joint statement at the end on the road forward:

“Joint U.S.-EU Statement following President Juncker’s visit to the White House

“Washington, 25 July 2018

“STATEMENT/18/4687

“European Commission – Statement

“We met today in Washington, D.C. to launch a new phase in the relationship between the United States and the European Union – a phase of close friendship, of strong trade relations in which both of us will win, of working better together for global security and prosperity, and of fighting jointly against terrorism.

“The United States and the European Union together count more than 830 million citizens and more than 50 percent of global GDP. If we team up, we can make our planet a better, more secure, and more prosperous place.

“Already today, the United States and the European Union have a $1 trillion bilateral trade relationship – the largest economic relationship in the world. We want to further strengthen this trade relationship to the benefit of all American and European citizens.

“This is why we agreed today, first of all, to work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods. We will also work to reduce barriers and increase trade in services, chemicals, pharmaceuticals, medical products, as well as soybeans.

“This will open markets for farmers and workers, increase investment, and lead to greater prosperity in both the United States and the European Union. It will also make trade fairer and more reciprocal.

“Secondly, we agreed today to strengthen our strategic cooperation with respect to energy. The European Union wants to import more liquefied natural gas (LNG) from the United States to diversify its energy supply.

“Thirdly, we agreed today to launch a close dialogue on standards in order to ease trade, reduce bureaucratic obstacles, and slash costs.

“Fourthly, we agreed today to join forces to protect American and European companies better from unfair global trade practices. We will therefore work closely together with like-minded partners to reform the WTO and to address unfair trading practices, including intellectual property theft, forced technology transfer, industrial subsidies, distortions created by state owned enterprises, and overcapacity.

“We decided to set up immediately an Executive Working Group of our closest advisors to carry this joint agenda forward. In addition, it will identify short-term measures to facilitate commercial exchanges and assess existing tariff measures. While we are working on this, we will not go against the spirit of this agreement, unless either party terminates the negotiations.

“We also want to resolve the steel and aluminum tariff issues and retaliatory tariffs.”

The approach outlined above would not be consistent with the US tabled negotiating objectives submitted to Congress in January 2019 for possible trade promotion authority eligibility, where tariff reductions on agricultural products is specifically identified on the first page of the objectives. https://ustr.gov/sites/default/files/01.11.2019_Summary_of_U.S.-EU_Negotiating_Objectives.pdf. And the approach ignores the longstanding concerns in Congress about agricultural market access, regulatory barriers in agriculture, including whether EU actions are science based and other agricultural related matters. The US negotiating objectives from January 2019 are included below.

01.11.2019_Summary_of_U.S.-EU_Negotiating_Objectives

Not surprising, in the U.S., there has been strong pushback from the members of Congress with strong agricultural interests, including by the Chairman of the Senate Finance Committee.

The EU viewed the US-EU joint statement as representing an agreed narrower-than-all-trade-topic agreement. The EU did not get government procurement, geographical indications or other issues of interest to them in the joint statement, and the European Commission’s mandate does not include negotiating to liberalize agriculture tariffs. The new DG Trade Commissioner Hogan during a hearing before the European Parliament’s INTA Committee meeting on February 19, 2020 confirmed that the EU would not be negotiating to change EU standards in areas viewed as relevant to consumer safety, food safety, etc. despite receiving from the U.S. a list of regulations, the U.S. wishes to have as part of the negotiations.

Ongoing Talks and the Visit of EU Parliament INTA Committee Members the week of February 24, 2020

With a new EC trade Commissioner, the EU and U.S. are increasing their efforts at finding a path forward on a host of issues. The EU has indicated recently a recognition of many of the issues of concern to the U.S. in the WTO’s dispute settlement impasse. The U.S. did not expand the range of products (at least for 30 days) that would be subject to retaliatory tariffs for Airbus subsidies. There are more frequent meetings at senior levels. Work continues on issues of mutual interest within the WTO as well. These are all positive signs.

For the first time in nearly seven years, a delegation from the International Trade Committee of the EU Parliament will be visiting Washington this coming week (Feb. 24) to meet with Congressional leaders and with the Administration. In other words, significant efforts by all sides are being made to see if closer relations can be developed. But the challenges are many.

A review of the EU Parliament INTA hearing with EC Commissioner Hogan from February 19th shows deep commitments by the Parliament to current agricultural policies and regulatory approaches, to inclusion of climate change chapters in all negotiations, to efforts to establish a carbon tax to address situations where trading partners are not contributing to a sustainable environment and more. There is significant concern about the U.S.-China Phase 1 agreement and its implications for diversion of EU sales and a deep skepticism of the current Administration’s commitment to the rule of law. Such views and positions will test the ability of the U.S. and the EU to find meaningful solutions to enough issues to justify an agreement.

Conclusion

If there is going to be an agreement between the U.S. and the EU in 2020, it will likely have to be along the lines of the joint communication from July 2018. While such an agreement could meet the FTA requirements of GATT Art. XXIV (substantially all goods test is the issue – excluding autos and agriculture would raise questions), such an agreement would not likely be viewed by Congress as meeting the U.S. negotiating objectives under TPA or as presented by the Administration in January 2019. An agreement that covers what is in the joint communication also could not colorably be presented as a Phase 1 agreement like the U.S.-Japan tariff reduction package, with agriculture to be addressed in a Phase 2. Thus, Congress will be presented with an agreement with our largest trading partner where agricultural liberalization is unlikely.

Hopefully, there will be additional convergence on issues at the WTO so a more united front on more issues can be presented. As well, it is hoped that 2020 will see the resolution of some of the longstanding disputes or unilateral actions by either side that are of concern to the other. While such outcomes are not certain, the U.S. and EU have too much to lose not to find a broader area of consensus in trade going forward. 2020 may be the year to see the start of greater cooperation.

WTO Reform – Addressing The Disconnect Between Market and Non-Market Economies

The GATT and the WTO were created by market economy countries, and the rules embodied within each reflect an effort to identify principles and rules that would promote reciprocal trade among its members. While there have long been members of the GATT and now the WTO that have not been market economies in fact, the problem of the distortions that occur to the global trading system from state-directed or non-market economies has come into sharp focus in the last twenty years with the accession and rapid growth of China and the accession of a number of other countries or the emulation of China’s model by existing members with substantial state direction, state ownership of business, state planning, forced technology transfer and massive subsidization.

While a number of WTO members have been concerned about the disconnect between the WTO rules-based system and such non-market economies where various conduct is not actually addressed by WTO rules, the United States has led the effort to obtain a reaffirmation of the market-oriented nature of the WTO and the need to address the distortions that exist but are not addressable under the WTO.

The European Union, Japan and the United States since the 11th Ministerial Conference in Buenos Aires in 2017 have been working on addressing the massive industrial subsidies, challenges from state-owned or invested enterprises and forced technology transfer. The recent joint declaration with identified changes to the Agreement on Subsidies and Countervailing Measures was the subject of a prior post. See https://currentthoughtsontrade.com/2020/01/14/wto-reform-joint-statement-of-january-14-2020-of-japan-the-u-s-and-the-eu/

The U.S. Raises the Issue of Nonmarket Economies in 2018

But the United States has led on the broader issue. The U.S. teed the issue up in a presentation to the General Council during the summer of 2018 with the submission of a fourteen page paper. China’s Trade-Disruptive Economic Model, Communication from the United States, WT/GC/W/745. The paper was broken down into four sections. The first dealt with “non-market oriented conditions set by the government and the party” looking at the objectives of control and at control at the firm level. The second section deal with “non-market allocation of resources” and covered non-market allocation of key means of production, industrial policies, and the use of law as an instrument of the Party State. The third section reviews the “costs to WTO Members of China’s economic model” covering topics like non-reciprocal and protected markets, excess capacity created by the Chinese model and the extensive use of forced technology transfer. The forth section looked at “benefits to China of its economic model”. The U.S. paper and the additional document submitted by the U.S. (2017 Report to Congress on China’s WTO Compliance) are included below.

WTGCW745

WTGCW746

While the effort of the U.S. has been vigorously opposed by China and other like minded Members of the WTO, to the United States and other major players like the European Union and Japan, there cannot be meaningful WTO reform without addressing the distortions flowing from economic systems that are not premised on market principles or where the state has a large role.

The March 3-4, 2020 General Council Meeting

The first meeting of the WTO’s General Council in 2020 will be on March 3-4 (an informal meeting was held on February 21st). On the agenda will be the United States paper in the form of a draft General Council Decision titled “The Importance of Market-Oriented Conditions to the World Trading System”. WT/GC/W/796. The text is copied below:

“THE IMPORTANCE OF MARKET-ORIENTED CONDITIONS TO THE WORLD TRADING SYSTEM DRAFT GENERAL COUNCIL DECISION

“Communication from the United States

“The following communication, dated 20 February 2020, is being circulated at the request of the delegation of the United States.


“The General Council decides to adopt this declaration on the importance of market-oriented conditions to the world trading system.

“The General Council recalls that the World Trade Organization (WTO) was established to promote Member economies’ participation in a world trading system ‘based on open, market-oriented policies and the commitments set out in the Uruguay Round Agreements and Decisions’.1

“The General Council also recalls that the establishment of the WTO reflected Members’ ‘desire to operate in a fairer and more open multilateral trading system for the benefit and welfare of their peoples’ and, during the period of time during which the Uruguay Round was being negotiated, ‘significant measures of economic reform and autonomous trade liberalization were implemented in many developing countries and formerly centrally planned economies’.2

“The General Council expresses its serious concerns with non-market-oriented policies and practices that have resulted in damage to the world trading system and lead to severe overcapacity, create unfair competitive conditions for workers and businesses, hinder the development and use of
innovative technologies, and undermine the proper functioning of international trade.

“The General Council affirms that market-oriented conditions are fundamental to a free, fair, and mutually advantageous world trading system, to ensure a level playing field for Members’ workers
and businesses.

“The General Council affirms Members’ citizens and businesses should operate under market-oriented conditions and notes the following elements indicate and are important so that market-oriented conditions exist for market participants:3

“i. decisions of enterprises on prices, costs, inputs, purchases, and sales are freely determined and made in response to market signals;

“ii. decisions of enterprises on investments are freely determined and made in response to market signals;

“iii. prices of capital, labor, technology, and other factors are market-determined;

“iv. capital allocation decisions of or affecting enterprises are freely determined and made in response to market signals;

“v. enterprises are subject to internationally recognized accounting standards, including independent accounting;

“vi. enterprises are subject to market-oriented and effective corporation law, bankruptcy law, competition law, and private property law, and may enforce their rights through impartial legal processes, such as an independent judicial system;

“vii. enterprises are able to freely access relevant information on which to base their business decisions; and

“viii. there is no significant government interference in enterprise business decisions described above.

“The General Council agrees to reaffirm Members’ commitment to open, market-oriented policies in order to achieve market-oriented conditions that are critical to ensure a level playing field for workers and businesses and a fairer and more open world trading system that benefits their peoples.

“1 Marrakesh Declaration of 15 April 1994, fifth preambular paragraph.
“2 Marrakesh Declaration, paras. 2 and 4.
3″ This decision is without prejudice to the rights or obligations of any Member under the Marrakesh Agreement Establishing the World Trade Organization.”

Conclusion

While a lot of attention remains on reform to the dispute settlement system to permit a return to a two-tiered level of review of Member actions, there has been a growing recognition that significant reform is needed for the WTO to restore its relevance in a rapidly changing global environment. While reform needs to address updating of rules to cover new areas and making existing rules more effective, there cannot be meaningful reform without addressing the disconnect between Members who operate on market economy principles and those that don’t.

While it is highly unlikely that in a consensus based system Members with economic systems that are not premised on market principles will agree to address the massive distortions their economic systems create, the future of the WTO depends on finding ways to address the differences and distortions. Look for a contentious General Council meeting on this topic.

The U.S. Modifies the List of Developing and Least Developed Countries Under U.S. Countervailing Duty Law

During the Uruguay Round, various special and differential treatment provisions were included in the agreements being negotiated. The Agreement on Subsidies and Countervailing Measures (“ASCM”) included provisions that would give developing countries and least developed countries higher subsidy de minimis levels and higher negligibility levels. See ASCM Art. 11.9 (de minimis level of subsidies is 1%; negligible imports not subject to orders), Art. 27.10 (de minimis level of subsidies is 2% for developing countries; negligibility is 4% of total imports for developing countries or 9% for multiple developing countries).

The Uruguay Round Agreements Act implemented these requirements within U.S. law. Negligible imports from any country are 3% of total imports (7% for multiple countries each less than 3%) and 4% and 9% for developing/least developed countries. De minimis subsidy levels are 1% generally but 2% for developing and least developed countries. See 19 U.S.C. 1671b(b)(4) and 19 U.S.C. 1677(24)(A) and (B).

Under U.S. law, the U.S. Trade Representative is charged with developing a list of developing and least developed countries for purposes of U.S. countervailing duty law. Such a list should be published and should be updated as necessary. 19 U.S.C. 1677(36). While some criteria are listed in the statute, USTR is given discretion on what other criteria to consider.

The first list was published in 1998 on June 2, 63 FR 29945-29948. https://www.govinfo.gov/content/pkg/FR-1998-06-02/pdf/98-14737.pdf. A revised list was published on February 10, 2020, 85 FR 7613-7616. https://www.govinfo.gov/content/pkg/FR-2020-02-10/pdf/2020-02524.pdf.

The New List Brings Forward the U.S. Position at the WTO on Need for Differentiation Among Countries

The Federal Register notice of February 10, while not referencing the U.S. position at the WTO on the need for differentiation for purposes of which WTO Members take advantage of special and differential treatment, largely uses the same factors proposed at the WTO for determining which countries should not be afforded developing country/least developed country status for purposes of U.S. countervailing duty law.

Specifically, USTR for its new list looked to (1) per capita GNI excluding any country listed as a high income country by the World Bank, (2) share of world trade (reduced from 2% in 1998 to 0.5% in 2020), (3) membership or application for membership in the OECD, (4) G20 membership, (5)(not in the WTO differentiation proposal) membership in the EU and (6) any WTO members who did not declared itself a developing country during accession to the WTO where its per capita GNI is lower than high income. A country that satisfied any of the five criteria are excluded from the higher de minimis and higher negligibility standards

High income countries based on World Bank June 2019 data

The World Bank list shows 218 countries/territories and identifies whether they are high income or lower income countries on a per capita GNI. The last data for June 2019 shows 80 of 218 countries being high income. See https://blogs.worldbank.org/opendata/new-country-classifications-income-level-2019-2020.

Various countries or territories like Korea, Taiwan, Saudi Arabia, UAE, Qatar, Hong Kong, Macao, Singapore, Oman, Chile are listed as high income and would not be eligible for increased de minimis or higher negligibility standards under U.S. countervailing duty law based on this criteria.

Share of world trade (0.5% or greater)

Besides Korea, Hong Kong and Singapore which had been excluded from the 1998 list based on their share of global trade, the new list excludes Brazil, India, Indonesia, Malaysia, Thailand and Viet Nam based on share of world trade figures. 85 FR at 7615.

Membership in or application to the OECD

Colombia and Costa Rica are excluded from higher de minimis and negligibility levels under U.S. countervailing duty law based on their application for membership to the OECD. 85 FR at 7615.

Membership in the G20

The G20 came into existence in 1999, thus after the 1998 list was published by USTR. China has not been treated as eligibile for higher de minimis or higher negligibility levels and continues not to be considered for eligibility. Other G20 countries (besides China) who are not eligible despite per capita GNI levels below high income are Argentina, Brazil, India, Indonesia, and South Africa. 85 FR at 7615.

Membership in the EU

Several EU member countries are not high income countries on the World Bank list but are excluded from higher de minimis and negligibility levels on the new list — Bulgaria and Romania. 85 FR at 7615.

WTO Members who have not claimed developing country status at accession

While the U.S. would not have flagged countries who did not claim developing country status at accession but whose per capita GNI was below high income as needing to be addressed in its differentiation papers at the WTO, such countries are not included in the list of countries eligible for higher de minimis and negligibility levels under U.S. countervailing duty law. This list includes Albania, Armenia, Georgia, Kazakhstan, the Kyrgyz Republic, Moldova, Montenegro, North Macedonia and Ukraine.

Likely Importance of the Changes in the USTR List

Data compiled by the WTO from country notifications of investigations brought under national countervailing duty laws, shows that between January 1, 1995 and June 30, 2019 (latest data presently available), the U.S. initiated 254 countervailing duty investigations. One or more investigations were brought against imports of products from 37 countries. See the WTO chart below.

CV_InitiationsRepMemVsExpCty

While there have been no countervailing duty cases in the United States against the vast majority of WTO Members during the first twenty-five years of the WTO, the changes in the list could be relevant for some countries where there have been CVD cases in the past — Argentina, Brazil, India, Indonesia, Malaysia, South Africa, Vietnam being the most likely countries affected. Any changes in results would depend on the underlying facts and may be relevant in only some cases or for one or more producers in a given case.

Conclusion

Monday’s Federal Register notice from the U.S. Trade Representative will not result generally in significant changes in how U.S. countervailing duty law operates. It could be important in particular cases or against particular exporters.

The real importance would appear to be the Administration’s taking its views on differentiation and applying them to an important U.S. trade remedy as a sign of the seriousness of the need to obtain a modification to who is eligible for special and differential treatment. The larger issue is viewed by the United States as critical to restoring the negotiating function at the WTO.

USTR’s Report on the WTO Appellate Body — An Impressive Critique of the Appellate Body’s Deviation from Its Proper Role

On February 11, 2020 the U.S. Trade Representative released a Report on the Appellate Body of the World Trade Organization . https://ustr.gov/sites/default/files/Report_on_the_Appellate_Body_of_the_World_Trade_Organization.pdf. The Report is a total of 174 pages, the report itself being 122 pages along with four appendices. The Report does not lay down what it views as the required solutions to the widespread problems that the United States has with the Appellate Body’s actions over the first twenty-five years of the WTO. But the report lays out the U.S. concerns in great detail, why the concerns reflect violations of the limited role of the Appellate Body within the WTO’s dispute settlement system and how WTO Members are harmed by the actions of the Appellate Body over time. The report goes over the issues that the U.S. has reviewed extensively at the Dispute Settlement Body and the General Council over the last two years and adds several additional concerns.

On the critical issue of Appellate Body overreach, the Report lays out examples of specific major problems for the United States in terms of the Appellate Body creating obligations or limiting rights under the WTO Agreements but identifies a number of other examples as well. It is fair to opine that the overreach issues flagged in the report constitute an absolute minimum of issues that need to be corrected for there to be an adequate restoration of rights and obligations in the view of the United States.

The appendices review concerns expressed over the last twenty years by members of Congress, various U.S. Trade Representatives and their Deputies on the continuing problem of WTO Appellate Body overreach vis-a-vis U.S. laws, regulations and practices, and actions by Congress calling for the U.S. Administration to address problems of WTO Appellate Body overreach.

In short, the Report is an extraordinary document that lays out in a comprehensive and coherent manner the U.S. view on why the WTO dispute settlement system has deviated far from its intended path. The full report is included below.

USTR-report-on-the-AB-of-the-WTO

The Report’s release at the time that the WTO Members seek a road forward on the dispute settlement system and how to restore an appellate body level of review gives all WTO Members notice that the U.S. is serious in insisting on Members coming to grips with how and why the Appellate Body has strayed so far from the limited mandate of the Dispute Settlement Understanding. Without a coming together of the Membership on the causes, one can expect that the United States will continue to block the start of selecting Appellate Body members.

Because certain major WTO Members seem unconcerned with (or are even supportive of) the violations that characterize a large number of Appellate Body decisions (at least on particular issues), it is not clear that meaningful movement and discussion will occur in the coming months in the lead up to the 12th Ministerial Conference in Kazakhstan in early June of this year. If not, resolution of the current impasse on the WTO Appellate Body is likely to drag on indefinitely.

Excerpts from the Executive Summary

The Executive Summary provides a concise review of the U.S. concerns. Excerpts are provided below (Report at 1-3):

“The United States and other free-market nations established the World Trade Organization (“WTO”) in 1995 as a forum for negotiating and implementing trade agreements. The dispute settlement mechanism of the WTO was designed to help Members resolve trade disputes arising under those agreements, without adding to or diminishing the rights and obligations to which Members had agreed. When the WTO dispute settlement system functions according to the agreed rules, it provides a vital tool to enforce Members’ WTO rights and obligations. For more than 20 years, however, the United States and other WTO Members have expressed serious concerns with the Appellate Body’s disregard for those rules.

“As detailed in this Report, the Appellate Body has repeatedly failed to apply the rules of the WTO agreements in a manner that adheres to the text of those agreements, as negotiated and agreed by WTO Members. The Appellate Body has strayed far from the limited role that WTO Members assigned to it, ignoring the text of the WTO agreements. Through this persistent overreaching, the Appellate Body has increased its own power and seized from sovereign nations and other WTO Members authority that it was not provided. For example:

“ The Appellate Body consistently ignores the mandatory deadline for deciding appeals;
“ The Appellate Body allows individuals who have ceased to serve on the Appellate Body to continue deciding appeals as if their term had been extended by WTO Members in the Dispute Settlement Body;
“ The Appellate Body has made findings on issues of fact, including issues of fact relating to WTO Members’ domestic law, although Members authorized it to address only legal issues;
“ The Appellate Body has issued advisory opinions and otherwise opined on issues not necessary to assist the WTO Dispute Settlement Body in resolving the dispute before it;
“ The Appellate Body has insisted that dispute settlement panels treat prior Appellate Body interpretations as binding precedent;
“ The Appellate Body has asserted that it may ignore WTO rules that explicitly mandate it recommend a WTO Member to bring a WTO-inconsistent measure into compliance with WTO rules; and
“ The Appellate Body has overstepped its authority and opined on matters within the authority of WTO Members acting through the Ministerial Conference, General Council, and Dispute Settlement Body.

“The Appellate Body’s persistent overreaching has also taken away rights and imposed new obligations through erroneous interpretations of WTO agreements. The Appellate Body has attempted to fill in “gaps” in those agreements, reading into them rights or obligations to which the United States and other WTO Members never agreed. These errors have favored non-market economies at the expense of market economies, rendered trade remedy laws ineffective, and infringed on Members’ legitimate policy space. For example:

“ The Appellate Body’s erroneous interpretation of the term “public body” threatens the ability of Members to counteract trade-distorting subsidies provided through SOEs, undermining the interests of all market-oriented actors;
“ The Appellate Body has intruded on Members’ legitimate policy space by essentially converting a non-discrimination obligation for regulations into a ‘detrimental impact’ test;
“ The Appellate Body has prevented WTO Members from fully addressing injurious dumping by prohibiting a common-sense method of calculating the extent of dumping that is injuring a domestic industry (“zeroing”);
“ The Appellate Body’s stringent and unrealistic test for using out-of-country benchmarks to measure subsidies has weakened the effectiveness of trade remedy laws in addressing distortions caused by state-owned enterprises in non-market economies;
“ The Appellate Body’s creation of an “unforeseen developments” test and severe causation analysis prevents the effective use of safeguards by WTO Members to protect their industries from import surges; and
“ The Appellate Body has limited WTO Members’ ability to impose countervailing duties and antidumping duties calculated using a non-market economy methodology to address simultaneous dumping and trade-distorting subsidization by non-market economies like China.

“For many years, successive Administrations and the U.S. Congress have voiced significant concerns about the Appellate Body’s disregard for the rules agreed to by WTO Members. As set forth in the Appendices to this Report, in multiple Congressional Sessions, up to and including the current Session, Senators and Representatives of both parties have voiced urgent concerns and the need for reform in numerous resolutions, reports, and statements.1

“1 See Statements by Members of the United States Congress Expressing Concerns with Appellate Body Overreaching (Appendix A1); Congressional Legislation and Reports Expressing Concern with Appellate Body
Overreaching (Appendix A2); Statements by U.S. Trade Representatives or Their Deputies on Appellate Body Overreach (Appendix B1); and Statements by the United States to the WTO Dispute Settlement Body Expressing Concerns with the Appellate Body’s Failure to Follow WTO Rules and Erroneous Interpretations of the WTO Agreements (Appendix B2).

“Unfortunately, U.S. efforts were ignored, and the problem has worsened as too many WTO Members remain unwilling to do anything to rein in this conduct. The proper functioning of the WTO Appellate Body has a disproportionate impact on the United States because more than one quarter of all disputes at the WTO have been challenges to U.S. laws or other measures. Specifically, 155 disputes have been filed against the United States, and no other Member has faced even a hundred disputes. According to some analyses, up to approximately 90 percent of the disputes pursued against the U.S. have led to a report finding that the U.S. law or other measure was inconsistent with WTO agreements. This means that, on average, over the past 25 years, the WTO has found a U.S. law or measure WTO-inconsistent between five and six times per year, every year.

“But these failings have dire consequences for U.S. interests in the WTO, and for all WTO Members, as well. The negotiating function of the WTO has atrophied as the Appellate Body has facilitated efforts by some Members to obtain through litigation what they have not achieved through negotiation; the effectiveness of WTO tools designed to address distortions by nonmarket economies has been greatly diminished; and the WTO dispute settlement system continues to lose the credibility necessary to maintain public support for the system.

“In short, the Appellate Body’s failure to follow the agreed rules has undermined not only WTO dispute settlement, but the effectiveness and functioning of the WTO more generally. Furthermore, by encouraging behavior that distorts markets, the Appellate Body has helped to make the global economy less efficient. Lasting and effective reform of the WTO dispute settlement system requires all WTO Members to come to terms with the failings of the Appellate Body.”

Additional Comments

The Executive Summary lists seven ways in which the Appellate Body has deviated from the limited role assigned to the Appellate Body within the Dispute Settlement Understanding. The last two listed have not been the focus of much of the U.S. commentary over the last several years but reflect additional concerns with the Appellate Body’s conduct. The first issue goes to decisions where the Appellate Body has ignored the clear Dispute Settlement Understanding requirement to recommend a party bring its actions into conformity with its WTO obligations where during the pendency of a dispute the Member alleged to be acting inconsistent with WTO obligations withdraws the measure in question. Report at 64-68. The second deals with situations where the Appellate Body has articulated how WTO bodies should carry out their functions even though the functioning of various WTO bodies is not an area properly before the Appellate Body. Report at 69-74. A third additional issue that is not listed in the Executive Summary but is in the full report (Report at 74-80) is “The Appellate Body Has Departed from WTO Rules by Deeming Decisions Not Made under Article IX:2 to Be Authoritative Interpretations of Covered Agreements”.

A major part of the Report is a review of selected Appellate Body decisions which have incorrectly interpreted various WTO Agreements and have thus either created obligations or reduced rights of the United States (and other Members). See pages 81 – 119. The opening paragraphs of this part of the Report summarize the concerns (page 81):

“In addition to failing to follow the rules that WTO Members have adopted, the Appellate Body has erroneously interpreted and applied numerous important WTO agreements. The Appellate Body has overreached on substantive issues, engaged in impermissible gap-filling, and read into
the WTO agreements rights or obligations that are not there.

“The texts of the covered agreements result from extensive negotiations among sovereign nations and autonomous customs territories, and reflect differing negotiating objectives and positions. It is often possible to reach agreement on only one particular obligation or discipline while being unable to reach agreement on any obligation or discipline even in a related area. As such, ‘gaps’ in the text of a covered agreement may simply reflect a situation where there was a limit upon what negotiators could agree. WTO Members have not agreed to delegate to WTO adjudicative bodies the task of filling in gaps in the covered agreements, and it is critical for WTO
adjudicators to respect these limits.

“Despite this, the Appellate Body has expanded its own power and attempted to substitute for negotiators to re-write, reduce or supplement the agreed text. Among other interpretive errors, the Appellate Body has engaged in impermissible gap-filling and read into the text of the covered agreements obligations or rights that are not present in the text. This conduct is inconsistent with the Appellate Body’s role and adds to or diminishes Members’ rights and obligations, contrary to Articles 3.2 and 19.2 of the DSU.”

Five examples are reviewed at length, including four that address issues from trade remedy agreements (Subsidies and Countervailing Measures; Anti-Dumping; Safeguards) and one that involves the Technical Barriers to Trade Agreement. Moreover, four additional decisions are referenced in footnote 195:

“195 For example, this Report does not discuss the dispute US – Continued Dumping and Subsidy Offset Act Of 2000, in which the Appellate Body’s interpretation of the Subsidies Agreement in effect created a new category of prohibited subsidies that was neither negotiated nor agreed to by WTO Members; or other examples, such as US – Gambling, US – Cotton, US – FSC.”

The problem of the Appellate Body (or panels) creating obligations or diminishing rights not contained in the various agreements of the WTO is not limited to these nine cases where the U.S. has raised serious concerns but has included concerns raised by many trading partners. In a paper prepared for the Asia Society Policy Institute in early 2018, I reviewed excerpts from various Dispute Settlement Body meetings where various WTO Members raised concerns about creating obligations or diminishing rights. The paper is enclosed below.

Final-Asia-Society-Paper-re-dispute-settlement

Conclusion

The fundamental questions facing the WTO membership on the dispute settlement system are whether Members will agree to conform the dispute settlement system to the limited role envisioned at its creation in 1995 and restore balance to the Agreements that were negotiated. The United States has laid out its case that a limited role for the Appellate Body was all that was intended and all that the U.S. supports. Many Members have seen the deviation from the Dispute Settlement Understanding but have looked the other way or even encouraged the expansion of the deviation for a variety of reasons, not least of which is achieving through disputes what wasn’t achieved through negotiations. Without a resolution acceptable to the United States, the WTO dispute settlement system will struggle to regain its full measure of legitimacy and there will be no restoration of an Appellate Body.

U.S. modifies its regulations to provide path for countervailing undervalued currencies in certain circumstances

On February 4, 2020, the Commerce Department’s modification of its countervailing duty (“CVD”) regulations was published in the Federal Register specifically to outline when Commerce would investigate allegations of subsidies on certain imported goods flowing from undervalued foreign currency achieved at least in part through government action. 85 Fed. Reg. 6031-6044. The modification to the U.S. CVD regulations “will apply to all segments of proceedings initiated on or after April 5, 2020”. The modification to the U.S. regulation is enclosed below.

85-FR-6031-2-4-2020-ITA-FR-final-rule-re-benefit-and-specificity-re-currency

The U.S. Department of Commerce International Trade Administration published its proposed modification of its regulations on May 28, 2019 (84 FR 24406) and received some forty-seven written comments on the proposal, including from some foreign governments (Brazil and India) and various business groups and law firms in China as well as from domestic parties (industries, workers, companies, law firms representing parties, trade associations, individuals) supporting or opposing or seeking modifications to the proposal.

Many domestic industries and their workers competing with imports believed to benefit from undervalued currencies had been seeking for years a modification to U.S. law to address what have been viewed over the years as periods of very active government interference in the market to achieve undervalued currencies by major trading partners. In recent years, China has been the main concern, but there have been ongoing concerns about past actions of the governments of Japan, Korea and others. Thus, the Commerce Department’s decision to develop modifications to its regulations has generally been viewed as a positive development by industries and workers who have competed with undervalued imported goods.

Article VI of the GATT, dealing with antidumping and countervailing duties, has had an Ad note to Paragraphs 2 and 3 which recognized that certain currency practices could be addressed by GATT Contracting Parties as either countervailable subsidies or as a form of dumping. Specifically, “2. Multiple currency practices can in certain circumstances constitute a subsidy to exports which may be met by countervailing duties under paragraph 3 or can constitute a form of dumping means of a partial depreciation of a country’s currency which may be met by action under paragraph 2. By ‘multiple currency practices’ is meant practices by governments or sanctioned by governments.” Article VI and the Ad notes remain part of the WTO.

While the multiple currency practices of the 1930s and 1940s are not the currency problems of the last thirty years, there is nothing in the WTO agreements that prohibits Members from addressing currency practices under the Agreement on Subsidies and Countervailing Measures (“ASCM”) where the terms of the Agreement are met. The Commerce Department modified regulations place certain undervalued currency situations within U.S. law which in turn reflects the U.S. understanding of its obligations under the ASCM.

The revisions modify the Commerce regulations on specificity and on benefit. 19 C.F.R. 351.502, dealing with specificity of domestic subsidies, is modified by adding a new subsection (c) which states that “In determining whether a subsidy is being provided to a ‘group’ of enterprises or industries within the meaning of section 771(5A)(D) of the Act, the Secretary will consider enterprises that buy or sell goods internationally to comprise such a group.” 85 FR at 6043.

A new section, 19 C.F.R. 351.528, is added to identify when exchanges of undervalued currencies will be viewed as countervailable. Commerce will examine whether there is a potentially actionable subsidy only where a country’s currency is undervalued during the relevant period. If that condition is met, Commerce will make an affirmative determination only where “there has been government action on the exchange rate that contributes to an undervaluation of the currency.” Government action will not generally include “monetary and related credit policy of an independent central bank or monetary authority”. Commerce may consider the foreign “government’s degree of transparency regarding actions that could alter the exchange rate.” 85 FR at 6043. This latter provision is presumably a reflection of the need for transparent actions by trading partners or the potential need to use adverse facts available where the actual actions of the foreign government can not be ascertained.

Finally, if there is currency undervaluation caused in part by government action, Commerce reviews how a benefit will be measured. Commerce will look to see if there is a difference between the nominal, bilateral United States dollar rate consistent with the equilibrium real effective exchange rate (REER) and the actual rate during the period of investigation or review. If yes, the benefit is the difference between the amount received by the foreign company and the amount that would have been received by the company if the currency had not been undervalued.

Commerce will seek input from the U.S. Department of Treasury on the questions of currency undervaluation, government action, and any difference between the equilibrium REER and the actual exchange rate. Treasury has expertise in exchange rate matters, but the determination of whether undervaluation constitutes a domestic subsidy is for Commerce to make. Information submitted by Treasury will be on the record and subject to comment and rebuttal by parties to the proceeding.

Part of the regulatory process in the United States includes the agency promulgating the regulations addressing issues raised by those who submit comments on the proposal. There were eleven categories of issues raised on the modifications to the CVD regulations. As the full Federal Register notice is available above, this note simply lists the range of issues addressed by Commerce in its final notice and encourages the reader to review the full Federal Register for the details of the Commerce Department comments on specific issues:

  1. Whether the CVD Law is an Appropriate Tool To Remedy Subsidies From Currency Undervaluation
  2. Statutory Authority to Promulgate This Rule
  3. Financial Contribution
  4. Determination of Undervaluation
  5. Government Action on the Exchange Rate
  6. Calculation of the Benefit
  7. Other Calculation Issues
  8. The Role of Treasury
  9. Specificity
  10. General Comments (Commerce’s Proposal Infringes on the IMF’s Authority, Possible Retaliation by U.S. Trading Partners, Other Methods To Combat Currency Manipulation/Misalignment May Be More Effective, Relationship to the Antidumping Law)
  11. Economic Impact

When Commerce published its proposal in May 2019, it noted that of the nineteen countries where the U.S. had one or more countervailing duty orders outstanding, twelve of the countries in 2017 were shown by either the IMF or by the Peterson Institute as having an undervalued currency (84 FR at 24411 n.13):

“13 In FY 2018, countervailing duties were deposited on various products imported from 19 countries. For 12 of these 19 countries, at least one of the two sources (IMF or Peterson Institute for International Economics) deemed
the domestic currency undervalued during 2017. Based on information from Customs and Border Protection, the total value of imports from these 12 countries with potentially undervalued currencies equaled roughly 32 percent of the total value of imports from all 19 countries.”

As reviewed, undervaluation is but the first step in any evaluation. Government action is another critical element and generally won’t cover monetary policy actions of governments. Nonetheless, using 2017 data, twelve countries had potentially undervalued currencies and hence could be subject of investigations or reviews to determine if the currency undervaluation constitutes a countervailable subsidy.

Conclusion

It is likely that 2020 will see one or more petitions or administrative reviews of existing orders where a petitioning party seeks to explore whether undervalued currencies constitute actionable subsidies under U.S. law. With Japan, Korea and China having changed the extent of government interference in their exchange rates in recent years, the first case or cases may go after other countries where government actions to depress currency value is identified by domestic industries or their workers. As is true in any area of new exploration, there are many unknowns that will presumably be answered as cases are brought and investigations or reviews conducted: whether Commerce will deem any such petitions or requests in administrative review to be sufficient to proceed on currency undervaluation; how the development of a record will proceed including provision of information from foreign governments whose practices are under investigation; how Treasury will proceed in providing information and its views and the extent of independent review by Commerce versus simple adoption of Treasury views — are just a few of the unknowns.

Trading partners may opt to challenge the modification in U.S. regulations as such at the WTO or may pursue as applied challenges should Commerce investigate their currency for undervaluation in a particular case. China has warned the U.S. that going after its currency would be problematic for any Phase 2 negotiations. The Director-General in response to a question about the new US regulations has opined that the WTO is not the right forum for currency issues (this despite the AD note to Article VI of the GATT).

But for domestic producers and their workers who face various forms of trade distortions through subsidies and/or dumping, the modification to U.S. countervailing duty regulations is a potentially important advance in permitting at least individual industries and their workers to obtain a more level trading field going forward.

Counterfeit and Contraband Goods — Issuance of A Presidential Executive Order on January 31, 2020

Rounding out a busy January on trade issues, President Trump on January 31st issued an Executive Order (“EO”) addressing the ballooning volume of illicit trade (counterfeit and pirated goods). The EO is directed at traffickers and those seeking to avoid U.S. customs duties, taxes, and fees but will also affect “express consignment operators, carriers, hub facilities, international posts, customs brokers, and other entities, including e-commerce platform operators”.

Executive Order 13904 of January 31, 2020, on Counterfeit Goods

The Executive Order issued by President Trump follows the issuance of a Memorandum on Combating Trafficking in Counterfeit and Pirated Goods from the President issued on April 3, 2019, calling for a study by the Department of Homeland Security on the extent of the problem and presenting suggested potential solutions. See, e.g., https://www.whitehouse.gov/presidential-actions/memorandum-combating-trafficking-counterfeit-pirated-goods/.

  1. April 3, 2019 Presidential Memorandum

President Trump’s April 3, 2019 Memorandum was a call for a coordinated game plan by the Administration on addressing the challenges posed by counterfeit and pirated goods including via the internet. Here is the relevant part of the Memorandum:

“Section 1.  Policy and Background.  (a)  It is the policy of my Administration to protect American businesses, intellectual property rights holders, consumers, national and economic security, and the American public from the dangers and negative effects of counterfeit and pirated goods, including those that are imported through online third-party marketplaces and other third-party intermediaries.  We must improve coordinated efforts within the Federal Government to address this challenge, which are led by the Attorney General, the Secretary of Commerce, the Secretary of Homeland Security, the Director of the Office of Management and Budget, through the Intellectual Property Enforcement Coordinator, and the United States Trade Representative.

“(b)  Counterfeit trafficking impairs economic competitiveness by harming United States intellectual property rights holders and diminishing the reputations and trustworthiness of online markets; cheats consumers and poses risks to their health and safety; and may threaten national security and public safety through the introduction of counterfeit goods destined for the Department of Defense and other critical infrastructure supply chains.  An estimate from the Organisation for Economic Co-operation and Development (OECD) indicates the value of trade in counterfeit and pirated goods to be approximately half a trillion dollars per annum, with roughly 20 percent of this trade infringing upon intellectual property belonging to United States persons.  A recent Government Accountability Office report examined four categories of frequently counterfeited goods, and, based on a small sample of these goods purchased through various online third-party marketplaces, found that more than 40 percent were counterfeit.

“(c)  Preventing the manufacture, importation, and sale of counterfeit and pirated goods is a priority for Federal law enforcement agencies.

“(d)  Existing efforts within the Federal Government to deter online trafficking in counterfeit and pirated goods through third-party intermediaries should be expanded and enhanced to better address the scale, scope, and consequences of counterfeit and pirated goods trafficking.

“(e)  Third-party intermediaries, including online third party marketplaces, carriers, customs brokers, payment providers, vendors, and others involved in international transactions, can all be beneficial partners in combating trafficking in counterfeit and pirated goods.  In order to build on cooperative efforts that are already underway with such partners, a coordinated approach by the Federal Government, including its law enforcement agencies, and private industry is needed.

“(f)  Comprehensive data regarding the extent of counterfeit trafficking through online third-party marketplaces are lacking.

“Sec. 2.  Report on the State of Counterfeit and Pirated Goods Trafficking and Recommendations.  (a)  Within 210 days of the date of this memorandum, the Secretary of Homeland Security, in coordination with the Secretary of Commerce, and in consultation with the Attorney General, the Director of the Office of Management and Budget, the United States Trade Representative, the Assistant to the President for Economic Policy, the Assistant to the President for Trade and Manufacturing Policy, the heads of other executive departments and agencies (agencies) and offices as determined by the Secretary of Homeland Security, shall prepare and submit a report to the President through the Assistant to the President for Economic Policy and the Assistant to the President for Trade and Manufacturing Policy.  In preparing the report, the Secretary of Homeland Security, in coordination with the Secretary of Commerce, shall, consistent with applicable law, consult with intellectual property rights holders, third-party intermediaries, and other stakeholders.

“(b)  The report shall:

“(i)     Analyze available data and other information to develop a deeper understanding of the extent to which online third-party marketplaces and other third party intermediaries are used to facilitate the importation and sale of counterfeit and pirated goods; identify the factors that contribute to trafficking in counterfeit and pirated goods; and describe any market incentives and distortions that may contribute to third-party intermediaries facilitating trafficking in counterfeit and pirated goods.  This review should include data regarding the origins of counterfeit and pirated goods and the types of counterfeit and pirated goods that are trafficked, along with any other relevant data, and shall provide a foundation for any recommended administrative, regulatory, legislative, or policy changes.

“(ii)    Evaluate the existing policies and procedures of third-party intermediaries relating to trafficking in counterfeit and pirated goods, and identify the practices of those entities that have been most effective in curbing the importation and sale of counterfeit and pirated goods, including those conveyed through online third-party marketplaces.  The report should also evaluate the effectiveness of Federal efforts, including the requirement for certain Federal contractors to establish and maintain a system to detect and avoid counterfeit electronic parts under the Defense Federal Acquisition Regulation Supplement (DFARS) 252.246-7007, as well as steps taken by foreign governments, such as France and Canada, to combat trafficking in counterfeit and pirated goods.

“(iii)   To the extent that certain types of data are not currently available to the Federal Government, or accessible in a readily usable form, recommend changes to the data collection practices of agencies, including specification of categories of data that should be collected and appropriate standardization practices for data.

“(iv)    Identify appropriate administrative, statutory, regulatory, or other changes, including enhanced enforcement actions, that could substantially reduce trafficking in counterfeit and pirated goods or promote more effective law enforcement regarding trafficking in such goods.  The report should address the practices of counterfeiters and pirates, including their shipping, fulfillment, and payment logistics, and assess means of mitigating the factors that facilitate trafficking in counterfeit and pirated goods.

“(v)     Identify appropriate guidance that agencies may provide to third-party intermediaries to help them prevent the importation and sale of counterfeit and pirated goods.

“(vi)    Identify appropriate administrative, regulatory, legislative, or policy changes that would enable agencies, as appropriate, to more effectively share information regarding counterfeit and pirated goods, including suspected counterfeit and pirated goods, with intellectual property rights holders, consumers, and third-party intermediaries.

“(vii)   Evaluate the current and future resource needs of agencies and make appropriate recommendations for more effective detection, interdiction, investigation, and prosecution regarding trafficking in counterfeit and pirated goods, including trafficking through online third-party marketplaces and other third-party intermediaries.  These recommendations should include suggestions for increasing the use of effective technologies and expanding collaboration with third party intermediaries, intellectual property rights holders, and other stakeholders.

“(viii)  Identify areas for collaboration between the Department of Justice and Department of Homeland Security on efforts to combat trafficking in counterfeit and pirated goods.

“(c)  Within 30 days of submitting the report required by section 2(a) of this memorandum, the Secretary of Homeland Security is authorized and directed to prepare, consistent with applicable law, a public version of the report and publish it in the Federal Register.”

2. The January 24, 2020 Report to the President from Homeland Security, Combating Trafficking in Counterfeit and Pirated Goods.

Last month, following outreach to stakeholders, the U.S. Department of Homeland Security (“DHS”) submitted its report to President Trump. Combating Trafficking in Counterfeit and Pirated Goods, Report to the President of the United States, January 24, 2020 (“January 24, 2020 DHS Report” or “Report”). https://www.dhs.gov/sites/default/files/publications/20_0124_plcy_counterfeit-pirated-goods-report_01.pdf.

It is this report that was relied upon for Executive Order 13904 issued on January 31.

The report reviews the severity of the problem counterfeiting and pirated goods pose to the U.S. economy, U.S. competitiveness, health and safety and to national security. It references information gained from other studies and from the private sector. For example, a 2018 report from the OECD, Governance Frameworks to Counter Illicit Trade, is cited by DHS for its finding that there was “a 154 percent increase in counterfeits traded internationally – from $200 billion in 2005 to $509 billion in 2016.” January 24 DHS Report at 4. “Relevant to the President’s inquiry into the linkages between e-commerce and counterfeiting, OECD reports that ‘E-commerce platforms represent ideal storefronts for counterfeits and provide powerful platform[s] for counterfeiters and pirates to engage large numbers of potential consumers.’1/” Page 4 of the Report citing OECD, Governance Frameworks to Counter Illicit Trade, Illicit Trade, OECD Publishing, https://doi.org/10.1787/9789264291652-en.

The health problems from counterfeit medicines and food products have been widely reported over the last decade or more with knock-of medicines not containing the proper elements. Similarly, counterfeit food products (for humans and animals) may be made with fillers that may cause health problems or even death. The quantity of counterfeit auto and defense sector parts, made of inferior materials and not to manufacturer or government specifications create quality issues and can pose problems for national security. The examples are endless and are found around the world.

The report reviews the complications in combating counterfeit and pirated goods with the growth of e-commerce, the shift from ship cargo shipments to express delivery and mail shipments, from expanded de minimis levels and reduced information from such shipments, and from failure of the private sector to broadly adopt best practices to reduce availability of such goods.

The report both identifies product categories with high levels of counterfeit and pirated goods, some of the major sources of such goods, and provides a list of actions for the U.S. Government and a list of best practices for the private sector involved in e-commerce platforms and third-party marketplaces.

For example, Customs and Border Protection publishes data on annual seizures of goods involving intellectual property rights. The top ten product categories from 2018 were wearing apparel/accessories, footwear, watches/jewelry, handbags/wallets, consumer electronics, consumer products, pharmaceuticals/personal care, optical medial, toys and computers/accessories. Seizures also occur of prohibited substances (e.g., drugs like cocaine, ecstasy, marijuana, LSD, DMT, etc.). January 24, 2020 DHS Report at 10 and 16.

While China is identified as the largest source of counterfeit and pirated goods (id.at 8), other countries are obviously also the source of such goods. China, Hong Kong, Singapore and India were identified as having shipped 97 percent of the counterfeit medicines seized in the U.S. Id at 17.

The report makes clear that there are many actions that the U.S. government must take to deal with the evolving threat from counterfeit and pirated goods. However, the report and private sector input also make clear that there must be a stronger government-private sector partnership for future efforts to be successful. Below are the summary tables from the Report on government actions and best practices for the private sector that are meant to address both government and private sector practices.

From page 5 of the Report:

Immediate Actions by DHS and Recommendations for the U.S. Government

  1. Ensure Entities with Financial Interests in Imports Bear Responsibility
  2. Increase Scrutiny of Section 321 Environment
  3. Suspend and Debar Repeat Offenders; Act Against Non-Compliant International Posts
  4. Apply Civil Fines, Penalties and Injunctive Actions for Violative Imported Products
  5. Leverage Advance Electronic Data for Mail Mode
  6. Anti-Counterfeiting Consortium to Identify Online Nefarious Actors (ACTION) Plan
  7. Analyze Enforcement Resources
  8. Create Modernized E-Commerce Enforcement Framework
  9. Assess Contributory Trademark Infringement Liability for Platforms
  10. Re-Examine the Legal Framework Surrounding Non-Resident Importers
  11. Establish a National Consumer Awareness Campaign

From page 6 of the Report:

Best Practices for E-Commerce Platforms and Third-Party Marketplaces

  1. Comprehensive “Terms of Service” Agreements
  2. Significantly Enhanced Vetting of Third-Party Sellers
  3. Limitations on High Risk Products
  4. Rapid Notice and Takedown Procedures
  5. Enhanced Post-Discovery Actions
  6. Indemnity Requirements for Foreign Sellers
  7. Clear Transactions Through Banks that Comply with U.S. Enforcement Requests for Information
    (RFI)
  8. Pre-Sale Identification of Third-Party Sellers
  9. Establish Marketplace Seller ID
  10. Clearly Identifiable Country of Origin Disclosures

3. Executive Order 13904, 85 Fed. Reg. 6725-6729

The Executive Order (“EO”) was issued on January 31, 2020 and published in the Federal Register on February 5. The EO lays out the Administration’s policy on addressing the problems of counterfeit and pirated goods in e-commerce, including its intent to not permit those engaged in such conduct to be able to do business with the U.S. government or to engage in importing or to avoid liability under U.S. law. Section 1 of the EO, 85 FR 6725.

Section 2 of the EO instructs DHS to engage in rulemaking to establish criteria importers must meet in order to obtain an importer of record number. One such criteria shall be that any person seeking a number has not been debarred or suspended by CBP “for lack of present responsibility”. 85 FR at 6725-6726.

Section 3 of the EO outlines responsibilities of express consignment operators, carriers, hub facilities and licensed customs brokers (‘group”) including to identify efforts of individuals or entities not entitled to importer of record status to resume trade. DHS through CBP is also instructed to consider measures against any member or members of the group who facilitate business by those not entitled to importer of record rights. 85 FR at 6726.

Sections 4 and 5 deal with efforts to be undertaken by the U.S. Postal Service in conjunction with other parts of the Administration to work with the international postal network to adopt similar restrictions as are contained in Section 2 and to provide a series actions the U.S. will take against foreign posts that are deemed not to be compliant. 85 FR at 6726-6727.

Section 6 reviews Administration intention to publish more information on seizures pertaining to illicit trade. It also calls on the Attorney General to make available resources to ensure Federal prosecutors will accord a high priority to going after import violations of the EO. 85 FR at 6727.

Section 7, reflecting the concern of DHS that import fees are not sufficient to cover the costs evaluating imports and importers for counterfeit and pirated goods, orders DHS to prepare a report on the adequacy of current fees and suggesting modifications if appropriate and consistent with U.S. law. 85 FR at 6727-6728.

Conclusion

There is strong support in the Congress and amongst the business community for strong enforcement against illicit trade, including shutting down counterfeit and pirated goods.

The growth of e-commerce has had many positive effects on the U.S. and world economies. It has also unleashed a massively expanding capability of those engaged in counterfeiting and the pirating of goods to market such goods to consumers in the U.S. and around the world without consequence. The risks identified in the DHS Report to manufacturers, to consumers, to health and safety and to national security are real and expanding.

The tension between growing e-commerce and ensuring that all players in the e-commerce system bear responsibility to address shutting down counterfeit and pirated goods is apparent in the Executive Order and the disciplines it does and doesn’t impose on players.

Similarly, the business community (particularly those involved in e-commerce, express delivery and the retail sector) have pushed hard for larger de minimis level imports to facilitate the movement of trade. As the DHS report makes clear, however, those engaged in shipping counterfeit and pirated goods are working the de minimis process to make identification of their products harder. The Report envisions making the de minimis exception harder to hide behind where users may be suspected on engaging in illicit trade.

The EO and related actions described above have the potential to strengthen enforcement in this important area of global commerce. Time will tell whether the actions envisioned will be enough to make a difference in fact in the rate and direction of growth of counterfeit and pirated goods.

Brexit takes place at 11 p.m. London time on January 31, 2020

The European Union goes from 28 member countries to 27 at the end of January 31st as the British referendum to withdraw from the EU is brought to fruition by votes in the EU Parliament (621 votes in favor, 49 against, 13 abstentions) on January 29 and the European Council (unanimous) on January 30. The provisional text voted on by the Parliament is embedded below.

European-Parliament-agreement-on-withdrawal-of-UK-from-EU-P9_TA-2020-0018_EN.pd_

While the votes were not in doubt, withdrawal from the EU does not establish what the relationship with the EU will be after the interim period of 2020. What is clear is that by Saturday, February 1, the U.K. is no longer part of the EU and will be treated as a third country under EU laws and regulations.

There was a debate in the European Parliament on January 29th ahead of the vote which provides some clues as to the challenges facing the U.K. in the coming months. For example, while the EU is willing to consider an FTA with the U.K. with zero tariffs and quotas, it is dependent on the U.K. adhering to EU regulations (level playing field concept in Europe). While some U.K. industries (auto and aerospace) have urged their government to adhere to EU standards, it is not clear that the U.K. has the intention to do so across the board. Protecting the rights of Europeans in the U.K. (and of U.K. citizens in the EU) was reviewed at length by various Parliamentarians and representatives from the European Commission. It is obviously an important issue for the EU. As is dealing with climate change through aggressive actions by EU governments and any government wishing a special or close relationship. A number of speakers reviewed the challenges likely based on the short interim period and the complexity of negotiations anticipated.

The debate had many Parliamentarians from the remaining 27 member countries and the European Commissioners who spoke thanking their colleagues in the U.K. for the U.K.’s contribution over the 47 years of the U.K.’s membership in the EU, expressing regrets on the decision to leave but looking forward to working with the U.K. going forward, with some hoping that future generations of citizens in the U.K. will decide to rejoin.

There were some comments made on lessons to be learned from Brexit with some focusing on the need for EU reform, for member countries accepting all obligations versus a system of exceptions, and a general belief that the EU needs to be able to take action more quickly.

A number of Parliamentarians from the U.K. and Scotland spoke. A number representing constituents who voted against Brexit in the referendum expressed their concern with the withdrawal and indicated they would vote against the document.

A large group of U.K. Parliamentarians seemed to agree with the harsh words of Nigel Farage, a strong Brexit proponent and, by his own words, anti-EU. His views were that the U.K. had joined a common market not a political union. He opposes the expansion of the EU into traditional national issues and its push to become a super-nation with all the trappings of a nation (Parliament, Council, Court, etc.). He also views the EU as undemocratic and antidemocratic using as an example the failure of the EU to honor referendums in various countries that opposed the constitution (2005). His description of the U.K. feelings towards the rest of Europe was summed by his statement “We love Europe, we simply hate the European Union.” Mr. Farage reviewed that the new British Prime Minster Boris Johnson had indicated that there would be no “level playing field” agreed to in negotiations with the EU.

For access to the videos of the debate see https://www.europarl.europa.eu/news/en/press-room/20200128IPR71204/brexit-deal-approved-by-the-european-parliament

As noted above, the level of ambition in any new U.K.-EU relationship will depend in part on whether there is a “level playing field” in the regulatory arena. Prime Minister Johnson’s comments simply suggest that the next eleven months will be difficult for the parties as they see if they can find a new relationship acceptable to both sides or whether the U.K. assumes the status of any other third party without a Free Trade Agreement (“FTA”) with the EU.

The U.K. will also be under pressure from the U.S. to abandon various EU regulations to facilitate an FTA with the U.S.

So the U.K. will not be part of the EU in just over 24 hours. But the road ahead with the EU will likely keep markets uncertain for months to come.