Aaron Cosbey
2. CROSS-CUTTING ISSUES
To fully understand the relationship of trade and investment law to various green industrial policy measures, it is necessary to review a few cross-cutting concepts:
◼ How is WTO law related to non-multilateral trade and investment law? This is important because it means nothing to simply say that trade law prohibits or allows a given policy;
trade law exists at the WTO multilateral level as well as in regional and bilateral agree-ments; and there is trade-related investment law at both those levels as well as in dedicated investment agreements. The different bodies of law contain different rights and obligations.
◼ How does WTO dispute settlement interpret existing law? In many cases it is difficult to say with authority which policies are legal or not, and it is important to understand why that is.
◼ How do the exceptions work in trade and investment law and how might they be applied in the context of green industrial policy?
Exceptions are important to this discussion, since a number of green industrial policy measures seem to be in conflict with trade law obligations. But in some cases they can be saved by exceptions.
2.1. RELATIONSHIP BETWEEN WTO LAW AND NON-MULTILATERAL AGREEMENTS
The WTO body of trade and investment law is a collection of legal agreements among the 164 members of the WTO, spanning various trade and investment-related subjects. One of the most relevant to green industrial policy is the GATT, but there are also more specialised agree-ments covering how governagree-ments should create and implement trade-related measures such as subsidies, government procurement, standards and labelling, intellectual property rights, invest-ment measures and others. For the most part, all WTO members are bound by the obligations of all agreements, but there are a few that have been agreed among a sub-set of members only–
called plurilateral agreements. Members that have acceded to the WTO since it succeeded the GATT in 1995 are bound by the terms of their individual accession agreements, which may involve addi-tional obligations.
136 WTO members are also bound by commitments they may have made in non-multilateral settings, for example in regional trade agreements and bilateral investment treaties, and it is important to understand how the bodies of law interact.
Regional trade agreements will not typically set out obligations that are less onerous than those found in WTO law since, no matter what the regional trade agreement parties agree among themselves, they are still bound by their obliga-tions to other WTO members. Whether or not these agreements explicitly refer to it, WTO law still binds the parties. Regional trade agreements may clarify what the regional trade agreement parties understand to be WTO law, where there are some doubts. For example, the Mexico-Pan-ama free trade agreement clarifies that the WTO exceptions for measures designed to protect human, animal, or plant life or health will cover environmental measures, though the word envi-ronment does not appear in the original WTO text (Mexico-Panama Free Trade Agreement 2014, Article 19.2(1)). This is not an alteration of WTO law, but merely a declaration of mutual understanding as to how that law should be interpreted.
On other issues regional trade agreements go beyond WTO law in setting out Parties’ obligations.
In the Canada-EU Comprehensive Economic and Trade Agreement, for example (Article 8.5(1)(f)), Canada and the EU prohibit the use of technology transfer requirements as a condition for investing in their territory–a commitment not found in the WTO’s Agreement on Trade-Related Investment Measures. Similarly, it is typical in regional trade agreements for the parties to agree to intellectual property right provisions that are stronger than those found in the WTO’s Agreement on Trade-Re-lated Intellectual Property, such as longer terms for patent protection. In such cases the so-called WTO-plus provisions typically apply only between the parties.18
In the area of investment, WTO law is contained in the Agreement on Trade-Related Investment Measures, which has relatively light obligations.
Non-multilateral agreements in this area are found in bilateral investment treaties and in the investment chapters of regional trade agreements.
The investment law in such agreements is almost all WTO-plus. As with trade-related provisions, WTO law is still in force and obligations in such agreements will only apply between the parties.
18 Some regional trade agreements' (RTA) commitments apply more broadly. For example, a change in patent protection terms would affect all a country’s trading partners.
The analysis below focuses primarily on WTO law when discussing trade-related law, since most of the relevant non-multilateral commitments are similar to those found in the WTO. When discuss-ing investment-related law, the analysis focuses primarily on bilateral investment treaties and the investment chapters of regional trade agreements.
When the analysis departs from these parameters, this is noted.
2.2. INTERPRETATION AND APPLICATION OF TRADE AND INVESTMENT LAW
Green industrial policy efforts can conflict with trade and investment law. There are several important caveats that apply when discussing the potential conflicts. First, the law is not usually spelled out to the level of detail that would allow it to be obvious how it applies in any given situation;
were that possible, there would be few disputes.
Rather, the applicable law must be interpreted in the context of each case, taking into account the specifics of the measures in question. Moreover, some aspects of WTO law call for judgment in interpretation: What do ‘reasonable’ or ‘dispropor-tionately large’ mean in a specific context? And there are often dissenting interpretations issued on such questions by the different authorities: in the case of the WTO, panellists or appellate body members. As such, it is not always possible to say unequivocally that a certain type of policy is or is not prohibited by WTO law. There is no principle of precedent in WTO law, but in practice the prin-ciple is well respected.
Blanket statements become even more difficult in the area of investment law. Ad hoc arbitral panels interpret investment law and, while they will be conscious of previous awards, they have been known to issue widely divergent interpretations on essentially similar questions of law (Jones 2011; Ortino 2012; Nilsson and Englesson 2013). In WTO disputes the final interpreter of the law is the standing Appellate Body that tends to adhere strongly to case law.
It should also be noted that most WTO members arguably have many WTO-illegal measures in place. The fact or probability of illegality only comes into play when some other WTO member formally complains about those measures, possi-bly taking the issue beyond consultations to dispute settlement. The decision to do so is not taken lightly by any government, and suspected non-conforming measures are often simply
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Trade and Investment Law and Green Industrial Policy
ignored as not damaging enough to warrant the cost and political friction engendered by dispute settlement proceedings. No such political or public interest filter exists in the case of invest-ment law, where a private investor has the right to initiate binding arbitration with the host govern-ment, as investor-state dispute settlement.
2.3. EXCEPTIONS TO TRADE LAW
Some forms of green industrial policy meas-ures are likely to breach WTO or investment law obligations. For several areas of trade law this is not the end of the story. Some agreements include carefully described exceptions that cover agreed objectives, including environmental ones such as conservation of exhaustible resources and protection of human, animal or plant life or health (GATT, Article XX; General Agreement on Trade in Services (GATS), Article XIV; Agreement on Trade-Related Investment Measures (TRIMs), Article 3; Agreement on Government Procurement (AGP), Article III). GATT Article XX serves as a sort of template model for such exceptions:
Subject to the requirement that such meas-ures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restric-tion on internarestric-tional trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures: …
(b) necessary to protect human, animal or plant life or health; …
(g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption; …
Some of the agreements discussed here have these sorts of exceptions: the WTO and regional trade provisions on trade in goods, trade in services, trade-related investment measures and government procurement. Others do not, such as the WTO Agreement on Subsidies and Countervail-ing Measures, subsidy provisions of regional trade agreements and bilateral investment treaties.
Governments will find it difficult, if not impos-sible, to successfully use the general exceptions in trade law to ‘save’ non-conforming green industrial policy measures. In GATT Article XX, the chapeau paragraph’s requirements that the measures not be unjustifiable discrimination or a disguised restriction on international trade
are caveats to ensure that the measures to be saved are only focused on achieving the specified objectives, in this case environmental objectives.
However, by definition green industrial policy measures aim to achieve both environmental objectives and economic objectives, and excep-tions to the law are definitely not meant to save the latter.
In other words, if a green industrial policy meas-ure is seeking the exception status of GATT Arti-cle XX (b) or (g), the objective of the measure will have to match the environmental criteria in those sub-paragraphs–and this should be straightfor-ward. The measure will be aimed at preserving the environment. But the elements of the meas-ure that simultaneously seek to promote indus-trial development will also need to be justified as environmental in nature, or face rejection under the chapeau text.
So a measure discriminating in favour of a domestic green sector would have to provide some environmental rationale for that discrim-ination. If foreign competitors produce environ-mental goods or services more efficiently, there is no such rationale at least in the short run: it would actually be better for the environment to use foreign manufactured environmental goods and services. Because they are cheaper, such imported goods would yield more environmental benefit per dollar spent.
Cosbey and Mavroidis (2014) have suggested that such an environmental rationale might exist, describing an ‘environmental Bastable test’. The Bastable test asks whether the total costs of an industrial policy measure are outweighed by the value of all the future benefits that the measure might produce. The cost and bene-fits would be calculated as present discounted values of the stream of future costs and benefits.
If the balance is positive, the measure is judged worthwhile. This is strictly a national economic cost-benefit calculation.
The environmental Bastable test, on the other hand, would be a global assessment and would look at total environmental costs and benefits.
It would count as costs the lost environmental benefits from slower deployment of the technol-ogies, and against this it would balance the future environmental benefits. Those benefits would materialize only if the policy succeeded in creat-ing new innovators and competitors in the envi-ronmental technology space.
138 So if it could be convincingly argued that creating new firms in a green sector ultimately resulted in environmental gains–that a measure passed the environmental Bastable test–then a green industrial policy measure might pass GATT Arti-cle XX (b) or (g). But this would be difficult. The environmental Bastable test, like the original test, is mostly a heuristic device and impractical to use as a benchmark. The success or failure of any given green industrial measure is unpredictable and not easily quantified for the purposes of envi-ronmental cost benefit analysis. Given the scep-tical audience such an argument would likely have in the WTO dispute settlement system, its chances of success are not good.
GATT’s Article XVIII provides another set of excep-tions to GATT rules, for balance of payments and industrial policy purposes that apply to parties whose economies “can only support low stand-ards of living and are in the early stages of development”. There has never been case law to clarify exactly which countries are covered by this description.
These industrial policy exceptions are found in GATT Article XVIII sections A and C. Section A allows a covered member to withdraw or modify a scheduled GATT concession, to raise a tariff, to “promote the establishment of a particular industry with a view to raising the general stand-ard of living of its people.” Such a move must be preceded by notice to other members and negotiations with any member that is substan-tially affected to agree on compensatory adjust-ment–likely the lowering of tariffs in other areas of interest to its partners. It is technically possible but very difficult for such an effort to proceed even when a member is unsuccessful in getting negotiated agreement with its partners.
This would require agreement from the general
membership, including any countries that had withheld bilateral agreement.
Section C allows a covered member to take other sorts of unspecified measures aimed at the same objective, even where they conflict with most GATT obligations. Kuntze and Moeren-hout (2014) argue that this might include feed-in tariffs with domestic content requirements, for example. The measures qualifying for exception status under GATT XVIII section C would have to be notified to other WTO members, and if the members agree that there is no more GATT-con-sistent manner to achieve the same objectives, then the measure can proceed. However even if no such agreement can be reached, the notify-ing member can, after 90 days, implement the notified measure. Affected members can request negotiations on compensation.
There has been limited case law to interpret Arti-cle XVIII, with only two cases and those concern-ing balance of payments provisions, not the industrial policy clauses (WTO 1999; WTO 2002a;
WTO 2002b). As such it remains to be seen how free a WTO member might be to take advantage of what seems to be a useful exception. Neither of the two balance of payments cases was decided in favour of the implementing country. It is not obvious which countries might benefit. For exam-ple, China is a developing country member of the WTO, but it is unclear whether it could be char-acterized as ‘in the early stages of development’.
It is also unclear whether the member would be required to demonstrate that the proposed meas-ures would actually raise the general standard of living of their people–something that might be difficult in the case of domestic content require-ments. And of course the requirements for negoti-ations on compensation to affected members may make the proposition less viable.