Enforcement of FTAs: lessons for TPP and new trade agreements
The U.S. administration insists on the fact that the TPP is ‘enforceable’. If experience of previous US trade agreements is to offer any guidance, this enforceability cannot be taken for granted. Yet the stakes are high for both regional trade rules’ credibility, and for multilateralism’s future.
By Sébastien Jean, Kevin Lefebvre
Post
In its presentation of the Trans-Pacific Partnership (TPP) the US administration has repeatedly stressed that the landmark 12-country trade agreement’s commitments are ‘enforceable’. President Obama has said that TTP offers “the -strongest commitments on labor and the environment of any trade agreement in history, and those commitments are enforceable, unlike in past agreements”.[1]
The term ‘enforceable’ suggests the possibility to force parties to comply with their commitments. In the case of a sovereign country, this cannot be achieved through coercive measures per se, but instead through provisions making the breach of an agreement’s terms unattractive.
TPP includes a dispute settlement mechanism which in principle is close to the one provided for in the World Trade Organization, involving direct commercial sanctions in case a party is in breach of its commitments in specific areas. An example is the ‘consistency plan’ explicitly linking commercial benefits granted by the US to Vietnam to the latter’s commitments on labour issues. The so-called ‘tariff delay mechanism’ proposed by the US to Japan in the automotive sector is also worth mentioning: it allows the US to delay the phase-out of its tariffs if Japan is found not to abide by its commitments to cut non-tariff barriers in this sector.
Not quite as innovative as presented
The US has called these measures ‘innovative’. This is surprising. After the North American Free Trade Agreement’s (NAFTA) pioneering clauses introduced in 1994, a big part of regional trade agreements (RTAs) have been endowed with a ‘quasi-judicial’ dispute settlement mechanism (DSM) allowing third-party arbitration (note that we focus here on trade, as opposed to investment, disputes). This was the case of most agreements signed since the mid-1990s, totaling approximately 150 agreements in force in 2012.[2] Like the WTO’s dispute settlement body (DSB), most of these mechanisms rely upon an independent panel’s assessment of a party’s practices’ conformity with WTO rules, and on the principle that, failing compliance, the complainant country may remove trade benefits, i.e. exert trade retaliation.
Putting aside the case of common markets like the EU or even MERCOSUR - which often go together with institution building and extensive judicial powers - preferential trade agreements’ similarity with the WTO system remains superficial. There is even a fundamental difference: despite its shortcomings, the WTO DSB has proven its efficiency in delivering rule-based settlements; in contrast, regional agreements’ trade dispute settlement mechanisms have remained virtually unused.
‘Virtually’ unused regional dispute settlement mechanisms
Consider the most famous case, NAFTA. Chapter 20 provides for a trade dispute settlement mechanism with an architecture resembling that of the WTO. Yet, so far only three cases have been addressed in this framework since its coming into force, while NAFTA country members brought thirty-four disputes opposing each other to the WTO’s DSB.
The ASEAN Free Trade Agreement is another prominent case given the regional bloc’s size and the fact that it is based upon a long-standing regional organisation. ASEAN signatories adopted a dispute settlement mechanism in 1996, subject to an ‘enhanced protocol’ in 2004, which again resembles the WTO’s DSB. This mechanism has not been used at all (some initiated disputes did not go beyond the consultation stage) while, in the meantime, disputes between member countries brought to WTO have flourished.
A more recent example is the so-called KORUS agreement between U.S. and Korea, which came into force in 2012. This agreement is claimed to extend dispute settlement mechanism prerogatives beyond what previous US trade agreements did, in particular by providing for trade retaliation in case of non-compliance with labor- and environment-related provisions. To our knowledge, no trade dispute has been brought so far to this mechanism, while Korea, in the meantime, brought two disputes against the US to the WTO DSB.
Potential challenge to the WTO’s dispute settlement system
The ineffectiveness of dispute settlement in regional agreements can be ascribed to many reasons, mainly related to the lack of financial resources and of an institutional framework, to overlap with the multilateral system, to the restricted scope of trade benefits involved,[3] to the politicization of disputes, and to the lack of peer pressure, which plays a significant role in the multilateral system.
This does not mean that RTA provisions are not applied. A country conspicuously failing to comply with its commitments would lose credibility, which is in no one’s interest. Easily verifiable commitments, such as tariff rate reductions, are actually applied, with very few exceptions.
In addition, agreements generally create steering groups and monitoring bodies, allowing for a regular dialogue, which likely solve a number of issues. When stakeholders demonstrate goodwill, disputes can be efficiently settled through such bodies, and this is of high practical importance, for example in the coordinate application of sanitary policies.
Cases where commitments’ enforcement is complex and difficult to monitor are more problematic, especially when some stakeholders aim at circumventing them. For instance, what if a TPP member does not apply consistently provisions against overfishing, or does not fight effectively illegal logging, in both cases without conspicuously breaching its commitments? This is where an effective trade dispute settlement mechanism would be needed.
The focus put by U.S. authorities on the enforceable nature of TPP commitments might mean that they are aiming at establishing an effective dispute settlement mechanism under this agreement. As a matter of fact, the relatively high number of partners involved may help to limit disputes’ politicization and create peer pressure.
It is doubtful whether action will follow, but much is potentially at stake if it were to. This is why. Firstly, dispute settlement effectiveness has become a central, and exclusive, characteristic of the multilateral trading system; improved effectiveness of RTAs in this field would mean enhanced competition for the WTO. Secondly, complex, rules-related commitments are taking central importance in trade policies; precisely the issues for which an effective dispute settlement mechanism is essential.
The same conclusions may actually apply to the EU, which joined belatedly the trend toward quasi-judicial dispute settlement mechanisms, starting from its agreements with Mexico in 2000 and with Chile in 2003. More recently, the mechanism included in the agreement with Korea is described as “efficient and fast” by the European Commission, with short delays left for arbitration and wide-open possibilities left for suspension of benefits in case of non-compliance. To our knowledge, none of them has been used so far. While potentially highly meaningful, their efficiency thus remains hypothetical.
The term ‘enforceable’ suggests the possibility to force parties to comply with their commitments. In the case of a sovereign country, this cannot be achieved through coercive measures per se, but instead through provisions making the breach of an agreement’s terms unattractive.
TPP includes a dispute settlement mechanism which in principle is close to the one provided for in the World Trade Organization, involving direct commercial sanctions in case a party is in breach of its commitments in specific areas. An example is the ‘consistency plan’ explicitly linking commercial benefits granted by the US to Vietnam to the latter’s commitments on labour issues. The so-called ‘tariff delay mechanism’ proposed by the US to Japan in the automotive sector is also worth mentioning: it allows the US to delay the phase-out of its tariffs if Japan is found not to abide by its commitments to cut non-tariff barriers in this sector.
Not quite as innovative as presented
The US has called these measures ‘innovative’. This is surprising. After the North American Free Trade Agreement’s (NAFTA) pioneering clauses introduced in 1994, a big part of regional trade agreements (RTAs) have been endowed with a ‘quasi-judicial’ dispute settlement mechanism (DSM) allowing third-party arbitration (note that we focus here on trade, as opposed to investment, disputes). This was the case of most agreements signed since the mid-1990s, totaling approximately 150 agreements in force in 2012.[2] Like the WTO’s dispute settlement body (DSB), most of these mechanisms rely upon an independent panel’s assessment of a party’s practices’ conformity with WTO rules, and on the principle that, failing compliance, the complainant country may remove trade benefits, i.e. exert trade retaliation.
Putting aside the case of common markets like the EU or even MERCOSUR - which often go together with institution building and extensive judicial powers - preferential trade agreements’ similarity with the WTO system remains superficial. There is even a fundamental difference: despite its shortcomings, the WTO DSB has proven its efficiency in delivering rule-based settlements; in contrast, regional agreements’ trade dispute settlement mechanisms have remained virtually unused.
‘Virtually’ unused regional dispute settlement mechanisms
Consider the most famous case, NAFTA. Chapter 20 provides for a trade dispute settlement mechanism with an architecture resembling that of the WTO. Yet, so far only three cases have been addressed in this framework since its coming into force, while NAFTA country members brought thirty-four disputes opposing each other to the WTO’s DSB.
The ASEAN Free Trade Agreement is another prominent case given the regional bloc’s size and the fact that it is based upon a long-standing regional organisation. ASEAN signatories adopted a dispute settlement mechanism in 1996, subject to an ‘enhanced protocol’ in 2004, which again resembles the WTO’s DSB. This mechanism has not been used at all (some initiated disputes did not go beyond the consultation stage) while, in the meantime, disputes between member countries brought to WTO have flourished.
A more recent example is the so-called KORUS agreement between U.S. and Korea, which came into force in 2012. This agreement is claimed to extend dispute settlement mechanism prerogatives beyond what previous US trade agreements did, in particular by providing for trade retaliation in case of non-compliance with labor- and environment-related provisions. To our knowledge, no trade dispute has been brought so far to this mechanism, while Korea, in the meantime, brought two disputes against the US to the WTO DSB.
Potential challenge to the WTO’s dispute settlement system
The ineffectiveness of dispute settlement in regional agreements can be ascribed to many reasons, mainly related to the lack of financial resources and of an institutional framework, to overlap with the multilateral system, to the restricted scope of trade benefits involved,[3] to the politicization of disputes, and to the lack of peer pressure, which plays a significant role in the multilateral system.
This does not mean that RTA provisions are not applied. A country conspicuously failing to comply with its commitments would lose credibility, which is in no one’s interest. Easily verifiable commitments, such as tariff rate reductions, are actually applied, with very few exceptions.
In addition, agreements generally create steering groups and monitoring bodies, allowing for a regular dialogue, which likely solve a number of issues. When stakeholders demonstrate goodwill, disputes can be efficiently settled through such bodies, and this is of high practical importance, for example in the coordinate application of sanitary policies.
Cases where commitments’ enforcement is complex and difficult to monitor are more problematic, especially when some stakeholders aim at circumventing them. For instance, what if a TPP member does not apply consistently provisions against overfishing, or does not fight effectively illegal logging, in both cases without conspicuously breaching its commitments? This is where an effective trade dispute settlement mechanism would be needed.
The focus put by U.S. authorities on the enforceable nature of TPP commitments might mean that they are aiming at establishing an effective dispute settlement mechanism under this agreement. As a matter of fact, the relatively high number of partners involved may help to limit disputes’ politicization and create peer pressure.
It is doubtful whether action will follow, but much is potentially at stake if it were to. This is why. Firstly, dispute settlement effectiveness has become a central, and exclusive, characteristic of the multilateral trading system; improved effectiveness of RTAs in this field would mean enhanced competition for the WTO. Secondly, complex, rules-related commitments are taking central importance in trade policies; precisely the issues for which an effective dispute settlement mechanism is essential.
The same conclusions may actually apply to the EU, which joined belatedly the trend toward quasi-judicial dispute settlement mechanisms, starting from its agreements with Mexico in 2000 and with Chile in 2003. More recently, the mechanism included in the agreement with Korea is described as “efficient and fast” by the European Commission, with short delays left for arbitration and wide-open possibilities left for suspension of benefits in case of non-compliance. To our knowledge, none of them has been used so far. While potentially highly meaningful, their efficiency thus remains hypothetical.
This post was also published at http://www.borderlex.eu.
[1] Statement by the President on the Trans-Pacific Partnership, Office of the Press Secretary, The White House, 5 October 2015.
[2] Source: Chase Claude, Yanovich Alan, Crawford Jo-Ann and Ugaz Pamela 2013. “Mapping of Dispute Settlement Mechanisms in Regional Trade Agreements – Innovative or Variations on a Theme?” WTO Staff Working Paper (ERSD-2013-07).
[3] In a regional agreement framework, only preferential benefits could be withdrawn, not the ones of WTO. In other words, the MFN rate can be thought of as the upper-bond of potentially applicable retaliations.
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