2011 Trade Policy AssessmentMaine Citizens Trade Policy Commission

September 16, 2011

2011 Trade Policy AssessmentMaine Citizens Trade Policy Commission

September 16, 2011

Robert StumbergGeorgetown University Law Center

Harrison Institute for Public Law

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Roadmap

1. Introduction a. Overview – trade and investment

agreementsb. Current – Trans-Pacific Partnership

Agreementc. Which agreements affect states?d. How people use trade rules

2. Trade rules that affect statesa. Pharmaceutical trade rulesb. Limits on regulation of servicesb. Foreign investor rights

3.Example – treatment of tobacco in FTAs

1. Introduction a. Overview – trade and investment

agreementsb. Current – Trans-Pacific Partnership

Agreementc. Which agreements affect states?d. How people use trade rules

2. Trade rules that affect statesa. Pharmaceutical trade rulesb. Limits on regulation of servicesb. Foreign investor rights

3.Example – treatment of tobacco in FTAs

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Overview of trade agreements

U.S. Trade Agreements in Force

WTO – 153 nations

FTAs - 17 nationsBITs - 39 US treaties

20 agreementsTrade disputes - yesInvestor disputes - noOngoing negotiations - yes

20+ chaptersTrade disputes - yesInvestor arbitration - yesOngoing negotiations - yes

Single functionTrade disputes - noInvestor arbitration - yesOngoing negotiations - yes

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Which agreements affect states?

AgreementsAgreementsTrade RulesTrade Rules

GoodsGoods ServicesServices Procure-Procure-mentment SubsidiesSubsidies InvestmentInvestment

WTO AgreementsWTO Agreements xx xx xx xxFree Trade AgreementsFree Trade Agreements xx xx xx xxBilateral Investment Bilateral Investment Treaties Treaties xx

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Intro - How people use trade rules

Trade rules that limit government authorityTrade rules that limit government authority

State laws that affect trade

Legal use of trade rules (rare)• Threat of trade sanctions• Investor compensation• Domestic enforcement / preemption

Political use of trade rules• Lobbying by federal officials• Lobbying by foreign governments• Lobbying by private firms

Pharmaceutical trade rules

Australia and Korea FTAs – models for TPPA

Reimbursement policies – must be based on “competitive market-derived” prices

Problems

• States use preferred drug lists to reduce prices 50% (Maine)

• Affordable Care Act is moving to reference pricing

Coverage –programs operated by central government

Carve-out for federal-state partnerships?

• Medicaid – yes

• Medicare Part B – no statute defines pharmaceutical prices

• Sec 340B Fed. Public Health Act – no statute defines discounts for federally funded clinics

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Alcohol distributionAlcohol distribution

Electric power - delivery & controlElectric power - delivery & control

Civil engineeringCivil engineering

ConstructionConstruction

Financial services Financial services

GamblingGambling

Hospital servicesHospital services

What does GATS cover?90 U.S. commitments from A-to-Z

Health insuranceHealth insurance

Higher education and researchHigher education and research

Mining servicesMining services

Pipeline transport & storage of fuelsPipeline transport & storage of fuels

Tobacco distributionTobacco distribution

Urban planningUrban planning

Waste managementWaste management

What are GATS rules?

Market AccessNo quantitative limits

National TreatmentNo discrimination

Domestic Regulation70 proposed “disciplines”

Notquantitative limits

Notdiscriminatory

Market AccessNo quantitative limits

Domestic Regulation70 proposed “disciplines”

National TreatmentNo discrimination

Notquantitative limits

Notdiscriminatory

What are GATS rules?

11. [Domestic regulations] . . . shall be pre-established, based on objective and transparent criteria and relevant to the supply of the services to which they apply.”

Proposed GATS “disciplines”Proposed GATS “disciplines”Article 11 - applicable to all covered Article 11 - applicable to all covered sectorssectors

Proposed GATS “disciplines”Proposed GATS “disciplines”Article 11 - applicable to all covered Article 11 - applicable to all covered sectorssectors11. [Domestic regulations] . . . shall

be pre-established, based on objective and transparent criteria and relevant to the supply of the services to which they apply.”

Each term is ambiguous. Each term is ambiguous. Each hasEach has

Benign meanings andBenign meanings and

Radical meaningsRadical meanings

Locate near infrastructureProvide storage capacity

Most relevantto service

Least relevant to service

Intrinsic to serviceIntrinsic to service External to serviceExternal to service

Licensing of ports, refineries, industrial facilities

Preserve environmentPreserve coastal access

Conserve historic valuesPreserve scenic vistas

RelevanceMeasures ... shall be ... relevant to the supply of the services to which they apply.

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Foreign investor rights

ExpropriationFair and equitable treatmentMost-favorable treatment

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Example – Treatment of tobacco in FTAs

Trade agreements serve and protect tobacco with the benefits enjoyed by every other sector

• How do trade negotiators treat the outliers – the industries that unavoidably threaten public health?

• If tobacco succeeds in using trade agreements to protect its market share from new forms of regulation, then any industry will be able to.

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Prohibitions on promoting tobacco trade

U.S. law prohibits trade negotiators from promoting tobacco trade

• Doggett Amendment“Funds shall not be available to “promote the sale or export of tobacco or tobacco products, or to seek the reduction or removal by any foreign country of restrictions on the marketing of tobacco or tobacco products, except for restrictions which are not applied equally to all tobacco or tobacco products of the same type.”

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U.S. negotiators have exceeded their authority

U.S. FTAs provide tobacco companies with benefits that only an FTA can provide:

• Investor-state arbitration to challenge other countries’ tobacco controls

• Outside of domestic courts

• Using investor protections not available under domestic law

• Trademark protections in foreign markets

• Expanded limits on non-discriminatory government regulation

• Necessity test for regulation of goods

• Emerging limits on cross-border distribution services

• Tariff reductions for specific tobacco products

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Tariff reductions are obvious

U.S. FTAs with Peru, Singapore, Chile, Australia

CigarettesCurrent status FTA commitment

WTO bound tariff – $1.05/kg + 2.3%

Peru – zero tariff eliminated

Singapore – 13.1¢/kg + 0.2% staged elimination

Chile – 13.1¢/kg + 0.2% staged elimination

Australia – 42.0¢/kg + 0.9% staged elimination

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Tariff reductions are obvious

U.S. FTAs with Peru, Singapore, Chile, Australia

Processed tobacco leaf – other than cigarettes

Current status FTA commitment

WTO bound tariff – 37.5¢/kg

Peru zero tariff lock in zero

Singapore – 4.6¢/kg staged elimination

Chile – 4.6¢/kg staged elimination

Australia – 15.0¢/kg staged elimination

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Less obvious

Trade and investment rules that protect tobacco marketing

• Example – PMI describes Singapore’s standard for banning marketing terms as “overly broad” discretion, which PMI says could –

• “lead to violations of the TBT Agreement”

• “threaten to violate existing … agreements with the U.S.” and

• “undermine international investment, TBT and IP rights”

• Singapore’s standard – The Minister of health may ban use of“any term, descriptor or trade mark, or any figurative or other sign, that directly or indirectly creates the false impression that a particular tobacco product is less harmful than other tobacco products.”

• Compare to the U.S. standard:“The Secretary may … require restrictions on … the advertising and promotion of, the tobacco product, if the Secretary determines that such regulation would be appropriate for the protection of the public health.”

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• Uruguay prohibited deceptive cigarette brands – “light” and “low tar.”

• Tobacco companies shifted to colors – Marlboro Reds, Blue, Gold.

• Smoking rates stayed high, so Uruguay limited companies to

• A single brand• 80 percent package warning • Pictographs of severe health

effects

Less obvious still – Investors are using trade rules

Among PMI’s arguments –

• Uruguay violates fair & equitable treatment and WTO/TRIPS obligations.

• Under the BIT’s umbrella clause – Uruguay must “observe the commitments it has entered into with respect to the investments of Swiss investors.”

• Commitments include obligations under TRIPS.

Philip Morris International filed investor arbitration – Switzerland-Uruguay BIT

• Investors’ lawyers aim to privatize trade litigation.

• Incorporating trade rules could lead to “vast” expansion of trade litigation.

• Multiple investment clauses could link investors to trade rules.

Lessons from the Marlboro Man v Uruguay

• TBT necessity tests

• TRIPS trademark protections (“IP rights are private rights”)

• GATS limits on domestic regulation (“commercial presence” of subsidiaries)

• Example – proposal that governments must ensure that regulations are not more burdensome than necessary.

Which trade rules are investors trying to use?

BIT law WTO law

• Minimum standard of treatment (fair and equitable treatment). Ensure compliance with customary international law (CIL) – debatable scope.

• International law clauses. Ensure treatment “in accordance with international law” – not limited to CIL.

• Umbrella clauses. Observe “any obligation” with regard to investments.

• More favorable treatment clauses. If another agreement between the parties provides “more favorable treatment” of investments, it will prevail.

• Most-favored nation treatment. Ensure the most favorable treatment provided to investors from any third country. If the expansive clauses above are not available, MFN incorporates them from any third-party BIT.

Which investment clauses might incorporate trade rules?

Most investment agreements (FTA chapters or BITs) have clauses that are designed to incorporate obligations from outside of the

agreement.

Hypothetical TPPA invest. chapter

No expansive treatment clauseTPPA

investmentclaim

NZ investor

MalaysiaMalaysia

MFN

BelgiuBelgiumm

Malaysia-Belgium BIT:

Yes “international law” clause

MFN links to clauses in third-part BITs

How might MFN expand protection of foreign investors?Even if the TPPA avoids expansive clauses (international, umbrella, more favorable, etc.), MFN could incorporate similar clauses from older third-party BITs. Examples:

United StatesArgentina BIT 1994 International law

Ecuador BIT 1997 Umbrella clause

AustraliaArgentina BIT 1997

More favorable / bilaterals

Australia-US bilateralTRIPS-plus protections

ChileUnited Kingdom BIT 1997

International law

MFN ConnectionsUnder BITS and FTAs

UNCTAD

Potential TPPA reforms

• Be wary of half-measuresMany reforms proposed for the TPPA have value, but they are half measures.

• Carve-out of tobacco from the investment chapter

This solution leaves in place the risk of state-to-state disputes under several trade chapters.

• Health exceptions for all chapters – Health exceptions would help safeguard domestic regulations, but the standard language includes a necessity test that shift the burden of proof to defending governments.

• Limits on investor protections – Clear limits on investor protections are essential, but they leave in place the risk of state-to-state disputes under several trade chapters.

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Potential TPPA reforms

• Adopt effective reforms in the TPPAThree reforms do not suffer from uncertain interpretation or only partial coverage of TPPA chapters.

• Carve out tobacco A complete carve-out of tobacco would de-fuse the TPPA as a threat to tobacco controls.

• Exclude investor-state remedies

• As emphasized by Australia, investor claims could threaten a wider class of public health measures.

• Tobacco controls may save more lives than other health measures, but that does not justifyprotecting only tobacco controls from the threat of investor arbitration and trade disputes.

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