Canada and the EU’s draft trade agreement was recently leaked, and it appears to give more space to nations to regulate the financial services sector than past trade deals. (h/t @snlester) But CETA may actually introduce new problems for financial regulators.
A quick refresher: the Uruguay Round of trade talks produced the world’s first major “trade” deal that also included rules restricting what types of financial regulations countries could apply on their home turf. This obviously concerned financial regulators, who were worried that WTO adjudicators would give more weight to “trade” concerns than regulatory ones. The compromise was a “prudential measures defense” or “prudential carve-out” that a country could invoke in WTO proceedings if its financial regulations were ever challenged. The problem is that the defense is not clearly written, and may cause more problems than it solves, as I have written here and here.
The CETA drafters appear to be sensitive to this criticism, and have a lot more language emphasizing the importance of regulation. (I’ve posted the full thing below). But even the permissive language (e.g. “Each Party may determine its own appropriate level of prudential regulation”) does not mean that investors or states could not challenge that regulation once the state established it.
A few quick points.
First, the CETA text puts states back in the drivers’ seat. Other trade agreements outsource power to international courts and adjudicators, who are seen as trustees and independent interpreters of a system of rules that hold states to account. Some scholars have questioned the wisdom of this. As Eric Posner and John Yoo write,
Tribunals are likely to be ineffective when they neglect the interests of state parties and, instead, make decisions based on moral ideals, the interests of groups or individuals within a state, or the interests of states that are not parties to the dispute. The difference between our view and the conventional wisdom centers on the role of tribunal independence. A tribunal is independent when its members are institutionally separated from the state parties-when they have fixed terms and salary protection, and the tribunal itself has, by agreement, compulsory rather than consensual jurisdiction. Conventional wisdom holds that independence at the international level, like independence at the domestic level, is the key to the rule of law as well as the success of formalized international dispute resolution. We argue, by contrast, that independent tribunals pose a danger to international cooperation because they can render decisions that conflict with the interests of state parties. Indeed, states will be reluctant to use international tribunals unless they have control over the judges. On our view, independence prevents international tribunals from being effective.
Simon Lester asks what part of Judge Griesa’s anti-Argentina injunctions would be actionable under WTO rules. This was a possibility I raised here. On Twitter, he asks “have other courts interpreted similar clauses differently than Griesa did?” and “Isn’t this US court enforcing a private contract, rather than interpreting statute/regulation?”
It’s a good question. My take is that the measures at issue would not be the underlying contractual term, but Griesa’s interpretation of it plus any judicial or executive branch efforts to enforce the holding.
First, on the question of the weight of precedent. There has not been much interpretation by courts of the so-called pari passu clauses which are at issue here. As SCOTUS Blog notes,
One promise [by Argentina] was that any dispute would have to be settled under New York law. And another was a so-called “equal treatment” guarantee. That second promise goes by a Latin phrase, pari passu. Loosely translated, it means that everybody gets treated the same when it comes to investors’ rights. It is a standard part of almost all international borrowings by governments. …
Ultimately, a federal judge in New York City, Thomas P. Griesa (in time, fully supported by a higher court, the U.S. Court of Appeals for the Second Circuit), ruled that if Argentina made any more payments to the swap participants, it had to pay what it owed to the holdouts — that is $1.33 billion. That, Judge Griesa said, is what pari passu means.
Argentina thinks pari passu means something else: only that it would treat the investors in a single borrowing the same, not that it would treat everyone in the world to whom it owed money the same. The holdouts had a chance to make a swap, and they chose not to.
The rival interpretations could be recast as to whether pari passu clauses guarantee equality of outcome (payment) or equality of opportunity (everyone given same procedural rights to make a deal).
The US argued for the latter interpretation in its amicus brief. The Obama administration lawyers said that the correct legal result (as a matter of New York contract law) is that which is consistent with settled expectations of the meaning of contractual terms at the time of original contract. Citing a long string of academic and historical publications, the US argued that the settled understanding was limited to procedural equality.
Could the US face WTO sanctions for the recent Argentina bonds debacle?
A quick recap of where we are. US Judge Griesa recently ruled that Argentina cannot pay off its restructured bondholders without first paying a group of “vulture fund” holdouts. Those restructured bondholders were due their payments last night, but US banks were enjoined from making the payments on Argentina’s behalf (despite having Argentina’s money to do so). This prompted Standard & Poors to declare Argentina in technical default. Financial reporter Felix Salmon is referring to the mess using the hashtag #GrieFault on Twitter, distinguishing a judicially determined default from one where a government doesn’t have the economic resources to meet its payment obligations.
Argentina prefers a different nomenclature, noting that the US is “internationally responsible” for its judiciary, which it accuses of “transfer restrictions“.
In the world of international law, thems are fighting words. Back in 2011, the WTO ruled that the US court rulings are “a priori capable of constituting a measure attributable to the United States, which may be challenged in dispute settlement proceedings under” the WTO. And a decade earlier, a WTO panel noted that – if US prosecutors or courts moved to block payments and transfers to offshore gambling sites – it risked violating its WTO obligations.(Indeed, Argentina just announced that it might pursue action at the International Court of Justice, although it is not clear on what basis.)
It would be ironic if the Obama administration, which supported Argentina’s positions in US court filings, now finds itself on the hook for judicial actions it disagrees with. But them’s the rubs when it comes to international law (as I write in this piece for UNCTAD).
Here’s a bit more detail on how I see such a claim playing out:
This is not the latest Malbec-themed eco-lodge in Mendoza. The Supreme Court, led by Justice Scalia, determined in a 7-1 decision that Argentina’s hold-out creditors can use US courts to obtain information about the government’s assets all around the world. The case is called Republic of Argentina v. NML Capital (“NML”). NML was requesting information on the global transactions made for Argentina by Bank of America and Banco de la Nacion, including with individuals, defense ministries, subfederal governments, and more.
This information would be used to eventually attempt to ask courts (in the US and elsewhere) to attach Argentina’s assets to make up for what the creditors feel they are owed. In short, the Supreme Court’s authorized a global fishing expedition to find Argentine assets. This is an interesting contrast with the sharp limitations put on tax authorities using similar techniques to find laundered and tax-evaded income (see page 52 of this report, for instance).
NML is the latest in a long saga of investor and bondholder complaints related to steps that Argentina took following its 2001-02 financial crisis.
The case shows how US courts are becoming increasingly embroiled in sensitive foreign affairs issues. It comes on the heels of a March Supreme Court decision (BG Group PLC v. Republic of Argentina) that found that US courts will defer to investment arbitrators’ awards against sovereign states, even when (as Argentina and the Obama administration suggested in their losing argument) that the investor complainant hadn’t complied with the terms of the underlying investment treaty. Chief Justice Roberts, in a dissent, wrote that the majority “trivializes the significance to a sovereign nation of subjecting itself to arbitration anywhere in the world, solely at the option of private parties…”
The present case is a bit different.
A Times report this morning deemed as “binding” an opinion of the International Court of Justice that Japan’s whaling practices were in violation of its obligations under the International Convention for the Regulation of Whaling.
I am a bit wary of any characterization of international law as “binding”. In the absence of a global entity able to force compliance, what does “binding” mean? My impression is that some scholars use “binding” to refer to what could be even just a purely moral obligation, while others use it to refer to an obligation backed up by force.
I had similar concerns about the word “to avoid” in a WTO law context (how much intention does it require?), which I explore here with coauthor Jayati Ghosh. Then, as now, I reached for the Oxford English Dictionary for a bit more insight.
The entry for the adjective “binding” refers back to the verb “to bind“. There are fully 23 variants of “bind” that the OED editors catalogue. Among them:
- Tying up and fastening (as in objects);
- Tying up a person to deprive them of liberty;
- More binding, encircling, intertwining of things.
We then get to a group of eight different variants, under the heading “To restrain or unite [people] by non-material bonds”. We have the binding of holy matrimony, the binding of affection between people, the binding of apprenticeship. We have the notion of an actor committing themselves to a future course of action (” A landed proprietor may bind himself to a future payment, in a written deed.”) There are references to purely moral obligation, although there is an emphasis on this undertaking being an actual constraint (much like the physical constraints noted above). Given these definitions, it is not surprising that many writers use “bindingness” in a sort of power-neutral sense. Japan “binds” itself to ICJ rulings, or is “bound”, because that is what could make the international legal system cohere.
Then, there are three of these that touch specifically on law-related themes.
Over at the Monkey Cage, Erik Voeten analyzes which scholars mis-predicted Russia’s Crimean intervention. Most people got it wrong of course, and of various international relations subdisciplines, the high water mark was 20 percent getting it right. Of particular interest to 2C readers:
Self-identified Liberals and Constructivists did poorly, with Liberals both very unlikely to predict intervention and very likely to offer a definitive “no” rather than the “don’t know” answer that was very popular among Constructivists (who sometimes look dimly on the predictive ambitions of social science).
Perhaps a misplaced faith in the power of international law and institutions was at the root of this. After all, the Russian intervention violates a system of laws and norms that these paradigms hold dearly. Yet, non-realist scholars who study international law or international organizations as their primary or secondary field were more likely to foresee the military action (see graph).
Delving deeper into the data, I found that only 7 percent of the 150 self-identified Liberals and Constructivists who do not study international organizations and law foresaw the Russian military intervention. By contrast 15 percent of the 87 Liberals and Constructivists who study international law and organization got it right. This is admittedly speculative but it may be that paradigms impose blinders especially outside of ones field of study. Only 5 percent (4) of the 87 Liberals and Constructivists who do not study international security, Russia or international organizations and law correctly predicted a military intervention.
To follow up Erik’s speculation with more of my own, I would wager that legal scholars from non-social science backgrounds would probably fare even worse, if we had data on this, for similar reasons of misplaced faith in the normative powers of law. Those who are willing to treat legal processes empirically rather than normatively would probably score better.
Not quite, but the Court did side with UK investors against Argentina and Obama in a historic decision last week.
The decision paired an unusual alliance of the court’s most liberal and conservative justices, who ruled in favor of empowering transnational arbitrators – not only to second guess national policies and judicial processes – but to decide when they get to second guess them. Two of the court’s swing votes (Chief Justice Roberts and Justice Kennedy) dissented, arguing for more deference to national institutions. This outcome could have been predicted from the tone of the court’s oral arguments back in December, which was fairly hostile to both governments’ arguments.
The dispute arose when Argentina’s financial crisis response in the early 2000s harmed a UK corporation’s investment in the country’s privatized natural gas distribution sector. The investor (BG Group) successfully brought a claim under the UK-Argentina investment treaty. The dispute was sited in the US, which meant that Argentina could (and did) ask US courts to vacate the award. The US phase of the dispute went all the way to the Supreme Court, making it the first time that the court has ruled on an investment treaty dispute.
The Obama administration sided with Argentina in alleging that the transnational arbitrators should not have accepted jurisdiction over the case, arguing that the treaty obligated BG Group to first seek recourse in Argentine courts for 18 months before launching the treaty complaint (which the company did not do). The US’ recent treaties put some similar procedural limits and preconditions on countries’ consent to be sued by investors; the solicitor general’s position in the case seemed motivated by ensuring courts respect those limits in future cases.
There are a lot of interesting and novel aspects of the Supreme Court’s decision. I’ll focus on just a few.