Month: October 2015

The fifth and final lesson from last month’s World Trade Organization ruling against Argentina’s anti-tax haven policies is:

Naming is (or should be) half the battle.

When countries have disputes over goods trade, it’s relatively straightforward what to compare. If my country makes cars, and your country keeps them out in favor of your nation’s carmakers, then you are discriminating against LIKE goods.

In services trade, matters are less clear. Is a haircut by an expert stylist LIKE a haircut from your dad, who uses a razor he got in the 1970s from Sears Roebuck? Is a haircut by someone who doesn’t speak your language (and so can’t understand your style preferences) the same as someone who does? Is a haircut in a place that doesn’t regulate and license barbers like a haircut from a barber that had to pass aptitude exams? The opportunity for qualitative distinctions in the services arena is  limited only by your zest for Seinfeld-ian discursions.

It is unsurprising, then, that disputes under the WTO’s General Agreement on Trade in Services end up coming down to how the service is characterized. When the gambling haven Antigua challenged the US Internet gambling ban, the island’s lawyers had to show that the US GATS commitment in “recreational services” implicitly included “gambling services”. The US had to contest that claim. They also had to try to convince WTO adjudicators that “gambling via the Internet” was not like “gambling in a brick and mortar casino”, as the latter is easier to regulate.

What is surprising, however, is how little attention WTO panelists dedicated to likeness in their recent ruling against Argentina.

Continue reading “WTaxO Lesson #5: Name It” →

Hillary Clinton made waves yesterday by announcing her opposition to the Trans-Pacific Partnership, or TPP.

As Simon Lester notes, her opposition seems to be based on two issues: the TPP’s lack of disciplines on currency manipulation and some of the pharmaceutical provisions.

Where does Hillary stand on investor-state dispute settlement, or ISDS – one of the most controversial provisions in the TPP?

The campaign has not yet announced a position, but the candidate has made statements in the past that give some hints.

As HuffPo has reported, her 2014 book Hard Choices has the following passage:

Currently the United States is negotiating comprehensive agreements with eleven countries in Asia and in North and South America, and with the European Union. We should be focused on ending currency manipulation, environmental destruction, and miserable working conditions in developing countries, as well as harmonizing regulations with the EU. And we should avoid some of the provisions sought by business interests, including our own, like giving them or their investors the power to sue foreign governments to weaken their environmental and public health rules, as Philip Morris is already trying to do in Australia. The United States should be advocating a level and fair playing field, not special favors. (Emphasis added.)

Seems very critical, especially the framing of investor rights as “special favors”.

Continue reading “What does Hillary Clinton think of #ISDS in #TPP?” →

The fourth lesson from last week’s World Trade Organization’s ruling against Argentina’s anti-tax haven policies is:

Use your defenses; that’s what they are there for.

One of the key issues litigated in the case was the meaning of a defense for prudential measures under the WTO’s General Agreement on Trade in Services (GATS).

The clause appears to be more broadly worded than other defenses that countries have against violating their WTO commitments. It reads:

Notwithstanding any other provisions of the Agreement, a Member shall not be prevented from taking measures for prudential reasons, including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system.  Where such measures do not conform with the provisions of the Agreement, they shall not be used as a means of avoiding the Member’s commitments or obligations under the Agreement.

I had long warned that this prudential measures defense (PMD) language could be problematic from a regulatory perspective: does the second sentence cancel out the first?

From the US’ oral statements to the recent WTO panel, it is clear the US did NOT want an answer to the question…

Continue reading “WTaxO Lesson #4: Use Your Defenses” →

I have a piece in today’s Washington Post Monkey Cage based on my PhD research.

Here’s the lede:

With the conclusion of negotiations in Atlanta on the Trans-Pacific Partnership (TPP), we will soon have texts to look at, and, eventually, a vote in Congress. It’s the biggest deal in trade politics in several years. It will be widely covered in the media against the backdrop of the presidential election — where many candidates, both Republicans and Democrats, are touting their TPP opposition.

The vote on Fast Track Trade Promotion authority earlier this year showed that opponents of trade deals can get within striking distance of a win in the House of Representatives. In the final vote, it passed by only 219-211. The administration will have to hold on to roughly the number of votes it got then, and opponents will try to get a few to flip.

One sticking point will be the agreement’s chapter on investor-state dispute settlement (ISDS).

If you want to read the full thing, including this bizarro graph below that I made to look like a Christmas tree, head on over to the Monkey Cage site.

A third takeaway from this week’s World Trade Organization’s ruling against Argentina’s anti-tax haven policies is:

Proving protectionism doesn’t require statistics or demonstrated injury.

One would think that a body tasked with enforcing open trade would have a very clear and consistent methodology for examining trade impact. Not so.

When development economists talk about trade disputes and protectionism, they think of situations where:

1. there is an actual good or service
2. from the complaining country
3. being harmed in the challenged host country
4. in a significant
5. and demonstrable way
6. to the benefit of host country providers
7. that sell the same thing.

As it happens, this is also consonant with part of the broader justification for trade agreements: create legal penalties that can deter countries from injuring one another. Less conflict, more peace – everybody wins.

As I write in this book chapter, the WTO has developed an odd approach to evaluating trade distortions. Instead of a more traditional economic analysis of protectionism, the panel report released this week used a “conditions of competition” (COC) framework. This was developed by trade lawyers over many WTO cases.

Here, there needn’t be suppliers or goods present in the host country – the logic being that the protectionism might be so bad that they the foreign products don’t get into the local market in the first place. That has a certain appeal. (Although mostly in the the case where a country is blocking market access (which was not the case here).

Where I get lost is the rest of the formulation. Under COC, no amount of discrimination is too little to be a violation, and it needn’t be proven that the discrimination generates a tangible benefit reaped by any identified domestic interest. What products or services get compared in the likeness tests is a freewheeling enterprise with substantial discretion for panelists.

The recent WTO decision revealed some of the quirks of COC. Continue reading “WTaxO Lesson #3: Trade Without Stats” →

A second takeaway from yesterday’s World Trade Organization’s ruling against Argentina’s anti-tax haven policies is:

Trade lawyers won’t solve your regime complex problems. As political scientists Kal Raustiala and David Victor write in their classic article on regime complexes:

Regime complexes are marked by the existence of several legal agreements that are created and maintained in distinct fora with participation of different sets of actors. The rules in these elemental regimes functionally overlap, yet there is no agreed upon hierarchy for resolving conflicts between rules. Disaggregated decision making in the international legal system means that agreements reached in one forum do not automatically extend to, or clearly trump, agreements developed in other forums. We contend that regime complexes evolve in ways that are distinct from decomposable single regimes.

Trade is an example of a regime complex. As WTO cases continue to be brought on more areas of non-trade law (like financial services and taxation), the potential for conflict between trade and non-trade obligations grows.

With yesterday’s ruling, the WTO is trying to allay fears that trade obligations necessarily threaten other forms of international and national regulation. Indeed, the WTO panel conceded that tax justice was an important goal throughout their entire analysis. The panelists extensively cited papers by the G-20, United Nations and other bodies on the importance of tax justice. (Interestingly, the panel also approvingly cited the US and Europe’s interpretations on almost every contentious point – as if to signal that they were allowing the WTO to evolve in a way consonant with the views of its most powerful members.)

One reading of their decision was a critique of Argentina for not doing ENOUGH for tax justice. Arguably, if Argentina had not exempted Panama from its sanction regimes, the Kirchners would have won their case. If correct, this is an example of two elements in a regime complex being harmonized: trade needn’t trump tax justice.

I’m a bit skeptical of this reading, for two reasons.

First, we’d be hard pressed to identify regulations in any country so flawless, that so perfectly achieve their objectives, that enterprising complainants and WTO panelists couldn’t find fault with them. That’s not a defense of bad policy-making, but it is policy realism.

And that gets to my second reason. While some elements in a regime complex can be harmonized with each other (in this case tax justice and trade), not all elements can be. For example, countries might simultaneously want to ensure tax justice, have viable trading rules, and also diplomatically reward countries that are cooperative. The WTO decision (arguably) harmonizes the first two objectives, but not the last one.

There are five major legal/policy takeaways from yesterday’s World Trade Organization’s ruling against Argentina’s anti-tax haven policies. I am going to post them separately over the next few days. The first takeaway is:

Financial services defenses are not that different from other defenses.Old WTO hands know that countries with services trade commitments benefit from general exceptions and specific defenses. Argentina invoked both for different aspects of its anti-tax avoidance regime, to no success.

Examples of general exceptions include the right to break your WTO commitments if necessary for certain law enforcement or taxation purposes (WTO General Agreement on Trade in Services Article XIV(c) and XIV(d) respectively). Specific defenses include the hitherto uninterpreted prudential measures defense (PMD, in the GATS Annex on Financial Services).

From the plain text, the general exceptions seem to be much harder to use. For instance, a country invoking XIV(c) must show that:

1. The law they are trying to enforce is not itself GATS inconsistent;
2. The measure they are using to enforce the law is designed to do so;
3. The measure is “necessary” to enforce the law, which in turn requires showing that: a) the measure’s policy objective is important; b) the measure contributes to fulfilling the objective; and c) the measure reduces trade as little as possible. WTO panels “weigh and balance” these different factors. The second test involves a lot of discretion, as it involves assessing whether the measure does what it says it does and how much it helps (in the case law, it’s a gray area between more than marginally but not necessarily indispensably);
4. Any alternative measures the complainant suggests do not better achieve the objective in less trade restrictive fashion;
5. The “measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail, or a disguised restriction on trade in services”. Note the use of “or”, so any of the above could do the measure in. (See paragraphs 7,614-.764 for discussion.)

In contrast to this nine-hurdle ropes course, the PMD merely states that members “shall not be prevented from taking measures for prudential reasons”. This would seem to be an easier test to meet.

Not so, as it turns out. The panel (at paras 7.808-.949) was surprisingly willing to consider a very wide range of policies “prudential”, including long-term and short-term, responsive and preemptive.

Where Argentina got stuck was on the word “for”. As I mentioned in yesterday’s post, Argentina goes after tax havens through the stick of sanctions, coupled with the carrot of being removed from the list once the tax haven comes to the negotiating table. As a consequence, the world is divided up into non-tax havens (who aren’t sanctioned), tax havens (who are sanctioned) and tax havens in the process of cleaning up their act (who aren’t sanctioned). By implication, groups in the third category are treated better than the second – despite no difference in tax transparency.

The panel argued that the word “for” implied essentially the test at 3(b) above, namely that there had to be a “rational relationship of cause and effect” between the measure and the prudential objective (para. 7.942). Indeed, in some ways, the test is harsher than the standard GATS analysis, as the panel did not look at the degree of goal achievement. In their assessment, any inconsistency in a tax justice framework rendered the whole thing null.

(The panel did not even get to the PMD hurdle that myself and others had warned was the harsher hurdle, the requirement that prudential measures “not be used as a means of avoiding” WTO obligations.)

In short, while finance seems to benefit from additional protections at the WTO, it ain’t necessarily so.