Enforcement of Environmental Obligations in International Trade Law: the EU FTA
Regime
Xanthos Clerides
The enforcement of environmental obligations in international trade is crucial to secure a level playing field allowing economic actors to compete on fair grounds. The framework of most of the recently concluded EU FTAs incorporates a set of substantive environmental obligations purporting to prevent any undue disturbances caused by the lowering of national environmental standards. What distinguishes these FTAs from their predecessors is the establishment of a dispute settlement mechanism solely for the environmental chapters of the agreements. However, this procedure ultimately lacks the enforcement bite that the US FTAs employ to bring recalcitrant states into compliance with their obligations, giving trade parties no option to retaliate in the event of a violation. Consequently, from a policy perspective, such a mechanism would allow a party to get away with its FTA violations by quite simply refusing to comply with any environmental panel reports, and then challenge any countermeasures taken by its counterpart at the WTO. The effectiveness of this new structure thus also rests on the flexibility of WTO rules, which as they stand, give clear primacy to WTO dispute settlement over any trade-related matters, and also restrict FTA parties from invoking non-WTO law in WTO disputes. Yet, considering the current stalemate in Appellate Body appointments, and the fact that an FTA forum would be more appropriate to examine trade-related matters in light of environmental obligations under the agreement, the FTA avenue becomes more and more attractive. Nonetheless, the WTO adjudicative bodies seem quite willing to uphold trade restrictive measures which pursue a legitimate environmental objective.
1. Introduction
Over the last decade the international trade arena has witnessed an explosion of Free Trade Agreements (FTA). What is particularly interesting, however, is the growing tendency of trade partners to go beyond the traditional auspices of WTO law, further committing themselves into new areas of concern. These newly explored FTA obligations are called WTO-X. Amongst these areas of commitment is the protection of the environment.1
The WTO does recognise the link between trade and environment, bringing within its purview not only the impact of trade on the environment but also the impact of environmental governance on trade.2 Enshrined in the preamble of the Agreement establishing the WTO is the objective of
1 Henrik Horn, Petros C. Mavroidis and Andre Sapir, ‘Beyond the WTO? An Anatomy of EU and US Preferential Trade Agreements’ (2010) 33(11) World Econ 1565.
2 WTO Website, ‘Introduction to Trade and Environment in the WTO’, (WTO ECAMPUS).
<https://ecampus.wto.org/admin/files/Course_385/Module_1612/ModuleDocuments/TE-L1-R1-E.pdf> accessed 27 March 2019.
protecting and preserving the environment.3 Hence, trade-related aspects of environmental policies are well within its competence.4 The Committee on Trade and Environment (CTE) is mandated with considering ‘the provisions of the multilateral trading system with respect to the transparency of trade measures used for environmental purposes and environmental measures and requirements which have significant trade effects’.5 Yet, as things are, environmental policy is strictly speaking, not within the WTO agenda. The WTO’s function is limited to dealing with measures protecting the environment only when they have a trade-related impact.
Article XX of the GATT is one of the main sources for the adoption of trade-related
environmental measures. Article XX establishes the exceptions to the substantive obligations of the GATT, allowing Members to deviate thereof upon certain conditions. However,
competitiveness and economic motivations related to environmental concerns, such as measures to level the playing field by insisting that foreign producers use the same production methods producers in the regulating state in order to balance regulatory cost differences, do not expressly fall within the ambit of Article XX.6
Against this background however, WTO rules allow for the formation of FTAs,7 despite the fact that they run counter to the most favoured nation principle. In principle therefore, incorporating environmental provisions within an FTA helps to bridge the gap between environmental
regulation and international trade law, and importantly, maintain a ‘level playing field’ between trade partners, effectively preventing any regulatory race to the bottom, and consequently unfair competition.8 Enforcement of environmental obligations could thus be viewed as a tool to secure a level playing field allowing economic actors to compete on fair grounds.9
3 Marrakesh Agreement Establishing the World Trade Organization (15 April 1994) 1867 U.N.T.S. 154. 4 WTO Website (n 2).
5 ‘Decision on Trade and Environment’, adopted by ministers at Marrakesh on 15 April 1994.
6 Joel P. Trachtman, ‘WTO Trade and Environment Jurisprudence: Avoiding Environmental Catastrophe’ (2017) 58(2) Harv. Int’l L.J 273
7 Article XXIV General Agreement on Tariffs and Trade (GATT) 1994.
8 Robert Falkner and Nico Jaspers, ‘Environmental protection, international trade and the WTO’, in Kenneth Heydon and Stephen Woolcock (eds), The Ashgate Research Companion to International Trade Policy, (Ashgate 2012).
9 Clive George, ‘Environment and Regional Trade Agreements: Emerging Trends and Policy Drivers’, Trade and Environment Working Papers (OECD 2014).
On the contrary, while the WTO allows for the existence of FTAs, studies show that the effects are not always positive. Traditionally, FTAs have been too focused on trade liberalisation, doing little to effectively get to grips with the race to the bottom effects that FTAs could potentially create. The proliferation of FTA has brought great uncertainty as to the effects of these agreements. Mainstream FTAs tend to create incentives for a regulatory race to the bottom amongst trade parties in their efforts to cut costs of production.10 With the elimination of tariffs trade parties seek other ways to obtain competitive advantages, including the reduction or relaxation of environmental regulations and standards.11
The European Union (EU) has been adamant on its stance towards environmental protection. In the past few years it has concluded a series of ‘new era’ FTAs, equally going beyond the mainstream coverage of trade agreements. The FTAs with South Korea, Japan and Vietnam include a chapter on trade and sustainable development, jointly addressing labour and
environmental issues, while the Comprehensive Economic and Trade Agreement (CETA) with Canada has a standalone chapter dedicated to the environment. All of the above FTAs
incorporate substantive environmental obligations to prevent the downgrading of environmental standards with a view to encourage trade. However, whether these trade agreements are actually a step in the right direction, or in fact stimulate international trade differently, is a question to be answered by taking a closer look at the content and scope of the provisions purporting to commit trade parties to maintain sustainable trade practices, and effectively prevent ‘environmental dumping’ with a view to gain an unfair competitive leverage.
What is particularly innovative about the new structure of EU FTAs is the availability of a dispute settlement procedure developed solely for the environmental and sustainability chapters of the agreements. This gives trade parties the power to enforce environmental obligations, which was not the case with mainstream FTAs. This paper will however argue that despite the
10 Stephan W. Schill and Geraldo Vidigal, ‘Reforming DIspute Settlement in Trade: The Contribution of Mega-Regionals’ (RTA Exchange: International Centre for Trade and Sustainable Development and the Inter-American Development Bank, 2018).
11 Peter Draper, Nkululeko Khumalo, and Faith Tigere, ‘Sustainability Provisions in Regional Trade Agreements: Can they be Multilateralised?’ (RTA Exchange: International Centre for Trade and Sustainable Development and the Inter-American Development Bank, 2017). < http://e15initiative.org/wp-content/uploads/2015/09/RTA-Exchange-Sustainability-Provisions-Draper-Khumalo-Tigere-Final.pdf> accessed 27 March 2019.
efforts made to establish a standalone dispute settlement mechanism for environmental litigation, this procedure ultimately lacks the enforcement bite to keep parties in compliance with their environmental protection obligations after a finding of a violation by the relevant panel. The effectiveness of this new structure thus also rests on the flexibility of the WTO dispute
settlement system to the extent that it would consider non-WTO law in a WTO dispute in order to justify a breach of WTO obligations . Accordingly, this paper will also explore the possibility for FTA parties to resort to trade countermeasures to enforce their environmental obligations, examining both the WTO and general international law context on countermeasures.
Moreover, another issue which surfaces due to the proliferation of FTAs, is the conflict of jurisdiction between the WTO adjudicative bodies and the FTA alternatives. Given that the recent EU FTAs explore areas of deeper integration, including environmental protection, it is rather attractive for trade parties to instead choose FTA procedures for the settlement of their trade disputes, which would arguably allow a panel to consider and give effect to sustainability obligations under the agreement that relate to the dispute at hand. However, while the issue of uncertainty with respect to the WTO and FTA conflicts has been recognised and has been the subject of WTO discussions previously, it has been conspicuously absent from DSU
negotiations.12 Instead negotiations are being driven by other topics such as guidance for panel interpretation, confidentiality, transparency and developing countries.13 Resort to FTA dispute settlement is also reinforced considering the current stalemate in the Appellate Body
appointments. As Schill and Vidigal note, this “may help bring to life dispute settlement in ‘mega-regional’ trade agreements, such as the EU-Canada Comprehensive Economic Trade Agreement (CETA)”.14 Yet, while current affairs push for the FTA forums to obtain a more active role in the settlement of trade disputes, it seems that trade parties tend to show a clear preference in the well tested and successful WTO dispute settlement procedure. Further, the WTO Dispute Settlement Understanding (DSU), as it stands, leaves little room for trade disputes to be brought to any forum other than the WTO itself. Notwithstanding the restrictive nature of
12 Adam Hyams and Gonzalo V. Puig, ‘Preferential Trade Agreements and the World Trade Organization: Developments to the Dispute Settlement Understanding’ (2017) 44(3) Leg Issues Econ Integrat 237. 13 Ibid.
14 Stephan W. Schill and Geraldo Vidigal, ‘Addressing Interstate Dispute Settlement Concerns in Mega-Regional Agreements’ (RTA Exchange: International Centre for Trade and Sustainable Development and the Inter-American Development Bank, 2018). <https://rtaexchange.org/blog/view?id=4012> accessed 14 June 2019.
the DSU, following the decision in Mexico - Soft Drinks, WTO panels and the Appellate Body have shown to be quite unwilling to decline jurisdiction in favour of the FTA alternatives. However, a relatively recent decision of the Appellate Body in Peru - Agricultural Products indicated that in exceptional circumstances, FTA parties may be able to contract out of their obligation to submit their trade disputes to the WTO, or in any case block the establishment of a panel. While FTA dispute settlement is arguably a more ‘appropriate’ forum for the settlement of environmental trade disputes, since it would allow an FTA trade panel to assess the legality of a trade measure taking into account the environmental obligations arising under the agreement, this paper will argue that amendments have to be made to the current rigidity of the DSU for trade parties to be able to resort freely to FTA dispute settlement and/or contract out of their WTO obligations.
The last part of this research will examine the WTO jurisprudence on environmental disputes to assess whether and to what extent FTA parties could utilise WTO law, and in particular Article XX of the GATT, as a handle to justify environmental retaliation. FTA parties retain the option to implement their environmental policies through trade restrictive measures provided that they comply with the conditions set by WTO law. The WTO refers to the need for compromise
between the goal of growth on the one hand and the need to protect the environment, on the other hand.15
2. Environmental Provisions in EU FTAs: content and scope
The first section will focus on exploring the content of the environmental obligations
incorporated in the EU FTAs, assessing also their scope and effectiveness to prevent any race to the bottom effects and establish a level playing field to prevent the distortion of the conditions of competition between the constituent parties.
2.1 Right to regulate
Traditionally, most FTAs have been addressing sustainable development by merely
incorporating Article XX of the GATT. Offsprings of this type of environmental clause have been reproduced in most FTAs. For example, CETA Chapter 28, titled ‘Exceptions’,
incorporates by reference Article XX GATT in relation to mostly all of its obligations with respect to trade in goods:
“...Article XX of the GATT 1994 is incorporated into and made part of this Agreement. The Parties understand that the measures referred to in Article XX (b) of the GATT 1994 include environmental measures necessary to protect human, animal or plant life or health. The Parties understand that Article XX(g) of the GATT 1994 applies to measures for the conservation of living and non-living exhaustible natural resources.”16
This type of clause purports to either recognise the existing right of trade parties to regulate to protect the environment, or establish exemptions for domestic policies that would otherwise be inconsistent with trade obligations, provided that those policies meet certain environmental criteria. This offers great leeway for trade parties to regulate for the protection of the
environment, not only domestically, but also depending on the measure at issue, beyond their ordinary scope of jurisdictional rights under general international law.17 However, as it will be discussed in the last part of this paper, there are some limitations to the interpretation of these provisions which might affect their effectiveness to address environmental protection standards and any undue relaxations thereof.
2.2 Maintaining environmental standards
While many of the numerous FTAs currently in force are not as drastic in their approach to secure an effective environmental governance - merely employing Article XX to tackle
environmental protection concerns - there is today clearly a trend towards the inclusion of more substantive environmental provisions in FTAs. CETA, JEFTA and the agreements with South Korea and Vietnam, serve as an example that EU FTAs have moved towards the inclusion of considerably more comprehensive environmental provisions. Apart from statements in the preamble, obligations reaffirming the right of parties to regulate18, provisions establishing
16 CETA Chapter 28.3.1
17 Karsten Nowrot, ‘Environmental Dispute Settlement Mechanisms in EU Free Trade Agreements’ (2017) 4 Journal of European Studies 493.
effective enforcement19 and non-derogation obligations20, this new concept of FTAs also includes provisions to enhance MEA effectiveness21. In this way economic development and environmental protection are recognised as independent and mutually reinforcing pillars of this overarching steering concept.
2.2.1 Multilateral Environmental Agreements
Multilateral Environmental Agreements (MEAs) can be strengthened by strategically linking them to stronger institutions, such as FTAs.22 All EU FTAs referred to above, set by reference to MEAs, the baseline for environmental obligations. The most relevant provision reaffirms the commitment of trade parties to effectively implement, through their laws and practices, the MEAs to which they are party.23 Although, such reassurances appear to have little or no meaning, by tightly coupling FTA implementation mechanisms and dispute settlement
procedures to MEA obligations, effectively transforms MEA implementation into a binding and enforceable obligation under the FTA structure.24 Therefore, failure to implement obligations under the relevant MEAs would automatically give the right to the parties to bring matters before the dispute settlement procedure established under the sustainability chapter of the FTA. In July 2019, EU has requested a panel with respect to the implementation of labour obligations by South Korea arising under the International Labor Organisation (ILO).25 In practice therefore, one could assume that the approach would be the same in relation to the implementation and enforcement of MEA obligations.
2.2.2 Obligations to implement environmental laws
More importantly, the new structure of EU FTAs contains a set of obligations requiring the implementation of existing environmental laws and standards of each party. Firstly, it requires each party:
19 CETA Article 24.5.3. 20 CETA Article 24.5.2. 21 CETA Article 24.4.
22 Sikina Jinnah, ‘Strategic Linkages: The Evolving Role of Trade Agreements in Global Environmental Governance’ (2011) 20(2) J. Environ. Dev. 191.
23 CETA Article 24.4.2. 24 Jinnah (n 22).
25 Request for the Establishment of a Panel of Experts by the EU over Labour Commitments under the Trade Agreement, 4 July 2019<http://trade.ec.europa.eu/doclib/docs/2019/july/tradoc_157992.pdf> accessed 20 July 2019.
“...shall not waive or otherwise derogate from, or offer to waive or otherwise derogate from, its environmental law, to encourage trade or the establishment, acquisition, expansions or retention of an investment in its territory.”26
The provision further requires that each party:
“Shall not, through a sustained or recurring course of action or inaction, fail to effectively enforce its environmental law to encourage trade or investment.”27
Accordingly, through these two sets of environmental obligations, the expectation of effectively implementing of domestic environmental protection laws and standards is in fact transformed into an international legal obligation of the parties to the FTA.
To support the implementation of the above provisions, the agreements set out positive
obligations for the parties to ensure enforcement of their own environmental regulations through their domestic authorities. These provisions specify that parties shall ensure that their domestic authorities are competent enough to enforce and give due consideration to any violations of environmental laws and, at the same time ensure that these procedures are readily available to interested persons without any unnecessary complications and prohibitive costs.28
When it comes to the application of the above provisions, in a dispute between the United States and Guatemala concerning a similar provision with respect to the lack of enforcement of labour rights, the CAFTA-DR Panel held that a course of action or inaction is “in a manner affecting trade”29 if it has the consequence of modifying the conditions of competition between the parties in either the domestic or export market, without having to prove any actual effects on trade
26 CETA Article 24.5.2. 27 CETA Article 24.5.3. 28 CETA Article 24.6.
29 CAFTA-DR Article 16.2(a) provides that: “A Party shall not fail to effectively enforce its labor laws, through a sustained or recurring course of action or inaction, in a manner affecting trade between the Parties, after the date of entry into force of this Agreement”.
flows.30 Thus, not every failure to effectively enforce labour laws through a “sustained or recurring course of action or inaction” is in violation of the obligation, unless it can be proven that there is some effect on the conditions of competition between the disputing parties.31
In contrast, the EU counterpart of this provision solely refers to “encourage trade” rather than “affecting trade”. A party is therefore not in violation of its obligation to effectively enforce its environmental laws unless it can be demonstrated that through its course of action or inaction it has encouraged trade. This overreliance on ‘encouraging trade’ means that the provision’s reach is limited to trade effects in that party’s export market.32 This is because any price reduction in that party’s domestic market as a result of non-enforcement of environmental laws, would rather tend to restrict imports rather than encourage them. Consequently, and at least in principle, a party is not in violation of its obligation not to encourage trade through derogating, waiving or not enforcing its environmental laws, if it cannot be demonstrated that its conduct has had a positive impact on the competitive conditions of that party’s export market. For example, in the context of the EU - Vietnam FTA, if Vietnam’s domestic entities produce products which are not in compliance with domestic environmental laws, they would presumably be more competitive when they enter the EU market. Thus, a failure to enforce domestic environmental laws would tilt competitive conditions in favour of Vietnamese exports, or otherwise “encourage trade” of Vietnamese exports within the meaning of the provision. However, these are all speculations since we have not yet had any dispute on the environmental provisions of EU FTAs to test the waters. Interestingly, government consultations have been requested by the EU with respect to an alleged violation of labour obligations in the EU - South Korea FTA, which are virtually
identical in scope and effect with the environmental obligations of the agreement.33 However, there have not been any rulings yet since the dispute is still at an early stage. Outside the EU
30 CAFTA-DR Panel Report/Arbitration Award, In the Matter of Guatemala - Issues Relating to the Obligations Under Article 16.2.1(a) of the CAFTA-DR, 14 June 2017, para. 190-197.
31 ibid.
32 Lorand Bartels, ‘Human Rights, Labour Standards, and Environmental Standards in CETA’ in Stefan Griller, Walter Obwexer, and Erich Vranes (eds), Mega-Regional Trade Agreements: CETA, TTIP, and TiSA: New Orientations for EU External Economic Relations (Oxford University Press 2017).
33 EU and the Republic of Korea Government Consultations over Labour Commitments under the Trade Agreement, 21 January 2019, < https://eeas.europa.eu/delegations/south-korea/56833/eu-and-republic-korea-launch-government-consultations-over-labour-commitments-under-trade_en> accessed 27 March 2019.
FTA regime, the US has commenced consultations with Peru with respect to the implementation of the environmental chapter of the US - Peru Trade Promotion Agreement (PTPA).34
Another interpretative issue that should be made aware of is whether there is a requirement of intent in order to establish a violation of the provision prohibiting failure to enforce
environmental laws and standards. While the Panel of CAFTA-DR has interpreted “sustained or recurring course of action or inaction, in a manner affecting trade” as merely requiring effects on the conditions of competition between the parties in order to establish a violation of the
provision, the wording of the EU FTAs is different. The phrase “sustained or recurring action or inaction to encourage trade” tends to imply intention. On a similar basis, the Appellate Body in Japan - Alcoholic Beverages II interpreted “so as to afford protection to domestic production” within the meaning of Article III:1 GATT to require an objective analysis of the manner in which the measure was applied, to be discerned from the measure’s “design, the architecture and the revealing structure”, i.e. the ‘objective intention’ of the regulating state.35 Hence, if the interpretation to be given to the relevant provision is similar to the one used by the Appellate Body for Article III:1, the threshold to establish a breach would be stricter and higher. In such a case the complainant party would have to show that the conduct of the defendant party, that is, a failure to effectively enforce environmental laws through “a sustained or recurring course of action or inaction”, was followed in a manner which encouraged trade. However, as Hudec indicated, the Appellate Body did not really make a clear distinction between the concept of ‘protective application’ and the ‘aims and effects’ test.36 Even so, in the absence of an actual dispute these are only speculations and thus the mere effects test may still be applicable, effectively establishing a violation by demonstrating a positive bearing on the competitive conditions of that party’s export market as a result of non-enforcement of environmental laws.
34 Environment Consultations Under the US - Peru Trade Promotion Agreement (PTPA), 1 April 2019
<https://ustr.gov/about-us/policy-offices/press-office/press-releases/2019/january/ustr-requests-first-ever> accessed 27 March 2019.
35 WTO, Japan: Taxes on Alcoholic Beverages - Report of the Appellate Body (4 October 1996) WT/DS8/AB/R, p. 29.
36 Robert E. Hudec, ‘GATT/WTO Constraints on National Regulation: Requiem for an “Aims and Effects” Test’ (1998) 32 Int’l L 619.
Finally, the CAFTA-DR Panel held that a “sustained or recurring course of action or inaction” requires:
“...a repeated behavior which displays sufficient similarity, or prolonged behavior in which there is sufficient consistency in sustained acts or omissions as to constitute a line of connected
behaviour by a labor enforcement institution, rather than isolated or disconnected instances of action or inaction.”37
2.2.3 Promoting environmental standards
The new EU FTA regime also contains a set of obligations which purport to engage trade parties into implementing higher standards of environmental protection. The relevant provision states that:
“Each Party shall seek to ensure that… [its environmental] laws and policies provide for and encourage high levels of environmental protection and shall strive continue to improve such laws and policies with the goal of providing high levels of environmental protection.”38
Arguably, this type of provision establishes a weaker pair of obligations. The wording used, such as “shall seek to ensure”, lacks the necessary bite that one would expect in order to push
government policy to maintain higher levels of environmental protection. However, even though a ‘best endeavours’ provision may seem to have little or no meaning at all, laws and policies that manifestly fail to protect environmental standards would violate such an obligation. In 2013, the US had requested consultations with Bahrain under an equivalent provision on labour standards in the US - Bahrain FTA. It should be noted however, that the US counterpart of this provision states that “each party shall ensure” that high levels of environmental protection are maintained through domestic policies and laws, which is much stronger than the wording used in the respective EU provision.39
37 CAFTA-DR Panel Report/Arbitration Award, In the Matter of Guatemala - Issues Relating to the Obligations Under Article 16.2.1(a) of the CAFTA-DR, 14 June 2017, para. 152.
38 CETA Article 24.3. 39 Bartels (n 32).
2.3 Implementation mechanisms
A crucial feature of the EU as an institution is that it entitles individuals or NGOs to bring before their national courts and subsequently to the supranational judicial bodies, a claim with regard to the adherence of a Member State with EU rules. The new EU FTA regime tries to mimic this mechanism, although to a lesser extent, by providing interested parties with a platform to bring forth their concerns as to the implementation of the parties’ obligations with the overhead agreement. In that respect, the EU FTAs establish a ‘Civil Society Forum’ (CSF) formed by representatives of civil society organisations which convenes once a year to ‘conduct a dialogue’ on the sustainable development aspects of the agreements. Also, this forum includes the
participation of ‘domestic advisory groups’ composed of stakeholders from a range of affected sectors. These groups are then able to submit opinions and make recommendations on matters concerning compliance with the sustainability chapters of the agreements on their own initiative. The parties are then required to give those submissions due consideration.40 Civil society groups are also able to participate in the proceedings through amicus curiae submissions.
Furthermore, a Committee on Trade and Sustainable Development (CTSD) is established
composed of high level representatives responsible for labour and environmental protection. The CTSD is tasked with monitoring the implementation of the trade and sustainable development chapters of the agreement through regular meetings which also includes a session open to the public, though the parties retain the right to agree otherwise.41Importantly, however, although the CTSD is in charge of overseeing the overall implementation of the sustainability chapters of the agreement, day to day monitoring to ensure active compliance of the parties’ obligations is left to the work of the domestic authorities competent to enforce environmental law. In essence,
therefore, the monitoring mechanism is to a large extent delegated to the domestic authorities of each party.42
40 CETA Article 22.5 and 24.13.5. 41 CETA Article 26.2.
42 Martin Nesbit, Laurens Ankersmit, Anne Friel and Alejandro Colsa, ‘Ensuring compliance with environmental obligations through a future UK-EU relationship’ (Institute for European Environmental Policy, 2017)
<
https://ieep.eu/uploads/articles/attachments/19fec03e-525f-4669-86d2- 45d8b02e9885/Ensuring%20compliance%20with%20environmental%20law%20post%20-%2004%20October.pdf?v=63675971949> accessed 27 March 2019.
2.4 Dispute settlement
Of course, even though political enforcement could prove to be quite effective for this type of obligations, enforceability is binding only if agreements are subjected to dispute settlement provisions. In general, sustainable development provisions have mostly been excluded from the general dispute settlement mechanisms in FTAs.43 Against this background, the new regime of EU FTAs has incorporated an independent dispute settlement mechanism for the resolution of sustainability disputes. The availability of dispute settlement procedure for the settlement of environmental disputes helps to counter the long-standing fears that trade obligations, receiving relatively strong dispute settlement disciplines, could end up trumping sustainability obligations which arguably receive little to none adjudication mechanism.
44
The system adopted under the EU FTA structure is a traditional inter-state dispute settlement mechanism. A party may request consultations ‘in relation to any matter arising under this chapter’.45 If this procedure does not sufficiently address the matter at hand, parties may request a ‘Panel of Experts’ which, in its turn, delivers a report indicating any violation of the parties’ obligations. Crucially, however, this procedure ultimately lacks the bite of a formal state-to-state dispute settlement.The problem lies with the consequences of a finding of a violation. Although a retaliation mechanism is not necessarily more effective than adjudication, the absence of the right take countermeasures after a finding of a violation is arguably problematic. A finding of a violation would only engage the parties into discussions whereby they are merely required to take into account the final report in order to decide on an appropriate measure and/or a mutually satisfactory solution. Therefore, unlike the US counterpart of this type of mechanism, which allows the adoption of trade retaliatory measures for non-compliance, these reports only lead to implementation obligations.46 However, the recommendations and the report are regarded as binding and thus, at least in principle, their implementation monitored by the CTSD.
Nonetheless, these soft implementation features distinguishes this type of environmental dispute settlement mechanism from the hard quasi-judicial dispute settlement procedures found in the
43 Draper, Khumalo and Tigere (n 9). 44 Schill and Vidigal (n 10).
45 CETA Article 24.14-16 . 46 Schill and Vidigal (n 10).
US economic integration agreements.47 Consequently, to put it in the words of Draper, Khumalo and Tigere, “the separate remedy for environmental disputes and the fact that trade sanctions are not allowed for environmental disputes, provides insight into the lingering reservations
concerning the trade and environment debate”.48 Since the EU-FTA environmental dispute settlement mechanism does not prescribe for the taking of retaliatory action, the obvious conclusion is that the complaining party would be left “stranded against the wall of non-compliance”.49
3 The fall-back option: enforcing environmental obligations through trade countermeasures
In order to properly understand the standing issues surrounding the effectiveness of the EU environmental dispute settlement mechanism, let us assume that, in the context of the EU - Vietnam FTA, Vietnam fails to implement its environmental obligations even after a finding of a violation by the ‘Panel of Experts’. Is the EU entitled to resort to its inherent right of taking countermeasures under general international law,50 or is the right to do so depleted by the very existence of dispute settlement provisions in the relevant FTA? Further, although non-trade related countermeasures taken in response to a violation of an environmental rule will raise no issue of breach of WTO law, trade-related countermeasures are arguably more effective to bring
the recalcitrant state into compliance with its obligations. This is because trade-related
countermeasures can potentially affect important players in the targeted economy. Consequently, one must also ask the question whether a trade party may adopt trade countermeasures pursuant to the enforcement of FTA obligations, although prima facie inconsistent with WTO rules.51
47 Nowrot (n 17).
48 Draper, Khumalo and Tigere (n 11).
49 Joost Pauwelyn, ‘Enforcement and Countermeasures in the WTO: Rules are Rules-Toward a More Collective Approach’ (2000) 94(2) AJIL 355.
50 International Law Commission, ‘Draft articles on Responsibility of States for Internationally Wrongful Acts, with commentaries’, ILC Yearbook 2001, II.2, at 128.
51 Gabrielle Marceau and Julian Wyatt, ‘Dispute Settlement Regimes Intermingled: Regional Trade Agreements and the WTO’ (2010) 1(1) JIDS 67.
3.1 Countermeasures in the context of WTO and general international law
Under general international law ‘non-forcible’ countermeasures are adopted on the basis of a unilateral determination of the existence of an international wrongful act. This right is recognised by customary international law as codified in the International Law Commission’s (ILC’s) 2001 Draft Articles on State Responsibility. The ILC Articles constitute the Rules on State
Responsibility (RSR). As per Article 53(3)(b) of the ILC Articles, states are required to exhaust all available dispute settlement mechanisms before resorting to unilateral countermeasures. The ability to resort to countermeasures unilaterally is further conditioned by the requirement that such measures be directed solely against the responsible state and not against third parties, while at the same time they should also be temporary and reversible.52
Yet, the application of the RSR is barred when it comes to lex specialis provisions. Under Article 55 of the ILC Articles, states are given the option of complementing international obligations with a specific set of secondary rules. Accordingly, as Simma and Pulkowski noted, “a strong form of lex specialis could exclude the application of the general regime of state responsibility altogether, either by explicit provision or by implication, that is, by virtue of a regime’s
particular structure or its object and purpose”.53
Arguably, the WTO Dispute Settlement Understanding (DSU), which establishes a detailed and comprehensive mechanism for the administration of trade disputes and for the use of
countermeasures relating to WTO covered agreements, does constitute such a lex specialis provision. The introduction of ‘suspension of concessions’ as a substitute to countermeasures within DSU prohibits states to have parallel recourse to claims for countermeasures under the general international law of state responsibility.54 This approach is further strengthened by the decisions of WTO Panels and the Appellate Body which have interpreted DSU Article 23.155 to prohibit Members from resorting to any unilateral measures, lawful or unlawful, to remedy an
52 ILC Draft Articles on State Responsibility (n 50).
53 Simma Bruno and Dirk Pulkowski, ‘Of Planets and the Universe: Self-contained Regimes in International Law’ (2006) 17(3) EJIL 483.
54 ibid.
55 Article 23.1 of the DSU provides that: “When Members seek the redress of a violation of obligations or other nullification or impairment of benefits under the covered agreements or an impediment to the attainment of any objective of the covered agreements, they shall have recourse to, and abide by, the rules and procedures of the understanding”
alleged violation.56 Therefore, one could assume that the right of WTO Member to unilaterally resort to countermeasures under general international law is depleted. In contrast, while the WTO DSU requires Members not to take unilaterally determined countermeasures in relation to the WTO covered agreements, there are no explicit provisions with respect to the taking of countermeasures in response to a violation of an FTA obligation. This also appears to be the case when it comes to the ILC’s commentaries to the State Responsibility Articles. The State
Responsibility Commentaries on Article 55 seem to suggest that where an FTA requires that a specific dispute settlement regime be used, residual rules of general international law on countermeasures should be set aside, however they are silent with regard enforcement regimes that provide no possibility for the taking of countermeasures.57
All of the EU FTAs mentioned above contain a general provision for the settlement of disputes concerning the interpretation or application of the Agreement.58 Unlike the dispute settlement provision in the environmental chapters of the agreements, this mechanism allows parties to suspend obligations under the FTA in the event that non-compliance with the final panel report persists even after the reasonable time for conformity has lapsed.59 In the absence of a provision expressly granting the parties the ability to retaliate against non-compliance with a finding or a ruling, one may be of the view that the right to take countermeasures is extinguished. Such a conclusion is attractive since it is rather unlikely that the drafters of the EU FTAs would have expressly authorised countermeasures taken in response to non-implementation of trade obligations under the relevant FTA, while remaining silent with respect a failure to act in accordance with the decisions of the environmental dispute settlement panel. Since most FTAs, including the EU-FTAs, borrow heavily from the WTO DSU when it comes to the norms applicable to a breach of the FTA provisions, it is reasonable that the same presumption against unilaterally determined trade countermeasures applies to the dispute settlement procedure of the FTAs. On a similar basis, it would be rather unconventional if WTO Members were free to resort
56 WTO, United States: Import Measures on Certain Products from the European Communities - Report of the Appellate Body (10 January 2001) WT/DS165/AB/R; See also Geraldo Vidigal, ‘Why Is There So Little Litigation under Free Trade Agreements? Retaliation and Adjudication in International Dispute Settlement’ (2018) 20 JIEL 927.
57 State Responsibility Commentaries Article 55 (n 46). 58 CETA Article 29.2.
to unilaterally determined trade measures taken in the context of breaches of FTA provisions, while maintaining the strict policy on trade measures undertaken for the purposes of enforcing the provisions of the WTO covered agreements.60 Moreover, since WTO-consistent FTAs are those authorised by Article XXIV of GATT, which operates as a ‘defence’ to any derogation from the Most Favoured Nation (MFN) principle under the WTO covered agreements, it is very likely that the importance of the prohibition against unilateral action in the WTO context has the same application in the FTA sub-system.61 The Appellate Body in Mexico - Soft Drinks pointed out that trade restrictive measures based on unilateral determinations of WTO breaches would defeat the purpose of the specific and detailed rules that apply when a WTO Members seeks to take countermeasures under Articles 22 and 23 of the DSU. On the other hand, when it comes to FTA-authorised countermeasures, or otherwise FTAs that authorise retaliation in the event of non-compliance with the rulings of a panel, it would be reasonable to argue that countermeasures taken in conformity with such FTAs should benefit from the exceptions provided by GATT Article XXIV. Such measures could potentially be justified on the basis of fulfilling the closer regional integration objective set by Article XXIV:4. This also highlights the importance of FTA provisions expressly authorising the right to retaliate.
The other dimension to this debate would be that since the relevant dispute settlement provision is silent about the ability of trade parties to resort to countermeasure, such an action would prima facie be possible on the basis of the RSR established by the ILC Articles. Unless the principle of DSU Article 23, which prohibits resort to unilateral countermeasures, were to be interpreted so as to apply to all WTO consistent FTAs, the ILC Articles which would have applied in the absence of any FTA lex specialis, would seem to authorise unilateral, necessary and proportional countermeasures taken in response to a breach of obligations arising under an FTA. Therefore, in the event that the dispute settlement procedure of the FTA has failed to bring the losing party into compliance with its environmental obligations, the complaining party should be able to rely on its inherent right under general international law to adopt unilateral, necessary and
proportional trade restrictive measures with a view to inducing compliance.62
60 Marceau (n 51). 61 Ibid.
3.2 Countermeasures in WTO disputes: jurisdiction and applicable law
Nevertheless, in the event that an FTA party in fact resorts to countermeasures pursuant to its inherent right under general international law in response to a finding of a violation under the environmental chapter of the agreement, two important issues arise. First, whether a party can effectively challenge the jurisdiction of a Panel by resorting to non-WTO law. Secondly, whether a claim to the WTO could be rejected on substance because the challenged measure is a lawful countermeasure, i.e. can the Panels and Appellate Body apply non-WTO rules in a WTO dispute? The jurisdictional issue must be distinguished from the issue of the role of non-WTO rules before a WTO Panel, after the Panel has effectively decided to hear a case.63 The difference between these two questions is that the first refers to the procedural right of FTA parties to bring a claim before the WTO Panels, while the second question revolves around the substantive right of WTO Members to invoke non-WTO rules in order to justify measures that are in violation of the WTO covered agreements (hence, the jurisdiction and applicable law distinction).64
Under Article 1.1, the DSU applies to “disputes brought pursuant to the consultation and dispute settlement provisions of the agreements listed in Appendix I to the DSU”. Further, Article 3.2 establishes that the jurisdiction of WTO panels is limited to claims brought under the covered agreements.65 Finally, Article 11 mandates panels to “make an objective assessment of...the application of and conformity with the relevant covered agreements, and make such other findings as will assist the DSB in making the recommendations or in giving the rulings provided for in the covered agreements.” Consequently, there is no obligation for a Panel to address provisions that are not part of the covered agreements. Therefore, a substantive obligation which is provided solely under the FTA, but not under any WTO agreement, can only provide the basis for a claim under the FTA but not the WTO. This also means that the WTO Panel will apparently have no jurisdiction in such a case.66 However, once the countermeasures taken in response to an
63 Joost Pauwelyn, ‘The Role of Public International Law in the WTO: How Far Can We Go?’ (2001) 95(3) AJIL 535.
64 Henry Gao and Chin L. Lim, ‘Saving the WTO from the Risk of Irrelevance: The WTO Dispute Settlement Mechanism as a ‘Common Good’ for RTA Disputes’ (2008) 11(4) JIEL 899.
65 Article 3.2: DSU mechanism “serves to preserve the rights and obligations of Members under the covered agreements.”
alleged violation of the environmental obligations of the relevant FTA are in conflict with WTO rules, the WTO Panels and Appellate Body would have no discretion but to seize jurisdiction over the dispute. This approach also coincides with the Mexico - Soft Drinks decision whereby the Appellate Body suggested that a potential overlap with an FTA provision will not necessarily prevent WTO dispute settlement.67 In such a case the Appellate Body would not decline
jurisdiction because absent to special circumstances, it would not have the discretion to do so. Consequently, so long as a dispute between FTA parties affects WTO rights and obligations, the procedural right of recourse to WTO dispute settlement is not depleted. The issue of jurisdiction will be further discussed in the next part of this paper.
When it comes to the question of applicable law, Pauwelyn expressed that:
“As important as the distinction is between Panel jurisdiction (WTO claims only) and applicable law (potentially all international law), so too is the distinction between interpreting WTO rules (and the prohibition to add or detract from these rules in the process) and examining WTO claims in the context of other applicable international law (where the expression of state consent and conflict rules of international law must decide the outcome).”68
From this perspective, WTO Members have the power to conclude other treaties, such as FTAs, to change their rights and obligations under the WTO which, in turn, the WTO panels and the Appellate Body shall give effect to and apply them in WTO disputes. To conclude otherwise would mean that the right of WTO Members to enter into other treaties would be made redundant.69 Thus, according to Pauwelyn, the WTO agreement is no different than all other treaties part of public international law, meaning that it cannot “be applied in isolation from other rules of international law”.70
67 Appellate Body Report, Mexico - Taxes on Soft Drinks, para. 44.
68 Joost Pauwelyn, ‘How to Win a WTO Dispute Based on Non-WTO Law: Questions of Jurisdiction and Merits’ (2003) 37(6) JWT 997. ; See also Gao and Lim (n 64).
69 Ibid.
However, an immediate problem arises as a result of the outcome of the Mexico - Taxes on Soft Drinks decision. Assessing the lawfulness of the enforcement measure, or otherwise the
countermeasure, would require the WTO panels and/or the Appellate Body to make a finding on the consistency of the original measure with the FTA. The US challenged a Mexican tax on soft drinks which Mexico had allegedly enacted in retaliation of a prior US breach of NAFTA obligation and the refusal of US to appoint panelists to decide the dispute under NAFTA dispute settlement procedures. Pauwelyn suggested that among those ‘customary rules of interpretation of public international law within the meaning of Article 3.2 DSU is Article 31.3 of the Vienna Convention on the Law of Treaties 1969 (VCLT). Based on Article 31.3(c) of the VCLT, a treaty interpreter is required to “take into account”, together with the context, “any relevant rules of international law applicable in the relations between the parties”, in this case the FTA obligations between the two parties to the dispute.71 However, in the specific dispute Mexico did not invoke the general international law defense of countermeasures a self-standing justification for its WTO violation, merely alleging that the measure at issue was a countermeasure indirectly justified under GATT Article XX(d) to secure compliance with NAFTA obligations. Even so, whether a trade restriction can be justified as a countermeasure against an alleged violation of an FTA would entitle a WTO adjudicative body to determine whether there was a violation of the FTA in the first place, a function which the Appellate Body stated it could not exercise.72 Accordingly, it could be argued that the WTO dispute settlement mechanism does not have jurisdiction to determine whether a trade restriction could be excused on the basis of a lawful countermeasure under general international law.73 Thus, as Marceau argued, WTO adjudicative bodies lack the ‘constitutional capacity to reach a conclusion that would lead de facto to an amendment of the WTO treaty’.74 This therefore concurs with the view that the DSU indeed limits the jurisdiction of WTO panels to a narrow assessment of WTO rules only.75 Bartels holds that Articles 3.2 and 19.2 DSU implicitly constitute a rule of conflicts, and provide that WTO
71 Vienna Convention on the Law of Treaties Article 31.3(c) .
72 Appellate Body Report, Mexico - Taxes on Soft Drinks, paras 56, 78.
73 Gabrielle Marceau, ‘Trade and Labour’ Daniel Bethlehem et al. (eds), The Oxford handbook of International Trade Law (Oxford University Press 2009)
74 Geraldo Vidigal, ‘The Return of Voluntary Export Restraints? How WTO Law Regulates (and Doesn’t Regulate) Bilateral Trade-Restrictive Agreements’ (2019) JWT 53(2) (forthcoming); Gabrielle Marceau, ‘conflicts of Norms and Conflicts of Jurisdiction - The Relationship between the WTO Agreement and MEAs and other Treaties’ (2001) 35 JWT 1081.
texts shall prevail in the event of such conflict.76 The Appellate Body seems to have confirmed this approach by disregarding any arguments based on non-WTO rules because it ‘saw no basis in the DSU for panels and the Appellate Body to adjudicate non-WTO disputes’.77 In other words, Mexico’s attempt to justify its trade restriction was rejected since a violation of the NAFTA by the US would not correspond to any of the policy justifications under Article XX.78 Consequently, using trade restrictions exclusively as countermeasures for a violation of non-WTO agreements, in this case environmental obligations under FTAs, would be non- WTO-inconsistent unless the countermeasure can find application in one of the sub-paragraphs of Article XX.79 If the trade restrictive measure falls within the ambit of Article XX, the examination of whether the measure was a lawful countermeasure would be unnecessary.
Notwithstanding that the Appellate Body has rejected the possibility that a WTO panel could make this finding of consistency itself (whether there was a violation of the environmental obligations under the FTA in the first place), the enforcement measure could be seen as necessary to the formation of the FTA under Article XXIV:4 GATT.80 In Peru - Agricultural Products the Appellate Body noted with respect Article XXIV:4 GATT:
“The purposes of a customs union or FTA is ‘to facilitate trade’ between the constituent members and ‘not to raise barriers to the trade’ with third countries … paragraph 4 qualifies customs unions or FTAs as ‘agreements, of closer integration between the economies of the countries parties to such agreements”81
In theory therefore, as Vidigal argues, while Article XXIV does not operate as a ‘broad defence for measures that roll back on Members’ rights and obligations under the WTO covered
agreements’82, an FTA provision could potentially cut-back the rights of FTA parties under
76 Lorand Bartels, ‘Jurisdiction and Applicable Law in the WTO’ (2016) SIEL.
<https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2801989> accessed 12 June 2019. 77 Appellate Body Report, Mexico - Soft Drinks, para. 56 .
78 Marceau (n 73). 79 Ibid.
80 Vidigal (n 74).
81 Appellate Body Report, Peru - Agricultural Products, para. 5.116. 82Ibid.
WTO in order to facilitate trade or ensure closer integration between the constituent parties.83 Thus, one could argue that not having the necessary mechanism to enforce FTA obligations would run counter to one of the main purposes for the formation of FTAs, that is, “closer integration between the economies of the countries parties to such agreements”.84 Access to an effective dispute settlement and thus, the right to take countermeasures may be viewed as essential for the enforcement of FTA rights and obligations.
On the other hand, trade countermeasures taken in response to a non-trade breach do not serve the purpose of facilitating trade between FTA parties, instead it serves the purpose of ensuring and/or maintaining higher environmental standards. This would therefore be in direct conflict with the second sentence of Article XXIV:4 which provides that “the purpose of a customs or a free trade area should be to facilitate trade between the constituent territories”.85
On a different note, the Court of Justice of the European Union (CJEU) opened up an alternative avenue for remedying a breach and/or inducing compliance by the violating party. This was discussed in the recent case and novel ruling of the CJEU concerning the EU-Singapore FTA.86 The CJEU held that, despite the fact that the EU FTAs do not provide for the suspension of part of the commitments as a result of a breach of environmental obligations, it is nonetheless possible for the EU to suspend part of its trade liberalisation commitments if it considers that its counterparty has breached its obligations under the environmental chapter of the agreement. The CJEU explained that the EU is entitled to do so on the basis of customary international law down by Article 60 VCLT 1969.87 A ‘material breach’ of the obligations of the agreement by one party entitles the other party to invoke that breach as a ground to terminate or suspend the operation of the agreement. However, the threshold for a material breach to be established is relatively high. This would depend on whether environmental obligations could be viewed as an essential element of the FTA, a violation of which would constitute a material breach of the agreement.88
83 Vidigal (n 74).
84 GATT Article XXIV:4; Peru - Agricultural Products para. 5.116; ibid. 85 Marceau (n 51).
86 Opinion 2/15 Free Trade Agreement with Singapore of 16 May 2017, ECLI:EU:C:2017:376. 87 ibid para. 161.
88 Lorand Bartels, ‘Human rights provisions in Economic Partnership Agreements in light of the expiry of the Cotonou Agreement in 2020’ (European Parliament Think Tank, 2017).
Further, it should be noted that the CJEU is acting as a Court of a party, as opposed to an impartial international court.
In sum the legal consequences of the lack of an authorised countermeasure system under the environmental dispute settlement procedure are far from clear. From a policy perspective, by lacking the adequate enforcement, such a procedure would allow a party to get away with its FTA violations by quite simply refusing to comply with any environmental panel reports, and then challenge any countermeasures taken by its counterparty at the WTO. Also, due to the jurisdictional and applicable law limits lurking within the WTO system it seems more likely than not that unilaterally determined trade countermeasures pursuant to the non-compliance of
environmental obligations would not be justified for a violation of WTO obligations.
Even so, although the environmental dispute settlement procedure of the FTAs lacks the
enforcement bite to bring a recalcitrant state into compliance with its obligations after a finding of a violation, a complaining party still retains the option of raising trade restrictions in response to the non-implementation of environmental obligations, not in the form of countermeasures per se, but with a view of attaining a legitimate environmental objective. In the WTO context these type of measures could potentially be justified under the list of exceptions provided by Article XX GATT. However, given the new depths explored by the new EU FTA regimes, an FTA forum would arguably be more suitable to address trade-related issues in light of environmental protection obligations. Therefore, one must also ask whether trade parties are able to have recourse to the FTA forum to examine the legality of such trade measures.
It is important to note however that with respect to the EU FTA framework, where trade parties are not expressly allowed to retaliate pursuant to non-implementation of environmental
obligations, it is unclear whether an FTA trade panel would consider such an exception when it does not exist. In contrast, the US FTAs which contain such an option to retaliate would allow the FTA forum to consider such exceptions to trade restrictive measures.
FTA structures have increasingly become more dominant and have set up a solid and extensive dispute settlement system, some of which are very likely to come into direct conflict with the multilateral trading system of the WTO. As a result, an important and complex issue comes to light when raising trade restrictions in response to the violation of environmental obligations under the FTA context, namely, the question of jurisdiction.
Despite the growth in the formation of FTAs in recent years and, therefore, the creation of new dispute settlement systems under those structures, there have been little to none disputes brought before the FTA fora. As mentioned above however, Members have shown a clear preference towards the tested success of the WTO dispute settlement system. On the contrary, as the coverage of FTAs becomes more far-reaching and extends beyond the scope of WTO covered agreements, trade parties may start to find it more attractive to submit their disputes to the FTA forum. An unsettled question thus remains on whether the WTO DSU allows for environmental trade disputes to be brought instead before the FTA forum. Article 3.2 of the Dispute Settlement Understanding (DSU) requires strict adherence by WTO panels and the Appellate Body to the terms of the WTO Agreements. Therefore, as Hoekman and Mavroidis argue, submitting before the FTA fora “becomes more likely, as the WTO DSU will not be applicable”.89 This is indeed a crucial issue because, unlike the WTO dispute settlement system, an FTA trade forum would be able to consider any substantive environmental obligations under the FTA that relate to the trade dispute at hand. On the other hand, the DSU provides that WTO jurisdiction is compulsory, and prescribes that WTO panels have exclusive jurisdiction to resolve disputes arising from a violation of WTO covered Agreements. In light of the Mexico - Soft Drinks dispute, panels are obliged to exercise their jurisdiction unless a legal impediment precluded them from ruling on the merits of the claim.90 Thus, one should also ask whether Members have the ability to contract out of their WTO obligations, and consequently their obligation to submit their trade disputes to the WTO so that a party may be effectively blocked from resorting to WTO dispute settlement with respect to a dispute arising under the FTA.91
89 Bernard M. Hoekman and Petros C. Mavroidis, ‘WTO ‘à la carte’ or ‘menu du jour’? Assessing the Case for More Plurilateral Agreements’ (2015) 26(2) EJIL 319.
90 Gabrielle Marceau, ‘The primacy of the WTO dispute settlement system’ (2015) QIL 23 3 <
https://archive-ouverte.unige.ch/unige:96218>accessed 21 January 2019. 91 Vidigal (n 74).
4.1 The nature of the jurisdiction of the WTO dispute settlement system
In order to assess how the WTO itself regulates, or does not regulate dispute settlement under the FTA sub-system, an examination of the WTO DSU is required. Perhaps the most important provision is Article 23 which prescribes that the WTO dispute settlement system has exclusive jurisdiction for the resolution of trade disputes arising from any violation of the WTO covered agreements. Further, Article 3.8 provides that the jurisdiction of WTO dispute settlement is compulsory and quasi-automatic. Therefore, when a Member brings a claim to the WTO, it is neither required to prove any specific economic or legal interest, nor show evidence of any negative trade impacts caused by the contested measure. Importantly, this also means that the responding Member cannot refuse to participate in the dispute procedure. Consequently, taking our example from above, overlaps and/or conflicts of jurisdiction are very likely to happen when an FTA party responds to the non-implementation of environmental obligations with trade restrictive measures. This would not only infringe FTA trade concessions but also violate obligations arising under the WTO covered agreements. Thus, at least in principle, when such trade disputes arise between FTA parties, claims of violation can be brought to two distinct fora.
4.2 Primacy of the WTO dispute settlement mechanism
In light of such conflicts and overlaps of jurisdiction, the question is whether the WTO panels and the Appellate Body should refrain from exercising their powers to resolve disputes that are theoretically within the jurisdiction of two distinct fora. As mentioned above, this issue arose in the Mexico - Soft Drinks dispute. Although the NAFTA forum selection clause had not been invoked, the respondent state requested that the Panel should have refrained from exercising jurisdiction, on the basis that a party be precluded from exercising its dispute settlement rights as a result of a previous illegal conflict.92 The Appellate Body rejected the respondent’s argument and explained that in doing so would diminish the dispute settlement rights of a WTO Member under Articles 3.3 and 23, thus violating the panel’s obligation not to ‘diminish’ the rights of WTO members under Article 19.2.93 What the Appellate Body meant from this decision is that, by dissapplying a valid WTO norm because of a contrary non-WTO right, or otherwise “decline
92 Bartels (n 76); Appellate Body Report, Mexico - Taxes on Soft Drinks, para. 55. 93 Appellate Body Report, US - Mexico Soft Drinks, para. 53.
to exercise a validly established jurisdiction”, would effectively ‘diminish’ WTO rights and obligations within the meaning of Article 19.2, namely, the complaining Member’s right to seek redress of a violation of WTO obligations.94 It follows that the panels and Appellate Body are not competent themselves to determine all internal matters in relation to their exercise of jurisdiction, instead seizing jurisdiction even though an overlap might exist.95 As already mentioned above however, at the same time, the Appellate Body left open the possibility that there may still be a ‘legal impediment’ to the exercise of jurisdiction in some cases.
On a similar basis, the decision in Peru - Agricultural Products raised systemic questions of trade governance, giving once again the Appellate Body the opportunity to address the
interaction of WTO law with FTA rules, or to put in the context of this paper, whether an FTA could be used in order to remove a Member’s right to a WTO panel.96 Interestingly, the
Appellate Body explained that “the consideration of provisions of an FTA for the purpose of determining whether a Member has complied with its WTO obligations involves legal
characterisations that fall within the scope of appellate review under Article 17.6 of the DSU”, and thus went on to examine and interpret the actual meaning of what Peru and Guatemala agreed to in the FTA.97 In the specific dispute, however, the Appellate Body concluded that Guatemala's right to a WTO panel had not been extinguished.
The Appellate Body further stressed that “...the relinquishment of rights granted by the DSU cannot be lightly assumed”. In this respect, the Appellate Body noted that parties must clearly express that they intended to relinquish their rights:
94 Bartels (n 76). 95 ibid.
96Gregory Shaffer and L. Alan Winters, ‘FTA Law in WTO Dispute Settlement: Peru-Additional Duty and the Fragmentation of Trade Law’ (2017) 16(2) WTR 303.
97Joost Pauwelyn, ‘Interplay between the WTO Treaty and Other International Legal Instruments and Tribunals: Evolution after 20 Years of WTO Jurisprudence’ (2016). Forthcoming in: Proceedings of the Quebec City Conference on the WTO at 20,Pauwelyn, (eds. C.-E. Côté, V. Guèvremont, R. Ouellet), Presses de l’Université de Laval, 2018. <https://ssrn.com/abstract=2731144> accessed 10 June 2019 ; Appellate Body Report, Peru - Agricultural Products, para. 5.86.
“while we do not exclude the possibility of articulating the relinquishment of the right to initiate WTO dispute settlement proceedings in a form other than a waiver embodied in a mutually agreed solution…any such relinquishment must be made clearly”98
It follows that WTO panels cannot be barred from exercising jurisdiction unless the right to access WTO dispute settlement has been clearly relinquished by the parties to a dispute.99 Thus, going back to our initial example where a trade party resorts to trade restrictive measures
pursuant to the non-implementation of environmental obligations under the FTA, recourse to WTO dispute settlement would only be precluded if FTA parties have expressly agreed to relinquish their right to do so. As mentioned above, the Appellate Body also noted that Article XXIV:4 should not be interpreted so as to grant a broad defence for FTA measures which hinder Members’ rights and obligations under WTO law.100 This clearly limits the scope for WTO-minus provisions in FTAs, i.e. one that would deviate from the DSU right to a panel.
Consequently, the choice of an appropriate forum cannot simply undermine the integrity of the WTO dispute settlement system.101
Finally, the WTO dispute settlement primacy was reinforced in the early settled EU - Herring, or otherwise the so-called ‘Mackerel War’ dispute. Denmark, several months after initiating
arbitration proceedings under the United Nations Convention on the Law of the Sea (UNCLOS), also commenced consultations with the EU before the WTO regarding trade restrictive measures taken by the latter with respect Atlanto-Scandian herring and Northeast Atlantic mackerel.102 Being a self-governing territory of Denmark, the Faroe Islands’ WTO membership also falls under Denmark. Even though a year later the WTO was informed that the dispute had been settled, this case demonstrates that, while parallel proceedings may coexist, they do not threaten the WTO’s exclusive jurisdiction over any alleged violation of the covered agreements. Also, although parallel proceedings show the extent of the overlapping jurisdiction between different
98 Appellate Body Report, Peru - Agricultural Products, paras. 5.25 99 Ibid.
100 Ibid, para. 5.116. 101 Marceau (n 90).
international fora, and that the WTO is not the only avenue over trade-related disputes, they do not call into question its inherent and exclusive jurisdiction over WTO obligations.103
4.3 Contracting out of WTO dispute settlement: case law
In Peru - Agricultural Products the issue arose as to whether trade parties could impact the WTO treaty by means of modification solely between themselves, as provided for under Article 41 of the VCLT.104 The Appellate Body ruled out the possibility that such inter se modifications would be subject to Article 41 of the VCLT since “the WTO agreements contain specific provisions addressing amendments, waivers, or exceptions for regional trade agreements, which prevail over the general provisions of the Vienna Convention, such as Article 41”. Since the WTO regulates FTAs under Article XXIV GATT, constituting a lex specialis provision, Article 41 has no residual applicability in a WTO dispute. Therefore, the possibility of relinquishing the right to a WTO panel was ruled out in this context.
On the other hand, despite firm opposition to limit WTO jurisdiction, the Mexico - Soft Drinks and Peru - Agricultural Products decisions recognise that there may be occasions where a panel would be precluded from ruling on the merits of the claims before it.105 In theory, since Members are granted the right to form FTAs under Article XXIV GATT, there is no doubt that a Member would be justified in invoking the FTA dispute settlement mechanism in order to enforce norms arising out of the FTA in question, even if the same claim could be brought before the WTO dispute settlement mechanism. Accordingly, many FTAs, including those concluded by the EU, incorporate built-in mechanisms such as ‘choice of forum’, ‘exclusive forum’, or ‘fork in the road’ provisions to deal with a potential overlap of jurisdiction. One could assume therefore, that a clause granting the FTA forum exclusive jurisdiction, or an exercised fork in the road
provision, would violate the good faith principle if the party subsequently brings the case before the WTO dispute settlement. In light of Article 3.7 and 3.10 DSU, WTO jurisdiction may be
103 Makane M. Mbengue, ‘The Settlement of Trade Disputes: Is There a Monopoly for the WTO?’, (2016) 15(2) LPICT 207.
104 Vienna Convention on the Law of Treaties 1969 Article 41.
105 Appellate Body Report, Mexico - Soft Drinks, para. 54; Appellate Body Report, Peru - Agricultural Products, paras. 5.25-5.28.
