International trade and investment law : detecting disguised protectionism in environmental measures and determining its consequences

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Universiteit van Amsterdam Faculeit Der Rechtsgeleerdheid

International and European Law: International Trade and Investment

International Trade and Investment Law: Detecting

Disguised Protectionism in Environmental Measures and Its

Consequences

______________________________________

by

Savo Jasnic (10840117) Supervised by Esther Kentin

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1 Acknowledgments

Many thanks to all the professors who have generously shared their knowledge and made this year a truly remarkable experience. Special thanks to my supervisor Esther Kentin for all the help and guidance throughout. I would also express my gratitude to my professor of Investment Law and International Arbitration - Hege E. Kjos, as well as my Trade Law Professors James H. Mathis and Ingo Venzke. Lastly, many thanks to Honorable Judge Brower for the lecture at Peace Palace and interesting perspective on investment law and its interconnectedness with trade law.

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2

International trade and investment regimes are built on the premise of liberalization, which calls for, inter alia, open and liberalized markets, based on principles of non-discrimination and protection of legitimate expectations. Although pursuit of economic objectives may sometimes come at odds with public policy objectives, these concepts are not exclusive, but supportive. Article XX of the General Agreement on Tariffs and Trade (GATT) created a policy space for environmental measures which would otherwise be incompatible with its substantive provisions. Although references to environmental protection are found only in recent International Investment Agreements (IIAs), there has been no recorded case where ‘a state has been ordered to compensate an investor for enacting a generally applicable environmental law or legitimately enforcing an environmental regulation that caused an investor a loss’, as Brower noted.1 By contrast, protectionist measures are not compatible with international investment and trade regimes. IIAs seek to eliminate protectionism by incorporating rules on non-discrimination. GATT also incorporates rules on non-discrimination, as well as a general prohibition on quantitative restrictions.2However, driven by short-term political or economic goals, states may be inclined to adopt protectionist measures. Since international trade and investment regimes have been established to allow environmental measures, while simultaneously prohibiting protectionist measures, states may try to disguise a protectionist measure as an environmental one. Environmental measures are particularly suitable to serve as a disguise for protectionism, as they may produce very specific effects on the domestic economy. As Walter aptly noted, ‘the fact of national sovereignty in environmental policy, when coupled with its economic consequences, leads directly to repercussions on international economic relations’.3 As a result, environmental regulations have become an ‘increasingly seductive means of protection’.4

Charles Brower and Sadie Blackland, 'What's In A Meme? The Truth About Investor-State Arbitration: Why It Need Not And Must Not, Be Repossessed By States' (2014) 52 Columbia Journal of International Law, 689, 727

2_{GATT Article I General Most-Favored-Nation Treatment; GATT Article III National Treatment on Internal}

Taxation and Regulation and Article XI General Elimination of Quantitative Restrictions

3

C. Ford Runge, Trade Protectionism and Environmental Regulations: The New Nontariff Barriers, 11 Nw. J. Int'l L. & Bus. 47, p.50 available at

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4 A notable case study that illustrates a particularly transparent attempt of a government disguising protectionist motives under environmental pretense was the US-Tuna5 case, litigated in 1982. Although the United States (US) claimed that the measures were ‘to protect human, animal, or plant life or health’, evidence showed that US adopted contested regulation to retaliate against the seizure of nineteen fishing vessels and the arrest of a number of U.S. fishermen who, according to Canada, fished illegally within its fisheries jurisdiction. Over time, it seems that governments have become more cunning at disguising the protectionist motives behind environmental regulation. The US – Tuna/Dolphin6 and US – Shrimp Turtle7 cases, which received the landmark status for trade law, illustrated the challenges facing adjudicators in determining the true motive of these measures. Similar scenarios were, and still are, occurring under the North American Free Trade Agreement (NAFTA). In cases like Ethyl8 and SD Myers,9 seemingly generally applicable environmental measures targeted Canadian industry competitors. How do the adjudicators in both regimes detect protectionist measures disguised as environmental ones? What will the consequence of this be? Are genuine environmental measures welcomed by the regimes in spite of their adverse effects on free trade? These are some of the central questions that this thesis will answer. It will aim to show how two inherently different regimes – trade and investment – react when faced with issue of disguised protectionism under the cloak of environmental measures. This thesis will identify and analyze the criteria and methods applied by tribunals and panels in resolving this issue. Consequently, the problem statement is the following: How to detect disguised protectionism in environmental measures and determine consequences of this distinction under International Trade and Investment regimes?

'International Economic Repercussions Of Environmental Policy: An Economist's Perspective', Environment and

Trade: the Relation of International Trade and Environmental Policy (1st edn, Allanheld, Osman 1982)

4_{Ibid, p.54 citing Walter, International Economic Repercussions of Environmental Policy: An Economist's}

Perspective, in Seymour and Rubin, ENVIRONMENT AND TRADE (Allaneld, Osmun, N.J. 1982).5 Unite States –

Prohibition on imports of Tuna and Tuna Products From Canada, Report of the Panel adopted on 22 February 1982

(L/5198 - 29S/91)

5_{Unite States – Prohibition on imports of Tuna and Tuna Products From Canada, Report of the Panel adopted on}

22 February 1982 (L/5198 - 29S/91)

6_{United States-Restrictions on Imports of Tuna, Report of the Panel, DS21/R (Sept. 3, 1991), not adopted (US –}

Tuna I); United States – Measures Concerning the Importation, Marketing and Sale of Tuna and Tuna Products, (DS381)

7

US – Shrimp, WTO Appellate Body Report, US – Shrimp, WT/DS58/AB/R, adopted 6 November 1998

8

Ethyl Corporation v Canada, (1998), UNCITRAL

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5 The first part of the thesis will give an answer as to how international investment regime detect protectionist measures in the guise of environmental ones, and what the consequences are of that test. To come to a conclusion on this matter it will be necessary to firstly inspect the IIAs and their nexus within the environmental protection. Subsequently, I will identify and analyze the criteria used by the tribunals to determine when an environmental measure becomes a ‘regulatory taking’ and whether it is compensable or not. The third section will approach these same issues through the prism of the international trade regime, and in particular through jurisprudence based on the GATT. The last section will provide a conclusion with a juxtaposed image of the two regimes in relation to the subject matter, identifying the main areas of convergence or divergence. It follows that the combination of normative and comparative approach is adopted. Primary source will be investment and trade law jurisprudence, the analysis and comparison of which allow me to identify and evaluate the tests for distinguishing genuine environmental measures from protectionist disguised as such.

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6 CHAPTER I Environmental measures and Disguised Protectionism in Investment Law

1.1. Environmental references in IIAs

IIAs have undergone three evolutionary phases, or ‘eras’ as Vandevelde finds.10 Early IIAs were primarily and almost solely concerned with investment protection and the establishment of trade relations.11 Contemporary IIAs are broader in scope and have evolved to include inter alia human rights, health and environment considerations. A rise in awareness regarding environmental considerations began in the early 1970s.12 The first substantive results were reflected in the Stockholm Declaration on the Human Environment of 1972.13 This environmental movement was also strong in the 1990’s, leading to the conclusion of Rio Declaration in 1992, which introduced the concept of sustainable development.14 In the same year, NAFTA was being negotiated. The influence of the environmental lobby was particularly strong and NAFTA initiated a new trend of incorporating environmental references in the treaty text. Accordingly, NAFTA may serve as suitable reference point for explaining the development of environmental references in the IIAs.

Pre-NAFTA

The first Bilateral Investment Treaty (BIT) was concluded between Germany and Pakistan in 1959.15 Until the conclusion of 1985 China-Singapore BIT,16 no IIAs contained references to the environment. In Article 11 of the respective BIT, it was agreed that the Agreement shall in no way limit the right of the parties to take any actions that are aimed at the ‘protection of public health or the prevention of diseases and pests in animals or plants.’ Although such reference to

10_{Keneth Vandevelde, 'A Brief History Of International Investment Agreements' (2005) 12 UC Davies Journal of}

International Law & Policy, 157

11

Ibid, 158

12_{On environmental law, See Patricia W Birnie, Alan E Boyle and Catherine Redgewell, International Law And The}

Environment (3rd edn, Oxford University Press 2009).

13_{L.B Sohn, The Stockholm Declaration on Human Environment, Harvard International Law Journal, Volume 14,}

No 3 (1973)

14_{Rio Declaration on Environment and Development, UN Doc. A/CONF.151/26 (vol. I) / 31 ILM 874 (1992)} 15_{Treaty for the Promotion and Protection of Investments, (signed in Bonn 25 November 1959), available at} http://www.iisd.org/pdf/2006/investment_pakistan_germany.pdf (last accessed on 28 July 2015)

16

Agreement Between the Government of the People's Republic of China and the Government of the Republic of Singapore on the Promotion and Protection of Investments (signed on 21 November 1985), available at

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7 the environment was novel at the time and it could have been considered to represent a progressive shift in drafting of the IIAs on first glance, the question is whether referencing the environment improved the treatment of measures aimed at the protection of environment.

In Saluka, the Tribunal noted that it is ‘established in international law that States are not liable to pay compensation to a foreign investor when, in the normal exercise of their regulatory powers, they adopt in a non-discriminatory manner bona fide regulations that are aimed at the general welfare.’17 As Wagner noted “the obligation to compensate does not extend to regulations imposed pursuant to the exercise of legitimate government police powers, such as taxation and protection of human health and welfare”.18 This principle was reaffirmed in Tecmed where the tribunal held that ‘regulating for the purpose of environmental protection falls under the ‘police powers doctrine’ and it is an established principle that the State’s exercise of its sovereign powers within the framework of its police power may cause economic damage to those subject to its powers as administrator without entitling them to any compensation whatsoever.’19 Although, the applicable Spain – Mexico BIT was concluded after NAFTA, in 1995, it contains no reference to the environment. Santa Elena20 was not even litigated under protection of BIT,21 therefore no reference to the environment existed. Costa Rica expropriated property owned by a US investor to preserve an ecological site in accordance with its international environmental obligations. This expropriation was deemed to be for public purpose, and the dispute only regarded the amount of compensation.

Albeit on the basis of limited case law, initial conclusions can be drawn that bona fide environmental regulation are allowed under IIAs which do not contain reference to environment. An answer to the question as to whether referencing the environment improves the treatment of environmental measures will have to await the analysis of awards adopted by the tribunals adjudicating on the basis of IIAs containing environmental references, in particular - NAFTA.

17_{Saluka Investments B.V. v. The Czech Republic, 2006, UNCITRAL, Partial award, para 255}

18_{Wagner, J. Martin, 'International Investment, Expropriation and Environmental Protection' (1999) Golden Gate}

U.L Rev, 465, 466

19_{Técnicas Medioambientales Tecmed S.A. v United Mexican States, ICSID Case No. ARB(AF)/00/2, Award, 29}

May 2003, para. 119

20_{Compañiá del Desarrollo de Santa Elena, S.A. v. The Republic of Costa Rica, Award, ICSID Case No. ARB/96/1}

(United States/Costa Rica)

21

Ibid, Final Award, para. 26 (Jurisdiction was based on the letter dated 21 March 1995, by which Costa Rica consented to arbitration proceedings before an ICSID tribunal)

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8 NAFTA

The trend of incorporating environmental references in the IIAs started with the NAFTA, the ‘greenest’ IIA of its time.22 NAFTA introduced new safeguards which represented significant progress over other trade agreements of that time.23 NAFTA was concluded in 1992 and came into force two years later. The NAFTA Preamble reflects the ‘environmentally friendly’ character of NAFTA, as it makes references to inter alia environmental protection and sustainable development.24 NAFTA additionally introduced improved environmental safeguards, however they apply to trade, rather than investment.25 In Chapter 11, which concerns investment, it is recognized that parties may take any measures to ‘ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns’.26 As a response to environmentalist fears of potential race to the bottom in environmental standards, the parties agreed that it is ‘inappropriate to encourage investment by relaxing domestic health, safety or environmental measures’.27 Although the sum of environmental provisions labeled NAFTA as the greenest trade agreement of its time, its critics were not satisfied.28 For this reason, a side agreement on environmental protection was concluded – the North American Agreement on Environmental Cooperation.

Post-NAFTA

NAFTA’s influence on the development of IIAs was evident. The non-BIT IIAs as matter of general principle, in comparison to BITs, were negotiated under the visible influence of

22_{Some authors refer to it as the greenest trade agreement ever, See David Cloud, 'Warning Bells On NAFTA Sound}

For Clinton' [1992] The Congressional Quarterly, 3712; Scott Voughn, The Greenest Trade Ever? Measuring the Environmental Impacts of Agricultural Liberalization, available at http://www.rrojasdatabank.info/naftachap3.pdf

(last accessed on 28 July 2015)

23_{Ignacia Moreno and others, 'Free Trade and The Environment: The NAFTA, The NAAEC, And Implications For}

The Future' [1999] Tulane Environmental Journal; Steve Charnovitz, 'The North American Free Trade Agreement: Green Law Or Green Spin' [1994] Law & Policy in International Business, available at

http://digitalcommons.law.scu.edu/cgi/viewcontent.cgi?article=1727&context=facpubs (last accessed on 29 July 2015)

24_{In particular the Parties have agreed (1) "[u]ndertake [to act] in a manner consistent with environmental protection}

and conservation [in pursuing the goals of the agreement];" (2) "[p]reserve their flexibility to safeguard the public welfare;" (3) "[p]romote sustainable development;" and (4) "[s]trengthen the development and enforcement of environmental laws and regulations.

25_{NAFTA Article 713, 905, 715 and 907} 26

NAFTA Article 1114 (1)

27

NAFTA Article 1114 (2)

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9 environmentalists, for which reason, to varying extents, they resorted to NAFTA’s formula for the incorporation of environmental references.29 All thirty non-BIT IIAs surveyed in an OECD Working Paper make some sort of reference to the environment, while only 6.5% of the total number of BITs do the same.30 Certain BITs, mainly those concluded by Canada, Norway and the US also include such references.31 The treaties incorporate these references through general language in the preamble such as; reserving policy space for environmental regulation; provisions precluding non-discriminatory environmental regulation as a basis for indirect expropriation; not lowering environmental standards to attract investment and general promotion in environmental protection and cooperation.32

The negotiations of ‘mega-regional’ agreements – the Transatlantic Trade and Investment Partnership and the Comprehensive Economic Trade Agreement (CETA) – were open to public scrutiny, which criticized its potentially negative environmental implications.33 CETA is arguably most important and comprehensive FTA with an investment chapter that has been recently concluded, for which reason it could be considered a representative example. In its investment chapter, CETA recognized that non-discriminatory measures protecting legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriations.34 This recognition comes as a mere reaffirmation of otherwise applicable principles in International Investment Law35 and it will unlikely have any practical effect. CETA

29_{Thomas Waelde and Abba Kolo, 'Environmental Regulation, Investment Protection And ‘Regulatory Taking’ In}

International Law' (2001) 50 ICLQ. Walde noticed that Bilateral treaties are less in the eye of environmentalist than multilateral negotiations which resulted in a negotiations with less environmental pressure.

30

Kathryn Gordon and Joachim Pohl, 'Environmental Concerns In International Investment Agreements: A Survey' OECD Working Papers on International Investment , 2011/01, OECD Publishing, available at

http://www.oecd.org/daf/inv/investment-policy/WP-2011_1.pdf (last accessed on 28 July 2015)

31_{UNCTAD IIA Issues Note, 'Recent Trends in IIAs and ISDS', (1 February 2015), available at} http://unctad.org/en/PublicationsLibrary/webdiaepcb2015d1_en.pdf (Last accessed on 28 July 2015)

32_{K. Gordon (n 28), 5}

33_{European Environmental Bureau, 'How TTIP Regulatory rollback: How TTIP Puts the Environment at Risk',}

available at http://www.eeb.org/EEB/?LinkServID=4AFDDA9F-5056-B741-DB18FBAC26DE3743&showMeta=0; World Fair Trade Organization, 'One Million Signatures Opposing TTIP And CETA' (2014)

http://wfto.com/news/one-million-signatures-opposing-ttip-and-ceta (last accessed 28 July 2015).; Ttip2015.eu, 'Global Day Of Action Against TTIP, CETA And Tisa' (2015)

http://ttip2015.eu/blog-detail/blog/April%2018%20TTIP.html (last accessed 28 July 2015).

34

CETA, Chapter 10 – Investment, Article X11 (3) available at http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/ceta-aecg/text-texte/10.aspx?lang=eng#101 (last accessed on 28 July 2015)

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10 in detail regulates trade and environment36 and trade and sustainable development,37 but seems to come short with innovations, at least with respect to the investment part. It seems that the principles already applicable are being reiterated, which seems superfluous as the investment regime was already equipped with the tools necessary for the observation of environmental goals.

1.2 Detecting Protectionism in Environmental Measures

Under NAFTA, seventy-seven investment cases were litigated, eighteen of which had environmental pretext.38 The relevant portion of these environmental cases will be analyzed below, in addition to a few cases litigated under the protection of Bilateral Investment Treaties (BITs), with the aim of identifying the criteria for detecting protectionist or bona fidae motives in environmental measures. This distinction will be important, as protectionist measures could easily breach substantive standards of investment protection.

Public purpose

The public purpose requirement is based on the utilitarian view of governance, the principle which is manifested in the idea that the individual right to property may be infringed upon only by an overriding interest of the greater public.39 When states adopt legislation for the good of community and not for the benefit of individuals or protection of covert interest, such regulatory activity should be deemed to be undertaken for public purpose. The precise scope of the term is however quite elusive, as some legislation may seem to contribute towards the greater good of the public, like health or environmental protections, while in fact it preserves protectionist interests. Nonetheless, states enjoy wide discretion in determining what constitutes a public

36_{CETA, Chapter 25 – Trade and Environment, available at} http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/ceta-aecg/text-texte/25.aspx?lang=eng (last accessed on 28 July 2015)

37_{CETA, Chapter 23 – Trade and Sustainable Development, available at} http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/ceta-aecg/text-texte/23.aspx?lang=eng (last accessed on 28 July 2015)

38_{S. Sinclair, Canadian Centre for Policy Alternatives, 'Trade And Investment Research Project' (2015), availble at} https://www.policyalternatives.ca/sites/default/files/uploads/publications/National%20Office/2015/01/NAFTA_Cha pter11_Investor_State_Disputes_2015.pdf (last accessed on 28 July 2015)

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11 interest.40 The ICJ in Gabcíkovo-Nagymaros (Hungary vs Slovakia) recognized the protection of the environment as an ‘essential interest’ of the state.41

In Chemtura, Canada banned the pesticide lindane on the basis of a risk assessment.42 In response, Chemtura brought a claim against Canada challenging the risk assessment 43 and alleging that ban was a result of a ‘trade irritant and not of health and environmental considerations’.44 The good faith character of the measure was therefore put to the test. The Tribunal stated that it was not its task to ‘determine whether certain uses of lindane are dangerous’ or ‘to second-guess the correctness of the science-based decision-making of highly specialized national regulatory agencies.’45However, the tribunal could ‘not ignore the fact that lindane has raised increasingly serious concerns both in other countries and at the international level’.46 The tribunal also acknowledged that Canada undertook the obligation to restrict the use of lindane in accordance with Aarhus Protocol on Persistent Organic Pollutants.47 For these reasons, the tribunal found that the measure was ‘motivatedby the increasing awareness of the dangers presented by lindane for human health and the environment’ and as such it constituted ‘a valid exercise of Respondent’s police powers’.48 .

Methanex also brought a NAFTA claim vis-à-vis the US after California’s ban of MTBE (methyl tertiary-butyl ether), accusing the US of ‘rank protectionism of ethanol and concomitant punishment of methanol and indeed Methanex’.49 The measure was adopted after scientific evidence showed that MTBE contaminated several municipal water systems. The claimant alleged that MTBE was not environmentally detrimental and presented scientific evidence contesting the validity of the University of California Report (UC Report), a scientific report on which the measure was based. 50 Although the Tribunal held that it was not ’persuaded that the

40

Peter J. Stoett and Nico Schrijver, 'Sovereignty Over Natural Resources: Balancing Rights And Duties' (1998) 53 International Journal. 344-6

41_{Case concerning the Gabcíkovo-Nagymaros Project (Hungary/Slovakia), Judgment 25 September 1997, para 53,}

available at http://www.icj-cij.org/docket/files/92/7375.pdf

42_{Chemtura Corporation v Canada, (2010) UNCITRAL, Award, para 29} 43_{Ibid, para. 52} 44_{Ibid, para. 133} 45 Ibid, para. 134 46_{Ibid, para. 135} 47_{Ibid, para. 137} 48_{Ibid, para. 266} 49

Methanex v United States, (2005) UNCITRAL, Final Award of the Tribunal on Jurisdiction and Merits, Part II, Chapter D, para. 25

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12 UC Report was scientifically incorrect’,51 as Vadi correctly noticed, the Tribunal ‘did [not] take a position on its scientific truths’.52 The Tribunal further held the UC Report reflected a ‘serious, objective’ and scientific approach’.53 Ultimately, it was concluded that the measure ‘was motivated by honest belief, held in good faith and on reasonable scientific grounds’.54

Although previous examples illustrated bone fide regulatory measures, discretionary power of a state to regulate for public purpose may be abused nevertheless. Therefore, tribunals have developed an objective test to ascertain such abuse, requiring that measures must be reasonable and proportionate to the aim pursued.55 In both Tecmed and SD Myers this proportionality test was applied.

In Tecmed, the investor was barred from operating a landfill site due to the non-renewal of the operating license. The authorities claimed that the proximity of the landfill to the urban habitat made it unsuitable for future operation, for which reason the landfill was permanently closed. The investment was therefore completely deprived of its value. To determine whether the measure was expropriatory, the tribunal reviewed whether the measure amounted to a complete and indefinite interference with the investment, and was proportionate to the public interest being protected.56. The tribunal found the absence of a potential threat to the environment, together with sporadic local opposition, does not constitute a real crisis or a disaster of great proportions’.57 The complete interference with the investment was therefore not proportionate to the aim pursued. Consequently, the measure amounted to expropriation.

In SD Myers, an export ban on polychlorinated biphenyl (PCB) the investor virtually out of business. Claimant argued that the ban was an evident case of disguised protectionism, as it restricted the access of American waste management companies to the Canadian market, while favoring domestic companies operating in the same sector.58 Canada claimed that the ban was motived by environmental concerns, as the PCB posed threat to health and the environment

51_{Ibid, Part III, Chapter A, para. 101}

52_{Valentina Vadi, 'Standard Of Review And Scientific Evidence In WTO Law And International Investment}

Arbitration' [2014] Standard of Review and Margin of Appreciation. p. 162

53_{Methanex,Part III, Chapter A, para. 101} 54_{Ibid, Chapter A, para. 102}

55_{Waelde (n .29), p.828} 56 Tecmed, para. 122 57 Ibid, para. 144 58_{SD Myers, para. 131}

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13 when exported without appropriate assurances of safe transportation and destruction.59 Since it was apparent that the ban intended to protect the Canadian PCB industry from U.S. competitors,60 the Tribunal found no legitimate environmental reasons for introducing the ban.61 In fact, the Canadian Department of Environment suggested that opening up the border would represent ‘a technically and environmentally sound solution to the destruction of some of Canada’s PCB’,62 yet the border remained closed. If Canada were actually concerned with the environmental effects of PCB, it would be more logical to have prevented its use, rather than its exportation.

The tribunal continued with an analysis of the ‘incidental’ policy objective. In that sense, the tribunal found that the measure was aiming to strengthen the national waste management capacities in accordance with Basel Convention63 which required Canada to have adequate waste treatment facilities. The goal was deemed legitimate64 and the tribunal sought to weigh it against the following principles, derived from environmental agreements to which Canada was party:65

• Parties have the right to establish high levels of environmental protection. They are not obliged to compromise their standards merely to satisfy the political or economic interests of other states;

• Parties should avoid creating distortions to trade;

• Environmental protection and economic development can and should be mutually supportive.66

As a consequence, legitimate environmental goals, including the incidental goal of keeping the Canadian industry strong in order to assure a continued disposal capability, would need to be compatible with the free trade. In the same vein, the Tribunal found that “where a state can achieve its chosen level of environmental protection through a variety of equally effective and

59_{Ibid, para. 152} 60_{Ibid, para. 194} 61_{Ibid, para. 195} 62 Ibid, para. 173

63_{Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal, 1673}

UNTS 126; 28 ILM 657 (1989) (Basel Convention)

64_{SD Myers, para. 255} 65

Basel Convention, North American Agreement on Environmental Cooperation, 32 ILM 1482 (1993) (NEEAC) and NAFTA

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14 reasonable means, it is obliged to adopt the alternative that is most consistent with free trade.”67 The tribunal therefore sought less trade restrictive measure capable of satisfying the goal designated by Canada. Accordingly, the Tribunal found that the same objective – strengthening Canadian waste management industry – could be obtained by at least two less trade restrictive alternative.68

Tribunals have used several different tools to determine whether the measures fall within the concept of public purpose. Measures which were adopted on the basis of scientific evidence were deemed to satisfy the public purpose criteria. In reviewing scientific evidence, the tribunals demonstrated substantial deference, although not total.69 The tribunals also looked at whether the measure was reasonable and proportionate to the objective pursued. In such cases, they tried to strike a balance between legitimate environmental goals and trade liberalization. If the desired level of protection could have been achieved by less trade restrictive alternatives, the measure would not meet the public purpose requirement. Furthermore, measures which had economic or discriminatory ulterior motives, also failed the public purpose requirement.

Discrimination

A state measure will be discriminatory if it results ‘in an actual injury to an alien’.70 All modern IIAs include rules on non-discrimination incorporated within national treatment and most favored nation treatment standards. Discrimination will be an independent cause of action, as well as a ‘significant criterion in the balancing process to identify expropriation’.71 Lack of discrimination could infer a good faith character of the measure and by contrast, existence of discrimination may imply disguised protectionism.

As rules on non-discrimination are embodied in comparative standards,72 tribunals, particularly the NAFTA ones, first determine whether investors are in ‘like circumstances’. In SD Myers’ case, a separate opinion of Professor Schwartz highlighted that ‘discrimination cannot be

67_{SD Myers, para. 221} 68

SD Myers, para. 255

69_{Vadi (n 52), p. 167}

70_{Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (M Nijhoff 1995), p. 62} 71_{Waelde (n. 29), p. 835}

72

Howard Mann and Konrad van Moltke, 'NAFTA’S Chapter 11 and the Environment: Addressing The Impacts Of The Investor-State Process On The Environment' International Center for Sustainable Development. p 4, available at

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15 determined by applying a mechanical test of whether similarly situated individuals are treated the same, yet it depends upon examination of the wide context in which a governmental measure is established and applied in the specific circumstances of each case’.73 The context, in SD Myers, was shaped by NAFTA, NEAAC and the Rio Declaration.74 This means that the concept of ‘like circumstances’ is inextricably intertwined with the public purpose. As Professor Schwartz noted, ‘an analysis of like circumstances must explore whether Government [of Canada] had legitimate environmental reasons, or other important public welfare reasons, for treating S.D. Myers less favorably than its Canadian competitors.’75 This implies that discrimination could be justified provided adequate public policy reasons existed. Discrimination was determined, but without any overriding public policy reasons. Hence, there was no justification for the measure. The evidence that the ban aimed at eliminating the US competition and creating such a market where PCB would be handled ‘in Canada by Canadians’.76 The Tribunal stated that the mere intent will not suffice to render a measure discriminatory, yet its practical effect must create a disproportionate benefit for nationals over non-nationals.77 The effects test thus requires determination of ‘suitable comparators’. The term comprises of economic subjects operating in the same ‘economic’ and ‘business’ sector.78 Since SD Myers – US based company – was practically barred from conducting its business, whereas Canadian company continued their operations, the Tribunal found the measure to be discriminatory.

In Methanex, the Claimant – a producer of methanol – alleged that its suitable comparator were US ethanol producers. 79 The tribunal however found that the use of ethanol producers as comparator was not the most convenient as it was possible to pinpoint the identical comparator – US methanol producers. 80 As the measure was equally onerous for both US methanol producers and Methanex, the tribunal found no discrimination.

The nature of the measure in Ethyl is to a certain extent comparable to the character of the measure in SD Myers. Both measures were adopted for the alleged purpose of protecting the

73_{SD Myers, Separate Opinion, Professor Schwartz, para. 125} 74 Ibid, para. 130 75_{Ibid, para. 131} 76_{SD Myers (n 54), para. 184} 77_{Ibid, para. 252} 78 Ibid, para. 250 79

Methanex, Part IV B, para 5-8

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16 environment. In terms of achieving the designated objective, they both sought to prevent transportation of the hazardous chemical, yet tolerated its use and production. Canada indeed tried to prohibit the use of MMT under the Canada Environmental Protection Act, but failed as there was no scientific evidence that the presence of MMT in gasoline was detrimental to human health.81 Although an award has been rendered only with respect to jurisdiction, the fact that the case has been settled ‘in favor’ of Ethyl Corp,82 together with the documents presented before the arbitral tribunal, provides enough material to draw some conclusions. Evidence revealed that Canada was aiming to promote ethanol instead of MMT, not for the environmental, yet economic reasons. The measure was de facto discriminatory as all of the MMT was produced in the US by American companies, while ethanol was manufactured in Canada by Canadians.83 Canada sought to remove the case from the grasp of the tribunal, but having failed to successfully contest the jurisdiction, it decided not to rebut the substantive claims. Instead it settled the case and revoked the contested measure. This may be construed, at least to a certain extent, as an indication that the asserted claims of ulterior motives, disconnected from environmental protection, were not untrue.

Looking back, the tribunals used both the discriminatory intent of the measure and its practical effects as tools for detecting discrimination in ‘like circumstances’, and ultimately, protectionism. Discrimination was found to exist where no legitimate public policy reasons existed to override the better treatment of nationals over non-nationals operating in the same business sector. If differential treatment existed between nationals and non-nationals who did not operate in the same business sector, the tribunal found no discrimination.

Impact of the measure on investment – the degree of interference

Regulatory measures, including environmental, are liable to produce adverse effects on investment. Investments are protected against outright expropriation, including the measures amounting to expropriation. Expropriation is allowed, but only when enacted for public purpose, in a non-discriminatory fashion, in accordance with the process of law and against compensation. When does the measure amount to expropriation in the first place? How grave must the

81_{Methanex, Notice of Intent to Submit a Claim to Arbitration Under Section B of Chapter 11 of the North}

American Free Trade Agreement, para 7

82

Ethyl received roughly $13 million and the contested measure was withdrawn

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17 interference with investment be to render the measure expropriatory? Determining whether the obligation to compensate will incur, and its exact amount, will largely depend on the answer to these questions. Accordingly, the degree of interference is not per se a tool for detecting protectionism, but a tool for the characterization of protectionism. In other words, it is used to determine whether the protectionist measure produced the effects that should be compensated. In SD Myers it was held that expropriation ‘usually amounts to a lasting removal of the ability of an owner to make use of its economic rights’.84 Although it is not impossible that in certain circumstances a deprivation, ‘even if partial and temporary’, may still amount to expropriation, the general principle is that the deprivation of economic rights must be substantial and of certain duration.85

This concept of ‘economic’ rights’ which may be expropriated involves a ‘bundle of intangible rights in relation to property.’86 In Pope&Talbot,87 Canada instituted export restriction on softwoods and the tribunal confirmed that the market access was a right which may be subject to expropriation. In SD Myers, property interest known as ‘goodwill’ was perceived as a right that could be expropriated. Although in this particular case the measure did not amount to an expropriation, circa $6 million in damages were awarded for breach of national and fair and equitable treatment standards.88 Methanex claimed circa 1 billion dollars against U.S. for limiting its right to sell methyl, however without any success.

In Chemtura, the Tribunal held that it is not enough for a measure to merely deprive an investor of enjoyment of its respective right, the deprivation must be substantial.89 When the deprivation is so grave that it renders an investment completely unviable, as the case was in Metalclad, the tribunal will not have any difficulties in finding that the threshold is met. However, environmental measures are more likely to simply reduce the value of an investment or deprive an investor of its rights only to a certain extent.90 Some guidance in finding the threshold may be

84_{SD Myers, para. 283}

85_{SD Myers, Separate opinion, para. 220} 86

Muthucumaraswamy Sornarajah, The International Law On Foreign Investment (3rd edn, Cambridge University Press 2010)., p 383

87_{Pope & Talbot vs Canada, (2000), UNCITRAL} 88_{SD Myers v Canada, Second Partial Award, para. 311} 89

Chemtura, para. 242

90

Richard J. Lazarus, 'Putting The Correct "Spin" On Lucas' (1993) 45 Stanford Law Review (‘environmental law often bar the most profitable use, but they only rarely eliminate all economic uses of the property’), 1427, available

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18 sought in the award adopted in Pope&Talbot,91 albeit in the end determination of substantial deprivation ‘is a fact-sensitive exercise to be conducted in the light of the circumstances of the each case’.92 The Chemtura tribunal did not find substantial deprivation to have occurred, as the sales from lindane amounted to approximately 10% of the overall sales.93

Santa Elena Tribunal concluded that for the taking to occur, the deprivation of fundamental rights of ownership shall not be ‘merely ephemeral’.94 This principle was reaffirmed in SD Myers case, where the Tribunal held that an expropriation ‘usually amounts to a lasting removal of the ability of an owner to make use of its economic rights’.95 The export ban prevented the investor from conducting its regular business for only a limited amount of time which was not enough to qualify the measure as expropriatory.

Whether a measure is tantamount to expropriation or merely in breach of some other treaty standard will be of particular importance for the quantification of damages, as compensation will be ‘presumably smaller if it per se does not amount to expropriation, and larger if it contributes towards the assessment of regulatory action as expropriatory’.96 However, in SD Myers, the export ban was found to breach several standards,97 for which reason Professor Schwartz claimed that ‘it makes no practical difference to S.D. Myers whether the expropriation label is attached to the export ban’ for the purpose of quantification of damages. 98 It seemed unlikely that the damages would be any greater, as the amount of compensation was calculated on the basis of economic harm done to the investor.99

at http://scholarship.law.georgetown.edu/cgi/viewcontent.cgi?article=1156&context=facpub (last accessed on 28 July 2015)

91_{The following criteria were delineated as useful in determination of indirect expropriation: (i) whether the investor}

remained in control of its investment, (ii) whether it directed its day-to-day operations, (iii) whether its officers and employees were detained by the State, (iv) whether the State supervised the work of the investor's officers and employees or not, (v) whether the State had taken the proceeds of sales other than through taxation, (vi) whether the State interfered with management or shareholders' activities, (vii) whether the State prevented the distribution of dividends to shareholders, (viii) whether the State interfered with the appointment of directors or management, and (ix) whether the State had taken any other actions ousting the investor from full ownership and control of the investment.

92_{Chemtura, para. 249} 93

Chemtura, para. 262

94_{Santa Elena, para. 77} 95_{SD Myers, para. 283} 96_{Waelde (n 29), p. 835} 97

Article 1102 and Article 1105

98

SD Myers, Separate Opinion, para. 222

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19 In Metalclad, the investor was barred from operating the landfill.100 The operating permit was denied, which ultimately amounted to expropriation.101 Since the Tribunal found that the project had not operated long enough to establish a performance record, it rejected the incorporation of future profits in the compensation sum and the amount was calculated ‘by reference to the Metalclad’s actual investment in the project’.102 In Santa Elena, Costa Rica expropriated the property of a US based investor, who contested only the amount of compensation. As a matter of defense, Costa Rica made a reference to ‘its international legal obligation to preserve the unique ecological site that it is Santa Elena.’103 Nevertheless, the Tribunal awarded the compensation as it found that the international source of the obligation to protect the environment was of little relevance.104 This is an expression of the concept that requires that ‘the special sacrifices imposed by the regulation on the individuals for the benefit of the community at large need to be compensated.’105

Analyzed cases illustrated that the tribunals had recognized a wide spectrum rights which could be expropriated. Measures were deemed expropriatory if they permanently prevented the enjoyment of the investment. By contrast, lack of this temporal element qualified the measure as not amounting to expropriation. Nevertheless, when expropriation took place, compensation was paid, while its quantum was not dependent on the nature of the public interest at stake.

Due process

The due process requirement is incorporated in the full protection and security standard,106 fair and equitable treatment standard and is a requirement reviewed for the purposes of establishing

100

Metalclad Corporation v. The United Mexican States, (2000) ICSID Case No. ARB(AF)/97/1

101

In addition, Ecological Decree encompassing the respective landfill was adopted, the application of which would have had an expropriatory effect as it would prevent any conduct which involved discharging of polluting agents.

102_{Metalclad, paras. 120-.1} 103

Santa Elena, para 71 at 32 (emphasis added)

104_{Santa Elena, para 72. (‘Expropriatory environmental measures—no matter how laudable and beneficial to society}

as a whole—are, in this respect, similar to any other expropriatory measures that a state may take in order to implement its policies: where property is expropriated, even for environmental purposes, whether domestic or international, the state’s obligation to pay compensation remains’).

105_{Waelde (n 29), p. 845}

106_{Precise content of ‘full protection and security’ treaty standard is a subject to debate. It is arguable whether it}

encompasses both protection from the physical and legal perspective. The ‘deciding’ factor is the treaty language, in particular the appearance of the words ‘full’, as the failure of incorporation thereof may be interpreted as an intended omission which would restrict the protection solely to physical. In that scenario, the requirement of due process would be irrelevant for determination of breach.

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20 the existence of regulatory taking. It acts as a guardian of procedural certainty. If a procedure is unreasonably or arbitrarily burdensome on a party, it may be an indication of protectionism. This was the case in Metalclad. The investor was denied a construction permit months after the application had been filed and the construction work completed with the knowledge of administration.107 The denial was based on the ‘impropriety’ ofMetalclad’s construction of the landfill prior to receiving a municipal construction permit.108 The permit was denied without a particular procedure, at an unofficial meeting for which Metalclad had no knowledge of, nor received any notice in that respect.109 During the proceedings, Metalclad pointed out that there were no legal or construction deficiencies; that the environmental report confirmed the adequacy for operation of landfill and that there was no evidence that Municipality had ever required or issued construction permit for a project in that locality.110 On top of this,the Tribunal found that the ‘absence of any established practice or procedure as to the manner of handling applications for a municipal construction permit, amounts to a failure on the part of Mexico to ensure the transparency required by NAFTA’.111 Ultimately, the tribunal discovered that the true rationale behind the denial of the construction permit was not related to any physical defects pertaining to the construction, but to the opposition of the local population and certain environmental concerns.112 For the above reasons, and with reference to a flawed administrative procedure, the due process requirement was found to have been breached. This played an important role in ascertaining the existence of an expropriation and the breach of minimum standard of treatment. In Methanex the spotlight was on the procedure that grandfathered the adoption of the contested measure. The claimant alleged that the political contributions of a certain ethanol producer motivated the state governor into enacting the contested regulation.113 After a detailed analysis, the Tribunal concluded that these actions did not amount to any illicit act, as they were fully disclosed to the public and in line with the US’s laws.114 The ban of MTBE was based on a UC Report that found the substance to be detrimental to environment. Although the Claimant contested the report’s validity and bona fide character of the measure, the Tribunal held that the

107_{Metalclad para 90} 108 Ibid para 50 109_{Ibid, para 91} 110_{Ibid para 52} 111_{Ibid, para 88} 112 Ibid, para 92 113

Methanex, Part III, Chapter B, para 21

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21 ‘UC Report was subjected at the time to public hearings, testimony and peer-review; and its emergence as a serious scientific work from such an open and informed debate is the best evidence that it was not the product of a political sham engineered by California’.115 In its characterization of the process that preceded the enactment of the ban, the tribunal intertwined public purpose and due process:

“Methanex entered a political economy in which it was widely known, if not notorious, that governmental environmental and health protection institutions at the federal and state level, operating under the vigilant eyes of the media, interested corporations, nongovernmental organizations and a politically active electorate, continuously monitored the use and impact of chemical compounds and commonly prohibited or restricted the use of some of those compounds for environmental and/or health reasons. Indeed, the very market for MTBE in the United States was the result of precisely this regulatory process. Methanex appreciated that the process of regulation in the United States involved wide participation of industry groups, nongovernmental organizations, academics and other individuals, many of these actors deploying lobbyists.”

Similarly in Bilcon, the due process requirement was interconnected with the public purpose. Canada prevented the opening of a mining quarry following the recommendations of an environmental risk assessment. The scope of the assessment was to evaluate ‘the impacts of the projects in terms of likelihood of adverse effects, their significance and possible mitigation.’116 Despite the clearly stated terms of reference, the assessment found that the investment was at odds with ‘core community values’, a term which had no basis either in legislature, or in practice.117 The tribunal found that the investor was ‘faced with a fundamentally novel and adverse approach by an administrative body’.118 The assessment did not recognize any potential environmental risks that could be labelled as ‘significant’,119 nor did it suggest any measures to mitigate the alleged effects.120 In addition, the assessment was conducted after the investor spent

115_{Ibid, Part III, Chapter A, para 101} 116

William Ralph Clayton, William Richard Clayton, Douglas Clayton, Daniel Clayton and Bilcon of Delaware Inc.

v. Government of Canada, (2015) UNCITRAL, PCA Case No. 2009-04, Award on jurisdiction and Liability, para.

561 117_{Ibid, para. 503} 118 Ibid, para. 573 119 Ibid, para. 503 120_{Ibid, para.. 559}

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22 millions on environmental permits, although the law prescribed that it should have been conducted as early as possible ‘before irrevocable decisions are made’.121 In light of these deficiencies, and particularly relying on the analysis of two eminent environmental lawyers from Canada, the tribunal found that the methodology applied in the risk assessment was inconsistent with Canadian law.122 This is not to say that the tribunal substituted the assessment of environmental risks with its own analysis, but rather looked at whether the risk assessment was conducted in accordance with Canadian law. As the basic requirements of predictable and fair procedure were not followed by Canadian authorities, the measure failed to satisfy the due process requirement.

Referenced cases have shown that procedures which preceded the adoption of measures could signal potential protectionism. Where the procedure was deeply flawed and unpredictable, the due process requirement was found to be in breach. The due process requirement is a constituent part of minimum standard treatment and expropriation. Where the requirement was not satisfied, the standards implied the breach, provided all relevant criteria were met. Where procedure was transparent and reliable, the due process requirement was met.

Specific commitments

Specific commitments or guarantees given with respect to the investment may be relevant for the investor in two ways.123 On the one hand, in case relevant treaties contain umbrella clauses, breach of specific representations may represent a separate cause of action.124 On the other hand, breach of prior commitments can be assessed within the purview of minimum treatment standard and expropriation.

With reference to Revere Copper & Brass, Inc125 and Waste Management,126 the Methanex Tribunal accented the role of specific commitments for determination of relationship between the taking and a state’s power to regulate:

121_{Ibid, para 476} 122_{Ibid, para 543} 123_{Waelde (n. 29) p. 843} 124 Ibid 125

Revere Copper & Brass, Inc. v. Overseas Private Invest. Corp., 56 ILR 258, 17 ILM 1321, 1331,

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23 ‘[A]s a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alios, a foreign investor or investment is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation.’127

No specific commitments were ever given to Methanex and therefore the contested measure was not tantamount to expropriation.128

In contrast to Methanex, the Metalclad tribunal discovered the existence of prior commitments. The investor was lead to believe that upon obtaining relevant permits and approvals no further permits will be necessary to finish the construction and begin the operation of the landfill.129 The case resembled Biloune v Ghana130 which was used by the Tribunal as an authoritative reference. The Biloune tribunal paid particular regard to the investor’s legitimate reliance on government’s representations with respect to permit and the fact that the government knew about the initiated construction.131 The Metalclad tribunal held the same and concluded that the denial of the construction permit in a defective procedure, together with the existence of specific representations had a combined effect of being tantamount to expropriation.132

Most recently, in Bilcon v Canada, the investor was encouraged to invest in a mine quarry in Nova Scotia. Local public policy welcomed and promoted investments in mining.133 In addition, Nova Scotia’s officials, including the Premier and Minister of Environment, personally reiterated these encouragements. 134 As a result, the investor devoted substantial resources and efforts to obtain environmental permits and amended their project to meet the environmental standards.135 In spite of these explicit encouragements, the location was later labelled as a ‘no go’ zone by the flawed risk assessment report. The tribunal found such behavior to be unjust towards the

127_{Methanex, Part IV, Chapter D, para 7} 128_{Ibid, para 9}

129_{Metalclald, para 85} 130

Antoine Biloune (Syria) and Marine Drive Complex Ltd. (Ghana) v. Ghana Investment Centre and the

Government of Ghana, Ad Hoc-Award (1989-90)

131_{Metalclad, para. 108} 132_{Metalclad, para. 107} 133 Bilcon, paras. 456-460 134 Bilcon, paras. 461-472 135_{Bilcon para. 467}

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24 investor.136 Such a conclusion, coupled with the breach of due process requirement, rendered the measure in breach of the minimum international standard.

Commitments were particularly relevant when they explicitly targeted the project. As such, they were reviewed in the light of international minimum standard and expropriation. Since specific commitments or encouragements create legitimate expectations on behalf of the investor, thwarting such expectations rendered the measure illegal. In Methanex, specific commitments were deemed to have the capacity to override the principle that a non-discriminatory measure, enacted for public purpose and in accordance with due process is not compensable.

1.3 Interim Conclusions

Whether a measure was deemed to genuinely protect the environment depended on the analysis of different criteria. Public purpose, discrimination, impact of the measure on investment, due process and specific commitments issued to the investor were used as tools to detect protectionism or to confirm the genuine character of environmental measure. These criteria were attributed different value, based on the facts of the case. The tribunals did not review the measures in the light of each criteria in every case, yet they still relied on the analysis of at least two elements to prove or disprove the bona fide character of the measure. Non-discriminatory measures, based on scientific evidence and enacted in an open and transparent procedure were not compensable.

Newer generation of IIAs started a trend of incorporating references to environment in IIAs. Although jurisprudence based on IIAs which contain no reference to environment is limited (Tecmed and Santa Elena), it is still possible to draw some conclusions. The treatment of environmental measures did not seem to have improved with this trend of incorporating environmental references, as tribunals continued using comparable approaches in distinguishing genuine environmental from protectionist measures. The measure was still subjected to review and analyzed in the light of particular circumstances. Just because the measure is labelled as ‘environmental’, it is not perceived as ‘unreviewable’. Incorporation of environmental references in the IIAs may thus satisfy the laic critique, but in practice, such incorporation seems redundant. Genuine environmental measures were and still are welcome in the regime of international

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25 investment regardless of the treaty language. A clear example is Methanex, where a ban of dangerous chemical, which caused a damage of roughly $1 billion to an investor, was held legal due to its genuinely environmental pretense. However, measures which were found to pursue narrow economic interest under the false environmental pretext were deemed compensable. Measures in SD Myers and Metalclad shared these characteristics. These measures discriminated between competitors and were enacted in flawed procedures or in breach of prior commitments issued to the investor respectively. Tribunals balanced the competing interest of environmental protection and investor protection. The measures in Tecmed and SD Myers did not satisfy this proportionality test. When a less trade restrictive alternatives were reasonably available, this would imply protectionism, ultimately rendering the measure illegal. The expropiratory character of the measure was determined when the interference with investor’s rights was so grave that it completely stripped the investment of its value for an indefinite period, as the case was in Metalclad. If the effects of the measure were temporary, it did not amount to a taking, although it could still be found to breach other treaty standards, like in SD Myers. The quantum of compensation for expropriation did not depend on the reasons behind the measure and the damages were calculated according to economic harm suffered by the investor. This comes across as fair, as the burden of regulatory activity should not be borne by the investor alone, but a whole community.

Ultimately, it is to be concluded that the international investment regime is not putting a strain over the bona fide regulatory activities of states. Objectives of environmental protection and free trade are not mutually exclusive, but supportive. In fact, the zero success rate for protectionism and high costs of arbitration should encourage states to only pursue measures which are genuinely concerned with the protection of environment.

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26 CHAPTER II – Environmental measures and disguised protectionism in Trade Law

2.1 Environmental references in GATT

GATT marked a new beginning for world trade. Since its adoption, international trade was governed by a multilateral and liberalized framework. To create balance and policy space for legislation restricting and prohibiting trade for environmental or health reasons, GATT creators incorporated Article XX on General Exceptions. It was structured to provide justification for substantive breaches of the GATT. Measures ‘necessary to protect human, animal or plant life or health’ and measures ‘relating to the conservation of exhaustible natural resources’ could be justified. Even though GATT addressed the issues of environmental protection, it was still perceived as ‘unsympathetic to challenges of protecting the environment’.137 As a result, the era of ‘greening the GATT’ began in 1990’s.138 The Agreement Establishing the WTO incorporated a reference to ‘sustainable development’ in its Preamble, which turned out to have a very tangible effect in practice. In US – Shrimp, the Appellate Body relied on the Preamble to interpret Article XX.139

Article XX creates a space for measures seeking to protect legitimate policies in case they breach substantive provisions of GATT. Article XX is consisted of the chapeau which informs the character of the provision, followed by an exhaustive list of specific justifications, two of which, contained in paragraphs (b) and (g), are the most relevant for the topic of this thesis. The relevant paragraphs of Article XX read as follows:

Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any Member of measures:

b) necessary to protect human, animal, or plant life or health;

137_{Steve Charnovitz, 'Trade And The Environment In The WTO' (2007) 10 Journal of International Economic Law,}

available at http://ssrn.com/abstract=1007028 (last accessed on 29 July)

138

Daniel C Esty, Greening The GATT (Institute for International Economics 1994).

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27 g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption.

GATT’s influence was intrinsically obvious on the General Agreements on Trade in Services (GATS) which was concluded in 1995. Article XIV on General Exceptions of the GATS was drafted using the model of Article XX. As Cottier notes ‘the language, structure and purpose of these two provisions are identical, or at least similar’.140 In US – Gambling, the panel confirmed that Art. XX GATT 1994 can be referenced as it ‘may be useful in the interpretation of Article XIV, due to the textual and conceptual similarities between the two provisions’.141

2.2 Detecting Protectionism in Environmental Measures

Article XX welcomes measures ‘necessary for the protection of human, animal, or plant life’ and measures which are ‘relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption’. However, environmental pretense may be used as a disguise for protectionism. For this reason chapeau of the Article XX incorporates a requirement that provisionally justified measures cannot be applied in a manner constituting an ‘arbitrary or unjustifiable discrimination between the countries where same conditions apply’ or ‘disguised restriction of international trade’. Building on this structure, AB developed the two-tiered test, where provisional justification of the measure under subparagraphs (a) to (j) came first, followed by its review in the light of chapeau.142 This implies that the measure will be firstly checked against the public purpose criteria. Provided the measure’s design does not reveal protectionist intent, it will be provisionally justified under subparagraphs (b) or (g). After provisional justification, the effects of the measure will be analyzed in order to detect any unjustifiably discriminatory or disguised and restrictive effects on trade. The sum of these two tests is supposed to represent a comprehensive protection against disguised protectionism. The forthcoming section will put this

140

Thomas Cottier, Delimatsis Panagiotis and Nicolas Diebold, 'Article XIV GATS: General Exceptions', Max

Planck Commentaries On World Trade Law, Wto - Trade In Services (1st edn, Martinus Nijhoff Publishers 2008)

http://ssrn.com/abstract=1280215 (last accessed 29 July 2015) p. 4

141_{U.S. – Measures Affecting The Cross-Border Supply Of Gambling And Betting Services, WT/DS285/R, para.}

6.448.

142

United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services (brought by Antigua and Barbuda), Appellate Body report (WT/DS285/AB/R), para 22

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28 hypothesis to a test. With this aim in mind, the relevant portion of GATT case law will be analyzed to determine what tools the WTO adjudicators employ for detecting protectionism. Public Purpose

Initial requirements for measures aimed at the protection of the environment are imposed in subparagraphs (b) and (g) of Article XX respectively. The prior requires ‘necessity’, whereas the latter requires a ‘relating to’ nexus. In both cases, provisional justification will entail an examination of the ‘design, structure and architecture’ of the measure in light of the public purpose requirements, as formulated under one of the subparagraphs of Article XX.143

Necessity in Article XX (b)

The ‘necessity’ element was examined by the Panel in US - Tuna I in 1991 - before the establishment of the WTO. The case concerned the import ban of tuna harvested through methods resulting in the incidental killing of dolphins outside its jurisdiction, differing from the one prescribed by US law. The US claimed that requiring particular fishing techniques designed to prevent incidental killings was the only option available to the US.144 Mexico asserted that alternatives existed to unilateral actions that produced extraterritorial effects, and reiterated its proposal for an international conference that would examine the interaction of fisheries and the incidental taking of marine mammals.145 In addition, Mexico pointed out that if the US was genuinely concerned with the protection of dolphins, the measure would not be specifically concerned only with the fishing techniques of yellow fin tuna.146 Such arguments could imply protectionism, particularly because the new ‘dolphin friendly’ fishing techniques were more expensive than the techniques used by fishing industries in other countries.147 As a result, US

143_{United States — Standards for Reformulated and Conventional Gasoline,}_WT/DS2/AB/R_{, adopted 20 May 1996,}

DSR 1996:I, 3,Appellate Body Report p. 22

144_{US Tuna I, para. 3.33} 145_{Ibid, para. 3.34} 146_{Ibid, para. 3.38} 147

Fishermen could comply with the dolphin-safety regulations if they caught tuna on lines. Another option was to continue using nets, but move the fishing boats to the western Pacific, where dolphins and tuna do not swim together. On this topic see Vogel, Trading Up: Consumer and Environmental Regulation in a Global Economy

International trade and investment law : detecting disguised protectionism in environmental measures and determining its consequences