1
DISPUTE SETTLEMENT SYSTEMS IN SUSTAINABLE
DEVELOPMENT CHAPTERS OF EU FREE TRADE
AGREEMENTS
A debate on their effectiveness
Author: Ricardo Berenguer Asensi Student number: 12721980
Email: ricardoberenguer.a97@gmail.com Course: L.L.M Thesis
Master: International and European Law Track: European Union Law
Supervisor: Dr. Eva Kassoti Date of submission: 20/07/2020
2
INDEX
Abstract
3Introduction
4Chapter I: The current dispute settlement system used in TSD chapters of
EU FTAs.
9• Legal analysis 10
• Critical assessment 14
Chapter II: The sanction-based approach to dispute settlement mechanisms
in TSD chapters
17•
Legal analysis 19• Critical assessment 23
Chapter III: An alternative institutional designed for dispute settlement in
TSD chapters
27• The Permanent Court System 29 • The Principle of Autonomy of EU Law 31
Conclusion
353
ABSTRACT
Including environmental and labour provisions in EU FTAs (Free Trade Agreement) is becoming a common practice. With each new FTA, the EU tries to widen the scope of substantive commitments and obligations in the field of Sustainable Development. But it is not enough to regulate ambitious environmental or labour clauses if they are not effective in practice. Indeed, it is necessary to articulate a system of institutional effectiveness which guarantees that the goals pursued with those substantive provisions are achievable in practice. For its part, institutional effectiveness presupposed the existence of an operative dispute settlement system, based on certain aspects discussed in this thesis. Therefore, this thesis aims at examining whether the current dispute settlement system in EU TSD chapters is effective or not. Firstly, it argues that the existing dispute settlement system cannot be considered effective and, hence, TSD chapters do not enjoy institutional effectiveness. Secondly, it goes on to analyse what changes are necessary for the system to become effective, what other systems could prove to be better alternatives and what would be necessary to implement those systems in TSD clauses of EU FTAs. It starts arguing that, from a substantive point of view, a sanction-based system, that includes an arbitral panel with the competence to issue binding decisions and prescribe sanctions in case of non-compliance, can certainly provide the necessary effectiveness. Subsequently, this thesis discusses that, from an institutional point of view, a permanent court system could bring about a higher degree of effectiveness than the predominant ad hoc arbitration model.
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INTRODUCTION
Over the past years, the European Union´s trade and investment policy has undergone major changes. The establishment of an International Permanent Investment Court in agreements such as CETA1 or the launching of a new generation of Free Trade Agreements (FTAs) are examples of this process of evolution. However, one of the biggest changes experienced, not only in European trade policy but also in global trade policy, has taken place in the field of Sustainable Development. Indeed, nowadays more and more international trade agreements concluded by the EU include references to sustainable development in the form of specialised and differentiated chapters.
Sustainable development chapters (TSD2) currently implemented in EU FTAs include provisions related to labour rights and environmental standards. They often refer to international labour conventions or multilateral environmental agreements3 that the parties commit to respect and implement in their respective territories. In this sense, the parties to the agreement subject themselves to several obligations, such as: implementing those conventions and agreements in due time and form, taking appropriate measures when necessary to enforce the obligations included therein and not lowering environmental or labour standards in order to foster trade or investment.4 These chapters
normally make no difference between labour and environmental provisions, which are often included under the same heading.5 Even when they are separated into two chapters,
the content remains basically identical (especially regarding dispute settlement).6
The reasons behind the idea of including TSD chapters in EU international trade agreements are clear: the liberalization of trade and investment needs to go hand in hand with the protection of labour rights and the environment.7 A different approach would
1 Comprehensive Economic and Trade Agreement (CETA) between Canada, of the one part, and the European Union and its Member States, of the other part. Published on the Official Journal of the European Union the 14.01.2017, L11/23. Document 22017A0114(01).
2 The initials refer to ´´Trade and Sustainable Development´´ which is the heading normally used by the
European Union and its trade partners in their trade agreements to refer to sustainable development chapters.
3 See in this regard articles 23.3 and 24.4 CETA, respectively. 4 See, for example, art. 23.3,4 and 5 and art. 24.4,5 and 6 CETA.
5 In the case of the CETA agreement, chapter 22 refers to general norms of sustainable development while
chapters 23 and 24 are dedicated to labour rights and environmental standards respectively.
6For example, the provisions in chapters 23 and 24 CETA are essentially identical.
7 See in this regard Commission´s Communication to the European Parliament, the Council, the European
Economic and Social Committee and the Committee of the Regions, Trade for All, towards a more
5
certainly make international trade and investment unsustainable in the long term.8 Moreover, the EU is obliged by primary law to promote sustainable development in its external policy, specially under the common commercial policy.9 Furthermore, sustainable development also helps to protect European companies against unfair competition.10 A country that does not respect the same environmental or labour standards than the EU may well produce goods with less costs and trade them in Europe in similar conditions than European products, that is, with none or limited customs duties. Hence, if a country is to benefit from a liberalization of trade logic demands that that country must comply with similar standards than those complied with by European undertakings.11
According to the foregoing, it is obvious that the EU strives to implement sustainable development requirements around the world and its trade policy certainly constitutes a useful instrument. By granting trade and investment advantages and by using its economic strength, the EU could facilitate developing countries to implement and enforce sustainable development requirements through the conclusion of bilateral trade agreements. Indeed, there are numerous examples of FTAs concluded by the EU which include TSD chapters: EU and South Korea FTA, the Economic Partnership Agreement between the EU and Japan or the Comprehensive Economic and Trade Agreement between the EU and Canada12.
Point 4.2 makes clear the aim of the Commission to strive for sustainable development through its trade policy.
8Trade liberalization through FTAs may encourage countries to disregard environmental or labour
commitments in order to rapidly increase the level of production and decrease the cost attached to a grand scale production. Therefore, binding commitments on sustainable development are deemed essential to guarantee that environmental and labour norms are not overruled so as to increase production and decrease costs. See in this regard Commission´s Communication to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, Trade for All, towards a
more responsible Trade and Investment Policy, 14.10.2015, COM/2015/0497 final. Document
52015DC0497.
9 See articles 205 and 206 of the Treaty on the Functioning of the European Union, read in conjunction with
articles 21.2 and 3.5 of the Treaty on the European Union.
10 See in this regard, Marx, A., Ebert, F,. & Hachez, N., Wouters, J. “Dispute Settlement in the Trade and
Sustainable Development Chapters of EU trade agreements”. Leuven Centre for Global Governance Studies, 2017.
Commission´s Communication to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, Trade for All, towards a more responsible Trade and
Investment Policy, 14.10.2015, COM/2015/0497 final. Document 52015DC0497
11 European Parliament Resolution on human rights and social and environmental standards in international
trade agreements of 25 Nov. 2010 (2009/2219(INI)). Point B.
6
Having understood the importance of TSD chapters in EU FTAs, one question that arises relates to their effectiveness; in other words, are these chapters effective in practice? It is not enough to regulate ambitious labour and environmental standards unless their implementation is monitored, and enforceable mechanisms are available. Effective enforceability then turns out to be essential: a fundamental instrument that serves to secure that the agreed terms are respected. As stated by Bretherton and Niemann (2013, p.267), the general concept of effectiveness proves to be very difficult to accurately define. In the context of FTAs, we can distinguish between goal-attainment effectiveness, as the power of the EU to achieve its goals through the influence it exercises on other trade players (Van Schaik, 2013), and institutional effectiveness (effective enforceability), as the necessary support for the achievement of those goals. “In this way, institutional effectiveness presupposes goal-attainment effectiveness”.13 This thesis focuses on the institutional effectiveness of the existing TSD chapters included in EU FTAs, and hence, on the main aspect of such effectiveness (Elinor Ostrom, 2005): the existence of an operative Dispute Settlement Mechanism, where a third party settles the dispute by issuing binding resolutions and providing remedies, which are sufficient to address the issue in case of non-compliance and bring it to an end. All references to effectiveness are in accordance with the previous definition.
Consequently, the aim of this thesis is to analyse whether the current system of TSD enforceability implemented in EU FTAs is effective, in terms of including an operative dispute settlement mechanism as explained in the previous paragraph. In light thereof, the question that the thesis examines is whether TSD chapters in EU FTAs include effective dispute settlement mechanisms, and if not, what changes are necessary for the current dispute settlement system to become effective. It is enough to look at several documents of the EU institutions to see that the debate surrounding dispute settlement mechanisms in TSD chapters is intense and constant.14 Besides, there exists an incipient debate within
13 Marx, A., Ebert, F,. & Hachez, N. “Dispute Settlement for Labour Provisions in EU Free Trade
Agreements: Rethinking current approaches.” Politics and Governance, 5(4), 49-59, 2017.
14 Non-paper of the Commission services, “Feedback and way forward on improving the implementation
and enforcement of Trade and Sustainable Development chapters in EU Free Trade Agreements”. Published on the Official Journal of the European Union on the 26 of February 2018.
Non-paper of the Commission services, “Trade and Sustainable Development (TSD) chapters in EU Free Trade Agreements (FTAs).” Published on the Official Journal of the European Union on the 11 of July 2017.
Opinion of the European Economic and Social Committee on “Trade and Sustainable Development chapters (TSD) in EU Free Trade Agreements (FTA)”. Published on the Official Journal of the European Union on the 28th of June 2018. (2018/C 227/04).
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the academic literature as well. Some authors advocate the ´´different´´ character of TSD chapters to oppose to the establishment of a sanction-based approach. They believe the system should be reinforced by strengthening civil society participation and capacity-building, but it should still exclude sanctions, which empirically have not been proven to be more effective.15 On the other side, a growing group of experts and researchers attribute this lack of empirical evidence to other factors, such as: the short time that these sanction systems have been in place or the requirement to prove that the complaint is trade-related.16 I will shed light on this debate in the following chapters.
The thesis starts with a first chapter that examines and critically analyses the current dispute settlement system used by the EU with its trade partners: the cooperative approach.17 The analysis will involve both areas together (labour and environment) since
the differences between them, and especially regarding dispute settlement, are minimal. Nevertheless, I will refer to them separately when some specifications are deemed necessary. Then, the thesis moves on to explore alternative systems used in trade and investment policy worldwide (such as: the sanction-based and permanent court systems), and critically analyse whether they would provide more effective dispute settlement mechanisms in substantive and institutional terms.
The second chapter focusses on the substantive scope of the dispute settlement mechanism by analysing the opposite approach to the one taken by the EU: the sanction-based approach used by the US and Canada. I will argue that a sanction-sanction-based approach represents a better option than the EU cooperative approach, since it gives the arbitral panel competence to issue binding decisions and sanctions in case of non-compliance, thereby settling the dispute between the parties.
Briefing of the European Parliament Research Service “Trade and Sustainable development chapters in CETA”. Laura Puccio and Krisztina Binder. January 2017.
15 Marx, A., Ebert, F,. & Hachez, N. “Dispute Settlement for Labour Provisions in EU Free Trade
Agreements: Rethinking current approaches”. Politics and Governance, 5(4), 49-59, 2017.
Chayes, A., & Handler Chayes, A. “The new sovereignty: Compliance with international regulatory agreements”. Cambridge, MA: Harvard University Press, 1995.
It is worth mentioning as well that the only TSD dispute settlement procedure triggered in the context of EU FTAs is the EU-South Korea FTA, which is currently on the panel of expert’s phase.
16 Lowe, S. “The EU should reconsider its approach to trade and sustainable development”. Centre for
European Reform. 31 October 2019. To be consulted in WWW.CER.EU.
Jinnah, S. and Morgera, E. “Environmental Provisions in American and EU Free Trade Agreements: A Preliminary Comparison and Research Agenda”. Review of European Community & International Environmental Law, RECIEL 22 (3), 2013.
17 An ad hoc arbitral committee based on a cooperative approach to disputes which excludes the application
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The third chapter analyses whether a different institutional configuration18- an international permanent court as opposed to an ad hoc arbitral committee- is possible within the EU legal framework. For this purpose, this chapter will explore the bilateral permanent court system, included in the latest EU investment agreements,19 and the EU´s aspiration to transform the existing bilateral system into a Multilateral Court System. Finally, it includes a reflection and an evaluation of the conclusions achieved in each part, together with my personal view on the matter.
18 It is important to note that, currently, the predominant configuration is based on ad hoc arbitral
committees.
9
CHAPTER I: The current dispute settlement system used in TSD
chapters of EU FTAs.
The aim of this chapter is to outline the current structure of TSD dispute settlement in EU FTAs. For that purpose, I will first analyse the legal configuration of the existing dispute settlement mechanism for TSD chapters. Subsequently, I will make an evaluation of its effectiveness.
The EU and South Korea FTA20 (hereinafter: EU/SK) marked the beginning of an era of TSD chapters in EU FTA and, nowadays, we can find numerous examples of this kind: the Economic Partnership Agreement between the EU and Japan21 (hereinafter: EPA), the EU-Singapore trade and investment protection agreements22 (hereinafter: EU/SG), the
EU-Vietnam FTA23 (hereinafter: EU/VT) or the Comprehensive Economic and Trade
Agreement between the EU and Canada (hereinafter: CETA).24 All these FTAs include
TSD chapters with similar content, save specific exceptions. The parties recognise the binding force of TSD provisions and commit themselves to implement them swiftly and cooperatively.25 However, TSD chapters have a special, dialogue-based, dispute settlement mechanism that merely issues recommendations but have no power to impose sanctions or compel the defendant to undertake certain actions or omissions necessary to bring the violation of the law to an end.26
This approach has been identified as cooperative rather than punitive.27 It is based on the cooperative dialogue of both parties to the agreement and aims to bring the dispute to an
20 Free Trade Agreement between the European Union and its Member States, of the one part, and the
Republic of Korea, of the other part. Published on the Official Journal of the European Union on the 14th
of May 2011, L127. Document L:2011:127:TOC.
21 Economic Partnership Agreement between the European Union and its Member States, of the one part, and Japan, of the other part. Published on the Official Journal of the European Union on the 27th of
December 2018.L330/3. Document 22018A1227(01).
22 Free Trade Agreement between the European Union and its Member States, of the one part, and
Singapore, of the other part. Published on the Official Journal of the European Union on the 14th of
November 2019. L294/3. Document 22019A1114(01).
23 Free Trade Agreement between the European Union and its Member States, of the one part, and Vietnam,
of the other part. Available here: https://trade.ec.europa.eu/doclib/press/index.cfm?id=1437.
24 The mentioned FTAs will be used as examples in the following legal analysis of the dispute settlement
mechanism for EU TSD chapters, notwithstanding the fact that similar provisions are regulated in other EU FTAs as well.
25 See in this regard article 23.11(3) CETA
26 See, inter alia, articles 23.10 and 24.15 CETA, 16.18 EPA, 13.15 EU/SK, 13.17 EU/VT and 12.17
EU/SG.
27 Hradilová, Katerina & Svoboda, Ondrej. “Sustainable Development Chapters in the EU Free Trade
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end through constructive talks between the parties to the agreement. The Commission28 believes TSD provisions have a different nature than trade or investment provisions and cannot be placed under a dispute settlement mechanism with jurisdiction to issue sanctions. In the Commission´s view, dispute settlement mechanisms in this area must remain limited to decide whether the alleged infringement has taken place or not, leaving the parties to the agreement the task of finding the most appropriate methods to solve the situation. However, other institutions, such as the European Parliament, think otherwise29
– I will come back to this topic in the next part of this chapter.
In order to provide background to the discussion that will follow, I will now move to the legal analysis of the dispute settlement mechanism contained in TSD chapters.
1.1 Legal analysis
The dispute settlement procedure established for TSD chapters in EU FTAs consists of two phases: an intergovernmental first stage, similar to a mediation process, and a second stage where an arbitration committee is convened.
Government consultations.30
The objective of this phase is to cooperatively reach an agreement regarding TSD disputes. Similar to a mediation process, the parties commit themselves to try to find a common solution before referring the dispute to the panel of experts.31
The procedure must be initiated by a party to the agreement, who must send a written request to the other party.32 Consequently, the right of initiative, the right to activate this
28 Non-paper of the Commission services, “Feedback and way forward on improving the implementation
and enforcement of Trade and Sustainable Development chapters in EU Free Trade Agreements”. Published on the Official Journal of the European Union on the 26 of February 2018.
Non-paper of the Commission services, “Trade and Sustainable Development (TSD) chapters in EU Free Trade Agreements (FTAs)”. Published on the Official Journal of the European Union on the 11 of July 2017.
29 As a reflexion of this discussion see Bronckers, M. and Gruni, G. “Taking the enforcement of labour
standards in the EUs Free Trade Agreements seriously”. Common Market Law Review 56, 1591–1622, 2019.
See also “The future of Sustainable Development Chapters in EU free trade agreements”, Policy Department for External Relations, Director General for External Policies of the Union. WORKSHOP. PE 603.877- July 2018.
Briefing of the European Parliament Research Service “Trade and Sustainable development chapters in CETA”. Laura Puccio and Krisztina Binder. January 2017.
30 Articles 23.9 and 24.14 CETA, 16.17 EPA, 13.14 EU/SK, 13.16 EU/VT and 12.16 EU/SG.
31 Articles 23.10 (1) and 24.15 (1) CETA, 16.18 (1) EPA, 13.15 (1) EU/SK, 13.17 (1) EU/VT and 12.17
(1) EU/SG.
32 Articles 23.9 (1) and 24.14 (1) CETA, 16.17 (2) EPA, 13.14 (1) EU/SK, 13.16 (2) EU/VT and 12.16 (2)
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procedure when a dispute regarding TSD chapters arises, falls exclusively on the parties to the agreement (the States), that is, the EU and its respective trade partners. Civil society organisations cannot legally compel the parties to initiate government consultations.33 The EU and its trade partners enjoy the utmost discretion when deciding whether to initiate government consultations (and when needed, panel of experts). Some authors have criticized the little room conferred to civil society under this procedure.34 We will come back to this discussion at the end of this chapter.
The written request must mention in detail the actions or omissions which, in view of the party submitting the request, are violating the provisions of the TSD chapter. The problem that the requesting party has identified must be clearly established, together with the complaints related thereto.35 The parties must start consultations as soon as possible and
cooperate to solve the dispute.36
On the other hand, this phase also includes a possible sub-phase to be employed when one party considers that the matter requires further discussion.37 This sub-phase refers to the possibility of involving the Trade and Sustainable Development Committee (an institutional mechanism established under each FTA) that will have to discuss the matter and help the parties reach an agreement. Moreover, both parties may seek the advice of their respective domestic advisory groups, apart from consulting environmental NGOs or the International Labour Organisation, if they consider it necessary.38 Consequently, we can say that the EU tries to compensate the fact that civil society organisations cannot initiate this procedure by conferring them a certain degree of participation in the consultations.
33 See, for example, articles 23.9 (3) and 24.14 (3) CETA.
34 Ebert, F.C. “Labour provisions in EU trade agreements: What potential for channelling labour
standards-related capacity building?”, in International Labour Review, 155, 3, pp. 407-433, 2016.
35 Articles 23.9 (2) and 24.14 (2) CETA, 16.17 (4) EPA and 13.16 (2) EU/VT.
36 Articles 23.9 (1) and 24.14 (1) CETA, 16.17 (3) EPA, 13.14 (2) EU/SK, 13.16 (3) EU/VT and 12.16 (3)
EU/SG.
37 Articles 23.9 (4) and 24.14 (4) CETA, 16.17 (5) EPA, 13.14 (3) EU/SK, 13.16 (4) EU/VT and 12.16 (4)
EU/SG.
38With respect to consulting other organisations, articles 23.9 (3) and 24.14 (3) CETA, 13.16 (3) EU/VT or
12.16 (3) EU/SG, inter alia, require common accord of the parties to the agreement if the advice is sought directly by them, or just the decision of the TSD Committee when the matter has been referred to this organ. Considering that this Committee is composed of representatives of both parties´ governments, we may say that participation of civil society organisations in this procedure requires mutual agreement of the parties- being each party capable of blocking this possibility by merely opposing.
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Panel of Experts.39
If an agreement is no reached in consultations within a specific time, each of the parties may decide to convene a Panel of Experts.40 This panel party functions as an arbitral tribunal and, after hearing the parties and recovering the necessary evidences, it will deliver a report detailing the relevant findings.41
Regarding the composition, the panel will consist of three members.42 The Committee on
Trade and Sustainable Development must develop a list of potential candidates43, among whom, the members of the panel may and should be selected. The selection is carried out by the parties´ common accord.44 However, if they cannot reach an agreement within a
prescribed period of time, different alternative methods haven been introduced. For example, the CETA agreement refers to the rules of composition of the arbitral panel on trade provisions45; in the EU/SG46 or the EPA47 agreements, the designation will be done by lot among the potential candidates referred beforehand. In all cases, the members of the panel must have special knowledge in labour law, environmental law or in dispute settlement, apart from fulfilling certain personal characteristics, such as: being independent, not being affiliated to any government and being recognised professionals in their respective fields.48 Besides, in order to guarantee the independence of the panel, TSD chapters also include the obligation of appointing a national of a third State (not party to the agreement) as chairperson of the panel.49
The tasks50 of the panel of experts are analysing the case referred by the parties and drawing up a report including the relevant findings. This report must contain the findings of fact, the interpretation of the provisions of the TSD chapter, the determination of
39 Articles 23.10 and 24.15 CETA, 16.18 EPA, 13.15 EU/SK, 13.17 EU/VT and 12.17 EU/SG.
40 Articles 23.10 (1) and 24.15 (1) CETA, 16.18 (1) EPA, 13.15 (1) EU/SK, 13.17 (1) EU/VT and 12.17
(1) EU/SG.
41 Articles 23.10 (11) (12) and 24.15 (10) (11) CETA, 16.18 (5) EPA, 13.15 (2) EU/SK, 13.17 (8) EU/VT
and 12.17 (8) EU/SG.
42 Articles 23.10 (3) and 24.15 (3) CETA, 16.18 (4) EPA, 13.15 (3) EU/SK, 13.17 (5) EU/VT and 12.17
(5) EU/SG.
43 Articles 23.10 (6) and 24.15 (6) CETA, 16.18 (4) EPA, 13.15 (3) EU/SK, 13.17 (3) EU/VT and 12.17
(3) EU/SG.
44 Articles 23.10 (4) and 24.15 (4) CETA, 16.18 (4) EPA, 13.15 (3) EU/SK, 13.17 (5) EU/VT and 12.17
(5) EU/SG.
45 Articles 23.10 (5) and 24.15 (5). 46 Article 12.17 (5).
47 Article 16.18 (4).
48 See, for example, articles 23.10 (7) and 24.15 (7) CETA or 13.17 (4) EU/VT. 49 Articles 16.18 (4) EPA, 13.15 (3) EU/SK, 13.17 (5) EU/VT and 12.17 (5) EU/SG.
50 Articles 23.10 (11) (12) and 24.15 (10) (11) CETA, 16.18 (5) EPA, 13.15 (2) EU/SK, 13.17 (8) EU/VT
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whether there has been an infringement or not and to what extent and the rationale behind all the findings. The panel of experts can include appropriate recommendations to solve the matter.51 It must be emphasized that the panel proposes recommendations and suggestions, but in no case, oblige the parties to undertake specific obligations or impose sanctions. In drafting the report, the panel may ask and receive specialised reports from other experts or organisations.52
The procedure53 consists of three phases. Firstly, the panel will examine the facts, the
documents and the evidences presented by the parties and other groups. Secondly, the panel will issue an interim report that can be contested by the parties in their observation writings. Lastly, after considering the parties´ observations, the panel will issue a final report that will be made public.
When the report concludes that there has been a violation of a TSD provision, the parties must open a debate and try to find appropriate solutions, taking utmost account of the relevant findings and recommendations included thereto.54 The Trade and Sustainable Development Committee must monitor the implementation of the final report.55 The joint dialogue with civil society and the domestic advisory groups may present observations to the Committee.56
Lastly, TSD chapters include a clear provision that obliges the parties to only rely on the dispute settlement procedure established under these chapters.57 No other system, neither inside nor outside the agreement, can be used to deal with disputes relating to TSD provisions.
51 Ibid.
52 This provision undoubtedly refers to the possibility of presenting amicus curiae documents and seems to
strengthen the position of civil society, which can intervene in this phase of the procedure without needing the mutual agreement of the parties.
53 Articles 23.10 (11) (12) and 24.15 (10) (11) CETA, 16.18 (5) EPA, 13.15 (2) EU/SK, 13.17 (8) EU/VT
and 12.17 (8) EU/SG.
54 Articles 23.10 (12) and 24.15 (11) CETA, 16.18 (6) EPA, 13.15 (2) EU/SK, 13.17 (9) EU/VT and 12.17
(9) EU/SG.
55 Ibid. 56 Ibid.
57 Articles 23.11 (1) and 24.16 (1) CETA, 16.17 (1) EPA, 13.16 EU/SK, 13.16 (1) EU/VT and 12.16 (1)
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1.2 Critical assessment
After examining the relevant legal provisions, it is common ground that TSD chapters are not subject to an effective dispute settlement mechanism. The European Parliament or the European Economic and Social Committee58 advocate for a different approach that can
make the dispute settlement system more effective. In other words, they advocate for the introduction of a real mechanism capable of settling the disputes by issuing sanctions and binding decisions. In the same line, relevant contributions in the academic literature call for a change in the system to address its current deficiencies.59 They particularly take the
view that a sanction-based approach, as employed by the US or Canada in their trade agreements, could be more appropriate.60 Nonetheless, the Commission differs61 and, in
its view, there is nothing that guarantees that a sanction-based approach will increase the enforceability of these chapters. The Commission takes the view that a cooperative approach (the system currently used in TSD chapters concluded by the EU) would certainly provide better outcomes, which are based on agreed and concerted actions and commitments.62
However, it is argued here that, contrary to the Commission´s argument, indeed there are several weaknesses in the current system. The remainder of this section will identify and analyse them.
58 Opinion of the European Economic and Social Committee on “Trade and sustainable development
chapters (TSD) in EU Free Trade Agreements (FTA)”. Published on the Official Journal of the European Union on the 28th of June 2018. C 227/04.
Briefing of the European Parliament Research Service “Trade and Sustainable development chapters in CETA”. Laura Puccio and Krisztina Binder. January 2017.
59 Lowe, S. “The EU should reconsider its approach to trade and sustainable development”. Centre for
European Reform. 31 October 2019. To be consulted in WWW.CER.EU.
Marx, A., Ebert, F,. & Hachez, N. “Dispute Settlement for Labour Provisions in EU Free Trade Agreements: Rethinking current approaches”. Politics and Governance, 5(4), 49-59, 2017.
Marx, A., Ebert, F,. & Hachez, N., Wouters, J. ´´Dispute Settlement in the Trade and Sustainable Development Chapters of EU trade agreements´´. Leuven Centre for Global Governance Studies, 2017.
60 I will discuss this view in the next chapter, where I will address the substantive scope of a dispute
settlement mechanism.
61 Non-paper of the Commission services “Trade and Sustainable Development (TSD) chapters in EU Free
Trade Agreements (FTAs)”. Published on the Official Journal of the European Union the 11th of July 2017.
Non-paper of the Commission services “Feedback and way forward on improving the implementation and enforcement of Trade and Sustainable Development chapters in EU Free Trade Agreements”. Published on the Official Journal of the European Union on the 26th of February 2018.
62 I will come back to explain the Commission´s arguments against a sanction-based approach in the next
15
In the first place, government-government consultations seem to be a valid and effective way to start a dispute settlement procedure. Giving the parties the opportunity to debate and share their concerns with a view to amicably solving the dispute can just be welcome. However, as I have mentioned before, reserving the right of initiative to the parties of the agreement may decrease enforceability by limiting the number of concerns or issues to be discussed. The introduction of mechanisms whereby civil society organisations can make their views heard and, in some instances, oblige the parties to start consultations, could constitute a valid way of improving the current system.63 Nevertheless, even though
there is still much room for debate and research surrounding this topic, it is not in the centre of this thesis.
In the second place, we can find more deficiencies in the panel of expert phase. It does not represent an effective last phase of a dispute settlement mechanism since the panel does not settle any dispute; it merely acts as an expert body that issues recommendations but have no power to decide an appropriate and equitable outcome.64 The parties are free to adopt any measures they deem necessary and, even though there are supposed to comply with the panel´s report, it is totally within their competence to agree on a proper solution to the case.65
Moreover, the report does not have to include specific measures to be adopted by the parties, it determines whether there has been a violation of a TSD provision and to what extent, and it may propose some ways of dealing with the situation. Therefore, the panel of experts merely determines the existence of a breach of the law, which may place some pressure on the infringing party, that now has been declared in violation of a TSD provision by an independent body, but in no case, can it substitute a true arbitral
63 See Opinion of the European Economic and Social Committee on “Trade and sustainable development
chapters (TSD) in EU Free Trade Agreements (FTA)”. Published on the Official Journal of the European Union on the 28th of June 2018. C 227/04.
64 Bronckers, M. and Gruni, G. “Taking the enforcement of labour standards in the EUs Free Trade
Agreements seriously”. Common Market Law Review 56, 1591–1622, 2019.
Jinnah, S. and Morgera, E. “Environmental Provisions in American and EU Free Trade Agreements: A Preliminary Comparison and Research Agenda”. Review of European Community & International Environmental Law, RECIEL 22 (3) 2013.
65 Currently, there is no practical example in this regard. However, the legal terminology is clear: once the
panel has issued its report, the parties must convene again and try to find a solution to the case. EU FTAs do not specify any further measures to be adopted when the recommendations are not followed. Moreover, the use of the term ´´recommendations´´ seems to strengthen the non-binding character of the panel of experts´ report. In the end, the final word is on the parties, who can freely adopt any measures they deem appropriate to solve the problem.
16
committee with competence to sanctioned or compelled the defendant to undertake certain actions.
Furthermore, the specific prohibition to rely on different dispute settlement systems only clarifies that the EU does not wish to place Sustainable Development in the same level than Trade or Investment.66 All in all, the success of the panel of experts´
recommendations depends on the parties´ willingness to undertake obligations in this area; on the claimant´s willingness to press its counterpart through trade sanctions or other diplomatic instruments and on the defendant´s willingness to comply with the panel´s report. Hence, we cannot say this system is truly effective.
Lastly, there is also some degree of concern related to ad hoc committees individually set up for each case. Some authors67 advocate for the inclusion of a permanent court system
as it has already been done in investment chapters.68
In conclusion, it is now common ground that the cooperative approach followed by the EU does not represent an enforceable and effective dispute settlement system. On the contrary, a sanction-based approach certainly seems a better option, since the arbitral panel would enjoy competence to issue binding decisions and sanctions in case of non-compliance with its report. The thesis now moves on to analyse that approach.
66 Cuyvers, L. “The sustainable Development Clauses in Free Trade Agreements of the EU with ASIAN
Countries: Perspectives for ASEAN?” Journal of Contemporary European Studies, Vol. 22, No. 4, 427-449, 2014.
Scherrer, C.; Greven, T.; Leopold, A.; Molinari, E. “An analysis of the relative effectiveness of social and environmental norms in free trade agreements”. Brussels: European Parliament. 2009.
67 See literature included in notes 137, 138 and 139. 68 See, for example, chapter 8 of CETA.
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CHAPTER II: The sanction-based approach to dispute settlement
mechanisms in TSD chapters
The thesis moves now to examine an alternative substantive approach to dispute settlement: the sanction-based system. In the following sections, I will introduce the discussion within the institutions and the academic literature in this field and explain the legal configuration of the most relevant existing sanction-based systems. Finally, this chapter includes a critical analysis of those systems.
For many years, the European Parliament has been calling for changes in the dispute settlement system of TSD chapters in EU FTA.69 It has asked the European Commission to implement a sanction mechanism in cases of non-compliance with the panel of experts´ report.70 In the same vein, the European Economic and Social Committee has concluded
that different amendments are necessary in order to increase enforceability of TSD chapters.71 The Committee also takes the view of the European Parliament and clarifies
that the use of sanctions should be further explored by the Commission.72 However, the Commission seems to reject a sanction-based approach by merely saying that economic compensation cannot be used in case of a breach of a TSD provision, since it would not always be possible to economically quantify the breach.73 Moreover, it affirms that
compensation will not necessarily result in ´´effective, sustainable, and lasting improvements´´ of TSD provisions.74 Furthermore, the Commission believes that sanctions are appropriate in case of TSD chapters of a narrow scope (such as the US or
69 European Parliament Resolution on human rights and social and environmental standards in international
trade agreements of 25 Nov. 2010 (2009/2219(INI)).
Van den Putte, L. “Divided We Stand: The European Parliament’s Position on Social Trade in the Post-Lisbon Era”, in, Marx, A., et al. (eds.) Global Governance of Labour Rights Cheltenham: Edward Elgar. 2015.
70 European Parliament Resolution on implementation of the 2010 recommendations of Parliament on
social and environmental standards, human rights and corporate responsibility of 5 July 2016 (2015/2038(INI))
71 Opinion of the European Economic and Social Committee on “Trade and Sustainable Development
chapters (TSD) in EU Free Trade Agreements (FTA)”. Published on the Official Journal of the European Union on the 28th of June 2018. (2018/C 227/04).
72 Point 4.6 and 4.7 of the abovementioned Opinion.
73 Non-paper of the Commission services, “Feedback and way forward on improving the implementation
and enforcement of Trade and Sustainable Development chapters in EU Free Trade Agreements”. Published on the Official Journal of the European Union on the 26 of February 2018.
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Canada TSD chapters), but not for ambitious and broad TSD chapters, as in the case of the EU.75
From a legal point of view, the Commission´s view against sanction-based systems lacks sufficient basis. In the first place, it only considers sanctions taking the form of financial compensation quantified in accordance with the economic losses suffered by the claiming party due to the breach of a TSD provision. Nonetheless, there are numerous other types of sanctions available in legal and economic literature.76These include fines or periodic
penalty payments, which, in principle, do not required an economic quantification of the damage.77 In the second place, saying that sanctions will not necessarily result in
´´effective, sustainable and lasting improvements´´ of TSD provisions is a vague declaration since there is nothing to suggest that a cooperative approach will result in more ´´effective, sustainable and lasting´´ improvements either. Finally, a broad TSD chapter could be perfectly placed under a sanction-based system, as long as it includes provisions which clearly and unconditionally prescribe obligations for the parties.78 The parties should explore this issue when negotiating the agreement and exclude from the scope of the dispute settlement any provisions which do not represent a clear and precise obligation. Saying that TSD provisions do not include any clear and precise obligation whatsoever is just false.79
Currently, there is just one EU FTA which includes a sanction-based dispute settlement system, as opposed to the common system explained in the previous chapter: the EU-CARIFORUM Economic Partnership Agreement (hereinafter EU-EU-CARIFORUM).80 Outside the EU scope, the US and Canada systems are the most relevant sanction-based mechanisms currently active in international trade.
75 Ibid
76 Charnovitz, S. “Rethinking WTO Trade Sanctions”, in American Journal of International Law, 95, 4, pp.
792-831, 2001.
Falkner, “Fines against Member States: An effective new tool in EU infringement proceedings?”, 14
Comparative European Politics 36, 2016.
77 To this respect, we can look at the practice of the EU in infringement procedures. The sanctions there
employed are periodic penalty payments and lump sum (fines). See Communication from the Commission on the application of article 228 of the EC Treaty. SEC 2005 1658.
78 Scherrer, C.; Greven, T.; Leopold, A.; Molinari, E. “An analysis of the relative effectiveness of social
and environmental norms in free trade agreements”. Brussels: European Parliament. 2009.
79 Provisions that refer to the implementation of labour conventions and environmental agreements or the
prohibition to reduce existing standards in order to foster trade and investment are examples of clear and precise obligations. See for example arts. 23.3 and 4 and 24.4 and 5 CETA.
80 Free Trade Agreement between the European Union and its Member States, of the one part, and the
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According to the foregoing, we will dedicate the following sections of this chapter to analyse the inclusion of a sanction-based approach in the EU system of TSD chapters. Firstly, the chapter goes on to explain the main legal features of the abovemention systems. It also discusses the different available sanctions for TSD chapters and their main characteristics. Secondly, this chapter critically examines the analysis carried out in the first section by highlighting the deficiencies of the existing sanction-based systems and proposing alternatives.
2.1 Legal analysis
In order to provide the necessary legal background for the following analysis and subsequent discussion, I will start by describing the different types of sanctions that could be envisaged in a dispute settlement mechanism.81 For the purposes of the current
research, these sanctions will only be analysed from the point of view of a dispute settlement in TSD chapters, that is, sanctions that could be imposed by the panel of experts in case of non-compliance with its final report.
Trade sanctions. Suspending trade concessions or imposing embargos are examples of this type of sanctions. Obviously, given the fact that these sanctions also oblige the complaining party to undertake specific actions that may provoke similar reactions by the other party, their imposition should remain outside the competence of the arbitral panel. This type of sanctions should remain as last resort, when the infringing party systematically refuses to comply with the panel of experts´ report as well as to pay the imposed fines or periodic payments.82
Financial compensation. It is true, as the Commission sustains,83 that economically
quantifying a breach of a TSD provision may prove impossible in some cases.84
Therefore, I also take the view that financial compensation should not be included in a sanction-based system applicable to TSD provisions, at least not as the sole remedy. This does not mean that an economic quantification of TSD provisions is ruled out in all cases,
81 See in this regard the literature included in notes 76 and 77.
82 Besides, this is already provided for in several EU FTAs for cases of systematic non-compliance in Trade
disputes. See art. 29 CETA, for instance.
Wybe T. Douma, “The Promotion of Sustainable Development through EU Trade Instruments”, 28(2) Eur. Bus. L. Rev. 216, 2017.
83 See note 73.
84Such as: the violation of an obligation to implement a certain labour or environmental convention or the
failure to provide enough procedural guarantees in domestic cases concerning implemented environmental or labour standards.
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but that there are, in my opinion, other more appropriate penalties that could be employed in every situation.
Fines and periodic penalty payments. Imposing a single or periodic payment in case of non-compliance with the panel of experts´ report finds no legal impediment whatsoever. For the sake of legal certainty, the parties to the agreement should agree on certain guidelines or annexes that prescribe the rules to be followed by the panel of experts when calculating the fine (GDP of the infringing State, importance of the rule violated, duration of the violation and so on).85.
We now move to explain the main features of the most important existing sanction-based systems in order to prepare the reader for the critical assessment that will follow.
EU-CARIFORUM FTA
The EU-CARIFORUM is the only EU FTA that includes sanctions in case of a violation of a TSD provision. Therefore, it contradicts the previously explained Commission´s argument that sanction-based dispute settlement systems present certain unbridgeable legal problems. The EU-CARIFORUM FTA has a specific dispute settlement mechanism for TSD chapters86, which is complemented by the possibility of initiating the ordinary dispute settlement procedure intended for trade conflicts.87
The procedure starts with government consultations.88 If no agreement is reached the parties may convene a Committee of Experts that will deliver a report about the matter at issue.89 During this part of the procedure, the parties may seek the advice of relevant international organisations or expert bodies.90 This part of the procedure is specific for TSD disputes and it is basically identical to the TSD dispute settlement procedure analysed in the previous chapter.
85 Canada incorporates this type of criteria when calculating the ´´monetary assessment´´ to be paid. See
note 116.
The EU already has experience with similar provisions existing in the framework of infringement procedures under EU law. See Communication from the Commission on the application of Article 228 of the EC Treaty, SEC (2005) 1658.
86 Part II, Title IV, Chapter 4 (environment) and Chapter 5 (labour). 87 Part III, Chapter 2
88 Arts. 189.4(environment) and 195.4 (labour).
89 Arts. 189.5 and 6 (environment) and 195.5 and 6 (labour). 90 Arts. 189.3 (environment) and 195.3 (labour).
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If the outcome of the previous phase is unsatisfactory each party may request the establishment of an arbitral panel91 and the general procedure for trade disputes starts. The panel will issue an interim report92, which can be contested by the parties, and, subsequently, a final report93, elaborating on the relevant findings of the case and including recommendations of how to bring the violation to an end.94 Each party shall take all necessary measures to comply with the panel´s ruling within a reasonable period of time.95 This period of time can be agreed by the parties96, but in case of disagreement,
the arbitral panel will determine the time that the infringing party has to comply with the ruling.97
After the expiry of the reasonable period of time, if the party complained against has not notified any measures to comply with the panel´s ruling or has notified measures declared insufficient or against the treaty by the panel, the complaining party may request compensation.98 The amount of compensation must be agreed by the parties.99 In case of
disagreement, the complaining party may adopt ´´appropriate measures´´ of temporary nature in order to put pressure on the party complained against.100 For TSD disputes, adopting appropriate measures cannot lead to the suspension of trade concession under the EU-CARIFORUM agreement.101
US sanction-based system
The US has concluded numerous FTAs102 with a sanction-based dispute settlement for TSD provisions since the adoption of the North America Free Trade Agreement (NAFTA). In general, these agreements allow the parties to submit environmental or labour related complaints to the ordinary dispute settlement procedure provided for trade disputes. After having exhausted different consultative mechanisms, each party may
91 Art. 206 92 Art. 208 93 Art. 209 94 Art. 209.3 finale 95 Arts. 210 and 211 96 Art. 211.1 97 Art. 211.2 and 3 98 Art. 213.1 99 Art. 213.1 100 Art. 213.2 and 4 101 Art. 213.2 finale
102 Examples of the latest US FTAs are: US-South Korea FTA, the US-Colombia FTA or the US-Panama
FTA. In order to shed light on the latest developments in the field of US Sustainable Development enforcement, I will use the US-South Korea FTA as example. Available in this link https://ustr.gov/trade-agreements/free-trade-agreements/korus-fta/final-text.
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request the establishment of an arbitral panel that will rule on the matter.103 If the party complained against is found in violation of an environmental or labour provision it must take all appropriate measures to solve the situation.104 The parties must agree on the necessary steps to solve the infringement in accordance with the panel´s recommendations.105 In case of disagreement, the complaining party may request compensation, which needs to be agreed again by the parties.106 When there is disagreement in this issue as well or the terms agreed are not respected, the complaining party can suspend trade concessions of equivalent value.107 As we can see, the system is
quite similar to the EU-CARIFORUM FTA.
In the earliest US agreements, TSD disputes could only be brought to the arbitral panel in very specific cases, normally concerning the enforcement of domestic labour or environmental provisions108 or for matters affecting trade.109 However, the trend has
evolved over time, and the latest agreements make no discrimination for TSD chapters110,
that is, all disputes concerning labour or environmental provisions can be brought to the arbitral panel.
Canadian sanction-based system
TSD provisions are normally agreed in separate side agreements, namely Agreements on Labour Cooperation (ALC) and Agreements on Environmental Cooperation (AEC).111 In the first case, all ALC prescribe an autonomous sanction-based dispute settlement.112 It starts with consultations113 and, subsequently, each party may convene an arbitral panel.114 This panel will review whether the party complained against has effectively
103 Art. 22.9 US-South Korea FTA. 104 Art 22.12 US-South Korea FTA 105 Art. 22.12 US-South Korea FTA 106 Art. 22.13(1) US-South Korea FTA 107 Art. 22.13(2) US-South Korea FTA 108 For example, in NAFTA.
109 For example, in the US-Guatemala FTA. 110 See note 102
111 Notwithstanding the fact that the CETA agreement constitutes an exemption in this respect and includes
two TSD chapters within the FTA. Besides, this is the only Canadian FTA that excludes sanctions with respect to labour cooperation provisions, notably due to EU pressure.
112 See for example Canada-Colombia Agreement on Labour Cooperation, Part 2 and Annex 3 and 4. I will
use the provisions of this agreement as example since it is one of the latest ALC concluded by Canada and reflects very well the current trend in dispute settlement for labour provisions. Available in this link
https://www.canada.ca/en/employment-social-development/services/labour relations/international/agreements/colombia.html#ccalc.
113 Art.12 Canada-Colombia ALC. 114 Art. 13 Canada-Colombia ALC
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failed to fulfil its obligations, in a trade-related matter115. The most notable difference with the US system can be found in the imposition of the ´´monetary assessment´´116, which is directly imposed by the panel (not agreed by the parties) when the party complained against fails to comply with the panel´s final report.117 Moreover, in case of non-voluntary payment of this monetary assessment, the parties can turn to the domestic procedures of each other´s jurisdictions to seek enforcement.118 Canada relies on domestic enforcement of payment while the US relies on suspension of trade concessions.
In the second case, almost all Canada´s AEC do not provide for the possibility of imposing sanctions.119 Moreover, in many cases, amicable consultations are the only
procedure available for non-compliance with environmental provisions.120
2.2 Critical assessment
Despite the existence of numerous examples of TSD provisions in FTAs or side agreements, there are just a few examples of cases when a dispute settlement procedure was triggered. This has been the situation with respect to both EU FTAs and non-EU FTAs.121 In the same way, sanction-based systems have only been triggered in a few occasions.122 Consequently, due to the lack of empirical evidence, the examination carried out in this section will be done from a theoretical point of view.
To start with, it is convenient to highlight that some of the deficiencies presented in this section are common to the three systems analysed previously, whereas others are specific to a particular FTA/s.
In the first place, all three previous systems are characterised by an extreme length and complexity. In particular, in the EU-CARIFORUM FTA, the parties may end up going
115 Art. 13 Canada-Colombia ALC. Indeed, a review by an arbitral panel of violations of the ALC can only
be carried out when the issue is trade related.
116 This monetary assessment takes the form of a fine imposed in accordance with several criteria regulated
in Annex 4 point 1 Canada-Colombia ALC. This criteria is quite similar to the one employed by the Court of Justice of the European Union in its case-law on infringement procedures (duration of the infringement, seriousness, efforts made to comply with the panel´s final report…).
117 Arts. 19 and 20 Canada-Colombia ALC
118 Annex 4 point 3 for procedures carried out in Canada and Annex 4 point 4 for procedures carried out in
Colombia.
119 See for example AEC between Canada and Costa Rica and between Canada and Panama. 120 See for example AEC between Canada and Colombia.
121 In the case of the EU, just one dispute has arisen so far, concerning the EU-South Korea FTA. Currently,
the panel is deliberating before issuing its final report.
122 In the case of the US, only one case has reached the last phase of the sanction-based dispute settlement
procedure: the US-Guatemala FTA case. However, the claim was dismissed by the panel who could not find any trade relation with the Sustainable Development violation.
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through five different phases, or even six in case of labour complaints.123 This complexity and length prevent many complaints from being submitted. A party will likely only consider initiating this procedure for very serious breaches of TSD provisions, leaving behind many other important complaints. Therefore, the effective enforcement of many TSD provisions could never be triggered. A shortening of this procedure, by eliminating superfluous phases124, should be further considered by trade partners.
In the second place, the EU-CARIFORUM FTA and the US system only prescribe the use of sanctions in the form of compensation. As previously explained, financial compensation may not always be an appropriate sanction for TSD breaches. It would require the complaining party to prove, inter alia, the production of an economically quantifiable damage, which, in some cases125, may not be possible. The choice of
compensation seems to respond to the fact that both systems rely on the general dispute settlement procedure for trade, rather than establishing an autonomous mechanism for TSD cases. However, other types of sanction such as fines or periodic payments, which do not require the existence of an economically quantifiable damage, can work better for TSD disputes.
Moreover, these two systems require the parties to agree on the compensation to be paid. The panel of experts must limit itself to set the findings of fact (whether there has been a violation or not or whether the party complained against has failed to comply with the panel´s report) and issue recommendations of how to bring the infringement to an end. It may result contradictory to require two parties in a trial to agree on how much the party complained against will pay the complaining party. It is highly likely that such agreement never takes place. In this respect, by giving the panel jurisdiction to determine the appropriate fine or payment, the parties subject themselves to a real dispute settlement procedure where a third party decides the outcome of all aspects of the case.
Furthermore, the requirement of an agreement on compensation obliges these systems to establish a last resort instrument when no agreement can be achieved. The EU-CARIFORUM speaks of ´´appropriate measures´´ and explicitly excludes the suspension
123 Government consultations, Committee of Experts (plus mediation in case of labour complaints), two
reports of the arbitral panel, consultations for an agreement on compensation and the adoption of other ´´appropriate measures´´. In the end, an extremely complex, lengthy and costly procedure.
124 For example, the mediation phase and the consultations for an agreement on compensation could be
perfectly removed. In addition, the Committee of Experts could be convened for the entire process without having to be set up as a specific phase.
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of trade concessions. The US system, for its part, allows the adoption of trade suspensions. Regarding the former, blocking the suspension of trade concessions in any case concerning a violation of a TSD provision ties the hands of the complaining party126 and seems to collocate Sustainable Development below trade. Consequently, the prohibition of adopting trade suspensions should also be removed. A State should always have this option, as it has for trade or investment matters. However, the suspension of trade concessions should remain outside the scope of this dispute settlement procedure and be only used by decision of each State whenever it considers necessary.127
In this context, the Canadian system seems to provide a better alternative. Firstly, because sanctions take the form of a ´´monetary assessment´´ (a fine) and are calculated in accordance with fixed criteria128, which do not depend on the existence of an
economically quantifiable damage. Secondly, the monetary assessment is directly imposed by the arbitral panel, thereby leaving the competence to decide all the aspects of the case to the arbitral panel.129 Lastly, Canadian ALCs provide for the enforcement of the monetary assessment through domestic procedures130, a method that can be employed when the infringing party refuses to pay.
Nevertheless, the Canadian system also presents major deficiencies. All cases concerning labour disputes must prove to be trade related. This requirement can prevent many crucial cases from ever being subjected to dispute settlement since TSD provisions are not necessarily trade related. Besides, practically all AEC are excluded from the scope of the dispute settlement system; and exclusion that finds no legal reason.131
126 There are not many actions that a complaining State could undertake against its trade partner who refuses
to cease in its infringement as well as to pay appropriate compensation. Suspension of trade concession is an instrument designed to put pressure on the infringing State when no other remedies are available and excluding its adoption in all cases regarding TSD provisions certainly increases the bargaining power of the infringing State.
127 Charnovitz, S. “Rethinking WTO Trade Sanctions”, in American Journal of International Law, 95, 4,
pp. 792-831, 2001.
128 See note 116
129 In this way, the system becomes shorter (no further consultations to agree on compensation are required)
and more effective (the arbitral panel does settle the dispute by determining the existence of a violation and the fine to be imposed in case of non-compliance).
130 The parties can have recourse to domestic enforcement of the fines instead of having to go through
consultations or having to undertake other, more serious, measures (such as a suspension of trade concessions). This last measure may provoke numerous ´´side effects´´: negative economic effects on both parties’ economies, diplomatic retaliation, practical breach of the FTA and so on. Therefore, having another avenue to enforce payment of fines is a good alternative.
131 It seems that Canada offers a true enforceable and effective dispute settlement system, but potentially
excludes a great number of labour (trade relation requirement) and environmental (prohibition of initiating the very procedure) issues from the scope of this system.
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All in all, we can conclude that a sanction-based system offers a better option for enforcement of TSD chapters than a cooperative system. However, the current systems need to be reshaped in order to accommodate the concerns discussed above and become truly effective. Therefore, in summary, a sanction-based system should present the following characteristics: a short and rapid procedure (government consultations and establishment of an arbitral panel), all TSD issues being admitted (both environmental and labour provisions with no trade-related requirement), the imposition of sanctions in case of non-compliance with the panel´s report should be directly done by the panel, these sanctions should take the form of fines or periodic payments calculated in accordance with well-defined criteria and enforcement procedures in case of non-payment of the fines/periodic payments should be available.132
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CHAPTER III: An alternative institutional designed for dispute
settlement in TSD chapters
In the previous chapters, I have argued that, from a substantive point of view, an effective enforceable dispute settlement system must include the possibility of submitting the legal issue to an international body with authority to settle the dispute by issuing binding decisions and prescribing the necessary remedies (including sanctions) in case of non-compliance. Consequently, from an institutional point of view, the existence of such international, independent and impartial body capable of issuing binding resolutions is mandatory.133 Arbitration has normally been the institutional system employed in international trade and investment law as well as in Sustainable Development.
Nowadays, practically all investment and trade agreements include provisions relating to the setting up of ad hoc arbitral committees in case a dispute arises.134 The reasons behind
this option are (inter alia): depoliticising disputes concerning international agreements, that is, solving the dispute through an international neutral mechanism rather than through diplomacy; national courts are not considered sufficiently neutral to settle disputes between their sovereign State and other States or their nationals, and therefore, having recourse to an independent and impartial third party was deemed more appropriate; and, the fact that the main legal source of the disputes is special (an international treaty) and it normally has a very specific and technical content, which is not within the expertise of domestic judges.135
However, arbitration also presents some systemic weaknesses that may render the system ineffective in certain instances. Firstly, the ad hoc character of these arbitral tribunals results in a high degree of inconsistency and unpredictability.136 An arbitral panel convened for a specific dispute does not have to follow any precedence or case-law. Therefore, there may well be numerous awards solving equivalent disputes but providing
133 Cooperative approaches and amicable consultations are not enough, since those systems just involve the
parties to the agreement but no independent third body.
134 This happens in Trade, Investment and Sustainable Development Chapters.
135 McLachlan, C., Shore, L. and Weiniger, M. “International Investment Arbitration: Substantive Principles”. Oxford: Oxford University Press. 2008.
Lowenfeld, A. “Investment Agreements and International Law”, Columbia Journal of Transnational Law 42, 1, pp. 123-130, 2003.
136 Schultz, T., “Against consistency in Investment Arbitration”. In Z. Douglas, J. Pauwelyn, & J. V. (Eds.),
“The Foundations of International Investment Law: Bringing Theory Into Practice”, Oxford University Press, Nueva York, p. 297-316, 2014.
