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2

Pillars and Escape Hatches

Basic Concepts of International Trade Law in the Americas

2.1 Overview of the GATT and WTO

This chapter discusses the fundamental premises and economic underpinnings of the global trading system that are necessary for the reader to appreciate the varied interactions of trade and human rights law.1

We described the General Introduction how trade law and human rights law developed along parallel tracks after the Second World War. The same horrors of war that inspired the founding of the United Nations and the development of modern human rights law, discussed in chapter 3, also led finance ministers of the world’s leading trading nations to gather in Bretton Woods, New Hampshire, in 1947 to establish global cooperative financial and economic institutions. Such an initiative was not entirely new; states have used rules to regulate trade at least since the Middle Ages in the form of bilateral treaties of navigation and commerce. The first serious attempt to create global economic rules, however, followed formation of the United Nations. The Bretton Woods system that resulted included the International Monetary Fund (IMF) to govern exchange rate policy and the World Bank to function as the central source for reconstruction and development funds. Trade ministers later fashioned the third leg of this economic and financial stool in Havana with the drafting of rules for transborder commercial relations.

While it is not surprising that the Second World War’s human atrocities led to stronger rights of the individual in the form of human rights treaties, it is not quite so intuitive that the war’s nightmares also inspired economic change. The connection that world leaders perceived between the inferno that the world had just experienced and future economic policy among nation states was the severe inward turn toward protectionism during the late-1920s Great Depression. Leaders traced protectionist policies directly to the rise of fascist regimes in nations isolated after the First World War. The initial economic instrument, the General Agreement on Tariffs and Trade (GATT), was seriously flawed. Critics noted aptly that it possessed neither sheriff nor jail, yet it succeeded in bringing together in a single document the basic rules to be applied when countries wished to restrict the free flow of goods across borders.

The general rule was that trade was to be unrestricted, except in the specified situations, and under the enumerated conditions, described in the treaty. The exceptions included tariffs—border taxes—that the rules permitted Members to charge on a product’s importation. Other exceptions to unhindered trade involved the kinds of licenses with which Members could limit imports, the technical standards to which they could subject products, and the proper remedy for “unfairly traded” imports—dumped and subsidized goods.

In 1995, almost half a century after the historic Bretton Woods meeting, trade ministers created the WTO as the umbrella organization to administer the nearly two dozen agreements that became annexes to its Charter. This marked completion of the process begun by the GATT to form both a central organization to administer global trade rules and a dispute settlement system to interpret them. Because of the WTO, and the seven wideranging rounds of multilateral GATT trade negotiations that preceded its creation, detailed WTO Agreements now provide an elaborate set of rules spanning a broad range of subjects to govern how Members must act in the global marketplace. Negotiators prescribed rules for trade in agriculture and in textiles and for national laws governing subsidies, dumping, intellectual property rights, investment, and customs procedures applied at the border. Ministers established detailed procedures for “safeguard” actions that Members may take temporarily to protect domestic industries from import surges, for border protections against unsafe or unsanitary products, and a separate agreement governing the mushrooming trade in services.

2.2 Economic Underpinnings: Comparative Advantage

(A) Introduction

World trading rules are based on the concept of comparative advantage, described by British economist David Ricardo at a time nearly two hundred years ago when the sun never set on the British Empire. How does this theory help us understand why nations will export some products and import others, rather than simply producing all products domestically, which would render unnecessary any international trade?

(B) Absolute Advantage

In 1776 in The Wealth of Nations, Adam Smith introduced the theory of absolute advantage that set the stage for Ricardo’s brilliant and powerful further observation forty years later.2 Adam Smith analogized an individual worker to a country: If Worker A is more skilled than Worker B at making coats, and Worker B is more skilled than Worker A at making shoes, then Worker A will sell coats to Worker B and use the proceeds to purchase shoes from Worker B, rather than making both coats and shoes. It is cheaper—that is, more economically efficient—for Worker A to do so. We may say that Worker A has an absolute advantage over Worker B in the production of coats. By the same logic, Worker B has an absolute advantage over Worker A in the production of shoes.

Analogously, if Country A’s climate is ideally suited for growing grapes, but its workforce is not sufficiently trained to assemble computer chips, whereas Country B has a highly trained labor force but is located in the far North—a climate unwelcoming to grapes—we may say that Country A has an absolute advantage, in relation to Country B, in the production of wine. Country B has an absolute advantage over Country A in the production of computer chips. Therefore, Country A should not make both wine and computer chips. Country A will find that it is “cheaper” to export wine to Country B in order to earn the foreign exchange needed to buy Country B’s computer chips. In this way, the income of both countries will be highest.

In transitioning to Ricardo’s comparative advantage, it is important first to define “cheaper” in economic terms: Country A’s “opportunity costs” are lower. Opportunity cost describes the trade-offs that a country makes in choosing to produce with its finite resources one product instead of another; we may think of them as lost opportunities. So when we say that it is “cheaper,” or economically more efficient for Country A to produce wine rather than computer chips, we mean that Country A’s opportunity cost for making wine is lower than its opportunity cost for making computer chips. Country A will make fewer trade-offs in the production of wine than in the production of computer chips. Country A will use fewer of its finite resources.

(C) Comparative Advantage

To introduce David Ricardo’s contribution to the economics of trade, we may begin with a famous example used by economist Paul Samuelson to help us understand the comparative aspect of the theory. Suppose that a lawyer has created a court submission that must be typed and that she is a faster typist than any secretary she could hire. To use Adam Smith’s terms, she has an absolute advantage in both legal and typing work. Even though she could type the submission faster than could a secretary, the theory of comparative advantage tells us that the lawyer nonetheless should hire a secretary. Why? Because the value created by her legal services is greater than the value created by her typing services.

The opportunity cost, or trade-off, that she would make by spending an hour typing is the three hundred dollars that she could earn by performing legal work, which is greater than the opportunity cost of spending that hour on legal work (she has “lost” the lower value of secretarial earnings). Even though the attorney has an absolute advantage, then, in typing—she is faster at typing than anyone she could hire—and thus the typing will be slower, the total value created by the legal office will be greater if the lawyer sticks to her legal work. Translating this concept to international trade means that if each country produces only those goods in which it has a comparative advantage, nations together will create greater world wealth. Trade allows countries to specialize in the goods and services in which they are the most efficient producers. Such specialization will raise the gross domestic products (GDPs) of all trading partners. Consumer standards of living for this reason are higher in an atmosphere of open trade than when government measures artificially restrict trade.

Another example demonstrates that in a world of perfectly competitive markets, trade will be beneficial to countries whenever there are relative differences in costs of production. In Country A, one hour of labor produces six bushels of wheat or four bushels of corn. In Country B, that hour results in one bushel of wheat or two bushels of corn. Using only Adam Smith’s observations, we would conclude that Country A has an absolute advantage as to Country B in the production both of wheat and of corn. Does this mean that trade cannot benefit Country B at all and that it should simply leave production of wheat and corn to Country A? Because of David Ricardo, we know that the answer is no, because Country A’s absolute advantage in wheat production (six bushels to one) is greater than its absolute advantage in corn production (four bushels to two). In other words, Country A has a comparative advantage in wheat as compared with corn.

What may we conclude about Country B? Of course, Country B is at an absolute disadvantage as to both wheat and corn, but its labor force is one-sixth as productive as to wheat and one-half as productive as to corn. That is, Country B has a comparative advantage, in relation to Country A, in the production of corn. According to the principle of comparative advantage, both countries will benefit if Country A trades its wheat for Country B’s corn.

2.3 Four Pillars of GATT

(A) Relevance of Comparative Advantage

We learn first about comparative advantage in our exploration of the basic concepts of international trade because the drafters designed global trade rules to allow countries to make full use of their comparative advantage by removing government impediments to the free movement of goods and services. Thus, comparative advantage is a foundational theoretical assumption, a structural basis, of the trade system. Ministers provided in that first basic instrument of global trade rules, the GATT of 1947, and continued in 1995 in the WTO, that the principle of nondiscrimination should underpin trade. That is, WTO Members must treat goods from all other Members alike.

In basing global trading rules on a principle of equal treatment among all partners, trade powers left behind the mercantilist approach of the 18th century that demanded close state intervention to maintain favorable trade balances.3 Even more significantly, states turned away from a basic principle of sovereignty: that a state is free to treat others in a discriminatory fashion if the state believes that such action serves its best interests.4 Viewed through the lens of sovereignty, abandonment of the state’s ability to choose among its trading partners the ones on which the state would bestow preferences counts as notable recognition of the political as well as economic importance of Ricardo’s theory. This principle of trading relations helps remove state intervention in the trading process.

(B) Most-favored Nation and National Treatment Clauses

The two aspects of the nondiscrimination principle are codified in the first and third articles of the GATT (see Item 7 in the online Documents Annex); they are also the first two basic concepts of trade, or the Four Pillars of GATT—the more colorful phrase often used by GATT experts. Article I, called the Most-favored Nation Clause (MFN), explains how WTO Members must treat imported products originating in the territory of one Member in relation to imported products of other Members. Article III, called the National Treatment Clause, prescribes the manner in which Members must treat imported products in relation to domestic products.

Article I provides that if a WTO Member gives a benefit or privilege to any country, it must automatically and unconditionally grant that same benefit to every other WTO Member. The reference to most-favored, then, means that the importing Member must provide equal treatment for imports of a product from, and exports of that product to, all Members based on the treatment that it gives its most-favored trading partner with respect to that product. The United States might negotiate with Mexico a lower tariff for imports of Mexico’s shrimp in return for Mexico’s granting U.S. exports of computer software a lower import duty. But if a WTO Member not involved in that negotiation—for example, Japan—then exports shrimp to the United States or computer software to Mexico, the United States and Mexico must, without cost or conditions, give Japan the full benefit of the tariff reductions negotiated between Mexico and the United States, despite the fact that those reductions were based on reciprocal concessions only of Mexico and the United States. The MFN nondiscrimination principle results at once, and following but a single negotiation, in reductions in trade barriers by the United States and Mexico on two products for the 150 other WTO Members.

The National Treatment Clause has the same effect. As the name suggests, the requirement of Article III is that once foreign goods have entered the stream of commerce, Members must treat them in the same manner as Members treat “like” domestic products. “Like products” are goods similar in physical characteristics and uses to the imported goods. WTO Members must accord similar treatment only to like domestic goods. Members, for example, need not treat tractors in the same manner as they treat lawnmowers. National treatment means that the national or local government could not require that a wine from Spain, once it has satisfied tariff obligations at the border, be sold only in liquor stores, if the rules allow a like California wine to be sold in grocery stores as well. The Spanish wine also could not be subject to a California alcoholic beverages tax that did not apply equally to the California wine. Officials must regulate the Spanish wine’s sale, distribution, transportation, and use in the same manner as the California wine, and must impose similar taxes on the imported wine.

(C) Third and Fourth Pillars: Tariffs Bound and Quotas Outlawed

Article II of the GATT embodies the Third Pillar. Each WTO Member makes a commitment to charge no more than a certain tariff on a particular import. As in our Mexican shrimp example, countries will continue to negotiate these tariff reductions based on reciprocity. For example, if the United States buys most of its lumber from Canada and sells to Canada most of its computers, U.S. computer makers and Canadian lumber mills still benefit most from the lowered border taxes of lumber and computers, even though the MFN Clause will create “free riders” from other WTO countries.

Article II refers to the thousands of pages of these schedules of concessions on tariffs for hundreds of products. These tariffs are then “bound.” That is, the Member can charge a lower tariff if it wishes (and often does in order to gain the advantage of a lower tariff on a product that the Member wishes to export to a particular market), but the Member cannot charge a higher tariff than that set out in its schedule of concessions.

The Fourth Pillar of the GATT, Article XI, creates a basket of disciplines to address most other barriers to the free reign of Ricardo’s theory with its sweeping general prohibition of all other border restrictions on importation or exportation of products that other GATT articles do not permit. Article XI thus prohibits, for example, quotas or other restrictions on the volume of a product that can be imported or exported, as well as licensing systems that act as barriers to the exportation or importation of products.

Article XI effectively provides that there may be no restrictions on the import or export of a product except those permitted elsewhere in the WTO. Article XI itself lists two exceptions: import duties—tariffs—which of course are regulated by Article II; and taxes and other charges, regulated by Article III.

(D) A Closer Look at National Treatment and Like Products

A fuller examination of the Third Pillar and the concept of like products will aid our understanding of the Pillars. After eight rounds of GATT negotiations on import duties and other trade barriers, tariffs—in developed countries at least—no longer constitute significant restrictions to the free movement of goods across national borders. Most disputes over the Pillars thus revolve around the complex rules requiring equal conditions of competition for imported and domestic like products. Understanding the like product concept is necessary to appreciate operation of the Pillars and most other aspects of global trade rules. The term is critical in nine articles of the GATT and three other WTO Agreements, so it comes up repeatedly in studying the relationship between trade and human rights.

The decision by the WTO Appellate Body—the Supreme Court of world trade—in the EC-Asbestos case offers the clearest explanation of the like product concept in a GATT Article III context that implicates human rights concerns. Canadian asbestos producers awoke one morning to find that France had shut down a major export market for their asbestos insulation through a total ban on all products containing asbestos, which it justified on human health grounds, citing evidence that asbestos is a known carcinogen. Although the ban applied both to foreign imports and to domestic production, the second article of the decree made an exception for importation and production of asbestos that had no substitutes.

Canadian producers were not amused to learn that the decree effectively banned only the type of chrysotile or white asbestos that they produced, because polyvinyl alcohol and cement-based substitutes existed for Canada’s type of asbestos. French companies were the leading producers of these polyvinyl alcohol- and cement-based articles, while Canada produced virtually none. Although it made other arguments, including that the ban violated the WTO Agreement on Technical Barriers to Trade (TBT), which prevents countries from disguising trade barriers as product safety standards, Canada’s most potent claim was that the French ban discriminated between imported and domestic products in violation of Article III:4 of the GATT.

Paragraph 1 of Article III sets out a general statement of policy that dispute settlement panels have held “informs” the rest of the article, including Paragraph 4, which does not even mention it. The Members recognize in Paragraph 1 that they cannot apply taxes and regulations “so as to afford protection to domestic production.” That statement, incidentally, is the purpose of almost every GATT provision—to ensure that Members do not nullify or override their Article II agreement to reduce tariffs on products by imposing nontariff barriers that have the same effect of restricting trade.

Thus, when Paragraph 1 states that the purpose of Article III is to prevent Members from protecting “domestic production,” the reference is not to all domestic production, but only to those products that compete with the imported product. Article III requires examination of the competitive relationship between the two products at issue. Paragraph 2 converts this general language into a specific prohibition against assessing internal taxes or other charges on imported products in excess of such charges collected on like domestic products. Paragraph 4 addresses the specific measures at issue in the EC-Asbestos case by imposing essentially the same obligation with respect to regulations and other requirements affecting the internal sale of imported products.5

The Appellate Body’s report in EC-Asbestos points out that the initial panel had found that the asbestos products and their PVA substitutes are “like products” and that France had treated the imported asbestos products “less favorably” than their domestic substitutes by totally banning the imports. France could not have mounted a viable argument against a finding of violation of Article III:4 under these facts if it had accepted the panel’s finding that the products were “like.” In fact, the parties did not even bother to argue this point on appeal. France, through the European Communities (EC), did argue that the panel improperly had found that the products were “like” within the meaning of Article III:4.

If the two products were not “like,” France could not have violated Article III by treating them differently. For example, if the United States tests imported beef for foot-and-mouth disease, but performs no such test on domestic chickens, it has not violated the national treatment obligation. A WTO Member need not treat chickens and cows alike, nor must it regulate baseballs similarly to computers. Therefore, if the EC could convince the Appellate Body that the two products were not “like,” then it could work a narrowing of Article III’s requirement to provide national treatment, with the result that a greater number of safety measures could be imposed on imports.

The initial panel analysis of the term employed the four general criteria recognized in a 1970 Working Party Report on Border Tax Adjustments: (1) the physical characteristics of the two sets of products (one deck baluster is made of wood, the other of vinyl), (2) the end uses of the products (polyurethane foam for attic insulation or for beer coolers), (3) consumer expectations (would the purchaser complain if hot-dip galvanized fasteners are substituted for the specified stainless steel fasteners), and (4) the tariff classification of the products (electric typewriters might be in one tariff group, charged a 5 percent tariff, while computer keyboards might be in another, charged 3 percent). Each of these criteria would be relevant in an examination whether two products are competing for the same buyer and no single criterion would necessarily outweigh the others.

The initial EC-Asbestos panel’s analysis gave compelling weight to the end-use criterion. The panel reasoned that, although the asbestos products and their substitutes were not physically identical—in that they had a different chemical composition, and in fact asbestos was unique—their end uses were the same for some applications. In effect, the panel concluded that their properties were effectively equivalent under Article III:4, which aims to prevent parties from using internal measures to protect domestic industry.

The panel explicitly declined to consider the health “risk” of the product as a separate criterion, reasoning that if it did so the other criteria would become meaningless, because the health risk clearly would overshadow other physical differences, as well as the other “like product” criteria. The panel almost had it right with this comment. Tellingly for purposes of this volume, the panel also found that taking account of the health risk would make the Public Health exceptions of Article XX superfluous. The Appellate Body examined the findings of the panel regarding the carcinogenicity of asbestos, noting that the types of cancer that it caused had a 100 percent mortality rate. Its conclusion from the assessment was that the toxicity of asbestos was indeed a “defining aspect” of the product, one that hardly could be overlooked when determining whether two products had the same physical characteristics. The Appellate Body also noted that under the criterion of consumer expectations, a manufacturer choosing among alternative inputs certainly would not be indifferent to the fact that one caused cancer and the other did not.

Having found that the products were physically distinguishable, that consumer expectations were likely to be significantly different, and that the panel simply had concluded without much analysis that the end uses of the products sometimes were the same, the Appellate Body found that asbestos and its substitutes were not like products within the meaning of Article III:4. France thus had not acted inconsistently with that article. One wonders if the Appellate Body did not have in mind how useful its narrowing of Article III might be to a Member looking for other ways to protect health and the environment, and perhaps other human rights as well, without being found to have violated the WTO Agreements.

(E) If It Quacks Like a Duck

A GATT dispute panel reminds us of another principle applicable to Article III’s discipline on internal regulations and taxes. Some countries collect internal taxes or impose internal regulations—for administrative purposes—at the border, rather than waiting for the imported product to clear customs procedures by payment of the appropriate tariff and meeting other importation rules. These countries find it easier to take care of everything at once while the product is still seeking permission to enter its customs territory. The drafters of GATT Article III recognized this fact by providing in a Supplementary Note to Article III (see Item 7 in the online Documents Annex) that these charges or regulations nonetheless are “internal” and must therefore be consistent with Article III. The nature of the regulation, not its point of collection, determines whether the WTO Member must apply national treatment principles to the product.

2.4 Exceptions to the Pillars

Left alone, the Four Pillars would ensure virtually unrestricted trade, the perfect realization of Ricardo’s principle. Members do not, of course, leave them alone. Members do not wish to accept imported food with unsafe ingredients, or heaters that blow up in the consumer’s face, or cocaine arriving on container ships, or trade surges that bankrupt domestic industries in need of a reasonable period to become internationally competitive. Trade is never, then, completely “free.” The Four Pillars of GATT are by no means without exception. The most important exception authorizes FTAs or customs unions such as NAFTA or the European Union (EU). Parties to such an agreement are permitted by the WTO to violate the Pillars by discriminating against WTO Members who are not parties to the Agreement, for example, by not granting other WTO Members the benefit of the reduced tariffs that characterize all FTAs. Because such agreements now number about three hundred and cover nearly half of all world trade, bilateral and regional economic preferences are a significant deviation from the GATT, justified on the ground that FTAs and customs unions have major multilateral wealth building effects.6

Notably, the WTO permits Members to erect trade barriers in their implementation of human rights law. Article XX of the GATT creates a set of General Exceptions authorizing Members to restrict trade under certain conditions in order to protect public health and welfare. We address these exceptions, and their strict conditions, in some detail in section 6.5. Paragraph (a) (public morals), Paragraph (b) (public health), and Paragraph (g) (exhaustible natural resources) provide fertile ground for affirmation of the primacy of human rights policies over economic considerations. Article XX articulates general exceptions. That is, once the conditions are met, “nothing in this Agreement shall be construed to prevent the[ir] adoption or enforcement by a Member.” Scholars have emphasized the narrow and begrudging interpretations of early GATT and WTO dispute settlement panels that set unnecessary barriers in the path of human rights enforcement, particularly in the sphere of environmental protection. We prefer to herald the amazingly broad reach that the 1947 drafters gave to these powerful provisions.

In particular, consider the Public Morals Clause of Article XX(a). Members have imposed frequent trade restrictions based on the “immorality” of activities in other countries. These restrictions have ranged from prohibitions on trade with countries practicing or condoning slavery to bans on importation of child pornography. The exception is broad enough to justify trade restrictions to encourage countries to abandon denial of freedom of the press, to allow their citizens to emigrate, to forbid work by indentured children, and to provide a remedy for other human rights violations, especially when a consistent pattern of such violations by the country are evident. In Antigua’s challenge to U.S. prohibition of Internet gambling, the WTO’s Appellate Body—the World Trade Court7 (WTC)—interpreted the equivalent Public Morals Clause in the General Agreement on Trade in Services (GATS), which sets rules for trade in services as opposed to the trade in goods regulated by the GATT and the other WTO Agreements. The WTC left undisturbed the broad definition of public morals advanced by the panel below: ‘“Public morals’ denotes standards of right and wrong conduct maintained by or on behalf of a community or nation”8 If the restrictive border measure unmistakably implements a human rights objective, our opinion is that few aspects of human rights law could not qualify as enforcing a Member’s “standards of right and wrong,” and thus fall, under this interpretation, within the policy addressed by the Public Morals Clause. We should think this result especially likely in view of the explicit charge by the UN Charter that Members promote human rights.

The Appellate Body explicitly noted the relevance of its analysis to the similar Public Morals Clause of GATT Article XX.9 We detail in section 6.4 the additional conditions that a Member must meet for full exemption, but we are confident that the U.S.-Gambling case takes an important step toward integrating human rights policies into the economic ends of the WTO Agreements. Importantly, the WTC has situated the General Exceptions on an equal plane with the Four Pillars, requiring that panels strike a balance in interpretation so that neither cancels out the other.10 The Court thus has effortlessly brought customary and other non-WTO international law into the room with WTO dispute panels and reminded panels that they must interpret “evolutionary” language in the 1947 treaty in light of contemporary concerns of the community of nations, taking advantage of other precepts of international law, including the opinions of the ICJ.11

We take considerable comfort in these interpretations of the General Exceptions, which verify the wide berth that WTO Members have given themselves to implement human rights policies and the direction that the WTC has extended to panels to find guidance in the broader precepts of international law in their analysis of claims that Members have violated the WTO Agreements.

Article VI contains another important exception that permits Members to restrict trade in unfair imports, as defined by the WTO Anti-dumping and Subsidies Agreements. These Agreements treat imports as unfair if exporters “dump” them (i.e., sell the goods at a lower price for export than they sell them in the home market, or for a price that is below their cost of production). The Agreements also identify as unfair products that benefit from targeted government subsidies, because the subsidy gives them an artificial comparative advantage in trade.

The WTO TBT Agreement and the Sanitary and Phytosanitary Measures (SPS) Agreement (treated in detail in sections 7.4 and 6.6) provide increasingly important road maps to Members that desire to restrict trade in pursuit of the protection of human life or health and the environment at the level that the Member considers appropriate. Through these and other exceptions, the apparently straightforward Pillars of the GATT become more complex than at first they seemed: (a) Article XI proscribes restrictions on imports or exports; (b) successive rounds of multilateral negotiations have substantially reduced tariffs, which Members then “bind” at the lower rate under Article II; and (c) articles I and III ensure through nondiscrimination that the benefits and privileges of local trading accords will be spread to all WTO Members, thus accelerating trading wealth across all Members. GATT’s Four Pillars have spawned many exceptions, some quite logical and consistent with the Pillars themselves, others needed to carve out a place within global trading rules for a precious package of continuously developing human rights policies.

2.5 WTO Dispute Settlement

As we would expect with twenty-seven thousand pages of trade rules, Members frequently have disputes over their interpretation and compliance. The centerpiece of the WTO is its powerful dispute settlement system, with its singular international law triumph of automatic adoption of dispute panel reports. Unlike the situation during the GATT’s first fifty years, the losing Member no longer may block implementation of a panel’s decision. Members of course still are sovereign states and may choose not to implement a panel’s “recommendations.” Noncompliant Members, however, now will suffer substantial financial pain in the form of trade retaliation by the winning Member for trade lost through the violative border measure. In almost every instance during the first ten years of the WTO’s operation, permission by a dispute panel to retaliate has been sufficient to convince the losing Member to bring its measure into compliance with a panel recommendation.

By contrast, during the first fifty years of trade dispute settlement, GATT parties authorized retaliation in only one instance (as it happens, against the United States for its dairy quotas), which illustrates the diplomacy-driven nature of the early years of trade dispute settlement. Virtually automatic adoption of panel reports operates by “reverse consensus.” Unless a consensus exists to reject the report, WTO Members acting jointly as the Dispute Settlement Body must accept every panel report (or the Appellate Body’s report after appeal, which is also an automatic right). A consensus rejection of the report must include the winning Member, because reverse consensus is defined to mean that no Member present formally objects. We are confident that Members will refuse only an egregiously ill-reasoned “outlaw” report—that is, one whose adverse impact on other programs would more than offset its favorable effects in the actions under dispute. In fact, Members have yet to reject a report, although in an instance in which both the winning and losing Members equally feared the future effects of a panel’s broad opinion, disputants agreed not to appeal the decision so that future panels could more easily ignore the ruling.12 As with all international dispute resolution, neither panel nor Appellate Body reports create binding precedent, although future panels or later Appellate Body decisions rarely disagree with Appellate Body reports.

A useful holdover from GATT dispute settlement, in which only positive consensus satisfactorily could end a formal disagreement among Members, is that the purpose of dispute settlement remains “a positive solution” While the adjudicatory systems after which its creators patterned WTO dispute settlement emphasize winners and losers, the WTO’s Dispute Settlement Understanding (DSU) repeatedly facilitates crafting of a mutually agreed solution that is consistent with WTO law. This central theme explains as well the four complex stages of WTO dispute settlement (good offices, conciliation, and mediation also are available, but are not used): consultations (sixty days), panel consideration (six to nine months, longer in technical cases), appeal (if desired) of the panel’s decision (sixty to ninety days), and, finally, implementation of the decision’s “recommendations” through the losing Member’s legislative or regulatory rescission of the offending border measure (up to fifteen months, sometimes extended). The DSU provides precious little guidance to panels beyond charging them to make “an objective assessment of the matter,” which is perhaps the minimalist approach required in melding the civil and common law systems of WTO Members. In these circumstances, we should marvel that panels have achieved the high level of legal discourse that we may find in their more than two hundred opinions. This achievement is even more notable in light of the almost certainly conflicting requirement on one hand “to clarify” provisions of the WTO Agreements while adhering to the dictate, on the other, that they “cannot add to or diminish the rights and obligations provided” in those Agreements.13

The WTC has begun not only to create a substantial body of international trade law, but also to have impact on public international law generally. This result flows from the essentially binding nature of its decisions and the increasingly broader reach of the WTO’s disciplines. Some commentators, in fact, have argued that its system of settling disputes elevates international trade law to a unique category in relation to other international law, because its rules are enforceable dictates, not aspirations, guidelines, or policies. Some analysts believe the WTO dispute settlement system to be the most sophisticated in international law and its decisions, “by almost any criteria imaginable, … far more important than the work of all the other” international adjudicatory bodies.14 In any event, the automaticity of the process makes WTO dispute settlement a potent alternative in the business world to traditional arbitration or litigation in foreign courts.

2.6 Trade in the Americas

(A) Commonality of Interests

Professor Hernández-Truyol has observed that the constraint of international treaties reaches beyond local laws.15 Both global and local rules, of whatever nature, must yield to human rights law.16 This observation not only has powerful relevance in the trade field, but we believe that it is in local and regional trade rules that negotiators may expect to make the most significant progress in crafting a purposeful intersection of these two pervasive areas of law and policy. To understand why this is so, let us first ask why Chile would be more likely to sign a free trade agreement with Peru than with Great Britain. Geographically, they are neighbors, so trade between them is inevitable; they speak the same language, so communication is easier; they share the same civil law history, so their legal systems will be similar; they are Southern Pacific Ocean nations whose citizens engage in many of the same occupations because of similar natural resources.

In other words, regional trade agreements always involve more than economics. They are about culture, foreign policy, and national security. The Declaration of Principles of the First Summit of the Americas in 1994 initiated negotiations toward a Free Trade Area of the Americas (FTAA). Among its goals is promotion of democracy as “the sole political system which guarantees respect for human rights and the rule of law.” The 1994 Declaration also seeks elimination of discrimination in the Hemisphere, holding that “it is politically intolerable and morally unacceptable that some segments of our populations are marginalized and do not share fully in the benefits of growth.” Finally, the Declaration aims to strengthen the role of women, stating that doing so “in all aspects of political, social, and economic life in our countries is essential to reduce poverty and social inequalities and to enhance democracy and sustainable development.”17

(B) North American Trade Agreements

Regional trade agreements, we have noted, reach far beyond economics. More positively, we could say that trade is an aspect of myriad other policies, and trade negotiators must not fall into the easy operational pretense that trade operates in a vacuum. FTAs identify countries that are comfortable forging closer economic, as well as social and cultural, ties. For these reasons, regional trade agreements carry the potential to resolve the human rights and trade dilemma earlier than global agreements can do so. The comfort level created by a commonality of interests leads to greater willingness to experiment. For example, Article 104 of NAFTA, among Canada, Mexico, and the United States, explicitly identifies the multilateral environmental agreements that will take priority in the event of a conflict with a NAFTA provision.18 Because all three NAFTA parties have ratified these environmental agreements, they had no interest in allowing their regional trade obligations to interfere.

This kind of commonality—and thus solution—is virtually impossible at the WTO level of 150-plus states. Because of its reliance on nondiscrimination, trade liberalization requires breaking down access barriers to a country’s market, which in turn leaves domestic actors unprotected from exporting companies with a comparative advantage in the domestically produced good. From a political standpoint, leaders far more easily may justify to their citizens according greater access to companies in neighboring countries, some of which may be joint ventures that include local businesses, as was frequently the case—for example, in the automotive industry—between Canada and the United States long before the U.S.-Canada FTA that preceded the NAFTA.

NAFTA of 1993 is in many areas a precedent-setting achievement. NAFTA was the first trade agreement to cover services such as computer software or engineering, as opposed solely to goods such as machine tools or soybeans. The services field is a critical one for the United States that accounts for close to three-quarters of its GDP.19 NAFTA also was the first to address the intersections between trade and the environment and between trade and labor. The treaty contains the most expansive rights ever given to private investors. At Canada’s insistence, the agreement also places limits on trade based on preserving a country’s culture, as reflected, for example, in its magazines and films. We shall see in chapter 11 the importance of safeguarding culture in protecting the human rights of indigenous populations. Finally, NAFTA initiated unique dispute settlement systems, including one that later treaties have yet to emulate, which ceded judicial sovereignty to binational panels that act in the place of domestic courts with equal powers over administrative agencies.20

(C) Caribbean and Central and South American Agreements

The move toward regional or bilateral trade agreements with neighboring states began in Latin America, as elsewhere, in the late 1950s, although those early efforts hardly were free trade models. Regional economic integration to foster economies of scale yielded in those days to the protectionist economic policies then in vogue. For regional economic integration to work, the FTA parties ultimately must test the economies of scale built through opening the larger FTA market to competition among FTA parties by lowering external barriers to bring in world competition. Only in this way may companies in the internal market, strengthened by the FTA’s promotion of scale efficiencies, be tested against the world’s players to make them even more efficient or, alternatively, to convince the domestic companies to pursue other interests. That second step never happened for the first forty years of Latin American economic integration. Only after Latin American governments abandoned the discredited isolationist policy in the 1990s did today’s powerful models for regional integration begin to emerge. These integration agreements have created some of the world’s most active and efficient companies.

Not all agree with the desirability of this growth. Critics point to these companies as behemoths of globalization that serve to enlarge the income gap not only between rich and poor people within countries but also between rich and poor states, flame the race to the bottom, and displace local businesses, including small subsistence agricultural farms. This volume seeks to find ways to retain NAFTA’s benefits while ameliorating its adverse effects.

Second only to the NAFTA in economic strength in the Hemisphere is the Common Market of the South (MERCOSUR in Spanish), which initially brought together the four countries of Eastern South America—Brazil, Argentina, Paraguay, and Uruguay. Venezuela is a recent adherent, although its basis for switching from the Andean pact has more to do with populist politics than economic considerations, a motivation that also describes Bolivia’s renewed attention to MERCOSUR. With the exception of certain products, in 1995 the treaty created a customs union—an FTA with a common external tariff—and the parties have made progress in harmonization of a number of further economic integration and environmental protection matters.

MERCOSUR is the earliest example of the change in economic philosophy from protectionist to free trade. Its objective was not to encourage industrial development behind high tariff walls, known as import substitution industrialization, but to promote the concept of comparative advantage by encouraging each party to specialize in—and export—those goods that it could produce most efficiently. For this reason, MERCOSUR requires that parties keep their external tariffs—duties charged to non-parties—low so that the output of MERCOSUR countries will remain internationally competitive. As a result, we could not easily name an industry in which Brazil, Argentina, and, to a lesser extent, Paraguay and Uruguay did not have one or more of the leading companies. Brazil since 1994 has been the Latin American powerhouse on the other side of the table with the United States and Mexico determining Hemispheric trade policy.

In 1992 the northwestern states of South America—Venezuela, Colombia, Ecuador, Peru, and Bolivia—formed the free trade area now known as the Andean Community of Nations (CAN in Spanish), which is well on its way to becoming a customs union. There have been some false starts, and some setbacks, most notably Peru’s suspension from the pact for three years when it slid back into military rule, but the Andean Commission now is responsible for an increasing array of economic functions of the parties, including a judicial function for trade matters that has had a unifying effect. The recent bolting from the CAN of Venezuela under Hugo Chávez, and Bolivia’s threats to do the same following the election of Evo Morales, initially suggested a crumbling of the bloc. Chile’s quick movement to fill some of the gaps, the continuation of most business ventures that previously existed, and new trade ties with the United States by the remaining Andean states, however, support confidence in the continued strength of the CAN, even as Chávez transforms Venezuela from a democratic to an authoritarian populist state.

The Central American nations of Guatemala, Honduras, El Salvador, Nicaragua, Costa Rica, and Panama signed the treaty creating the Central American Common Market (MCCA in Spanish) in 1991. Panama has yet formally to ratify the pact, but the other MCCA parties nonetheless extend to Panama the reduced tariff benefits. The MCCA has been a model of the new economics underpinning Latin American trade agreements, because the FTA has increased significantly both trade flows among the parties and the region’s exports to the rest of the world.

(D) Regional Negotiating Blocs

Another phenomenon has multiplied the economic and political impacts of these regional trade arrangements. Once these basic FTAs were completed, the parties often negotiated as a unit in other free trade forums, both bilaterally and with other blocs, thus creating a dizzying array of interlocking economic structures, some more important than others. Mexico, Canada, and the United States, on the other hand, despite the commonality of their membership in the NAFTA, always negotiate as separate countries, never as part of a NAFTA bloc, which illustrates a major difference between the NAFTA and these other major Hemispheric agreements. The NAFTA parties seek no greater economic integration than reduction of trading barriers among themselves on all products and services. While this is an ambitious goal, to be sure, it is nonetheless substantially unlike the objective of full economic—and deeper—integration sought by the other FTAs in the Hemisphere.

For example, MCCA seeks the free movement of labor and a monetary union, both forbidden subjects in the North. Before we discuss the most ambitious regional negotiation of them all, we should examine the Hemispheric free trade loners. Chile, despite its negotiation of FTAs with the three parties to the NAFTA, did so one country at a time. Since withdrawing from the CAN in 1976, Chile has negotiated alone, despite its small size, a result of a very early opening of its markets and its reliance on trade as the engine of its impressive economic growth. Chile does not burn bridges, however, and has partially filled the chasm created by Venezuela’s apparent transfer under Hugo Chávez to MERCOSUR.21 In 2006 it accepted associate membership in the CAN, complementing its similar status in MERCOSUR that is shared by MERCOSUR’s other neighbors in the CAN.

(E) Cuba, the Noncountry

Then there is Cuba. Cuba exports many products successfully, such as sugar, cigars, rum, and citrus, but because of its long reliance for subsidies first on the United States until 1959 (sugar) and then the Soviet Union until 1993 (oil) and its unwillingness to embrace democratic principles along with the rest of the Americas (see chapter 13 on democracy), it has remained isolated economically. President Nestor Kirchner’s longtime relationship with Fidel Castro resulted in the signing of a modest FTA with Argentina, and Canada and Mexico have taken advantage of the vacuum created by the fifty-year economic embargo imposed by the United States (see section 14.6) by investing nearly two billion dollars there in recent years. The real story has been Venezuela’s enormous economic assistance under President Hugo Chávez in the form of subsidized oil, which Cuba then can resell for foreign exchange. Cuba thus has regained the lucrative trade in oil that it lost in 1991 when the Soviet Union stopped similar shipments, except that today the price of oil has skyrocketed to record heights.22

The powerful economic and political influence of the United States on Cuba that began with active U.S. engagement in Cuban affairs under the Monroe Doctrine in 1823 abruptly ended with Castro’s revolution in 1959. In fact, since the day in 1961 when the United States tossed the Monroe Doctrine into the Bay of Pigs, that relationship worsened with each new Castro undertaking. First, the United States eliminated Cuba’s sugar quotas and Castro responded by nationalizing agricultural property in his initial land reforms. The United States then refused to refine Russian crude after Castro tightened economic ties with the Soviet Union in the 1960s. The Helms-Burton law in 1996 initiated a virtual economic war as foreign investors started to take advantage of nationalized property once owned by Americans. Five facts seem to us incontrovertible.

First, despite Venezuela’s recent rescue efforts, Cuba is today in dire economic straits, and while the extent to which the U.S. embargo has contributed is unclear, we believe that normal trade relations with the United States would substantially help Cuba rebuild its economy and alleviate the suffering of its people. Second, insofar as the purpose of the embargo was to destabilize the Castro regime, it has failed. Third, its trading partners have never fully supported the tough policy of the United States toward Cuba. While the United States at one time garnered support from the Organization of American States (OAS), even that sympathetic nod ended nearly thirty years ago and for the last decade annual UN resolutions condemning the embargo have become the norm, with even the Vatican joining the chorus in 1998. Fourth, the rest of the world indeed is investing in Cuba. The total foreign direct investment anticipated as of 1997 was over $6 billion. Ironically, NAFTA partners Canada and Mexico plan the largest investments at over $1.8 billion apiece. Finally, the reasons espoused by the United States to justify the embargo gradually have lost credibility over time. Without downplaying the risk from terrorists, while the security threat of a Cuba-Soviet alliance was real, it is harder to argue today that any country should consider the debilitated Cuban government a danger. With the peaceful passing of the ruling baton in 2006 from Fidel to his brother and “enforcer,” Raúl Castro, the United States has even less reason to suppose that a continued embargo will accomplish any purpose but further the suffering of the Cuban people.23

Even the human rights justification often given by the U.S. government has lost some of its grip on the high ground in light of U.S. support for nondemocratic and oppressive—but anticommunist—regimes throughout Latin America and Asia, not to mention the vote to admit China into the WTO and close economic ties to Jordan, Saudi Arabia, and Turkey. President Clinton’s 1994 China speech, given about the same time as the Miami Summit of the Americas that initiated FTAA talks, announced that the United States best could promote democracy and human rights through engagement, not isolation. China acceded to the WTO in 2001. Cuba, which, like the United States, negotiated the Bretton Woods Conference and was a founding member of the IMF, the World Bank, and the GATT—whose terms were negotiated in its capital in 1947—remains the only Hemispheric state not involved in its largest regional integration initiative, the creation of an FTAA.

(F) Ultimate Hemispheric Integration: FTAA

The FTAA encompasses the 850 million people of the Western Hemispheric democracies with their combined GDP of $13 trillion, thereby surpassing the EU as the world’s largest trading bloc. As we have noted, the FTAA process began when leaders of the thirty-four democracies of the Hemisphere concluded the Summit of the Americas in Miami in 1994, deciding on a range of objectives, including eradication of poverty and discrimination and strengthening democracy in the Hemisphere.

The FTAA is an ambitious negotiation with nine separate negotiating groups, and committees on smaller economies and civil society covering virtually every trade topic. There is no FTAA entity examining human rights, despite the fact that Hemispheric heads of state at the Second Summit of the Americas in Santiago in 1998 embraced promotion of the Universal Declaration of Human Rights and its regional counterpart, with particular reference to women, migrant workers, and indigenous peoples.24 We are convinced that a basic commitment to human rights will emerge as part of a completed FTAA.

After eight productive years of work, the FTAA became a casualty of its own ambition in 2003, with Brazil effectively breaking off talks when it became clear that the United States was not going to put its huge agricultural subsidies and its powerful anti-dumping law on the negotiating table. In essence, FTAA talks are on hold until trade ministers can take these two subjects to the next liberalization as part of the WTO’s Doha Round of multilateral negotiations, which also have broken off because of protectionist pull-backs in the leading developed countries.

How may we summarize the place of regional trade agreements in the Hemisphere in the human rights and trade interface? In addition to the promise that they hold as ubiquitous instruments that may more easily than the WTO begin to address the intersection purposefully, now they serve human rights by buttressing national efforts to promote the rule of law, and with it, institutions and systems that hold government accountable for the treatment of its citizens.25