(By PANAGIOTIS DELIMATSIS)

3 The fragmentation of international trade regulation

The regulation of international trade transcends law and politics. The WTO is the main multilateral regime regulating trade. However, several regimes at international or regional level have an impact on trade transactions. These specialized regimes co-exist in a ‘normative jungle’: Contrary to national legal systems, there is no common institutional mechanism that can bring about coherence in their negotiation, application and/or interpretation. WTO rules increasingly encroach upon other areas of law and policy, including environmental protection, agricultural and regional policies, labour standards, investment, human rights and cultural diversity. By the same token, international rules such as those relating to human rights or environmental protection can have a chilling effect on trade, particularly when trade barriers are used as a ‘stick’ to induce a certain type of behaviour by a given country. In addition, impediments to trade can be the inevitable corollary of state policies that are aimed to attain non-economic objectives. This interdependence does not, however, alter the fact that the WTO law, as interpreted at present, entertains an uneasy relationship with and is barely receptive to other areas of international law, as we will see below.

Fragmentation of international trade law is a rather new issue that drew little attention in academic literature to date. In the existing scholarship, one can identify two crucial debates that are relevant: the first is the so-called ‘trade and…’ debate relating to the boundaries of the WTO. The second relevant debate for our purposes is concerned with the proliferation of preferential trade agreements (PTAs) and the concomitant challenges that it raises in terms of jurisdiction, applicable law, or state obligations and inter-state relationships.

A. Types of fragmentation

In the ecology of trade regulation, the phenomenon of fragmentation (with a potentially negative connotation) is articulated mainly through two different strings which affect each other and interact in manifold ways: First, fragmentation is the result of horizontal collisions or overlaps among regimes of sometimes equal force in terms of membership such as the UNEP, the UNESCO Convention on Cultural Diversity or the human rights special regimes. Collisions of this type also include conflicts between the canons agreed multilaterally within the WTO and the rules that emerge at the periphery by means of the mushrooming PTAs. The proliferation of such agreements creates political and economic tensions and has been criticized as to its utility in furthering the causes of free trade. Not only are such agreements many times economically inefficient because they cause trade diversion (rather than trade creation) and lead to concession erosion,73 but they also lead to unnecessary regulatory fragmentation relating for, instance, to diverging safety standards or confusing rules of origin – problems that the creation of the WTO was supposed to address, at least in part. Horizontal fragmentation implies the risk of clashes between diverse and competing ethical rationales, goals and norms. Which criteria of conflict resolution should be applied in those cases and to what extent does the WTO need to take into account or be subordinated to other regimes? Which regime should prevail? And who should decide?

Nevertheless, fragmentation can also occur vertically in the form of collisions among different levels of governance. Diverse layers of governance comprise competing ethical rationales in terms of cultural, traditional and societal backgrounds. Here, one would also be bound to include soft-law norms, typically adopted by non-state actors, notably in areas such as human rights and corporate social responsibility, technical standards or environmental protection. Relevant questions that arise in such cases are: in which governance level should authority be allocated? Which perspective should prevail? To what extent and according to which principles should, for instance, WTO panels defer to national preferences in a WTO context? Vertical fragmentation additionally carries the risk of diverging rules and principles in identical fields of regulation.

Both fragmentation lines additionally bear potential conflicts of jurisdiction and may generate incompatible rulings, when specialized regimes include autonomous dispute settlement and law enforcement mechanisms. For instance, the complexity of the relationship between environmental and trade rules was highlighted in the Chile – Swordfish case. The case relating to a controversy between the EU and Chile over swordfish fisheries in the South Pacific and unloading of swordfish in Chilean ports was brought before both the International Tribunal of the Law of the Sea (ITLOS) and the WTO.

Overlapping scopes of legal regimes could provoke legal uncertainty as to the jurisdiction of dispute settlement bodies, mainly when adjudication could in each case take place under different regimes of general objectives, issue-areas or ethical background. Practice has shown that opposing parties have the possibility to call upon different dispute settlement organs or chose a competent body according to their interests (forum shopping), increasing the risk of differing legal outcomes. National courts could challenge the validity or binding effect of international decisions. States ultimately may be called upon to comply with one system, but by so doing, violate the other, or vice versa. Such situations not only compromise legal security, but also the effectiveness, efficiency and, indeed, survival of the ‘losing’ system.

As the trade related adjudication/arbitration systems (WTO, NAFTA, or ICSID) tend to be strong, and are not only overlapping with a variety of other specialized issue-fields of international law, but also interfere with national ethos and orders, there is an enormous potential of ‘bad’ fragmentation features to be addressed. Further research is needed about the behavioural lines of the actors involved and proposals about how to further shape and develop law in a way that allows coordination of systems and coping with governance challenges in an increasingly globalized and thus interdependent world.

B. The relevant case-law of the WTO

Based on these considerations, a review of the relevant WTO case-law and practice vis-à-vis non-WTO international law appears to be apposite. The WTO dispute settlement system is a self-contained regime in that it establishes its autonomous rules ranging from dispute initiation to enforcement of countermeasures. The Dispute Settlement Understanding (DSU), in its Article 23, establishes the first compulsory third-party adjudication system in the history of international law. The Appellate Body early clarified that WTO law should not be read in ‘clinical isolation from public international law.’ To date, however, the only non-WTO treaty to which the WTO adjudicating bodies refer systematically is the Vienna Convention on the Law of Treaties (VCLT) and most prominently its rules on treaty interpretation, that is, Articles 31 and 32, which are considered as a codification of the public international law rules of treaty interpretation as a matter of general, or customary, international law. They thus constitute the ‘customary rules of interpretation of public international law’ that the WTO adjudicating bodies are bound to apply pursuant to Article 3:2 DSU. More recently, in EC – Chicken Cuts, the Appellate Body clarified that treaty interpretation according to the VCLT rules is a holistic exercise that cannot be mechanically subdivided into rigid components. For our purposes, it bears mention that an important corollary of the VCLT rules of interpretation is the interpretive principle of effectiveness (ut res magis valeat quam pereat or effet utile) which stipulates that interpretation is adequate only if it gives meaning and effect to all the terms of the treaty. This principle calls for an interpretation that does not reduce parts of the WTO Treaty ‘to redundancy or inutility’. It does not, however, call upon the WTO adjudicator to position WTO law into the broader field of general international law nor to apply non-WTO law in a specific manner.

Furthermore, the WTO judicial system being inherently incomplete, non-WTO law has been consistently used as a valuable source of WTO law to fill gaps relating to important procedural questions such as the allocation of the burden of proof; legal standing; temporal/retroactive application of treaties; and representation before panels. Thus, the administration of substantive WTO law is made through recourse to rules and principles developed under general international law. By the same token, the WTO judiciary has made extensive reference to (and, in part, use of) general principles of (international) law such as good faith and abus de droit, in dubio mitius, the principle of effectiveness, the principle of contemporaneity91 and so on.

Frequent cross-referencing to customary rules of treaty interpretation and general principles of law as well as referencing to the relevant case-law of the ICJ enhance the legitimacy of the report of the Panels or the Appellate Body and in the end the legitimacy of the WTO dispute settlement system as a whole. Indeed, such references to general international law enhance the legitimacy of the WTO judiciary in adjudicating competing values. Unitary discourse can be particularly helpful in cases where rules outside the regime may reflect legitimate concerns or internationally recognized ethical positions. The US – Shrimp Appellate Body Report, for instance, is exemplary in this respect.

However, quid other international agreements and generally non-WTO rules? At the outset, a distinction is to be made between agreements to which several WTO agreements refer and agreements that are not explicitly mentioned in any WTO agreement. The former, by way of the explicit reference to them in a given WTO agreement, become direct and autonomous sources of law in WTO dispute settlement proceedings. This is the case, for instance, of the major international intellectual property conventions which, by virtue of Article 1:3 TRIPS, acquire a privileged status when interpreting WTO law. According to a fairly far-fetched understanding of this constellation, even the preparatory work of such agreements can be used to clarify the meaning of WTO law if the latter is essentially inspired from these agreements.

Under this category, mention should be equally made to the privileged role that the TBT and the SPS Agreements reserve for international standards. Thus, domestic laws which are adopted in accordance with or conform to international standards benefit from a presumption of consistency with WTO law, although international standards are typically voluntary and many times are set not only by intergovernmental bodies but also by semiprivate ones such as the International Organisation for Standardisation (ISO). This type of applied subsidiarity or ‘legal outsourcing’ results in an awkward outcome: The application of voluntary semi-private standards can be accepted more easily for WTO dispute settlement purposes than, for instance, an international treaty protecting human rights or establishing minimum labour standards. Implicit incorporation is also to be noticed in the second paragraph of item (k), Annex I to the Subsidies Agreement where tacit reference is made to the OECD Arrangement on Guidelines for Officially Supported Export Credits.97 Similarly, in EC – Bananas III, the WTO judiciary decided that it had competence to assess the Lomé Convention, agreed on by the EC and the ACP countries, because the signatories had been granted a waiver by the WTO General Council. The WTO judicial review was established once the waiver effectively incorporated the Lomé Convention into a WTO agreement.

Nevertheless, no unanimity exists as to the role of international law other than the instruments explicitly or implicitly referred to in the WTO Treaty and its Annexes. Seemingly, the only exception to this statement is the Harmonised Commodity Description and Coding System (‘Harmonized System’) of the World Customs Organization for which the Appellate Body accepted that constitutes context within the meaning of Article 31:3(a) VCLT, that is, an agreement between WTO Members relating to the WTO Agreement that was made in connection with the conclusion of that Agreement. However, this is the notable exception to the rule. Controversy starts once the discussion is focused on what non-WTO rules (other multilateral treaties? Preferential agreements? Bilateral agreements?) and under what conditions (agreements binding to all WTO Members? Binding only to the parties to the dispute?) can be relevant for WTO adjudication purposes.

With respect to custom, the Korea – Government Procurement Panel suggested that, in the absence of any clause in the WTO agreements excluding customary international law, the latter is relevant. This is, however, the only explicit reference of this type to be found in the – admittedly, already voluminous – WTO case-law. With respect to customary law, two examples deserve particular reference at this point: A first, evocative example of incomplete application of international customary law within WTO relate to state responsibility rules on countermeasures, most notably in US – FSC (22.6 – US) where reference was made to the UN General Assembly Resolution on State Responsibility. Importantly, the Arbitrator used this document as supplementary means of interpretation pursuant to Article 32 VCLT. Even if the WTO has indeed emancipated itself from general international law by creating a self-contained mechanism on suspension of concessions which overrides general international law on state responsibility, this is not meant to suggest that the WTO is completely decoupled from those rules which determine the consequences of breaches under general international law. However, retroactive remedies, while being customary law, have not found their place in the WTO proceedings, since for the calculation of damages in the WTO the end of the implementation period is used as a starting point. The second example relates to the precautionary principle and its treatment by the WTO judiciary in the EC Hormones case. Interestingly the Appellate Body contended that this principle can be regarded as a general principle of customary international environmental law, but probably not as a principle of general or customary international law.

Academic debate over the role of non-WTO law for purposes of WTO adjudication is divided. First, there are scholars that argue that non-WTO law should be applicable and sometimes even prevail over WTO rules, for instance, when the responding party successfully invokes a defence drawn from a non-WTO law source. Thus, a trade restriction otherwise inconsistent with WTO law can be justified through reference to rights given by other treaties, for instance the Kyoto Protocol of the UNFCCC. A central premise of this approach is that, whereas the DSU limits the jurisdiction of the WTO judiciary to claims of violation of WTO agreements only, it does not exclude reference to other international law rules when interpreting WTO provisions. (absence of ‘contracting out’).

In a second group, several scholars have emphatically suggested that the WTO adjudicating bodies are to apply as substantive law only WTO law, that is, the ‘covered agreements’ in accordance with the DSU. Article 7 DSU equally suggests as much by essentially specifying the applicable law, that is, the covered agreements. At the most, non-WTO law can be regarded as a factual matter in order to interpret the applicable WTO provisions, for instance, under Articles 31:3(c) or 32 of the Vienna Convention.

It is safe to say that the absence in the DSU of any express reference to other international law other than the one relating to customary rules of interpretation does not necessarily mean that such law does not have a role to play under the WTO adjudication. Additionally, just as in 753, at 766. See also, fairly eloquently, in Appellate Body Reports, US – Cotton Yarn, para. 120 and US – Line Pipe, para. 259. other regimes, in the WTO there is a presumption in favour of exhaustive regulation of a given subject-matter, which potentially has spillovers in, or could be settled by, other regimes, within the WTO. This, however, seems to be more a precaution against unconditional integration of other possible sources of law rather than a total and outright shield against such sources. It seems to be functioning as a filter implying that it is for the WTO adjudicator to decide, on a case-by-case basis, whether such sources should be taken into consideration.

WTO case-law has not yet shed light on the adequate approach to follow. In US – Shrimp, the Appellate Body used ‘modern international conventions and declarations’ to interpret the GATT, in particular the concept ‘exhaustible natural resources’ of Article XX(g). In the compliance ruling, the Appellate Body noted that such international agreements can assist in identifying a wide consensus on certain facts (for instance, are sea turtles an exhaustible natural recourse?) and thus in correctly establishing the meaning of Article XX(g). By adopting an evolutionary (and unitary from an international law perspective) approach, the Appellate Body largely neglected the relevant negotiating history of the GATT and found that ‘exhaustible natural resources’ include both finite (such as oil) and biological resources (such as sea turtles). Importantly, the Appellate Body referred to non-WTO law which does not bind all WTO Members. Similarly, in US – FSC, the Appellate Body referred to several bilateral and international agreements to interpret the concept of ‘foreign source income’ of footnote 59 to the SCM Agreement. By the same token, in EC – Asbestos the Appellate Body looked at WHO Conventions to find evidence as to the factual issue of toxicity of asbestos and the deleterious effects of its use to public health. In Chile – Price Band System, on the other hand, the Appellate Body denied to endorse a practice developed by various countries in the region as relevant for the interpretation of the Agreement on Agriculture.

Even if the US – Shrimp ruling is a rather atypical ‘discursive pattern’ which cannot allow us to prejudge future judgments, it can be argued that, whenever the WTO judiciary feels that the invoked non-WTO rules embody legitimate concerns o internationally recognized ethical positions preferably backed by a sufficient degree of consensus among WTO Members, even if not all WTO Members are also parties to the other agreement. However, in this case, it is highly likely that such an approach will be against the GATT traditions, as expressed by the travaux préparatoires. This seems to be inevitable, as the GATT founding fathers created an autonomous regime which was aimed to tackle trade-specific issues without reflecting on other issues which may increasingly interact with trade in the future. Since trade-only considerations cannot prevail in the mind of the contemporary WTO adjudicator, the conflict with the traditional GATT ethos is ordained by fate.

Non-WTO law can also be looked at to determine the appropriate application, rather than interpretation of a given WTO provision. In US – Shrimp, the Appellate Body, when examining the consistency of the application of the measure at issue with the requirements of the chapeau of Article XX GATT, found that the very existence of the Inter-American Convention for the Protection and Conservation of Sea Turtles suggests that the United States had acted in an unjustifiably discriminatory manner by negotiating with some countries, but not with others. As the Appellate Body explained in the Article 21.5 proceedings, such an agreement is not thereby converted into an autonomous legal standard, but is merely evidence of non-comparable, and potentially discriminatory treatment of non-signatories. In US – Shrimp (21.5 – Malaysia), the Appellate Body agreed with the Panel that regional fishing arrangements negotiated by the United States demonstrated the good faith efforts of that Member to protect sea turtles. Hence, reliance even on regional arrangements or standards may provide a de facto presumption of good faith, as warranted by Article XX.

(Edited by: China West Lawyer)