International Trade Update

Free Trade Agreements

Bush Administration’s Ambitious 2003 Trade Agenda

The Bush Administration recently concluded negotiations for free trade agreements with Chile and Singapore, and is actively pursuing agreements with Morocco, Australia, Central America, and the Southern African Customs Union. This ambitious agenda for free trade negotiations comes after the renewal by Congress of the Trade Promotion Authority (TPA) in August 2002. TPA (informally known as "fast track" authority) enables the President and his advisors to negotiate trade agreements with foreign nations and limits Congress’ power to approving or rejecting the entire agreement, with no ability to make any amendment to the negotiated text. Meanwhile, work continues on the Free Trade Agreement of the Americas and the Doha Round of World Trade Organization (WTO) negotiations. A number of other countries have informally requested negotiations leading to a free trade agreement with the United States; however, it is unlikely that any such initiatives can be undertaken in the near term. The aggressive efforts of the Administration to expand free trade have already put together an agenda that will test the resources and staff of the USTR in the coming months.

Proposed Repeal of Byrd Amendment

In January, the Appellate Body of the WTO confirmed a decision by a WTO Dispute Resolution Panel that the Continued Dumping and Subsidy Offset Act of the United States, the so-called "Byrd Amendment," is incompatible with WTO rules. The Byrd Amendment provides that antidumping and countervailing duties collected on imports into the United States are to be distributed to entities that supported the antidumping and countervailing duty petitions that led to the imposition of the duties. Specifically, these entities can be reimbursed for certain qualifying expenses, such as investments in manufacturing facilities and acquisition of technology, environmental equipment, working capital, and input costs, that were incurred after the effective date of the antidumping or countervailing duty order.

On March 11, one day after the Bush Administration proposed repealing the amendment as part of its budget recommendations, 68 senators sent a letter to President Bush urging him to preserve the amendment. The senators—comprising 44 Democrats, 23 Republicans and one independent—wrote that the Byrd Amendment was critical to maintaining U.S. jobs that otherwise would be lost in the steel industry and other sectors due to illegal dumping or unfair subsidies. They also accused the WTO of overstepping its bounds, arguing that the WTO was incorrect when it found the amendment to be inconsistent with U.S. treaty obligations. Please contact Martin Schaefermeier at 202-371-6220 if you are interested in learning more about this issue.

Miscellaneous Trade Bill Passes

The House of Representatives on March 4 passed the Miscellaneous Trade and Technical Corrections Act of 2003 (H.R. 1047). The bill is now being held up in the Senate by Sen. Richard Shelby (R-Ala.) who wants to add a controversial provision that would remove duty-free benefits for knit-to-shape socks under the Caribbean Basin Trade Partnership Act (CBTPA). The bill would, among other things, reduce or suspend duties on over 300 different products, expand the Generalized System of Preferences treatment for Pakistan, and grant most-favored nation (MFN) status to Serbia and Montenegro.

Lugar Introduces Russia MFN Bill

On March 10, U.S. Senate Foreign Relations Committee Chairman Dick Lugar (R-Ind.) introduced legislation to repeal the Jackson-Vanik amendment to Title IV of the 1974 Trade Act as it relates to Russia, and to authorize the President to establish permanent normal trade relations with Russia. Lugar stated that granting permanent normal trade relations will "provide certainty that will improve the investment climate and promote enhanced economic relations between the U.S. and Russia."

The Bush Administration had hoped to win congressional approval for MFN trade status for Russia by May, when President Bush is scheduled to meet Russian President Vladimir Putin; however, in light of the current bilateral tensions between Russia and the United States, it is unlikely that Russia will be graduated to MFN status in time for the summit. In addition, Russia’s intention to impose a trade-restrictive quota on poultry imports and tariff-rate quotas on beef and pork has angered U.S. farm groups, who have urged the Administration to impose trade sanctions against Russia. Finally, many members of Congress have voiced their concern over granting Russia MFN status before its accession to the WTO, stating that doing so will hinder U.S. negotiators in securing Russia’s entry to WTO on favorable terms.

U.S. Farm Groups Push For Cuba Embargo Liberalization

U.S. farm groups are pushing for support of the Free Trade With Cuba Act 2003. On March 11, 22 groups sent a letter to Sen.Max Baucus (D-Mont.), who introduced the Act in February, indicating their support of the Act. They note that while some legislative changes have been made to the process of exporting agricultural commodities to Cuba, significant restrictions remain that disadvantage U.S. farmers, ranchers and agribusinesses.

Although there has been some indication that public opinion is shifting in favor of more liberal trade with Cuba, President Bush has opposed further liberalization as long as Fidel Castro remains in power. In addition, both Congress and Cuban-American groups remain sharply divided as to the future of the U.S. embargo on Cuba.

Since the NAFTA entered into force in 1994, Mexico has been attempting to find a negotiated settlement to the dispute over U.S.-imposed quotas on its sugar exports. The dispute arose during congressional consideration of the trade pact when, in response to objections from sugar state members of Congress over the NAFTA provisions that would allow eventual free trade in sugar, the United States and Mexico negotiated a side agreement to cap Mexican sugar exports. However, the side agreement letters were never finally agreed upon and, with the continued U.S. imposition of quotas on Mexican sugar, Mexico responded by levying restrictions on imports of U.S. high fructose corn syrup. Efforts to settle the sugar dispute again failed in late 2002. In January, the Mexican Congress reimposed a 20 percent tax on soft drinks that use HFCS. The effect is to force Mexican soda manufacturers to increase use of cane sugar from the ailing Mexican sugar industry and decrease their reliance on HFCS suppliers, which are mostly U.S. companies. U.S. exports of HFCS have been effectively shut down, which has had a significant impact on U.S. corn producers. Any eventual settlement of the dispute will have to resolve both the sugar and HFCS issues.

Trade tariffs between the United States and Mexico have been phased out progressively under NAFTA since 1994, and on January 1, tariffs were eliminated on a wide range of agricultural products. The lifting of these tariffs has put increased competitive pressure on Mexican farmers. Mexican farm groups have therefore responded to the tariff elimination by pressuring the Fox administration to renegotiate trade terms under NAFTA or take other measures to inhibit imports of U.S. products. In response to this pressure, the Mexican government has begun to aggressively monitor imports and seek means to combat alleged unfair imports.

In January, Mexico initiated an antidumping investigation against U.S. pork. The United States has been working through bilateral channels to end the investigation and has raised the prospect of a U.S. challenge before the WTO should Mexico decide to impose duties.

Major trade disputes in the past year have placed significant pressure on the U.S.-E.U. trading relationship. Hostilities on both sides of the Atlantic center around U.S. non-compliance with World Trade Organization dispute resolution decisions, a continued E.U. import ban on U.S. hormone-treated beef and genetically modified foods, and the implications of these issues for the Doha Round of WTO negotiations.

The European Union is concerned that, by its account, the United States is out of compliance with WTO decisions in five cases:

• FSC: In January 2002, the WTO ruled in favor of theEuropean Union, finding the Foreign Sales Corporation (FSC) provisions of the U.S. tax law inconsistent with WTO rules. No legislation to repeal or replace the FSC passed during the 107 th Congress, and a repeal of the law continues to face strong opposition from many members of Congress. The European Union has been threatening to impose over $4 billion in trade sanctions against U.S. products.

• 1916 Antidumping Act: In September 2002, the WTO ruled against an 84-year old U.S. antidumping law that enabled initiation of proceedings against imports on the ground of transnational price discrimination and provided for civil and criminal penalties other than an antidumping duty to offset a dumping margin. Under Art. VI of GATT 1994 a member may not take antidumping action through measures other than a levy of an antidumping duty. The Act has yet to be repealed due to congressional opposition.
• U.S. Copyright Act: In 2000, a WTO panel found that U.S. copyright law does not afford the same protection to E.U. musicians in the United States as to U.S. musicians in the European Union In the European Union, all establishments are liable to pay a copyright fee for music. In contrast, a loophole in U.S. copyright law, dubbed the "Aiken exemption," exempts bars, restaurants, and retail outlets under 3,500 square feet from paying royalties for recorded music they play. In 2001, the United States agreed to pay $3.3 million over three years to remunerate European musicians for lost profits, and promised to remove the Aiken exemption from U.S. copyright law. However, the U.S. administration has yet to settle the matter.

• Steel Privatization: The WTO recently ruled against the United States in a case involving U.S. countervailing duties (CVD) on carbon steel manufactured by former state-owned steel makers in Europe. The panel’s decision prevents the United States from imposing countervailing duties against firms that have changed ownership in arms-length, market value transactions. The U.S. steel industry is expected to advocate that the U.S. government refuse to implement the ruling.

• Byrd Amendment:

Adding to this tension, the United States continues to express dissatisfaction over E.U. trade policies regarding U.S. agriculture. The Bush Administration, supported by biotech firms and many members of Congress, has expressed interest in bringing a case before the WTO over the E.U.’s 4-year-old ban on the importation of genetically modified organisms (GMOs).

In addition, the United States and the European Union are at an impasse over the European Union’s refusal to grant European market access to U.S. hormone-treated beef, which effectively blocks nearly all exports of U.S. beef to Europe. The European Union claims that the hormone-treated beef has been found to be carcinogenic, and that WTO rules allow product bans when human health could be threatened. In 1999 the United States retaliated against the E.U. ban, imposing $116.8 million in retaliatory tariffs on European products. The European Union has recently threatened to take the matter before the WTO again, to try to force the United States to end the tariffs.

Disagreements over agriculture policy also threaten to gridlock the current Doha Round. The deadline for agreement on intellectual property rights with regard to medicines has already been missed, and the deadlines for agreements on agriculture and services are fast approaching. It seems clear that without an agreement on agriculture, at least, the parties will not be able to finish the round. Both the United States and the European Union are preparing for the upcoming mid-term ministerial round and discussing what needs to happen to keep the negotiations on track.

Summary

In an arbitration of a claim by an investor against the Mexican government, where the claimant proved discriminatory treatment in violation of Chapter 11 of the North American Free Trade Agreement (NAFTA) and claimed damages of approximately US $40 million, the arbitral tribunal awarded the claimant only approximately US $1.5 million in damages. Moreover, despite finding a compensable violation of the investor’s rights under NAFTA, the tribunal did not award costs or attorneys’ fees. This award demonstrates that, although multilateral and bilateral investment treaties provide investors with redress of claims against state parties in which they have investments, in practice such redress may provide only limited relief.

Arbitration Under NAFTA Chapter 11

Chapter 11 prohibits NAFTA parties from undertaking certain kinds of measures with respect to investors of other NAFTA parties or their investments. Prohibited measures include: treatment of an investor of another party that is less favorable than the treatment accorded in like circumstances to its own investors, or to investors of any other party or non-party (whichever is more favorable), with respect to their investments; imposition of certain kinds of performance requirements with respect to investments, regardless of whether the investor’s home state is a NAFTA party; and directly or indirectly nationalizing or expropriating an investment of an investor of another NAFTA party unless certain requirements are met. Under NAFTA Chapter 11, an investor of one NAFTA party may submit a claim regarding an investment in the territory of another NAFTA party to arbitration under one of three sets of rules: (1) the Convention on Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention), (2) the Additional Facility Rules of the International Centre for Settlement of Investment Disputes (ICSID), or (3) the arbitration rules of the United Nations Committee on International Trade Law (UNCITRAL).

Calculation of Damages

Seven final awards on the merits have been rendered by arbitral tribunals under NAFTA Chapter 11. Only one of these decisions found a compensable expropriation under Article 1110 of NAFTA. NAFTA does not provide explicit guidance as to the means for determining damages for Chapter 11 claims. With respect to non-expropriation violations, Chapter 11 simply provides that investors may submit to arbitration claims that the other party violated certain obligations under NAFTA, such as national treatment, and that the investor or enterprise "has incurred loss or damage by reason of, or arising out of, that breach."

With such limited guidance provided by Chapter 11, tribunals finding non-expropriation violations of Chapter 11 have exercised broad discretion in determining what they consider to be reasonable approaches to calculating damages consistent with the requirements of NAFTA. A recent arbitration decision demonstrates these tribunals’ reluctance to award any damages that are speculative in nature.

In Feldman v. United Mexican States, the claimant, the sole investor in CEMSA, a company engaged in the export of tobacco products from Mexico, alleged that the Mexican government breached its obligations under NAFTA Chapter 11, Section A, by refusing to rebate excise taxes applied to cigarettes that CEMSA exported and by continuing to refuse to recognize CEMSA’s right to a rebate of such taxes with respect to CEMSA’s prospective cigarette exports. The tribunal did not find an expropriation in breach of Chapter 11, Article 1110, but it did find Mexico to be in breach of its national treatment obligations under Article 1102.

The tribunal took a rather restrictive approach to calculating the claimant’s damage award. The tribunal eliminated the "going concern value" claimed by the investor; this measure of damages is only available in arbitrations in which the claimant prevails on a claim of expropriation. With respect to the claimant’s request for lost profits, the tribunal found that the claimant had not been specific enough in its statement of lost profits, and noted that even had the claimant been more specific, the tribunal was not convinced of the existence or extent of the claimed lost profits. The only element of the claimant’s requested damages that the tribunal awarded was the amount of tax rebate the claimant should have been paid had the claimant not been the subject of discriminatory treatment by the Mexican government. The tribunal increased the amount of the award by simple interest calculated from the date the rebates should have been paid to the date of the decision.

The claimant in Feldman was awarded only approximately US $1.5 million out of the approximately $40 million requested. The tribunal’s award did not include the costs of arbitration or attorneys’fees; in complex arbitrations, the arbitrators’ costs alone can total several hundred thousand dollars. Thus, the result for the claimant was a very modest award.

Broader Implications

Although Feldman v. United Mexican States was submitted to arbitration under NAFTA, the tribunal’s approach to calculating damages (and approaches taken in other recent awards finding non-expropriation violations of NAFTA obligations) has broad implications for arbitrations submitted under other investment treaties and carried out under other arbitration rules. Like NAFTA, other investment treaties tend to provide arbitral tribunals with little guidance in calculating damage awards. Feldman confirms the emerging jurisprudence suggesting that, although lost profits may be recoverable under the provisions of an applicable multilateral or bilateral investment treaty, tribunals adjudicating disputes under investment treaties are generally reluctant to award lost profits, particularly where the claimed lost profits are remote or speculative.

This reluctance of arbitral tribunals to render damage awards on the basis of lost profits is of particular concern to those investors for whom the only harm caused by the discriminatory treatment was in the form of lost profits. For example, where an investor that is new to the market is denied a license necessary to engage in a certain area of economic activity, or issued a license with a more limited scope than the licenses issued to domestic competitors, it would be very difficult for the investor to prove its lost profits in a concrete and precise enough manner to satisfy the evidentiary requirements as articulated by some arbitral tribunals. Profit loss is frequently the only harm caused by discriminatory treatment; because lost profits are by their nature speculative, a fundamental protection of multilateral and bilateral investment treaties is weakened significantly by arbitral tribunals’ cautious approach to calculating claims for lost profits.