At the start of the negotiations, which ran from 29 November to 10 December, positions on future obligations were diametrically opposed. China and India said they would not endorse any agreement that did not commit developed countries to take on further greenhouse gas emission reductions under the Kyoto Protocol. The US - which is not a party to the treaty - wanted to replace Kyoto with a new agreement that would include binding commitments for all countries. The possibility of a compromise receded further when Canada, Japan and Russia announced that they would not sign up for a second phase of Kyoto commitments.

Agreement by Consensus Minus One

That delegates managed to agree upon a final outcome at all was an impressive feat, skillfully steered by Mexico’s foreign minister Patricia Espinosa, who took an inclusive approach in search for a solution that all countries could accept. Only Bolivia refused to endorse the final texts, arguing to the end that they could not be adopted due to lack of consensus. Doing so would set a dangerous precedent for exclusion, Bolivia said. Minister Espinosa responded that consensus did not mean unanimity, and one country could not exercise a veto power over 193 others. She gavelled the meeting to a close taking note of Bolivia’s objections.

Many delegates hailed the return of multilateralism to the negotiations, and stressed that the agreement was just a first step toward a more detailed and comprehensive outcome they hope to reach next year in Durban, South Africa.

Fate of Kyoto Still Unclear

For many developing countries, the 1997 Kyoto Protocol is the cornerstone for implementing the principle of ‘common but differentiated responsibilities’ in combating climate change. The treaty currently binds 37 developed nations to reduce greenhouse gas emissions by the end of 2012. New targets, covering the years 2013 to 2020, have been the subject of difficult negotiations over the past few years.

A two-page document adopted in Cancun directs Kyoto parties to complete their work “as early as possible and in time to ensure that there is no gap between the first and second commitment periods.” It also urges participants to raise the level of ambition of their reduction targets. According to the Intergovernmental Panel on Climate Change, potential damage limitation would require Kyoto parties to bring their collective emissions to 25.4 percent below 1990 levels by 2020. However, the possible defection of Canada, Japan and Russia, as well as the absence of the United States and major developing country emitters, leaves the protocol’s future uncertain.

All Countries Will Act to Prevent Dangerous Temperature Rise

The main Cancun outcome document focuses on long-term co-operative action under the Climate Change Convention itself. It emphasises a shared vision of climate change as one of the greatest challenges of our times, and recognises that deep cuts in global greenhouse gas emissions are required to ensure that the global average temperature rise is kept below 2°C above pre-industrial levels. Due to their historical responsibility for carbon emissions, developed countries should take the lead in combating climate change, but developing countries will also take ‘nationally appropriate mitigation actions’ aimed at achieving lower emissions by 2020 than would be the case under a ‘business as usual’ scenario.

Over the coming year, governments will try to identify a global goal for emissions reductions by 2050, as well as set a timeframe for differentiated ‘peaking’ of global emissions. The outcome of those deliberations will be considered at the Durban conference of the parties.

Financing for Developing Countries

On paper, at least, Cancun delivered more in terms of funding than many dared hope. It confirmed the Copenhagen Accord’s collective commitment by developed countries to provide US$30 billion in ‘fast-start’ financing between 2010 and 2012 to help developing countries deal with the impacts of climate change (adaptation) and curbing emissions (mitigation). Adaptation will be prioritised for least-developed countries, small-island developing states and Africa.

Longer term, developed countries committed to a goal of mobilising US$100 billion a year by 2020 to address climate-change-related needs of developing countries. Much of the money is to flow through a new Green Climate Fund, the details of which will be elaborated by a committee where developing countries will hold more than half of 40 seats. The fund will operate under the auspices of the World Bank for at least the first three years, supervised by 24-member board comprising an equal number of developed and developing country representatives.

How the annual $US100 billion would be raised remains sketchy (the decision on long-term co-operative action refers rather airily to a ‘wide variety of sources, public and private, bilateral and multilateral, including alternative sources of finance’).

Transparency Required on Mitigation Action

Developing countries’ access to international financing will be conditional to the recipients taking ‘meaningful’ action on mitigation and allowing their actions to be subjected to international measurement, reporting and verification (MRV).

The US in particular had insisted on independent verification of mitigation actions funded by international donors, while China was equally adamant that developing countries should only be subject to domestic MRV requirements. The Cancun text resolves this conflict by clarifying that international consultations and analysis of developing country reports will be “conducted in a manner that is non-intrusive, non-punitive and respectful of national sovereignty.” The text further specifies that technical experts will carry out their analysis in consultation with the party concerned.

Conserving Forests

Forests play a major role in absorbing carbon. Subject to adequate financial and technical support, developing countries are urged to take measures to reduce emissions from deforestation and forest degradation. As a first step, they should develop national strategies and ‘robust and transparent’ national forest monitoring systems. The national strategies should address a wide variety of issues, including drivers of deforestation and forest degradation, land tenure and forest governance. Forestry-related activities should be undertaken in accordance with national development priorities, and respect the rights of indigenous peoples and local communities.

Difficult Trade Issues Dropped

Several key issues related to trade were dropped in order to reach consensus. For instance, all references to the use of unilateral response measures that could impact on international trade were removed, leaving a crucial element of enforcement and regulation unresolved. Many developing countries want such measures to be explicitly prohibited. Agriculture and bunker fuels used in shipping were also snipped from the text after the two issues became inextricably linked and parties could not agree on how to manage bunker fuels. They were also a casualty of the fundamental debate on whether climate change may be used as an excuse for discriminatory trade measures. Depending on how the fallout of the Cancun agreement settles, these thorny issues could regain prominence next year in Durban.

Heads of state of the G-20 and the Asia-Pacific Economic Co-operation (APEC) recognised that next year offered a critical, if narrow, window of opportunity to bring the multilateral trade talks to a conclusion.

The G-20 welcomed the ‘broader and more substantive engagement’ of Geneva-based trade envoys over the past four months and said now was the time to ‘complete the end-game’. Delegates should engage in across-the-board negotiations to promptly bring the round to a ‘successful, ambitious, comprehensive and balanced conclusion’, the final communiqué said.

APEC leaders called upon their representatives “to engage in comprehensive negotiations with a sense of urgency in the end game, built on the progress achieved, including with regard to modalities, consistent with the Doha mandate.”

The concluding statements of both gatherings appeared more resolute than previous declarations about securing parliamentary approval for an eventual Doha deal. The G-20 committed to seek ratification where necessary, and the 21 APEC members vowed to “win domestic support in our respective systems for a strong agreement.”

While all this sounds like good news for the languishing Doha Round, it remains to be seen whether WTO Members can finally agree on what would constitute the ‘successful, ambitious, comprehensive and balanced’ outcome they have been chasing for nearly a decade. So far, little has transpired to indicate that compromise is within reach between Washington’s insistence on greater access to emerging markets and the resistance of Brazil, China, India and South Africa to such demands (see page 4). Meanwhile, most G-20 and APEC countries are feverishly pursuing bilateral and regional trade pacts (see page 15).

Beyond the Doha Round, the summiteers emphasised the importance of resisting protectionism. But where the G-20 reiterated the group’s commitment to roll back any new protectionist measures that may have risen since the June Toronto summit, “including export restrictions and WTO-inconsistent measures to stimulate exports,” APEC leaders promised to eschew such measures in all areas, as well as exercising ‘maximum restraint’ in taking action that might have significant protectionist effects even if the measure did not breach any WTO provisions (see related story on page 13).

Balancing Growth: Maybe Later

The broader goal of rebalancing global growth and trade fared far less well. Against a backdrop of high unemployment in developed countries that import far more than they export, the G-20 summit in Seoul in particular was mired in acrimonious debate over who should act, and how, to reduce disparities.

The US wanted G-20 members to commit to keeping their current-account imbalances (trade surpluses or deficits) below 4 percent of GDP over the next few years. China and Germany - with trade surpluses of 4.7 and 6 percent respectively - firmly rejected the idea. Chancellor Angela Merkel objected to “politically imposed upper limits on trade surpluses or deficits that are neither economically justified nor politically appropriate.” China’s deputy foreign minister Cui Tiankai said the plan harked back “to the days of planned economies.”

Faced with an impasse, the leaders promised to “reduce the reliance on external demand and focus more on domestic sources of growth in surplus countries while promoting higher national savings and enhancing export competitiveness in deficit countries.” The Toronto G-20 summit had agreed to more or less identical language in June, but both China’s and Germany’s exports have galloped ahead regardless.

In a small step forward, the leaders set up a somewhat fuzzy process to address the problem of ‘persistently large imbalances’. They directed finance ministers and central bank governors to develop, by the first half of 2011, a set of “indicative guidelines composed of a range of indicators that would serve as a mechanism to facilitate timely identification of large imbalances that require preventive and corrective actions to be taken.” The International Monetary Fund was charged with “assessing progress toward external sustainability and the consistency of fiscal, monetary, financial sector, structural, exchange rate and other policies.”

It is unclear whether G-20 members will agree on such guidelines, let alone enforce them rigorously. In a report submitted to the Seoul meeting, the IMF estimated that based on existing trends, current account deficits in advanced deficit economies would ‘nearly double’ by 2014.

Stalemate on Currencies

Exchange rate policies were easily the most controversial topic in Seoul. In the build-up to the summit, the US led the push for a faster appreciation of the yuan, blaming China for deepening global imbalances by keeping the currency undervalued. China argued that the US trade deficit would not diminish significantly as a result of a more expensive yuan, and insisted that currency reform would be gradual and guided by national economic needs.

The pressure on China eased when, just days before the summit, the US Federal Reserve embarked on a second round of ‘quantitative easing’ (QE2), which made a number of countries in Seoul point the finger at Washington.

Fed chairman Ben Bernanke defended the injection of a further US$600 billion into US capital markets as necessary to stimulate the economy and reduce high un-employment, but Brazil noted with concern that the policy would lead to a further strengthening of the real,  as well as other currencies such as the South Korean won, undercutting their competitiveness.

China and Germany were among those arguing that the Fed’s decision amounted to a deliberate effort to weaken the dollar and thus gain an export advantage at the expense of other countries.

Treasury Secretary Tim Geithner vehemently denied the allegations. The US would “never seek to weaken our currency as a tool to gain competitive advantage or to grow the economy,” he said. Beijing, however, remained unconvinced. “Don’t make other people take the medicine for your disease,” quipped Yu Jianhua of the Chinese commerce ministry. “Quantitative easing will have a very big impact on developing countries including China.”

The arm-wrestling between the two giants resulted in a vague general commitment to “move toward more market-determined exchange rate systems and enhance exchange rate flexibility to reflect underlying economic fundamentals” with no timeline or details attached. The leaders also promised to “refrain from competitive devaluation of currencies.” The language was reproduced verbatim in the APEC leaders’ declaration a couple of days later.

Uncertain Way Forward

Continuing divisions over imbalances and exchange rates may lead to an intensification of trade-related tensions, some experts warn.

Eswar Prasad, who teaches trade policy at Cornell University, sees a worrying potential that open conflicts on currencies will “feed into more explicit forms of protectionism, which could set back the global recovery.”

University of Chicago finance professor Raghuram Rajan noted wryly that “it was always clear that the G-20 would be able to do little concrete on the imbalances… The reality is that every large country will do what it thinks is best for its own agenda.”

The challenge for trade negotiators in Geneva will be to translate the Doha-friendly rhetoric of the two summits into reality against this backdrop.

In his address to the Trade Negotiations Committee meeting on 30 November, WTO Director-General Pascal Lamy outlined an intensive work programme for the months ahead. The push followed back-to-back G-20 and APEC summits, where heads of state recognised that 2011 presented a ‘critical, albeit narrow’ window of opportunity for concluding the talks (see page 1 for details).

“We have the political signal, we have the technical expertise and we have the work programme. We now need to translate these into a comprehensive deal which you can all take back home. The final countdown starts now,” Mr Lamy told Geneva-based negotiators.

The Process Ahead

The first objective is to update the 2008 draft agreements that would serve as the basis for hammering out a final accord. DG Lamy wants these for each area of the talks by the end of the first quarter of 2011. He urged Members to come forward with compromise proposals that would reduce the number of disagreements in the future texts.

The so-called ‘cocktail approach’ - consisting of meetings in various formats, including small groups, bilateral contacts, negotiating sessions and consultations led by the DG - is set to continue. From 10 January, negotiating groups on rules, trade facilitation, trade and environment, intellectual property rights, as well as development, will begin intensive sessions, to be joined a week later by agriculture, non-agricultural market access (NAMA), services and dispute settlement. Mr Lamy stressed that ambassadors and senior capital-based officials would play a key role in the discussions.

As the Director-General envisions it, this process will ultimately lead to tradeoffs across different negotiating areas: Members will have to “develop more of a global sense of what the final package will contain,” he said.

But frequent meetings alone will not suffice to overcome the deep substantive divisions among major economies that have left the Doha Round deadlocked for the past two years. In particular, the US has clashed with China, India and Brazil over access to fast-growing emerging markets. Washington says that the deal currently on the table is insufficient. Many countries have rejected these demands as out of proportion to what the United States is being asked to do to, particularly in terms of cutting farm tariffs and subsidies (see page 23).

WTO G-20 Demand New Concessions on Agriculture

Comments at the TNC meeting underscored the difficulties in forging consensus. Brazil, speaking on behalf of the G-20 developing country alliance on agriculture (not to be confused with the G-20 leading economies), warned that traditional providers of subsidies would have to make new concessions on agriculture if they hoped to get anything in return.

The US reiterated its view that China, India, Brazil and other large developing countries must provide greater access to their own markets. Chinese Ambassador Sun Zhenyu urged members to take a ‘realistic and pragmatic approach’ to the talks ahead. He noted that, in Seoul, G-20 leaders had also called for ‘respecting’ the Doha Round’s development mandate and ‘building on the progress already achieved’. He warned that “any unilateral movement of the goalpost and change of the rules in the end-game would cause further delays to the negotiations.”

DG Lamy reminded Members that even after basic agreement on a Doha package, it would take at least six to seven months for governments to schedule product-specific tariff and subsidy commitments and finish up the ‘legal polishing’ of the final accords. “We need to recall constantly that the clock is not our friend,” he cautioned.

With regard to access to generics, WTO Members reviewed how well the so-called ‘paragraph 6 solution’ was working. The term refers to a paragraph in the Doha Declaration on TRIPS and Public Health, which instructed the TRIPS Council to find an ‘expeditious solution’ to the problem faced by developing and least-developed countries lacking domestic capacity to manufacture generic versions of patented drugs under compulsory licence.

The solution, adopted by WTO Members in 2003, allows generics makers to export drugs under compulsory licence to developing countries without manufacturing capacity, but also imposes a complex web of requirements on both exporters and importers, mostly designed to ensure that the drugs are not re-exported to other countries, where they could threaten brand-name manufacturers’ markets. The procedure has been used only once, for a shipment of HIV/AIDS drugs from Canada to Rwanda in 2008.

India, Brazil, China, South Africa and other developing countries argued that this infrequency implied that the system must be too complicated to use. Canada, backed by other developed countries such as the US, Australia, Japan and Switzerland, suggested that the system was fine, and that governments had not used it because they were able to negotiate better drug prices with patent-holders, or import cheap generics from countries where the drugs were not under patent.

Canada stressed that once Rwanda had formally signalled its intention to use the system, it took Canadian patent authorities just 15 days to grant a compulsory license to generics manufacturer Apotex in 2007. An eight-month-long public tender process in Rwanda then ensued, which Apotex won by beating out an Indian competitor on price (eventually selling at below cost). In September 2008, the company shipped 6,785,000 tablets to Rwanda. A second shipment followed a year later, completing the country’s order.

India reported a much less positive experience. New Delhi’s representative said that a least-developed country lacking adequate drug manufacturing capacity (believed to be Nepal) had sought to use the system to import three patented medicines under compulsory licence from India, but ultimately gave up, dissuaded by the various notification, packaging, labelling and website tracking requirements set out in the paragraph 6 solution.

The delegate reminded Members that while India was the source of the vast majority of donor-funded HIV/AIDS medication, it has been required by the TRIPS Agreement to provide patent protection to pharmaceutical products since 2005. Thus, while pre-2005 drugs were for the most part off-patent in India and thus easily available for generic production, post-2005 drugs - which include the newer, more expensive HIV/AIDS treatment regimes - are patent-protected there.

A representative from the World Health Organisation also made a distinction between pre- and post-2005 drugs. While the official argued that access to medicines had to do with more than just intellectual property, he did note that competition from generics had cut prices of first line HIV/AIDS medicines dramatically over the past decade, enabling a massive increase in the number of patients receiving treatment. It could become necessary to use the paragraph 6 solution to acquire post-2005 medicines at affordable prices in the future, he said.

IP Enforcement Treaty under Fire

A number of developing countries issued stern warnings that the newly finalised Anti-counterfeiting Trade Agreement (ACTA) would undermine multilateral co-operation and global rules on intellectual property (see analysis on page11).

India said that ACTA risked “completely upset[ting] the balance of rights and obligations of the TRIPS Agreement,” and expressed concern that the treaty might subject non-parties to higher levels of intellectual property enforcement than those demanded under TRIPS, distorting the legitimate movement of traded goods in transit, and weakening the institutional status of the WTO and WIPO.

China called for scrutiny of the consistency and compatibility between ACTA and the WTO legal framework, particularly about whether it risked creating additional trade-restricting obligations for WTO members. In addition, the Chinese delegate criticised the lack of transparency that characterised much of the ACTA negotiations.

Both China and India also evoked the possibility of trade disputes if non-parties to ACTA end up affected by the agreement’s provisions.

Brazil expressed a strong preference for multilateral solutions and multilateral fora with legitimate credentials, such as the WTO and WIPO, “whose deliberations are not only open to more than 140 member countries, but are also conducted in as transparent a way as possible, including representatives from civil society and NGOs.”

The Brazilian delegate also noted with concern that ACTA contained “the necessary ingredients that may convert it, over time, into a truly international organisation dealing with the enforcement of IP rights, a development whose impact on WIPO and the WTO, especially on capacity-building and technical assistance, are unpredictable at this stage.”

ACTA participants (all but four of the 40 signatories are developed countries) reportedly rejected these allegations, arguing that the agreement would not affect TRIPS and was necessary to tackle counterfeiting, particularly for dangerous counterfeit medicines and spare parts.

Even before the broader stagnation in the Doha Round over the past two years, WTO negotiations on the liberalisation for goods with an environmental purpose were struggling. The discussions stem from the Doha Declaration’s paragraph 31.iii, which calls for negotiations on “the reduction or, as appropriate, elimination of tariff and non-tariff barriers to environmental goods and services.”

Despite nearly a decade of negotiations, the membership is yet to agree on what constitutes an environmental good. More than 150 products - mostly air-pollution control, solid-waste management, wastewater treatment and renewable energy equipment - have been proposed, including 43 ‘climate-friendly’ goods pushed by the EU and US as a matter of priority. Many developing countries complain that the list reflects Northern export interests. India advocates a different approach, under which a country would temporarily remove trade barriers to products and services needed for a specific environmental project, while Brazil has suggested that countries could engage in a request-offer process similar to the one used in the services negotiations.

Delegates spared each other a review of these differences at the November negotiating session of the Committee on Trade and Environment. Some, such as Brazil, noted that a range of other issues needed to be discussed, including special and differential treatment for developing countries, technology transfer and non-tariff barriers. The US countered that these cross-cutting issues could not be addressed in the abstract; they needed to be examined in relation to specific products. China and other delegations emphasised that the environmental goods negotiations should produce a ‘triple win’ with economic, environmental and developmental benefits.

Saudi Arabia introduced a paper based on ideas it had raised in previous meetings, namely labelling requirements, standards and intellectual property-related policies that can act as non-tariff barriers (NTBs) to environmental goods. It did not identify specific examples, however. In July, Saudi Arabia requested the chair to revise the list of products to include NTBs.

Members also discussed a different aspect of the Doha mandate on trade and environment: the clarification of the relationship between existing WTO rules and specific trade obligations set out in multilateral environmental agreements (MEAs).

In a new proposal (TN/TE/W/77) - the first on the subject in over two years - Switzerland called for a ‘conciliatory and non-adjudicatory’ process in which Members with different views on the relationship between existing WTO rules and MEA trade obligations could ask the CTE chair to facilitate discussions aimed at a solution, thus heading off controversial disputes. The paper, which included proposed potential text for a decision by the Ministerial Conference, the WTO’s top decision-making body, also said that in the event of trade disputes involving tension between WTO and MEA rules, countries should be encouraged to draw on the expertise of relevant experts, and that dispute panels “shall possess or have available the necessary expertise regarding both the WTO rules and the multilateral environmental agreement in question.”

Reacting to the proposal, several Members, including the US and New Zealand, stressed that the balance between WTO provisions and other sets of international rules should not be upset. The two countries are among those seeking to keep the mandate as narrow as possible, focusing on just a handful of MEAs and the specific trade obligations they contain.

In general, delegates agreed on the need to move to text-based negotiations, but were not sure how to get to that stage.

The next CTE meeting is tentatively scheduled for February 2011.

On 15 October, US Trade Representative Ron Kirk announced that his office had initiated an “investigation under Section 301 of the 1974 Trade Act with respect to acts, policies and practices of the government of China affecting trade and investment in green technologies.”

The announcement followed a 5,800-page petition filed by United Steelworkers (USW) in September. According to the complaint, China ‘illegal activities’ include an array of restrictions ranging from limiting access to critical materials, performance requirements for investors, discrimination against foreign firms and goods, prohibited export and domestic content subsidies, and trade-distorting domestic subsidies.

More than 180 members of Congress had called on President Obama to accept the petition, arguing that China had not followed through on many of its WTO accession commitments and had “developed a new generation of discriminatory and unfair trade practices designed to protect and promote its domestic industries as the expense of US jobs, commerce and know-how.”

Mr Kirk said the Obama administration was taking the union’s claims ‘very seriously’. USTR staff is now examining them in detail, and a formal dispute will be initiated on those allegations that are supported by sufficient evidence and can be effectively addressed through the WTO. The result of the investigation will be revealed by mid-January.

Beijing has vigorously condemned the USTR move. A ministry of commerce statement called the union’s complaint ‘groundless and irresponsible’, and the ministry’s spokesman Yao Jian insisted that China’s policies complied with WTO rules. It was contradictory, he said, to ask China to shoulder the responsibility of energy saving and cutting emissions on the one hand China to shoulder the responsibility of energy saving and cutting emissions on the one hand  - effectively providing a global public good - while criticising the country’s national clean energy policies on the other.

Zhang Guobao, head of China’s National Energy Bureau, said that while Chinese subsidies to renewable energy companies were ‘very small’, the United States had “subsidised  its  new energy enterprises with US$4.6 billion in cash in the first nine months of 2010, including US$3 billion to wind power enterprises.” He added wryly that US politicians appeared keener on garnering votes than on fair trade.

The Rare Earths Debate

China’s export restrictions on rare earths - ‘access to critical materials’ in the Steelworkers’ complaint - have hogged the media limelight in recent weeks. The US, Japan and the EU have reportedly started looking into the possibility of a WTO dispute on the issue.

Rare earths consist of a group of 17 minerals used in small but indispensable quantities in scores of high-tech products ranging from hybrid cars, wind turbines and catalysers to flat screen TVs, cell phones and guided missiles, to mention just a few. Demand for the materials has soared over recent years, and strong growth is expected for the foreseeable future.

Contrary to their appellation, most rare earths are not all that rare, but their extraction is difficult. China has about 31 percent of the earth’s deposits, thought to be best in the world. The US has some 15 percent, and smaller quantities can be found in countries such as Australia, Brazil, Canada, India, Mongolia, Namibia, Russia and South Africa. Brazil, India, South Africa and the US have all been leading producers in the past.

However, most extracting operations around the world shut down in the 1990s when China emerged as the lowest cost supplier and massively ramped up production. Rare earth mining is highly polluting, and a number of analysts point to lax environmental controls, and thus lower compliance costs, as one of the reasons for China’s success.

China now supplies more than 90 percent global rare earth demand, with domestic consumption representing between 50 and 60 percent of production. When export restrictions (quotas and taxes) where put in place in 2006, major clients started to worry about Beijing’s ‘stranglehold’ on the minerals. The quotas have been drastically reduced since then, standing at 8,000 metric tonnes for the second half of 2010 - down from 28.5 tonnes a year earlier. According to the Xinhua news agency, next year will see only a slight reduction.

In September, Japan claimed that China had suspended rare earth exports following an incident where Tokyo briefly detained the captain of a Chinese fishing boat that had collided with Japanese Cost Guard vessels in disputed territorial waters.

Importers’ unease escalated when media reports surfaced in October about shipments to the US and the EU being disrupted as well. Beijing categorically denied all allegations of export embargoes, and by early November shipments appeared to have resumed.

Nevertheless, many governments and high tech manufacturers are worried about future shortages. They are now looking for alternative sources of supply, but it could take up to five years or more to get production on line on the necessary scale.

WTO Challenge on Rare Earths Could Flounder

A WTO dispute on rare earth export controls would probably be harder to sustain than claims of illegal subsidisation of green technology industries.

First, export taxes are not prohibited by the WTO. (About one-third of the member-ship imposes such duties on a temporary or permanent basis on natural resource-based products ranging from agricultural goods and forestry and fisheries products to minerals and metals, as well as leather and skins.) Several regional and bilateral trade agreements, however, do prohibit export taxes.

Second, while WTO rules generally forbid export quotas (including bans), GATT Article XX(g) allows such measures when they relate to “the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption.”

And that is precisely what Beijing says it is doing.

China Defends Restrictions on Environmental Grounds

According to the Peoples’ Daily, “China now satisfies 90 percent of the world’s need with 30 percent of the world’s total reserves, which is not sustainable in the long term. The environmental problems inflicted by the exploration and utilisation at the early stage make regulating the industry an urgent task. Every country has the right to use its resources rationally. Having supplied a large amount of rare earth materials to the world at low prices, now it is time for China to consider the development of its rare earth industry.”

Lin Donghlu, Secretary General of the Chinese Society of Rare Earths, sounded a similar note: “The aim of our control of rare earth exports is to protect resources and the environment and promote sustainable development of green industries across the globe. The exhausting of these resources as a result of a lack of control would be a major blow to the world’s green resources. Now the time is right for other countries and regions to exploit their own resources again. Only establishing an international competition mechanism for the rare earth industry, instead of making China the only rare earth exporter, will promote the sustainable development of new energy technologies.”

In addition to curbing exports, China is imposing domestic production caps, cracking down on illegal mining and smuggling, and not issuing new mining licenses. The number of rare earth firms is to be cut from the current 90 to 20 in 2015.

At issue are stringent local content requirements in the province’s Feed-in Tariff Programme (FIT). FIT allows Ontario to subsidise electricity operators that use renewable energy if up to 60 percent of the inputs are manufactured in the province.

The motivation behind the disputed programme is two-fold: local job creation (50,000 by 2012) and the elimination of coal-fired power stations by 2014.

Foreign companies are eligible for the subsidy - the world’s highest at up to 80 cents per kilowatt hour of electricity produced - but only if they set up shop in Ontario and produce the electricity and equipment there, which a number of manufacturers have done. One deal stands out in particular: the C$7 billion contract awarded to South Korea’s Samsung Group in January 2010 to build four huge wind and solar power clusters in the province with a combined generating capacity of 2,500 megawatts by 2016.  In all, the deal is expected to create 16,000 local jobs.

Japan alleges that Ontario’s local content requirements breach the GATT principle of national treatment, as well as provisions expressly prohibiting such measures in the GATT, the Agreement on Subsidies and Countervailing Measures (SCM) and the Agreement on Trade-related Investment Measures. Tokyo also argues that the green energy benefit falls under the category of prohibited subsidy under Articles 3.1(b) and 3.2 of the SCM Agreement because it is “contingent upon the use of equipment for renewable energy generation facilities produced in Ontario over such equipment imported from countries such as Japan.” The EU and the US have joined the dispute as third parties.

So far, Canada’s federal government, which will defend the case at the WTO, has adopted a conciliatory tone. Trade minister Peter Van Loan said Canada “always wants to maintain good trading relationships with our major partners, and we always want to make sure that our actions are WTO compliant. In this case, we certainly encourage the Ontario government to take advantage of the consultations phase of this process to seek a satisfactory resolution.”

In contrast, civil society groups have expressed serious concern. Stuart Trew, trade campaigner at the Council of Canadians, wrote on rabble.ca about the threat that the provincial government would eliminate the local preferences, but keep the high feed-in tariffs renewable projects, leaving companies free to import their solar panels and wind turbines from anywhere in the world and still profit from high renewable energy rates. “It’s an unacceptable compromise. We will need both green jobs and green energy to make a truly sustainable economy. If global trade rules threaten that goal - Japan’s WTO complaint suggests they do - we should be thinking about how to change those rules, not the policies that get us part way there,” he concluded.

Not all Ontarians believe in the subsidy policy, however. There is considerable opposition to wind turbine parks, which home-owners blame for lowering property prices, but the most vocal critics complain that companies, not consumers, are benefiting from the governmental manna. With projections showing that electricity bills will go up 46 percent over the next five years, the energy policy is shaping up as one of the key issues of next fall’s general election.

The ‘made in Ontario’ policy, as well provincial government procurement more broadly, are also among the hot topics of the free trade negotiations that Canada and the EU are hoping to finalise in the course of next year (see page 18).

The complainants had asked the EU to defer the ban’s implementation until the ECJ rules on a broader challenge seeking to overturn the ban entirely. That case is expected to be tried next year.

As things stand, the EU prohibits virtually all trade in seal products, except those derived from traditional hunts conducted by indigenous people. Despite the exemption, Inuit groups have issued the loudest calls for the ban’s repeal, claiming that it will cause the market for seal products to collapse.

In their moratorium request, they also argued that the Inuit exemption might not always be recognised. However, Judge Marc Jaeger found that the plaintiffs had “presented no concrete indication that would justify their fears in this regard.”

“I am disappointed and angered that the suspension of the ban has been lifted,” said Mary Simon, president of Canada’s national Inuit organisation. “We plan to appeal the ruling as we believe the original seal ban was based on colonial perceptions of our sealing practices, and this week’s ruling is a perfect illustration of this.”

The seal ban, instituted on animal welfare rather than environmental grounds, could become a landmark case if it comes before a WTO dispute settlement panel (see Laura Nielsen’s analysis on page 9).

In 2009, Canada and Norway requested dispute settlement consultations with the EU. The two countries are expected to decide before the end of the year whether to request the establishment of a panel.

The dispute began in November 2009, when Canada and Norway launched a WTO challenge against the EU’s Regulation 2009/1007 on trade in seal products. Although neither country has yet requested the establishment of a dispute settlement panel, they may do so in the near future (see related story on page 6).

The Evolution of EU Seal Legislation

Regulation of trade in seal products in the EU dates back to the early 1970s and 1980s, when images of clubbed and bloody baby seals sparked a massive public outcry. With celebrities such as Brigitte Bardot shining a spotlight on the issue, the EU adopted a ban on trade in skins and fur derived from seal pups in 1983. Importantly, the so-called Brigitte Bardot Directive did not curb trade in products derived from adult seals, nor did it apply to products derived from seals hunted by the Inuit population (mostly due to a perception that Inuits do not kill pups).

The 2009 regulation goes much further. It no longer targets just the killing of pups, but the entire notion of sealing. In other words, the EU deems the killing and practices surrounding sealing inhumane under most circumstances and therefore essentially bans trade in all seal products, except those derived from Inuit hunts.

This is controversial for the sealing nations for at least three reasons. First, because sealing is used to manage wildlife (too many seals threaten the survival of other species, including fish and the birds that eat them). Second, sealing is politically important to governments whose rural coastal populations lack alternative sources of income. Third, sealing is considered a cultural heritage, with most of the nations concerned insisting on their right to manage their own resources.

While the economic value of seal trade is not very significant, non-economic factors (emotional and cultural) play the lead roles. The claimants’ sensitivities over tradition and sovereignty are up against another highly charged value espoused by the EU: animal welfare. Regardless of what the panel and/or the Appellate Body decide, it’s safe to bet that that the reaction of the public will not go unnoticed.

But do the panels and/or the Appellate Body need to take account of the emotional character of the underlying policies? Is it not the beauty of the WTO system that Members are free to determine their own policies, and the WTO only addresses the trade-restrictiveness of implementing measures rather than the underlying policy? In order to answer these questions, we need to examine the important difference between policies on animal welfare and those on the environment (that have been the focus of past GATT/WTO cases).

Animal Welfare Is Not Environmental Protection

The principles for protecting animal welfare are fundamentally different from those seeking to preserve animals for environmental reasons. The latter approach is primarily guided by a scientific determination of the extent to which biodiversity depends on the survival of a species, while animal welfare concerns focus on the well-being of individual specimens of the species independently of whether or not they are endangered.

There is no logic to animal welfare concerns. It is acceptable in Canada to club seals, in France to produce foie gras, and in China to eat dogs. The contradictory truth remains that marine mammals have a special standing amongst animals in many countries, while in others killing adult seals and even pups may be as morally acceptable as killing chickens.

There are very few international animal welfare standards and most experts would caution against concluding such agreements because experience tells us that they will be based on the lowest common denominator. However, without international standards, animal welfare will remain at the level of personal preference unless it concerns extreme acts of cruelty, such as hooking seals and skinning them alive.

What about WTO Rules?

A WTO dispute is likely to include claims of violations of Article 4.2 of the Agreement on Agriculture (AoA), Articles 2.1 and 2.2 of the Agreement on Technical Barriers to Trade (TBT Agreement) and GATT Articles 1:1, III:4 and/or XI:1.

As the TBT Agreement is more specific than the GATT, the panel might choose to focus on its provisions rather than those of the GATT. In that case, the burden of proof would rest on the complaining parties. The panel could argue that the EU regulation violates the TBT Agreement’s most-favoured-nation (MFN) and national-treatment principles because identical products are treated differently, distinguished only by whether or not they originated from Inuit hunting. The counter-argument, of course, is that the regulation does not discriminate because all seal products that originate from Inuit hunting are treated equally.

Article 2.2 of the TBT Agreement contains the notion that trade measures should not pose an ‘unnecessary obstacle to international trade’. The protection of animal welfare would probably be considered a ‘legitimate objective’ because ‘animal life and health’ is included in the list of such objectives. It is unlikely that the panel and/or the Appellate Body would deviate from the textual interpretation of those phrases in previous analyses of GATT Article XX(b).

The national treatment and MFN principles are laid down in GATT Articles III and I. These provisions would be breached if the panel takes the view that the Inuit exception is discriminatory. The panel may, however, choose to consider the EU measure as a simple quantitative restriction on trade and hence, a violation of GATT Article XI:1, as well as AoA Article 4.2.

If the EU thinks that it may have breached substantive obligations under the GATT, it will most likely evoke GATT Article XX (general exceptions), in which case it will bear the burden of proof in establishing the grounds for this defence.

The first step of the Article XX analysis is to categorise the measure within the policy scope of one of the paragraphs. Animal welfare in the form of seal protection could fit within paragraphs (a) as ‘necessary to safeguard public morals’, (b) as ‘necessary to protect animal life or health’, or (g) as a measure ‘relating to the conservation of exhaustible natural resources’. The entire issue will boil down to which paragraph(s) the EU decides to invoke.

Although it is often said that panels and the AB will not second-guess the underlying policies, but merely test the trade restrictiveness of the measure, jurisprudence has evolved. Most recently, the AB in China - Audiovisuals held that the ‘necessity test’ was largely informed by the ‘importance of the interest or value at stake’. It will therefore become very important to evaluate the ‘relative importance’ of the EU’s seal welfare policy. In the absence of any international consensus on the matter, the panel and the AB may well resort to scientific evidence from veterinarians on the alleged cruelty of the killing method.

And finally, there is the so-called Article XX ‘chapeau analysis’ on whether the measure is applied in a manner that constitutes a means of arbitrary or unjustifiable discrimination, or a disguised restriction on trade.

Did the EU Have Alternatives?

The most important point to note is that the EU regulation does not aim to give seals a ‘right to life’.  Rather, the policy is based on the rationale that although it may be possible to kill seals in a humane manner, most frequently this does not happen. The policy goal appears to be the avoidance of sponsoring inhumane sealing practices (primarily in commercial sealing) rather than the avoidance of seal products.

The EU could have chosen to tackle the problem through labelling. This option is specifically mentioned in the regulation as being insufficient to achieve the policy goal since it cannot be verified that seals are killed in a humane manner. In the Shrimp-Turtle case the AB appeared to recognise the need for a trade ban as opposed to merely labelling shrimp products as ‘turtle safe’. Whether the adjudicators will reason differently in this animal welfare dispute remains to be seen - if the complaining parties raise the issue.

It is more problematic to defend cases on the basis of the process and production methods (PPMs) involved than outright bans of the product itself. This is so because PPM requirements have to evaluate practices taking place outside the territory of the Member taking the measure - and this involves certification and verification of practices outside the jurisdiction of the Member taking the measure.

One issue that most likely will come up in this dispute is whether it is actually ‘less trade restrictive’ to just ban those products that do not live up to the PPM requirement (i.e. no inhumane killing method was used) than imposing an across-the-board ban on seal products. Given that the EU’s policy is not to target seal products, but the process in which they are produced, a PPM would actually correspond better to the policy goal - and therefore be considered less trade-restrictive because it would allow for trade in at least some seal products other than those derived from Inuit hunting practices.

The Inuit Exception

The Inuit exception represents a real problem for the EU. A flat out prohibition of all seal products would probably be found to breach GATT Article XI:1 as a quantitative trade restriction, but it would be hard to argue an MFN or national treatment violation. GATT Article XX analysis would also be much more straight-forward as there would be no question of an available, less trade-restrictive measure since all seal products would be prohibited.

The current situation is much more complex. It seems that the EU implicitly states it is obliged to exclude Inuit-hunted seal products from the scope of the regulation, which references the UN Declaration on the Rights of Indigenous People, as well as economic and social interests. However, the regulation does not set out any thoughts of whether Inuit seal hunting is more humane or easier to verify than sealing by non-Inuit people. If it cannot be verified whether Inuits use cruel hunting methods, justifying a trade ban on the grounds of preventing cruelty toward animals becomes even more problematic.

Repercussions on the Multilateral Trading System

One may speculate whether allowing for morally based trade measures would open the door for undermining the multilateral trading system. It would undoubtedly be so if Members started enacting numerous such measures with protectionist aims (this would also be the case if protectionist measures proliferated on human health grounds).

However, it is likely that the panel will end up deciding the matter on a purely technical trade law issue - staying well clear of any analyses of sensitive areas, such as the direct clash between animal welfare and biodiversity, or that between animal welfare and indigenous people. The real test in this dispute may well be whether the panel will dare rule that the EU regulation is - from a trade perspective - not designed in the least-trade restrictive manner possible. Just imagine the public outcry that would be sparked by news paper headlines reporting that the WTO approves of animal cruelty and the hooking and skinning of live seals!

Laura Nielsen is Associate Professor in WTO Law, The Faculty of Law, University of Copenhagen.

One way to determine the significance of ACTA is to assess whether it has lived up to the expectations expressed by the parties in 2007-2008 when it came first under consideration.

In an implicit reference to countries such as China and other developing economies, a 2007 discussion paper by the Australian Department of Foreign Affairs and Trade underlined that the “extent to which ACTA would attract support from countries where counterfeiting and piracy is more problematic would be critical in determining its real value.” The US said it expected other trading partners to “join in the emerging consensus for stronger IPR enforcement,” including developing countries, which also have “a major stake in fighting counterfeiting and piracy.”

On this count, not only did ACTA not attract support from emerging and developing countries, it has actually antagonised them. At recent TRIPS Council meetings, key developing countries, including China, India and Brazil, have come out in full swing against ACTA, even questioning its compatibility with WTO rules (see page 5). India indicated that “initiatives such as ACTA could short-change legal process, impede legitimate competition and shift the escalated costs of enforcing private commercial rights to governments, consumers and taxpayers” and thus have “the portents to completely upset the balance of rights and obligations of the TRIPS Agreement.”

Another objective originally pursued by ACTA promoters was to set a new, higher benchmark for enforcement. Hyperbolic references are often made to ACTA’s ‘robust’ and ‘state-of-the-art’ enforcement standards. However, the most recent text pales in comparison to the original level of ambition of the treaty’s promoters. Ottawa University’s Michael Geist believes the ACTA Internet chapter “must be seen as failure by the US, which clearly envisioned using it to export its Digital Millennium Copyright Act (DMCA)-style approach.”

Despite the lack of meaningful engagement with developing countries, and the watered down agreement that emerged from the last round of negotiations, industrialised countries have nevertheless come close to their main objective: the establishment of a ‘new international framework’ on IPRs enforcement whose provisions go beyond those of the TRIPS Agreement.

ACTA and the Global IP and Enforcement Landscape

Whether ‘light’ or not, ACTA is bound to have important repercussions on the global IP landscape as it is likely to become the ‘third pillar’ of the global IP and enforcement system alongside the WTO TRIPS Agreement and WIPO-administered IP treaties.

As noted with concern by Brazil at the October TRIPS Council session, ACTA contains the necessary ingredients that may over time convert it into “a truly international organisation dealing with the enforcement of IP rights, a development whose impact on WIPO and the WTO, especially on capacity-building and technical assistance, are unpredictable at this stage.”

ACTA promoters have repeatedly affirmed that it does not seek to replace or compete with existing international fora and agreements. The treaty’s preamble indicates that it intends to provide effective and appropriate means to complement the TRIPS Agreement and to operate “in a manner mutually supportive of international enforcement work and co-operation conducted within relevant international organisations.” However, ensuring ‘mutual supportiveness’ in practice may not always be easy.

In terms of institutional arrangements, ACTA will establish a committee with broad powers not only to oversee its implementation, but also to “make recommendations regarding implementation and operation of the agreement, including endorsing best practice guidelines” (Article 5.1.3.c). The adoption of best practices clearly means that ACTA is likely to  become the de facto locus for future international norm-setting on IPR enforcement, an objective constantly but unsuccessfully pursued by industrialised countries both at WIPO and the WTO over many years.

ACTA and Developing Countries

A key objective of ACTA is to secure the participation of emerging and developing economies. Indeed, as originally envisioned, it would make little sense, in terms of combating piracy and counterfeiting, to have it confined to mainly industrialised countries, which already have strong enforcement standards.

In this regard, ACTA chapter 4 on international co-operation is of significance and has attracted relatively little attention in contrast to other parts of the agreement. Chapter 4 recognises that international co-operation is ‘vital’ to achieve effective IPR protection (Article 4.1.1). It also includes a section on capacity-building and technical assistance, which will be available not only to ACTA members, but also “where appropriate, for prospective parties” (Article 4.1.3).

A developing country interested in joining ACTA would thus be entitled to technical assistance aimed at ‘improving enforcement of intellectual property rights’ from other ACTA parties taking into consideration that it is ultimately the ACTA Committee which “shall decide upon the terms of accession for each applicant” (Article 6.5.2). This gives considerable leeway to ACTA parties to shape the IPR enforcement legislation and practices of prospective members in accordance with their own views and interpretations of what ACTA standards entail and how they are to be implemented.

While ACTA is likely to be presented to prospective developing countries as leaving significant ‘flexibility’ for domestic implementation, in practice, technical assistance and accession terms could be a means to bring ‘back in’ some of the standards and interpretation left out during the final stages of the negotiations. It is well documented that technical assistance provided to implement the TRIPS Agreement, in particular legislative advice, was in many cases an important vehicle for TRIPS-plus interpretations of the agreement, which often did not incorporate the flexibilities, limitations and exceptions most relevant to public policy objectives.

Seeking a Modus Vivendi

Paradoxically, ACTA reflects the success of developing country resistance to attempts to achieve higher standards of IPR enforcement at the multilateral level. However, it also reflects their vulnerability vis-à-vis ‘forum shifting’ strategies deployed by industrialised countries and demands made in plurilateral and bilateral agreements.

So what is left for developing countries to do? Criticising ACTA at the TRIPS Council is likely to be of limited effectiveness as industrialised countries are represented there precisely by the same trade ministries and IP authorities that pushed for the treaty’s quick finalisation.

Although ACTA is often presented just as an agreement to combat counterfeiting and piracy through stronger intellectual property rights enforcement, through it, industrialised countries, and their IP-based industries, are seeking to amplify their competitive advantage over the emerging economies in a changing world economy where their manufacturing base has been considerably eroded to the benefit of these new players.

The debate about ACTA needs to be elevated from the self-contained and technical world of IP to the global policy debate about the future of the world economy. The G- 20 framework might provide an opportunity to do so, despite doubts about its effectiveness and representative nature. Ultimately, whether at the G-20 or elsewhere, industrialised countries and emerging economies will need to agree on a ‘modus vivendi’ regarding the treaty between ACTA members and non-member countries.

Ahmed Abdel Latif is Intellectual Property & Technology Programme Manager at ICTSD.