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Trade Law and Supply Chain Regulation in a Post-COVID-19 World

Published online by Cambridge University Press:  20 October 2020

Timothy Meyer
Timothy Meyer*
Affiliation:
Professor of Law, Vanderbilt University Law School. Many thanks to Grace Ko for excellent research assistance.
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Abstract

This Essay argues that trade agreements may overly constrain the ability of states to regulate supply chains for critical products such as medical supplies. Free trade agreements (FTAs) may exacerbate supply chain concentration, especially through loose rules of origin. And WTO rules constrain preventative regulation of supply chain risks designed to prevent a crisis, while providing exceptions for aggressive action only in the face of a crisis. Thus, WTO members risk flouting WTO rules if they do not limit aggressive, preventative supply chain regulation.

Type
The International Legal Order and the Global Pandemic
Information
American Journal of International Law , Volume 114 , Issue 4 , October 2020 , pp. 637 - 646
Copyright
Copyright © 2020 by The American Society of International Law

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References

1 Wayne M. Morrison, Cong. Res. Serv., The Made in China 2025 Initiative: Economic Implications for the United States, 1 (2019) (“Recent proposals by the Chinese government, such as its ‘Made in China 2025’ initiative, appear to signal an expanded role by the government in the economy, which many fear could distort global markets and negatively affect U.S. firms.”); see also Willy Shih, Is It Time to Rethink Globalized Supply Chains?, MIT Sloan Mgmt. Rev. (Mar. 19, 2020), at https://sloanreview.mit.edu/article/is-it-time-to-rethink-globalized-supply-chains .

2 Ellram, Lisa M., Offshoring, Reshoring and the Manufacturing Location Decision, 49 J. Supply Chain Mgmt. 2, 3–5 (2013)Google Scholar.

3 See, e.g., Klaus Ulrich, Coronavirus Outbreak Hitting German Supply Chains with Fears of Economic Paralysis, DW (Feb. 27, 2020), at https://www.dw.com/en/coronavirus-outbreak-hitting-german-supply-chains-with-fears-of-economic-paralysis/a-52554823; Todd Tucker, Coronavirus Will Change How We Think About Supply Chains, Medium (Mar. 20, 2020), at https://medium.com/@toddntucker/coronavirus-will-change-how-we-think-about-supply-chains-6a2b82d50cf7.

4 See World Trade Organization Secretariat, Export Prohibitions and Restrictions (Apr. 23, 2020), available at https://www.wto.org/english/tratop_e/covid19_e/export_prohibitions_report_e.pdf.

5 Biden for President, The Biden Plan to Ensure the Future of “Made in All of America” by All of America's Workers, at https://joebiden.com/madeinamerica.

6 Backer, Koen De, Menon, Carlo, Desnoyers-James, Isabelle & Moussiegt, Laurent, Reshoring: Myth or Reality?, 27 OECD Sci., Tech. & Indus. Pol'y Papers 6 (2016)Google Scholar (“The main argument—and hope—is that reshoring will create value added and jobs . . . .”).

7 Synthesis Report, Interconnected Economies: Benefiting From Global Value Chains, OECD Sci., Tech. & Indus. Pol'y 17 (2013).

8 Id.; see also De Backer, Menon, Desnoyers-James & Moussiegt, supra note 6.

9 See COVID-19 and Trade Policy: Why Turning Inward Won't Work (Richard E. Baldwin & Simon J. Evenett eds., 2020) [hereinafter “COVID-19 and Trade Policy”] and contributions therein.

10 Samson Ngugi, Trade Facilitation and Global Supply Chains: The Role of FTA Trade Facilitation Rules in Promoting Global Supply Chains, Medium (Dec. 31, 2019), at https://medium.com/@samsonngugioffice/free-trade-is-always-good-448dc551d04a.

11 Sébastien Miroudot, Resilience Versus Robustness in Global Value Chains: Some Policy Implications, in COVID-19 and Trade Policy, supra note 9 (“Fully localised production is not recommended for robustness as the disaster can happen within a domestic economy.”).

12 See Taylor Telford, Kimberly Kind & Jacob Bogage, Trump Orders Meat Plants to Stay Open in Pandemic, Wash. Post (Apr. 29, 2020), at https://www.washingtonpost.com/business/2020/04/28/trump-meat-plants-dpa.

13 Alex Gangitano, Trump Uses Defense Production Act to Order Meat Processing Plants to Stay Open, Hill (Apr. 28, 2020), at https://thehill.com/homenews/administration/495175-trump-uses-defense-production-act-to-order-meat-processing-plants-to.

14 The Trump administration's steel and aluminum tariffs illustrate the point. See, e.g., Menzie Chinn, What Is the National Security Rationale for Steel, Aluminum and Automobile Protection?, EconoFact (June 6, 2018), at https://econofact.org/what-is-the-national-security-rationale-for-steel-aluminum-and-automobile-protection.

15 See e.g., Aaron Friedberg, The United States Needs to Reshape Global Supply Chains, For. Pol'y (May 8, 2020), at https://foreignpolicy.com/2020/05/08/united-states-reshape-global-supply-chains-china-reglobalization (“the capacity to manufacture drugs and active pharmaceutical ingredients has moved from the United States and Europe to developing countries in Asia where costs are lower and environmental regulations more relaxed”).

16 See generally Office of the U.S. Trade Representative, Findings of the Investigation into China's Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation Under Section 301 of the Trade Act of 1974 (2018) [hereinafter 301 Report].

17 While China is far from the only country that uses such policies or presents supply chain concentration issues, I focus on China because it is the largest such economy and has been the focus of much public commentary.

18 Wu, Mark, The “China, Inc.” Challenge to Global Trade Governance, 57 Harv. Int'l L.J. 261, 301–04 (2016)Google Scholar (describing the WTO debate on how these subsidies should be categorized).

19 Id. at 315.

20 Id. at 297; see also 301 Report, supra note 16.

21 Simon Lester, Forced Technology Transfer and the WTO, Int'l Econ L. & Pol'y Blog (Mar. 29, 2018), at https://worldtradelaw.typepad.com/ielpblog/2018/03/forced-technology-transfer-and-the-wto.html (discussing the United States’ view that many Chinese policies aimed at technology transfer are outside WTO law).

22 See Panel Report, European Union—Anti-dumping Measures on Biodiesel from Indonesia, WTO Doc. WT/DS480/R (adopted Feb. 28, 2018); Appellate Body Report, European Union—Anti-dumping Measures on Biodiesel from Argentina, WTO Doc. WT/DS473/AB/R (adopted Oct. 26, 2016); Appellate Body Report, China—Measures Related to the Exportation of Various Raw Materials, WTO Doc. WT/DS394/AB/R (adopted Jan. 30, 2012) [hereinafter China Appellate Body Report].

23 See General Agreement on Tariffs and Trade 1994, Art. XI, Oct. 30, 1947, 55 UNTS 194 [hereinafter GATT] (“No prohibitions or restrictions other than duties, taxes or other charges . . . shall be instituted or maintained by any contracting party . . . .”). China did agree to limits on export duties for some products when it joined the WTO. World Trade Organization, Ministerial Declaration of 10 November 2001, WTO Doc. WT/L/432 (2001).

24 Mireya Solís, The Containment Fallacy: China and the TPP, Brookings (Mar. 24, 2013), at https://www.brookings.edu/blog/up-front/2013/05/24/the-containment-fallacy-china-and-the-tpp.

25 Eur. Comm. Press Release, EU Negotiating Texts in TTIP (July 14, 2016), at https://trade.ec.europa.eu/doclib/press/index.cfm?id=1230.

26 GATT, supra note 23, Art. XXIV; General Agreement on Trade in Services, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1B, Art. V, 1869 UNTS 183, 33 ILM 1167 (1994).

27 Although the United States declined to ratify the TPP, see Presidential Memorandum Regarding Withdrawal of the United States from the Trans-Pacific Partnership Negotiations and Agreement, 82 Fed. Reg. 8497 (Jan. 23, 2017), the other eleven members went ahead with the agreement.

28 World Trade Organization, Technical Information on Rules of Origin, at https://www.wto.org/english/tratop_e/roi_e/roi_info_e.htm.

29 Beth Balzan, What Is the Purpose of an FTA?, Am. Phx. Trade Advisory Serv. (Mar. 31, 2020), at http://americanphoenixpllc.com/what-is-the-purpose-of-an-fta.

30 Id.

31 Japan Reveals 87 Companies Eligible for “China Exit” Subsidies, Nikkei Asian Rev. (July 17, 2020).

32 Geoffrey Gertz has suggested that even with subsidies, firms may struggle to shift supply chains away from China. See also Finbarr Bermingham, U.S. Firms Want to Ditch China, but Warned “It Is Not Like Flipping a Switch,” S. China Morning Post (July 10, 2020).

33 See, e.g., Consolidated Version of the Treaty on the Functioning of the European Union, Art. 107, Oct. 26, 2012, OJ C 326 (generally prohibiting state aid).

34 See generally Keen, Michael & Konrad, Kai A., The Theory of International Tax Competition and Coordination, in 5 Handbook of Pub. Econ. 257, 311–14 (Auerbach, Alan J., Chetty, Raj, Feldstein, Martin & Saez, Emmanuel eds., 2013)Google Scholar.

35 Agreement on Subsidies and Countervailing Measures, Arts. 2, 5, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1869 UNTS 14.

36 Agreement on an International Energy Program, Nov. 18, 1974, 1040 UNTS 271.

37 Haven Orecchio-Egresitz, 22,000 Surgical Masks Shipped from the National Stockpile to the University of Michigan Were Not Usable, Bus. Insider (Apr. 16, 2020), at https://www.businessinsider.com/masks-sent-to-u-michigan-from-the-stockpile-not-usable-2020-4 (reporting that the national stockpile has had multiple issues with defective masks).

38 Governments might also be able to use antidumping or countervailing duties—additional surcharges imposed on “unfairly” cheap (often subsidized) imports—to counteract the supply chain risks posed by other nations’ subsidies, as a group of former EU trade officials recently proposed. See Mogens Peter Carl, Riccardo Perissich, John Bruton Karl Falkenberg, Michel Servoz, Pierre Defraigne, et al., EU Open Letter to the European Commission 12 May 2020, Politico (May 12, 2020). But while a variety of proposals have been floated to expand the use of antidumping and countervailing duties to respond to a broader range of policy problems, WTO panels have generally taken a dim view of expansive uses of these duties. See Shaffer, Gregory, Retooling Trade Agreements for Social Inclusion, 2019 U. Ill. L. Rev. 1 (2019)Google Scholar; Timothy Meyer & Ganesh Sitaraman, A Blueprint for a New American Trade Policy, The Great Democracy Initiative (2018).

39 Geoffrey Gertz, The Coronavirus Will Reveal Hidden Vulnerabilities in Complex Global Supply Chains, Brookings Inst. (Mar. 5, 2020), at https://www.brookings.edu/blog/future-development/2020/03/05/the-coronavirus-will-reveal-hidden-vulnerabilities-in-complex-global-supply-chains.

40 See, e.g., Todd Tucker, WTO Tobacco Industry Ruling Marks End of an Era, Medium (June 24, 2020), at https://medium.com/@toddntucker/wto-tobacco-industry-ruling-marks-end-of-an-era-2df6ee3d618.

41 Agreement on the Application of Sanitary and Phytosanitary Measures, Art. 5, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1867 UNTS 493; see also Simon Lester, Food Regulation, Science, Protectionism, and Regulatory Autonomy/Sovereignty, Int'l Econ. L. & Pol'y Blog (June 22, 2020), at https://ielp.worldtradelaw.net/2020/06/food-regulation-science-and-trade-policy.html.

42 Appellate Body Report, United States—Measures Affecting the Production and Sale of Clove Cigarettes, para. 71, WTO Doc. WT/DS406/AB/R (adopted Apr. 24, 2012).

43 Although localization regulations can take a number of different forms, the classic form, a local content requirement, clearly violates GATT Article III's national treatment rule. See, e.g., Appellate Body Report, Canada—Certain Measures Affecting the Renewable Energy Generation Sector, para. 6.1.b, WTO Doc. WT/DS412/AB/R (adopted May 24, 2013); Appellate Body Report, India—Certain Measures Relating to Solar Cells and Solar Modules, para. 6.2.a, WTO Doc. WT/DS456/AB/R (adopted Sept. 16, 2016) [hereinafter India Appellate Body Report].

44 Such measures could violate the most-favored nation obligation. See GATT, supra note 23, Art. I.

45 See Meyer, Timothy, How Local Discrimination Can Promote Global Public Goods, 95 Boston U. L. Rev. 1939 (2015)Google Scholar.

46 The panel found the measure violated GATT Article XI, which bans prohibitions on imports or exports. A related component of the EU's measure failed under the GATT's national treatment rule. See Panel Report, European Union and its Member States—Certain Measures Relating to the Energy Sector, paras. 7.974–7.975, 7.1002–7.1003, WTO Doc. WT/DS476/R (adopted Oct. 8, 2018) [hereinafter EU Energy Panel Report].

47 Elsewhere in this Agora, Julian Arato, Kathleen Claussen, and J. Benton Heath make an argument similar to mine: that the need to resort to these exceptions exposes a structural weakness in international economic law. Arato, Julian, Claussen, Kathleen & Heath, J. Benton, The Perils of Pandemic Exceptionalism, 114 AJIL 627 (2020)Google Scholar. Alan Sykes, by contrast, argues that these exceptions operate as an escape clause during stressful times. Sykes, Alan O., Short Supply Conditions and the Law of International Trade: Economic Lessons from the Pandemic, 114 AJIL 647 (2020)Google Scholar.

48 GATT, supra note 23, Art. XI(2)(a). A carveout is formally different from an exception, in that the complaining party bears the burden of showing that carveout does not apply. See Joost Pauwelyn, Export Restrictions in Times of Pandemic: Options and Limits Under International Trade Agreements, in COVID-19 and Trade Policy, supra note 9 (listing carveouts and exceptions for export restrictions).

49 China Appellate Body Report, supra note 22, paras. 323, 344.

50 Id., para. 324.

51 GATT, supra note 23, Art. XX(j).

52 India Appellate Body Report, supra note 43, para. 5.70 (“We read this language in Article XX(j) to contemplate situations of ‘short supply’ that may continue over time, but are nonetheless expected not to last indefinitely.”); see also EU Energy Panel Report, supra note 46, para. 7.1348 (interpreting Article XX(j) not to apply to products “currently not in short supply but that may become”).

53 Appellate Body Report, Brazil—Measures Affecting Imports of Retreaded Tyres, para. 156, WTO Doc. WT/DS332/AB/R (adopted Dec. 17, 2007).

54 Id., para. 179 (“[T]he objective of protecting human life and health against such diseases ‘is both vital and important in the highest degree.’”).

55 Review for unjustifiable or arbitrary discrimination under the chapeau of Article XX has also posed a significant hurdle for governments.

56 See GATT, supra note 23, Art. XXI(b)(i)–(ii) (Art. XXI(b) also contains exceptions that would cover nuclear and military supply chains).

57 Panel Report, Russia—Measures Concerning Traffic in Transit, para. 7.77, WT/DS512/R (adopted Apr. 5, 2019).

58 Id., para. 7.76. A second panel, interpreting Article 73(b)(iii) of the Agreement on Trade-Related Aspects of Intellectual Property—which is identical to GATT Article XXI(b)(iii)—reached a similar conclusion. See Panel Report, Saudi Arabia—Measures Concerning the Protection of Intellectual Property Rights, paras. 7.241 et seq., WT/DS567/R (circulated June 16, 2020).

59 Arato, Claussen & Heath, supra note 47.

60 See, e.g., Deeks, Ashley S., “Unwilling or Unable”: Toward a Normative Framework for Extra-territorial Self-Defense, 52 Virg. J. Int'l L. 483, 492 & n. 23 (2011)Google Scholar (reviewing literature on what constitutes an “imminent” threat).