U.S. vs. P.R.C. in WTO = KO

Canadian legal blogger - Michael Geist - has a great article breaking down the recent ruling on the U.S.'s complaint against China regarding intellectual property rights enforcement.

The article is titled, "Why the U.S. Lost Its WTO IP Complaint Against China. Badly."

The title says it all. The ruling provides some large loopholes in the enforcement of IP violations under the Berne Convention and TRIPS.

Bryan Mercurio of the International Economic Law and Policy Blog discusses these loopholes here.

His point about China's high threshold of violations required to pursue a criminal conviction is especially interesting. China requires there to be 500 instances of copyright violation before they will initiate criminal prosecutions.

Mercurio writes:

"It also would seem to allow an individual to rent premises and set up shop selling pirated copies of music/DVDs and counterfeit TMs but avoid criminal prosecution as long as only 499 copies of each item are copied and sold."

What does this mean to the average person?

China's seemingly high threshold for criminal prosecution of IP violations means China can remain a safe haven for the smart counterfeiter.

Utilizing proven business techniques like on-demand production and just-in-time inventory strategies, organized counterfeiters could easily stay below the 500 instances threshold.

"I see you have 499 copies of Underworld: Rise of the Lycans. You'd sure be in trouble if you had one more copy. I'd have to run you in as a counterfeiter."

So if you are looking for cheap knockoffs of Western products, head on down to the PRC.

They are practically given it away! These prices are too low to miss!

And it is all legal - at least under international law.
--
www.joshualenon.com

Milking the Issue

The U.S. Food & Drug Administration announced a new policy to stop food products from China at the border.

Producers must prove that their products are not contaminated. Large scale contamination of milk, eggs, and animal feed with industrial chemicals prompted this action.

EIL looked at this issue earlier and found that such actions are allowed under the WTO.

China's Bailout Plan - WWWTOD

China is starting to worry about the effect of the global slowdown on their economy.

China's State Council announced a plan to increase export tax rebates in order to protect domestic industries. Rebates would go to labor-intensive products like garments and textile to high-value products like mechanical and electrical products.

These measures may be against China's obligations under international law.

Worth noting, the U.S. Bush administration has become so dependent on China's purchasing of Treasury bonds needed to finance a bailout of the American financial system that they have stopped criticizing China's trade and currency policies.

China may be violating international law and there is nothing the U.S. can do.

Or is there? Let's go to EIL's big three questions:

WHAT ARE THE ISSUES?

1.) Does China's export rebates violate international law?

2.) Can China's trading partners do anything to stop China's violation of their international legal obligations?

WHAT IS THE CONTROLLING INTERNATIONAL LAW?

Issue 1's Legal Analysis

When you see a trade issue in an international setting, you should immediately look to the World Trade Organization (WTO).

Export rebates fall under the WTO's Agreement on Subsidies and Countervailing Measures (SCM).

The SCM defines a subsidy in Article 1 to be an act that either is a direct transfer of funds or failing to collect funds - by a government, public body, or a private group entrusted by the government - to confer a benefit (on domestic producers).

Article 3.1 states that subsidies would be prohibited if they fall into two types:

(a) subsidies contingent, in law or in fact, whether solely or as one of several other conditions, upon export performance, including those illustrated in Annex I;

(b) subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods.

The Annex I is the Illustrative List of Export Subsidies (ILLES).

In this list is the key to determining if China's export rebates are illegal under the WTO.

Part (g) of the list reads:

(g) The exemption or remission, in respect of the production and distribution of exported products, of indirect taxes in excess of those levied in respect of the production and distribution of like products when sold for domestic consumption.

What does that mean? It means a government can give back to exporters the taxes they paid for materials needed to produce their goods - but only for products being exported.

Part (g) of the ILLES also limits the amount of money that can be given back to producers. The money rebated can be no more than the taxes levied on the same product being sold in that nation.

For example, a company in China manufactures televisions. Some get sold in China; some get sold abroad.

For the televisions that get sold in China, the Chinese government collects taxes. The components and raw materials used to make the television are taxed when this company buys them. Taxes are also paid when the televisions are sold. China uses a value-added tax system (VAT). Eventually, the manufacturing company gets a tax break due to the taxes on the final sale of the TV to a Chinese consumer.

For the television sold abroad, the Chinese government would not get taxes from the final sale. Those taxes would be collected by the government in whatever nation that television arrives. So the manufacturer loses money as they no longer get the tax break they would normally get for domestic sales.

Part (g) of the ILLES allows China to rebate to the television producer a similar amount as if the TV had been sold in China - but no more than that.

This is the crux of whether China's export rebates are legal.

Is China giving a rebate higher in excess of the indirect taxes levied on similar products consumed domestically?

So far, I've seen no hard details on what the final export rebate amounts will be. Some articles indicate that rebates may be raised up to 9 - 13 percent. Some rebates go as high as 17 percent.

These articles fail to compare that with the VAT for each product domestically.

If the rebates are too high, China will be in violation of their obligations under the WTO.

Issue 2's Legal Analysis

What can China's trading partners do if China's subsidy violates the WTO?

Article 4 of the SCM has a dispute resolution method.

First, the SCM encourages member nations to consult with each other when a dispute arises.

After 30 days, if no resolution can be found through consultation, members may file a dispute with the Dispute Settlement Body (DSB).

From there, a panel and experts begin reviewing the subsidy. If they determine that it is prohibited under the SCM, the offending nation is required to withdraw the subsidy without delay.

There are other processes, including possible delays and appeals.

There is a formal process in place for resolving such disputes through the WTO.

WHAT DOES THIS MEAN FOR THE READERS?

China exports a lot of goods - $1.22 trillion in 2007. Nearly 20% of those goods were shipped to the U.S.

It is in China's interest to keep their exports high. This brings in tremendous revenue to the country. These rebates allow Chinese producers to keep the costs of their products extremely competitive in the world market.

It is in the U.S.'s interest (to a degree) to keep the prices of goods low too. Consumer spending in the U.S. is dropping to record lows. Considering that consumer spending accounts for 2/3 of the U.S. Gross Domestic Product (GDP), pursuing a dispute resolution that leads to more costly goods from China may not be a smart short-term move.

What will probably happen is that China's higher export rebates will be scrutinized by their trading partners.

At some point, a trading partner will file a complaint with the WTO DSB.

Resolving the dispute will be a lengthy process that allows China to keep the costs of their manufactured goods low long enough to help their manufacturers.

Consumers worldwide will benefit from the cheap goods to which we've become addicted. When the economy rebounds, the DSB can rule on the matter of the rebates.

China can then withdraw the rebates without harming their own economy.

The imperfect system may actually work.
--
www.joshualenon.com

WWWTOD? - What would the World Trade Organization Do? Milking China Edition

China dominates world markets, especially in manufacturing.

It seems like you cannot buy anything without it being made, assembled, or containing components made in China.

But allowing one country with questionable oversight practices to control your country's access to manufactured goods does not always work out.

China has received some negative PR when several of its products have been found to possess dangerous flaws.

A run down of products from China that have recently turned out to be contaminated:

1. Dog Food
2. Toys
3. Medication
4. and now, Milk and Dairy Products

It appears that dairy companies and some Chinese government officials, knew that an industrial chemical - melamine - was being added to milk-based baby formula.

This doctoring was done to make the powdered formula seem more protein-rich.

When consumed, melamine can be harmful to humans, especially infants and children.

Apparently, the doctoring was so widespread that at least 53,000 children in China needed medical treatment and at least four died after consuming the tainted product.

China's chief governmental official overseeing quality control resigned and 22 different dairy companies recalled their product.

But that has not stopped the tainted dairy products from being discovered around the world.

Chocolate-company, Cadbury, had to recall products it had made using milk-powder from China. These products were sold not just in mainland China, but also in Hong Kong, Taiwan, and Australia.

Kraft foods has concerns about it's Oreo-brand cookies that are sold worldwide.

Tainted candies are being found by officials in Canada, Europe, and the United States.

China's milk crisis has become a global problem, but what can be done about it?

What are the issues?

Can a nation prevent tainted food products from being imported in this age of free trade and global economies?

Yes.

Countries can prevent tainted food products from entering their borders, but they must do so in accordance with legal guidelines and with the backing of sound scientific data.

What is the controlling international law?

When a problem revolves around trade of a product across borders, you sound immediately look to the World Trade Organization (WTO) agreements. These are a system of treaties that have established trade guidelines that must be followed by the participating member states.

Both the U.S. and China are WTO members.

The U.S. is one of the original signors in 1995, while China acceded to the agreements in 2001.

This means that both the U.S. and China are bound by the WTO agreements, which limits what they can and cannot do in regards to international trade.

The WTO used to have a plurilateral agreement on regulating dairy trade - the International Dairy Trade Agreement - but this agreement was allowed to lapse in 1997.

Now, the guiding agreement under the WTO is the Agreement on the Application of Sanitary and Phytosanitary Measures.

Annex A 1 (b) tells us that sanitary or phytosanitary measure are any measure taken:

"to protect human or animal life or health within the territory of the Member from risks arising from additives, contaminants, toxins or disease-causing organisms in foods, beverages or feedstuffs..."

It seems to me that preventing industrial chemicals being used as a food additive from poisoning infants and children is exactly in the province of this Agreement.

Annex C allows member states to check and ensure that products meet sanity & phytosanitary measures so long as they do not impose undue delay or unfavorable processes on imported goods.

So, WTO members have permission to check incoming food imports.

Article 5 of the agreement stops member states from banning food imports without justification. Member states must use risk assessment techiniques appropriate to the circumstances and based on international standards or sound scientific data.

In this case, it is well documented that melamine is harmful to humans. It is a chemical used in plastics production that leads to kidney stones and other health problems when consumed.

Scientific data exists to justify testing and banning products containing melamine.

There are further measures relating to giving notice to exporting countries and dispute resolution, but I think we have enough information to see how this affects you.

What does this mean to the reader?

WTO members have the right to ban food product imports if they have reasonable justification to do so.

They can do so to protect the health of their populace.

They require scientific proof that such a ban is justified.

Here, the weight of evidence justifies banning dairy-related products that are produced in China.

Readers should expect that government agencies will begin testing food with Chinese dairy products in them and banning some of them in the near future.

Already, the U.S. and Europe do not allow that importing of baby formula produced in China. It now looks like that ban may spread to other products with Chinese dairy in them.

Expect these announcements to come from agencies like the U.S. Food and Drug Administration.

I assume such measures will be labelled temporary, "until further notice," as a way to mollify complaints from China and multinational food processors.

China will seek a dispute resolution from the WTO based on the scientific evidence used to justify these bans.

--
www.joshualenon.com

WWWTOD? - What would the World Trade Organization Do? U.S. Bailout Edition

What is the Issue?

Does the massive bailout of the U.S. financial services sector by the U.S. government violate international law?

We already know that the last series of bailouts has been viewed with skepticism by the rest of the world. The bailouts have been seen as either an example of U.S. hypocrisy when insisting on deregulated markets in treaties or an admission of the failure of the U.S. guiding financial policies.

But is the bailout illegal under an international law regime?

What is the controlling international law?

The World Trade Organization governs many obligations - including domestic regulation - relating to trade and business.

The United States is a member of the WTO - voluntarily assuming obligations imposed by the Marrakesh Agreement, signed in 1994 and entering force in the U.S. in 1995.

The section of the Marrakesh Agreement that applies to financial services - like banking - is the General Agreement on Trade in Services (GATS).

Annex 1B of GATS contains the following provision in Article XXIX; Annex on Financial Services; Paragraph 2(a):

"Notwithstanding any other provisions of the Agreement, a Member shall not be prevented from taking measures for prudential reasons, including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system. Where such measures do not conform with the provisions of the Agreement, they shall not be used as a means of avoiding the Member's commitments or obligations under the Agreement."

(Source: WTO.org)

The seems to clearly indicate that actions taken to prop up failing domestic financial service suppliers are exempt from the WTO limits.

This includes throwing unprecedented sums of money at financial institutions in the hope that investment banks land softly and they can then proceed to swim about like Scrooge McDuck.

All perfectly legal under international law.

How does this affect the readers?

Readers can expect that many countries around the world will not contest the U.S. bailout in WTO tribunals. Get ready for your cash to help pay for executive golden parachutes.

Instead, foreign banks - like UBS - will be lining up to receive U.S. taxpayer cash. We're already seeing it happen.

The next question is, are we obligated to pay money to foreign banks as well as domestic ones?

Paul Stephan over at International Economic Law and Policy Blog tackles that issue here.

--
www.joshualenon.com

Doha Round Collapses - Again

Again, the Doha round of negotiation has ended with no resolution.

Developed and developing countries are not able to create a framework to lower trade barriers on agricultural goods.

The result is that world trade will continue to function unevenly through bilateral trade deals and WTO rulings.

For consumers looking for a break on rising food costs - keep looking. Right now, the governments of the world are not looking out for your pocketbooks.

Interestingly, Brazil seems to be a powerhouse in this round of negotiations. Rising commodity prices and over a decade of sound fiscal policy and social investment, have left Brazil with a strong economy and currency and a rising middle class. Because of this, Brazil was able to remain firm on issues important to them.

Focusing on improving your own country seems to make you stronger internationally. Who knew?

Doha Talks Close to Collapse - Again

The latest round of negotiation in the Doha round of the World Trade Organization (WTO) continues to lurch one step forward, three steps back.

Emerging factors:

- Many European countries feel that China cannot continue to be treated as a developing country. Being labeled a 'developing country' allows a nation to maintain higher trade barriers than it would normally be allowed under WTO rules.

- The United States continues to demand more access to other countries in return for concessions. Depending on the demands, this is not the worst position. The U.S. remains the market every country wants to exploit.

- Germany is the world's largest exporter. I need to do more research on this one, but this is the claim by Reuters.

Doha Talks Continue

The latest chapter in the seven-year ongoing negotiations in free trade is coming to a close. Since 2001, the World Trade Organization (WTO) has been periodically negotiating a new series of global free trade agreements.

The Doha round – named after the Qatar city where the talks first started – is supposed to focus on agricultural products. Food & drink are two of the products that the developing world might be able to competitively produce.

This terrifies many different parties. Why? Let's take a look at the issues.

What are the issues involved?

Environmentalists fear that increased trade in agricultural products will encourage environmentally irresponsible actions by desperately poor people. (See Brazil's problem with slash-and-burn ranchers.)

Isolationists fear what happens when a nation becomes dependent on other nations for food supplies. (Although, these same people demand tomatoes and oranges during January's icy grip and bananas year round. Where do they think this fruit grows? Not in North America.)

Lastly, North American & EU politicians fear what happens when they stop giving their local farmers subsidies. (You can't win votes in the "heartland" if you aren't writing government checks to farmers. France has an especially strong agricultural voting bloc.)

These fears have stretched the Doha talks from the projected four years to seven years with more to come.

In order to address some of these fears, the talks now include lowering tariffs on industrial and manufactured goods and services such as telecommunications. This is a large change from the original mandate of the talks. These items have been included to ease the fears of developed nations.

It is hoped that developed nations will open their markets to developing world agricultural goods if the developed can shipped finished goods and services to these poorer nations.

What is the controlling International Law?

Right now, none. The point of the Doha talks is to create a global body of international trade law governing trade barriers. Absent an agreement leading to WTO authority, the world will continue to muddle along with hodge-podge bilateral trade agreements and bootstrapped General Agreement on Tariff and Trade (GATT) provisions.

How does this affect you?

Right now, failure in the Doha talks makes it easier for the government to continue to pay farm subsidies. While helping farmers sounds good, at times it has artificially increased the price of food to the average consumer.

So, successful Doha talks may lead to cheaper food for the average American consumer.

Profitable agriculture may also stabilize developing countries desperate for income. If you can make a living farming, you may not fall into the cycle of the angry dispossessed that afflicts these nations. More peace is a possible outcome of successful Doha talks.

However, the inclusion of services in the talks means that it may be easier for multi-national corporations to outsource white-collar jobs to developing nations.

The impact of Doha can be positive, but negotiators for all side need to remain mindful of some pitfalls.

Government of developed nations should fight for stricter environmental and labor practices in the poorer countries.

Poorer countries should allow the developed world to create social insurance for their workers that might be negatively impacted by this lowering of trade barriers.