2011 Trade Policy Assessment Maine Citizens Trade Policy Commission September 16, 2011 Robert Stumberg Georgetown University Law Center Harrison Institute for Public Law

2 Roadmap 1. Introduction a.Overview – trade and investment agreements b.Current – Trans-Pacific Partnership Agreement c.Which agreements affect states? d.How people use trade rules 2. Trade rules that affect states a.Pharmaceutical trade rules b.Limits on regulation of services b.Foreign investor rights 3.Example – treatment of tobacco in FTAs 1. Introduction a.Overview – trade and investment agreements b.Current – Trans-Pacific Partnership Agreement c.Which agreements affect states? d.How people use trade rules 2. Trade rules that affect states a.Pharmaceutical trade rules b.Limits on regulation of services b.Foreign investor rights 3.Example – treatment of tobacco in FTAs

3 Overview of trade agreements U.S. Trade Agreements in Force WTO – 153 nationsFTAs - 17 nationsBITs - 39 US treaties 20 agreements Trade disputes - yes Investor disputes - no Ongoing negotiations - yes 20+ chapters Trade disputes - yes Investor arbitration - yes Ongoing negotiations - yes Single function Trade disputes - no Investor arbitration - yes Ongoing negotiations - yes

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5 Which agreements affect states?Agreements Trade Rules GoodsServices Procure- ment SubsidiesInvestment WTO Agreements xxxx Free Trade Agreements xxxx Bilateral Investment Treaties x

6 Intro - How people use trade rules Trade rules that limit government authority State laws that affect trade Legal use of trade rules (rare) Threat of trade sanctions Investor compensation Domestic enforcement / preemption Political use of trade rules Lobbying by federal officials Lobbying by foreign governments Lobbying by private firms

Pharmaceutical trade rules Australia and Korea FTAs – models for TPPA Reimbursement policies – must be based on “competitive market-derived” prices Problems States use preferred drug lists to reduce prices 50% (Maine) Affordable Care Act is moving to reference pricing Coverage –programs operated by central government Carve-out for federal-state partnerships? Medicaid – yes Medicare Part B – no statute defines pharmaceutical prices Sec 340B Fed. Public Health Act – no statute defines discounts for federally funded clinics 7

Alcohol distribution Electric power - delivery & control Civil engineering Construction Financial services Gambling Hospital services What does GATS cover? 90 U.S. commitments from A-to-Z Health insurance Higher education and research Mining services Pipeline transport & storage of fuels Tobacco distribution Urban planning Waste management

What are GATS rules? Market Access No quantitative limits National Treatment No discrimination Domestic Regulation 70 proposed “disciplines” Not quantitative limits Not discriminatory

Market Access No quantitative limits Domestic Regulation 70 proposed “disciplines” National Treatment No discrimination Not quantitative limits Not discriminatory What are GATS rules?

11. [Domestic regulations]... shall be pre-established, based on objective and transparent criteria and relevant to the supply of the services to which they apply.” Proposed GATS “disciplines” Article 11 - applicable to all covered sectors

11. [Domestic regulations]... shall be pre-established, based on objective and transparent criteria and relevant to the supply of the services to which they apply.” Each term is ambiguous. Each has Benign meanings and Radical meanings

Locate near infrastructure Provide storage capacity Most relevant to service Least relevant to service Intrinsic to service External to service Licensing of ports, refineries, industrial facilities Preserve environment Preserve coastal access Conserve historic values Preserve scenic vistas Relevance Measures... shall be... relevant to the supply of the services to which they apply. 13

Foreign investor rights Expropriation Fair and equitable treatment Most-favorable treatment 14

Example – Treatment of tobacco in FTAs Trade agreements serve and protect tobacco with the benefits enjoyed by every other sector How do trade negotiators treat the outliers – the industries that unavoidably threaten public health? If tobacco succeeds in using trade agreements to protect its market share from new forms of regulation, then any industry will be able to. 15

Prohibitions on promoting tobacco trade U.S. law prohibits trade negotiators from promoting tobacco trade Doggett Amendment “Funds shall not be available to “promote the sale or export of tobacco or tobacco products, or to seek the reduction or removal by any foreign country of restrictions on the marketing of tobacco or tobacco products, except for restrictions which are not applied equally to all tobacco or tobacco products of the same type.” 16

U.S. negotiators have exceeded their authority U.S. FTAs provide tobacco companies with benefits that only an FTA can provide: Investor-state arbitration to challenge other countries’ tobacco controls Outside of domestic courts Using investor protections not available under domestic law Trademark protections in foreign markets Expanded limits on non-discriminatory government regulation Necessity test for regulation of goods Emerging limits on cross-border distribution services Tariff reductions for specific tobacco products 17

Tariff reductions are obvious U.S. FTAs with Peru, Singapore, Chile, Australia Cigarettes Current statusFTA commitment WTO bound tariff – $1.05/kg + 2.3% Peru – zero tariff eliminated Singapore –13.1¢/kg + 0.2% staged elimination Chile –13.1¢/kg + 0.2% staged elimination Australia –42.0¢/kg + 0.9% staged elimination 18

Tariff reductions are obvious U.S. FTAs with Peru, Singapore, Chile, Australia Processed tobacco leaf – other than cigarettes Current statusFTA commitment WTO bound tariff – 37.5¢/kg Peru zero tariff lock in zero Singapore – 4.6¢/kg staged elimination Chile – 4.6¢/kg staged elimination Australia – 15.0¢/kg staged elimination 19

Less obvious Trade and investment rules that protect tobacco marketing Example – PMI describes Singapore’s standard for banning marketing terms as “overly broad” discretion, which PMI says could – “lead to violations of the TBT Agreement” “threaten to violate existing … agreements with the U.S.” and “undermine international investment, TBT and IP rights” Singapore’s standard – The Minister of health may ban use of “any term, descriptor or trade mark, or any figurative or other sign, that directly or indirectly creates the false impression that a particular tobacco product is less harmful than other tobacco products.” Compare to the U.S. standard: “The Secretary may … require restrictions on … the advertising and promotion of, the tobacco product, if the Secretary determines that such regulation would be appropriate for the protection of the public health.” 20

Uruguay prohibited deceptive cigarette brands – “light” and “low tar.” Tobacco companies shifted to colors – Marlboro Reds, Blue, Gold. Smoking rates stayed high, so Uruguay limited companies to A single brand 80 percent package warning Pictographs of severe health effects Less obvious still – Investors are using trade rules

Among PMI’s arguments – Uruguay violates fair & equitable treatment and WTO/TRIPS obligations. Under the BIT’s umbrella clause – Uruguay must “observe the commitments it has entered into with respect to the investments of Swiss investors.” Commitments include obligations under TRIPS. Philip Morris International filed investor arbitration – Switzerland-Uruguay BIT

Investors’ lawyers aim to privatize trade litigation. Incorporating trade rules could lead to “vast” expansion of trade litigation. Multiple investment clauses could link investors to trade rules. Lessons from the Marlboro Man v Uruguay

TBT necessity tests TRIPS trademark protections (“IP rights are private rights”) GATS limits on domestic regulation (“commercial presence” of subsidiaries) Example – proposal that governments must ensure that regulations are not more burdensome than necessary. Which trade rules are investors trying to use? BIT law WTO law

Minimum standard of treatment (fair and equitable treatment). Ensure compliance with customary international law (CIL) – debatable scope. International law clauses. Ensure treatment “in accordance with international law” – not limited to CIL. Umbrella clauses. Observe “any obligation” with regard to investments. More favorable treatment clauses. If another agreement between the parties provides “more favorable treatment” of investments, it will prevail. Most-favored nation treatment. Ensure the most favorable treatment provided to investors from any third country. If the expansive clauses above are not available, MFN incorporates them from any third-party BIT. Which investment clauses might incorporate trade rules? Most investment agreements (FTA chapters or BITs) have clauses that are designed to incorporate obligations from outside of the agreement.

Hypothetical TPPA invest. chapter No expansive treatment clause TPPA investment claim NZ investor Malaysia MFN Belgium Malaysia-Belgium BIT: Yes “international law” clause MFN links to clauses in third-part BITs

How might MFN expand protection of foreign investors? Even if the TPPA avoids expansive clauses (international, umbrella, more favorable, etc.), MFN could incorporate similar clauses from older third-party BITs. Examples: United States Argentina BIT 1994International law Ecuador BIT 1997Umbrella clause Australia Argentina BIT 1997More favorable / bilaterals Australia-US bilateralTRIPS-plus protections Chile United Kingdom BIT 1997International law

MFN Connections Under BITS and FTAs UNCTAD

Potential TPPA reforms Be wary of half-measures Many reforms proposed for the TPPA have value, but they are half measures. Carve-out of tobacco from the investment chapter This solution leaves in place the risk of state-to-state disputes under several trade chapters. Health exceptions for all chapters – Health exceptions would help safeguard domestic regulations, but the standard language includes a necessity test that shift the burden of proof to defending governments. Limits on investor protections – Clear limits on investor protections are essential, but they leave in place the risk of state-to-state disputes under several trade chapters. 29

Potential TPPA reforms Adopt effective reforms in the TPPA Three reforms do not suffer from uncertain interpretation or only partial coverage of TPPA chapters. Carve out tobacco A complete carve-out of tobacco would de-fuse the TPPA as a threat to tobacco controls. Exclude investor-state remedies As emphasized by Australia, investor claims could threaten a wider class of public health measures. Tobacco controls may save more lives than other health measures, but that does not justify protecting only tobacco controls from the threat of investor arbitration and trade disputes. 30

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