Innovative mechanisms for resolving or avoiding inter-state trade disputes in an Asia-Pacific regional free trade agreement.

• Author: Williams, Brett G

Abstract

This article elaborates upon ideas contributed to a symposium considering the possible shape of an Asia Pacific Community, including future trade arrangements within an Asia Pacific Community. It suggests some innovations in dispute settlement that could be considered for inclusion in such arrangements. The author suggests some innovative mechanisms by focussing on the way in which trade agreements and the dispute settlement mechanisms influence the internal political position of governments. The first mechanism would provide for a pre-quantification of the extent of retaliation that would he permitted should a complaint be successful. This mechanism would encourage respondent governments to focus earlier on weighing the potential loss of political support from exporters with any political support from import competing producers. The second mechanism would provide for free publication of an expert economic report on the economic welfare cost to the respondent of maintaining the protectionist measure subject to the complaint. This mechanism could increase the political weight attributed by the respondent government to the overall economic effects of the controversial measure. The paper further suggests that something similar to the second mechanism could be adopted as a separate transparency mechanism unrelated to dispute settlement. Such a mechanism might make it more likely that governments reform protectionist measures so as to avoiding the possibility of any legal dispute ever arising.

Introduction

The article in this issue by Micah Burch and Luke Nottage (1) describes some of the regional and bilateral trade initiatives (for example, the Asia-Pacific Economic Cooperation forum (2)) and some of the bilateral and regional trade agreements ('BRTAs') (for example, the Japan Singapore Free Trade Agreement of 2001, (3) the Australian Singapore Free Trade Agreement of 2003, (4) the ASEAN-China Framework Agreement, (5) the Trans-Pacific Rartnership Agreement of 2005 between Brunei Darussalarn, Chile, New Zealand and Singapore) (6) in place and under negotiation (the proposed ASEAN plus three--is China, Japan and Korea--the expansion in membership of the Trans-Pacific Partnership) among nations of the Asia-Pacific region. Burch and Nottage then discuss some novel approaches to mechanisms which could be built into existing agreements or any further agreements in the region to help resolve disputes:

1. the inclusion of investor State arbitration mechanisms for resolving disputes arising when Status engage in conduct that detrimentally affects foreign investors; and

2. the inclusion of mandatory arbitration provisions like those in the Organisation for Economic Cooperation and Development ('OECD') model tax treaty for resolution of double tax disputes enabling taxpayers to ensure double tax disputes between different States are resolved.

   This article makes some suggestions for novel approaches to resolving disputes between States arising from alleged breaches of the market access commitments contained in any BRTA among Asia-Pacific nations. These mechanisms could be considered in the context of existing BRTAs or in new BRTAs under negotiation or indeed in any wider Asia-Pacific Economic Community should such a thing ever come into existence. The suggested mechanisms are designed to be compatible with any unilateral initiatives in individual countries or to be capable of being multilateralised into World Trade Organization ('WTO') rules should any pair or group of Asia-Pacific countries find the mechanism workable and worthy of a proposal for amendment of WTO dispute resolution procedures.

   The suggested mechanisms for resolving trade disputes between States are:

1. a mechanism for pre-quantifying the extent of permissible retaliation, that is: provision for an early estimation of the possible retaliation that could be imposed should a complaint be successful; and

2. a mechanism for making the economic welfare costs of measures allegedly in breach of market access commitments transparent and widely known.

   Both suggested mechanisms are based on the same theoretical approach to trade agreements and their dispute settlement provisions. The approach to explaining the function of trade agreements relies on a variation of a model called the Trading Nations Dilemma as set out in the 1985 article by Kenneth Abbott. (7) The approach of that model and this explanation of it in describing the pressures within governments is sometimes called the 'public choice' or 'political economy' approach. (8) It is not the only model used to explain behaviour of States or the functions of trade agreements. (9) However, this article does not attempt to critique the model, or assess the merits of the different models of trade agreements.

   The theoretical background

   The decisions of governments of any States about trade policy can be seen as being a function of political pressures. The trade policy measures that a government implements may affect the level of political support and political opposition that it faces. Successful models of government behaviour in the area have incorporated various sources of political pressures. (10) The simplified matrix below (Table 1) is representative of the typical political economy approach to explaining the political pressures (and it approximates the political factors set out in Abbott's article referred to above).

   Table 1: Political support and opposition to a government reducing protection against imports. Key factors Political influence Import competing Against reducing protection (significant weight) producers Consumers In favour of reducing protection, but negligible weight in most circumstance Importance placed In favour of reducing protection/Against on national protection, but negligible weight in most welfare circumstances Exporters In favour of reducing protection because protection to another sector is equal to a tax on the export sector, but negligible weight in most circumstances because exporters are not engaged in the decision or do not understand its effects In aggregate: Which Likely political decision: Not to reduce decision will protection/to grant protection maximize political support and minimize opposition? Import competing producers have a clear and significant financial interest in supporting a government which grants them protection. Though there are other groups which have an interest in supporting a reduction in protection, they are likely to have a negligible influence on political decision making in most circumstances:

   * consumers gains are usually dispersed among a large group (with some exceptions) so that, for any individual, the cost of engaging in political activity is larger than the gain from reducing protection; (11)

   * the influence upon politicians of the value of enhancing national welfare will be diminished by the fact that political gains from enhancing national welfare would accrue much further into the future than the immediate political gains and losses from sectors directly and immediately affected by a political decision; (12) and

   * exporting producers do lose indirectly from a decision to grant protection to other producers but they may not understand that and, even if they do, their loss is quite dispersed so that the cost of influencing political decision may exceed their gain from being successful in influencing the relevant decisions.

   Therefore, in many (though not all) circumstances, the only significant political pressure affecting a government will be the pressure from import competing producers. This means that a government interested in maximising political support would choose to grant protection in many, even if not all, circumstances.

   If we construct a trade agreement in which two trading nations, TN1 and TN2, exchange tariff reductions, then the exporters in each nation would gain from the implementation of the agreement so they would have an incentive to provide political support to their government to enter into the agreement. Once a draft agreement specifies market access to the other country which would provide gains to exporters, then those exporters have an incentive to provide political support for entering into the agreement. As a political group, the exporting producers have many of the same characteristics as groups of import competing producers so they are likely to exert political influence of a comparable magnitude.

   Therefore, by bringing the possible trade agreement into consideration, the political situation affecting a decision to...