Unit 12 - Background & Issues

We shift gears in looking at (traditionally bilateral) FTAs and investment protections, as the legal underpinnings of global supply chains.  The closest investment protections ever came to being part of the multilateral WTO approach was when they were theoretically on the table as a Singapore Issue in the immediate aftermath of the Uruguay Round.  Meanwhile, there are only a few (non-US) FTAs lacking investment protections.  One of the distinguishing characteristics of an FTA since 1995 is that it includes investment protections and until recently direct investor-state arbitration arrangements too, which is a far cry from the customary law protections for foreign economic interests implemented via diplomatic protection, if at all.  It is probably best in practical terms to think of FTAs as a potential alternative to the WTO, especially beloved by states seeking increasingly regionalized trade (so theoretically China in the Asia-Pacific, for example, via RCEP).  It is in this context that we ask whether IPEF is, or is not, conceptually a FTA, and if not where does it lead in trade policy terms?

The first reason for talking about FTAs is simply that they are the practical basis of current global supply chains for distributed production of multinational corporations (aka larger business clients).  Meanwhile, despite a lot of political posturing, it is not at all clear that if NAFTA’s renewal had failed, US and foreign manufacturers’ Mexican production facilities inevitably would have come to the US, or if they had come they probably would have been highly automated so that any repatriated facilities would not bring many jobs.  And now, the focus at the client level is often on supply chain “diversification,” meaning maintaining alternate suppliers in different countries, which has come to the fore under different circumstances (the Ukraine conflict and Taiwan's issues with China highlighted problems most recently).  Meanwhile, intra-Asia, on the “natural disaster” front several years ago, Thailand faced serious flooding problems that put out of commission a number of automotive and automobile parts plants, which resulted in Toyota reconsidering a decision to place all its ASEAN manufacturing facilities in Thailand.  Similarly, on the “national security” side US electronics manufacturers are apparently considering both moving certain supply chains as US-China trade relations have become more contentious (so, for example, Apple moving some or all of their overseas assembly, for instance, from China to India or ASEAN member states like Vietnam, Thailand or Indonesia;  moving it completely back to the US seems not to be on the agenda, presumably a reflection of Apple sales overseas).

The second reason for talking about FTAs is that, as a result of the Doha Round having been stalled in practical terms circa 10+ years and then ending in a whimper rather than a bang, from the developed country perspective the practical thrust of trade liberalization has been moving forward more towards FTAs than via the multilateral WTO trading system for more than a decade (meanwhile, developing countries tend still to favor the multilateral system, presumably as market-access guarantee to developed country markets).  This is part of the narrative whether, if the multilateral trading system loses even more momentum, the result will be “regionalization” of trade (meaning regional trade blocks via FTAs, rather than individual countries entering into bilateral relationships).  That is being tested currently in Asia following the Trump administration’s withdrawal from TPP, since President Trump apparently would have favored bilateral agreements with the eleven different other TPP members, meanwhile the other TPP members went ahead and launched TPP-11 without the US for now.

So the free trade talking heads discussed for the longest time whether the biggest problem with the Trump Administration’s preferred approach was that other countries were simply not interested in it.   Then the Trump Administration turned to trying to negotiate and announce bilateral agreements, particularly with Japan.  So an agreement in principle with Japan was announced late in the Trump Administration, except that what the Japanese agreed to in areas like agricultural trade liberalization was more or less what they had agreed to under the TPP Agreement negotiated under the Obama Administration (so TPP may serve as the negotiating template for bilateral agreements, at least from TPP-11 member countries’ perspective).   And underlying the whole discussion is the idea previously alluded to that if the Trump Administration’s ultimate goal is repatriation of manufacturing (including jobs), it is not at all clear for economic reasons that would occur if a country simply were to reject the regional FTAs.  Now the issue is what is IPEF, really, and will it be interesting enough to attract the sustained engagement of Asian countries?

The third reason for talking about FTAs and investment protection is that you may recall “commercial presence” was part of one of the four modes of services delivery under the GATS, so the status of investments and investment protections are entwined with services liberalization, now a topic of increasing importance in international trade.  Foreign investment is not just about manufacturing facilities.

The fourth reason is admittedly speculative, but the more the Trump Administration applied pressure to the existing WTO structures (e.g., levying tariffs on China and other countries via national security claims, then more generally trying to throw sand in the WTO’s gears via trying to freeze the DSB Appellate Panel to force some kind of general renegotiation of the 1994 WTO outcome), the more it arguably accelerated the pre-existing tendency for trade law’s focus to transfer generally from the multilateral WTO as institution, into the regionally oriented “super” FTAs (like TPP or RCEP).  The problem is that if the Doha Round was already seemingly such a heavy lift that trade liberalization via the WTO largely ground to a halt before the Trump Administration entered office, why will WTO renegotiation become any easier?  If that characterization is accurate, the most rational investment of limited time and resources in governmental terms worldwide may be an ever-increasing focus on the FTA approach (also potentially the IPEF approach, if it really were just some version of FTA-lite).  Somewhat humorously, the chief stumbling block to this result may be China demonstratively assuming the mantel of leading WTO free trade proponent in the eyes of foreign publics.

Both USMCA and the ASEAN Economic Community are complex FTAs with liberalization of trade in goods, services and investments based ultimately upon ideas of economic integration in traditional terms.  Given limited time, however, we focus on investment protection law (and a little bit of services liberalization in Unit 13).  But to understand that, we first need to understand its customary law basis of the protection of foreign economic interests theoretically available in all countries.  The next level of protection would be bilateral investment and similar treaties, with FTAs containing investment protection provisions constituting effectively a third layer.  But pay attention, “investment protection” is not just about expropriation, but in modern practice more often than not the questions involve discrimination in terms of taxation or otherwise.