It is suggested that states should have an option to instigate “rebalancing review procedures” of their Free Trade Agreement commitments to enable ambitious trade and sustainable development commitments as such reviews would act as “safety valves” against possible future negative trade or sustainability effects.
It is further suggested that these rebalancing reviews be subject to conditions and processes that allow developing countries to participate on an equal footing.
By Marios Tokas, student at Geneva Graduate Institute
SDG 17 (partnerships for the Goals) requires that global trade partnerships be made to promote sustainable development through trade liberalization and make trade and environment mutually supportive. However, states may refrain from making ambitious commitments on development or conclude new trade agreements due to the fear of pushback by domestic industries that may be negatively affected by increased trade liberalization or ambitious sustainability commitments. It is suggested that states should have an option to instigate “rebalancing review procedures” of their Free Trade Agreement (FTA) commitments to enable ambitious trade and sustainable development commitments as such reviews would act as “safety valves” against possible future negative trade or sustainability effects. It is further suggested that these rebalancing reviews be subject to conditions and processes that allow developing countries to participate on an equal footing.
Winners and Losers in Trade Liberalization: Voters Against Free Trade Agreements
FTAs have often created tensions at the domestic level and among trade partners. The idea about “winners and losers” in trade liberalization, either on a multilateral or regional level, has been increasingly influential in domestic and regional politics. Even among developed countries, the voices of trade liberalization losers are powerful enough to carry the decisive swing in close elections. Further, many criticize the alleged democratic deficit of trade agreements since they cannot be amended in accordance with new developments in the domestic political arena. These may be perceived as disincentives for countries to pursue negotiations on ambitious FTAs.
The question that arises is how countries that have signed FTAs can instigate measures to rebalance the commitments they have made with their trade partners in order to mitigate possible negative effects for job creation, environmental protection, and economic development, or to adapt to new democratically chosen priorities. The negative effects may not only be related to traditional trade liberalization commitments such as increased market access, but also to sustainable developments commitments introduced in newer FTAs. Hence, the true question here is how a party may rebalance its obligations so that an FTA can effectively support SDG 17 to “[s]trengthen the means of implementation and revitalize the global partnership for sustainable development.”
Rebalancing in International Trade Law
The idea of having the capacity to unilaterally “rebalance” trade commitments is not novel. Already in GATT 1947, Article XXVIII allows GATT Parties (now WTO members for GATT 1994) to unilaterally modify or withdraw tariff concessions, after proper negotiations with principal supplying interests and the provision of tariff compensatory concessions. In case of disagreement, the principal supplying country is able to withdraw substantially equivalent concessions. The process of Article XXVIII is rare and arduous, as exemplified in the EU-Poultry case.
Fast-forward to 2020, the EU-UK Trade and Cooperation Agreement (TCA) allows under Article 411 the parties to “take appropriate rebalancing measures to address” material impacts on trade or investment between them, which result from significant regulatory divergences in labor and social regulation, as well as environmental protection. This, however, constitutes a unilateral and temporary measure, not a review process.
Review provisions were previously very rare: only 12% of total bilateral agreements, including FTAs, according to 2019 data from the European Parliamentary Research Service. Such provisions have recently started to appear more frequently in FTAs, such as the US–Mexico–Canada Agreement (USMCA). Yet, these constitute general review clauses where the process starts automatically at a predefined time, (e.g., 16 years), with no conditions linked to benchmarks (e.g., failure to succeed on a common goal), contingencies (e.g., existence of a particular negative effect) or procedures for these reviews.
In a nutshell, unconditional review mechanisms and unilateral rebalancing measures favor stronger parties to an FTAs that are in a better economic position to impose unilateral measures and have higher leverage (political and/or economic) in imposing review outcomes. For this reason, it is suggested that any rebalancing review provide clear conditions for invoking such a review. An instance of such rebalancing reviews exists in the Level Playing Field Chapter of the TCA, which allows reviews only subject to the agreed procedures and contingencies (material impact on trade or investment, or frequent unilateral temporary measures under Article 411).
Allowing for rebalancing reviews in FTAs
Starting with future FTAs or those under renegotiation, rebalancing procedures should be allowed when trade and investment concessions have a negative impact on labor and the environment, or vice-versa, when regulatory divergences in labor and environmental regulations cause significant negative impact on trade and investment. It is suggested that trade partners be able to call for a rebalancing review of specific commitments in an FTA by a panel of experts, who would issue a report on potential solutions. Such a report would be the basis for future renegotiations, or, in case of failure, the party should be allowed to suspend or denounce the treaty.
The call for rebalancing review should be tied to regular ex-post Impact Assessment Report (IAR) and limited by the common targets and goals set by the trade partners at the regional and international level. Hence, the party might call for rebalancing review only after the IAR has been issued and if its findings show that the environmental, economic or social goals and targets set by the parties are not met. Such an example may be the limitation of the global average temperature increase to 1.5oC above pre-industrial levels.
Rebalancing in FTAs with no rebalancing review provisions
Regarding existing FTAs that lack such rebalancing reviews, it is important to recognize the flexibilities that allow states to alter their bilateral trade arrangements in light of significant negative impact on trade and investment, and negative impact on labor or the environment. This would greatly increase the democratic legitimacy of FTAs (Charlotte Sieber-Gasser, 2021). Depending on the text of the FTA, such flexibilities may be found in general exceptions, carve-outs, and suspension and termination clauses.
Should an FTA contain no flexibility provisions, Article 62 of the Vienna Convention on the Law of Treaties provides for a unilateral right to terminate or suspend a treaty in case of a fundamental change of circumstances that constituted the essential basis of consent of the parties. While this is a rather high bar to clear, it could be argued that significant negative impacts on trade, investment, labor or environment would meet this standard. Deterioration of market shares and changes in trade balances or amount of investment, on the other hand, would arguably not qualify as such a change of circumstances. In any event, it should be recognized that parties to an FTA, which does not have termination clauses, have a unilateral right of denunciation or withdrawal in accordance with Article 56 of the Vienna Convention, which regulates denunciation of treaties with no express denunciation provision. Higher deference should be given to states seeking to suspend or terminate an FTAs, after attempts at renegotiation have failed.
Need for balance of rebalancing reviews
In case of formal rebalancing reviews, it is imperative that IARs are co-financed by the parties in accordance with their share of bilateral/plurilateral trade, similar to World Trade Organization (WTO) funding. At the same time, the institutional framework of an FTA should ensure that rebalancing review is technically and financially available to all parties. Lastly, rebalancing reviews should be differentiated from existing review clauses, which are not tied to any the environmental, economic or social goals and targets set by the parties, or to an IAR.
This article is a result of the Spring 2022 class, ‘Law of Sustainable Development,’ Geneva Graduate Institute, taught by Dr. Charlotte Sieber-Gasser and Dr. Manuel Sanchez.