Trashing NAFTA, Obstructing WTO: The Rise of Judicial Protectionism in Trump Era

By Anil Yilmaz

The last two years saw the Trump Administration bringing about several impactful reforms in a multitude of socio-economic areas. Majority of these reforms entail huge controversies and the ones focusing on multilateral trade agreements are of no exception. Obscurity surrounding the Transatlantic Trade Partnership and shelving of the Transpacific Partnership is already well-known. Currently the administration is making a blatant move to scrap the investor-state arbitration under NAFTA and obstruct with the WTO dispute resolution mechanism. Not so long ago President Trump defined NAFTA as “the worst trade deal maybe ever signed anywhere.” The US Trade Representative Lighthizer recently joined the conversation and laid out his skepticism of investor-state arbitration under NAFTA Chapter 11. Lighthizer essentially made two claims: Investor-state arbitration clauses work against US sovereignty and they ease the way for US corporations to migrate by eliminating the political risk abroad. However, as is often the case, the facts do not side with the Administration on this one. The US has never lost a case under NAFTA. Therefore, the impact of NAFTA upon US sovereignty is virtually zero. If anything, US companies are awarded handsome compensations by NAFTA tribunals and avoid otherwise harmful restrictions. Moreover, empirical studies fail to unequivocally find a direct correlation between the existence of free trade agreements and corporate decisions for making investments abroad. This means that regardless of the existence of any treaty, US corporations will likely continue operating abroad to maintain or increase their global market share. Scrapping ISDS clauses starting with NAFTA thus will only ensure one thing: exposing US corporations to political risk when operating abroad without a viable international legal remedy.

 

Businesses, politicians, and lawyers familiar with the existing legal framework warn the Trump Administration not to undermine the investor-state arbitration. For instance, renowned US international law practitioner Judge Brower recently condemned what he called “politicization” of investor-state dispute settlement and claimed that a move away from the current regime would be “selling-out” investors. At the Annual Meeting of ASIL, Judge Brower strongly criticized Lighthizer’s school of thought with reference to centuries-old trade practices. In a similar vein, dozens of Republican Congressmen moved by business leaders sent an open letter to Trump Administration to avoid “harming” their industry and maintain existing legal policies in relation to free trade agreements. [https://www.bloomberg.com/news/articles/2018-03-15/oil-gas-leaders-to-warn-trump-he-risks-harming-their-industry] On the other side of the aisle, opponents of the current investment regime gain recognition from the nascent populist movements in both Europe and the US.  Yet, such movements are based on real “fake news” Judge Brower claimed.

 

Trump Administration’s skepticism is not confined to investor-state arbitration. Since the summer of 2017, a similar effort is underway in relation to WTO dispute resolution. The US Government has denied appointing new members to the Appellate Body which hinders the once highly acclaimed dispute resolution process.   WTO Director-General Azevedo said that the US actions compromise the “ability of the system to resolve disputes”. The hybrid system that the WTO dispute resolution process offers introduces diplomatic and legal elements, and have long been championed by practitioners as one of the most effective around the world.  Now the US government looks at the prospects of scrapping it down. Trump Administration’s not so secret intention to substantially increase tariffs on Chinese imports explains the motive. Yet the experts warn again for potential legal ramifications. The US has invoked national security grounds to avoid applicable WTO rules. This method might be replicated by other countries like China, which could potentially eradicate the system altogether. Based on the US interpretation, any country, including China, may redefine their national security interest as to include anything. Hence, avoiding the existing multilateral trade regime. With a weakened Appellate Body that is failing to provide legal oversight, we can easily return to days when these institutions did not exist.

 

Trump Administration’s latest efforts significantly undermine the weight of international courts and tribunals and attempt to nationalize the adjudicatory process. Similar to its economic counterpart, judicial protectionism reverses the role of international trade and investment tribunals back to national courts and brings us to pre-cold war circumstances. Yet history is replete with examples of why this does not work. Additionally, there is no clarity on how this will support US interests. Protectionist measures may sound appealing at the outset, but it is their complex ramifications which makes them harmful. In this context, it is important to understand why the targeted judicial institutions were built in the first place. Prior to the existence of the current legal framework for trade and investment, capital-exporting states used to protect their economic interests abroad largely through diplomatic efforts. Due to ever-increasing burden of globalization, such diplomatic efforts may not be viable today. Reversing the processes could significantly undermine the probability of resolving economic disputes. Unresolved economic disputes, in turn, may raise diplomatic tensions and even lead to potential military conflicts. Therefore, it is important for Trump Administration to tread lightly when it comes to overhauling of this system. Without a thorough analysis made or alternatives created, walking away from NAFTA or undermining the WTO dispute resolution system could have significant adverse effects on US interests.