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April 12, 2012

Sweet surrender?

Over the last few posts (see here and here), we’ve explained the two major findings in the recent WTO ruling against U.S. efforts to reduce teen smoking.

The question inevitably becomes: what happens next?

There is a strong presumption under the WTO’s Dispute Settlement Understanding (DSU) that the U.S. will begin to remove the ban on clove cigarettes in 60 days, i.e. early June 2012. In this particular case, I wouldn’t be surprised if the WTO urged compliance by August 2012, right in the middle of the U.S. election season. But the outer bound for compliance is likely to be July 2013, or 15 months from the date of adoption of the Appellate Body report.

More details after the jump.

There are several stages in compliance proceedings.

First, there is report circulation. The WTO's Dispute Settlement Body (DSB) circulated the report last week, April 4, 2012. So that's already happened.

Next comes report adoption. By Article 17.14 of the WTO’s Dispute Settlement Understanding,

“An Appellate Body report shall be adopted by the DSB and unconditionally accepted by the parties to the dispute unless the DSB decides by consensus not to adopt the Appellate Body report within 30 days following its circulation to the Members. (8) This adoption procedure is without prejudice to the right of Members to express their views on an Appellate Body report. (footnote original) 8 If a meeting of the DSB is not scheduled during this period, such a meeting of the DSB shall be held for this purpose.”

Friday, May 4, 2012 is the 30-day window, so the AB report will be adopted by then.

Third, there's US implementation report-back and presumptive commencement of compliance. Article 21.3 of the DSU states in part: “At a DSB meeting held within 30 days(11) after the date of adoption of the panel or Appellate Body report, the Member concerned shall inform the DSB of its intentions in respect of implementation of the recommendations and rulings of the DSB….”  So the US has to inform of its intentions by Friday, June 1, 2012. (That’s 27 days, but the last working day before the 30 day period. So maybe it slips to Monday, June 4.)

As Article 21.1 states: “Prompt compliance with recommendations or rulings of the DSB is essential in order to ensure effective resolution of disputes to the benefit of all Members.” And there is a strong presumption that compliance steps begin immediately. In a previous compliance case (Chile-Alcoholic Beverages (Article 21.3)), a WTO arbitrator stated “‘prompt’ compliance is, in principle, ‘immediate’ compliance.”

(All these references can be gleamed here.)

And in another case (US-1916 Act (Article 21.3)), a WTO arbitrator said an implementing Member “may reasonably be expected to use all the flexibility available within its normal legislative procedures to enact the required legislation as speedily as possible.” And in a third case (EC-Hormones (Article 21.3)), a WTO arbitrator wrote that “withdrawal of an inconsistent measure is the preferred means of complying with the recommendations and rulings of the DSB in a violation case…”

However, there is an alternative compliance timeline. Article 21.3-4 of the DSU states that…

“…If it is impracticable to comply immediately with the recommendations and rulings, the Member concerned shall have a reasonable period of time in which to do so.  The reasonable period of time shall be: (a) the period of time proposed by the Member concerned, provided that such period is approved by the DSB;  or, in the absence of such approval, (b) a period of time mutually agreed by the parties to the dispute within 45 days after the date of adoption of the recommendations and rulings; or, in the absence of such agreement, (c) a period of time determined through binding arbitration within 90 days after the date of adoption of the recommendations and rulings.(12) In such arbitration, a guideline for the arbitrator(13) should be that the reasonable period of time to implement panel or Appellate Body recommendations should not exceed 15 months from the date of adoption of a panel or Appellate Body report.  However, that time may be shorter or longer, depending upon the particular circumstances.

4. Except where the panel or the Appellate Body has extended, pursuant to paragraph 9 of Article 12 or paragraph 5 of Article 17, the time of providing its report, the period from the date of establishment of the panel by the DSB until the date of determination of the reasonable period of time shall not exceed 15 months unless the parties to the dispute agree otherwise.  Where either the panel or the Appellate Body has acted to extend the time of providing its report, the additional time taken shall be added to the 15-month period; provided that unless the parties to the dispute agree that there are exceptional circumstances, the total time shall not exceed 18 months.”

According to existing WTO compliance arbitration case law, “the term ‘reasonable period of time’ has been consistently interpreted to signify the ‘shortest period possible within the legal system of the Member’.”

Taking the 15 month timeline as a guide would make it July 2013. (In theory, the US and Indonesia could agree to a longer time horizon, although I don’t know why Indonesia would.)

However, I’m betting since a key issue in the Indonesia-U.S. dispute was the fact that the FSPTCA was implemented in three months rather than six, it’s not unimaginable that a WTO panel would require a three-month compliance after adoption of the report, which would make it August 2012 – right in the middle of our election season.

Indeed, the compliance arbitrator in U.S.-Gambling noted that…

“Antigua also points to the fact that the United States Congress took just five months to pass the 2000 amendments to the IHA.  I take note of this fact.  Given that these amendments relate to the same field as the one in which the United States intends to implement in this case, I consider it relevant that Congress was able to act so expeditiously on a prior occasion.” Para 55

Does the fact that Indonesia is a developing country matter for the U.S. compliance timeline? It might. Article 21.2 reads: “Particular attention should be paid to matters affecting the interests of developing country Members with respect to measures which have been subject to dispute settlement.”

In the U.S.-Gambling case, Antigua attempted to argue that its developing country status merited a faster U.S. compliance, in order to kickstart job creation in the Internet gambling sector. However, since Antigua hadn’t made a very compelling case as to the development damage of the measure, the arbitrator didn’t rule on any Article 21.2 arguments (para 62-63). In Indonesia’s case, however, they already documented to the lower panel that it experienced $15 million in lost exports. So the Southeast Asian nation may be more likely to get preferential compliance treatment.

++

How politically viable is an August 2012 deadline for compliance? I would say not at all. For those not familiar with the intricacies of lawmaking in the U.S., it would be HIGHLY unlikely that legislation of any type be enacted any time from now until January 2013 (much less by August 2012), even if Democrats controlled both houses of Congress, which they do not.

++

This leads me to the next point. If the U.S. chooses to comply, how should it?

One of the more creative suggestions I’ve heard is that the U.S. should comply by just extending the flavored cigarette ban to menthol or all the way to tobacco. It seems very unlikely that such a ban would pass, or if it passed, that it would make Indonesia's complaints go away. (I'll say more about the latter point in a future post.)

First, I simply don’t think the votes are there in Congress for such a ban, nor will they be anytime in the next 3, 10, 15 or 18 months.

I bet almost all Republicans would vote against such a ban, on the grounds that it interferes with business interests. Only 13 sitting House Republicans cosponsored the FSPTCA, and only 71 voted for final passage – several of whom are no longer around. Notorious smoker Speaker John Boehner (R-Ohio) would probably not even allow a vote to be scheduled.

I think there would also be opposition from some in the Congressional Black Caucus. Presumably, if there were the votes on the Democratic side to make the ban happen, Waxman would have passed a wider ban back in 2009.

So, if there weren’t the votes then, there certainly aren’t now. Political handicappers like Stuart Rothenberg say that it is almost impossible that Democrats will take back the House.

(Even if through some miracle Obama could be convinced to ban menthol, I am betting some advisors will note that such a paternalistic move would probably play poorly in an election where "economic freedom" is appealing to many voters.)

Second, even if a menthol ban somehow did get through Congress, I’m betting it unlikely that it would survive scrutiny in the U.S. courts, which have been ruling against other aspects of the FSPTCA. There’s some indication that Waxman structured the bill the way he did, and USTR defended the measure they way they did, because of the adverse Supreme Court ruling in 2000 striking down FDA jurisdiction over tobacco,

“the FDA found that, because of the high level of addiction among tobacco users, a ban would likely be ‘dangerous.’ In particular, current tobacco users could suffer from extreme withdrawal, the health care system and available pharmaceuticals might not be able to meet the treatment demands of those suffering from withdrawal, and a black market offering cigarettes even more dangerous than those currently sold legally would likely develop. The FDA therefore concluded that, ‘while taking cigarettes and smokeless tobacco off the market could prevent some people from becoming addicted and reduce death and disease for others, the record does not establish that such a ban is the appropriate public health response under the act.’” 

One can agree or disagree with the Supreme Court (or the FDA) on this count, but it is undeniable that the crafters of the FSPTCA had such precedents in mind when they created the ban on flavored cigarettes that excluded menthol cigarettes, which are used by large numbers of adults.

++

Would any of these considerations matter for the U.S. compliance timeline? In a phrase, probably not.

Compliance arbitrators have said that determination of a “reasonable period of time” under WTO rules needn’t take into account “time or opportunity to control and manage economic or social conditions which antedate or are contemporaneous with the adoption of the WTO-inconsistent governmental measure” (Argentina – Hides and Leather (Article 21.3)). A WTO arbitrator did not look kindly on Japan’s request for a 23-month compliance period due to the intricacies of the legislative process (Japan – Alcoholic Beverages II (Article 21.3)). Likewise, Canada was rebuffed when it argued that it would be more convenient to phase in a WTO compliance measure at the same time as it was slated to adopt changes to customs legislation (Canada – Autos (Article 21.3)).

Closer to home, a compliance arbitrator in U.S.-Gambling noted that…

“The United States also submits that I should take account of the fact that several previous Congresses have considered bills related to internet gambling, but that none of these bills has passed.  The United States did not, however, provide me with any explanation as to the reasons why such bills have not been enacted into law.  I am, therefore, unable to determine whether Congress' inability to pass previous bills was related to their complexity—a relevant particular circumstance—or to their contentiousness—something that would not constitute a relevant particular circumstance for purposes of my determination…. I am not persuaded that several other factors invoked by the United States (to date, Congress has not been able to pass any of the bills relating to internet gambling that have been proposed) or Antigua (the asserted availability of partial implementation through a presidential executive order, the fact that the 109th Congress has already passed 15 laws in approximately 6 months of work, or Antigua's status as a developing country Member) are properly characterized as particular circumstances relevant to my determination in this case” (paras 48, 66)

In that case, the WTO arbitrator deemed that a “reasonable period of time” was 11 months and 2 weeks.

These examples show that the WTO is unlikely to give the U.S. additional time to build the votes in Congress, or to pave the way for a socially disruptive menthol ban whose impact will be felt in a racially disproportionate way (since working class African American adults are the primary consumers of menthol).

++

This leads to a final point. What if the U.S. doesn’t comply? Possibly, trade sanctions.

When? According to Article 22 of the DSU, Indonesia could launch trade sanctions on the U.S. within 30-60 days of the expiration of the "reasonable period of time." Based on our speculations, that would put it in August or September 2013 at the latest.

What? According to Article 22.4: “The level of the suspension of concessions or other obligations authorized by the DSB shall be equivalent to the level of the nullification or impairment.” Article 22.3 lays out a hierarchy of preferred sanctions, beginning with (as it would apply in this case), sanctioning U.S. flavored tobacco exports to Indonesia, U.S. exports subject to some sort of TBT discipline, or (if all else fails) any U.S. export Indonesia wants to sanction.

How much? As the lower panel wrote, “It is also not in dispute that, as a result of the ban, U.S. imports of clove cigarettes produced in Indonesia have declined from approximately $15 million in 2008 to zero in 2010.” (para 7.628) This means that Indonesia could suspend (say) tariff concessions or intellectual property protections with respect to U.S. products valued up to $15 million. We export about $7 billion to Indonesia a year, or about $800,000 an hour. In other words, Indonesia could sanction at the outer bound what we export to the country in a typical 19-hour period every year.

++

This is unlikely to create much of a deterrent effect, although even tiny sums can be sufficient justification for some in Congress that want to roll back regulation no matter what.

However, given the substantial overreach of the WTO in this case, Congress and the public would be justified in urging the administration to challenge the legitimacy of any trade sanction. After all, I don't think there's any moral or ethical reason to comply with a system of WTO rules that attempt to put trade flows above health, when there's no comparable international mechanism at the WHO that could put health above trade.

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ever smoke battery life

This matter is downcast to earth, hats off buds out there.

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