Financial Times (2.20.07).

How lawsuits are coming to dictate the terms of trade.

By Alan Beattie

Some years ago, American catfish farmers got cross when cheap Vietnamese catfish started flooding the US market. Their expensive lawyers forced the Vietnamese to stop calling their catfish catfish, on the grounds it was a different family to, though in the same Siluriformes order as, American catfish. The Vietnamese relabelled their exports as basa or tra (meaning, in Vietnamese, “catfish”). Sales continued to thrive.

Undeterred, the US catfish farmers’ lawyers changed their strategy, successfully securing import duties on Vietnamese catfish on the grounds that they were being “dumped”, or sold at unfairly low prices, in the American catfish market. To do so, they needed to prove that Vietnamese catfish were a “like product” to American catfish, having previously spent many thousands of dollars in fees to establish that Vietnamese catfish were not, in fact, catfish.

As far as their critics are concerned, that tells you pretty much all you need to know about what happens when trade lawyers get out of control.

As the so-called Doha round of World Trade Organisation global trade talks sputters, more and more of the work of trade relations has shifted away from negotiation and towards litigation and arbitration. To its defenders, this trend represents rule and reason constraining power politics. To its critics, it means runaway jurists subverting democracy.

In a recent exchange at the Council on Foreign Relations, Robert Lighthizer, a former deputy US trade representative who heads the international trade department at the law firm Skadden Arps, argued that dispute panels were exceeding their limited mandate. “The WTO dispute settlement system is veering off course and is increasingly a threat to the legitimacy of the entire body,” he said. “WTO panels have increasingly seen fit to sit in judgment of almost every kind of sovereign act.”

Such measures as the anti-dumping duties levied on the Vietnamese catfish have a long history in domestic US legislation governing international trade. The innovation of the past decade is the spread of the relatively new field of international public law – that governing relations between states – over international trade and investment, which was given a big boost by the creation of a WTO dispute settlement system in 1994 to interpret multilateral trade agreements. There has been an explosion of cases at judicial and arbitration bodies such as the WTO’s dispute settlement panel and the International Centre for the Settlement of Investment Disputes (Icsid), housed at the World Bank in Washington, which rules on disagreements between governments and private foreign investors.

A series of cases has highlighted the ability of a country – and increasingly, at the Icsid and similar “investor-state” tribunals, a company – to force a government to act in politically sensitive areas. A succession of cases brought by WTO members including Brazil, the European Union and even tiny Antigua and Barbuda (population 83,000) has forced the US Congress to rewrite corporation tax law, reform subsidies to cotton farmers and revise bans on internet gambling. Bechtel of the US sued impoverished Bolivia for $50m at Icsid for abrogating a water supply contract, though after a firestorm of criticism it last year accepted token damages equivalent to 25 US cents. Three Italian mining companies are currently suing South Africa for taking away their mineral rights without full compensation under that country’s “black economic empowerment” laws. Such cases often take place under the provisions of bilateral investment treaties (BITs) – a little-known but increasingly important part of the international trade architecture (see below).

There are obvious reasons for rulings by such panels to raise hackles. Many of their practices are based on binding commercial arbitration procedures with no appeal and, unlike most normal courts, the majority of hearings are held in secret.

Rulings are also often misunderstood. At the disastrous WTO meeting in Seattle in 1999, unions demonstrating in the streets were joined by dozens of environmentalists dressed as sea turtles. The marine reptiles were protesting against a panel ruling that the US was breaking WTO law in insisting that all shrimp sold in America be harvested in nets containing special holes for turtles to escape. In fact, the demonstrators had missed the point. The panel upheld WTO members’ rights to make such laws and criticised only the way the US implemented its law to favour its neighbours in Central America over producers in Thailand, Malaysia, India and Pakistan.

But critics of jurisprudential overreach and caprice have some powerful arguments. Public international law is based on the Roman civil law of continental Europe rather than the English common law tradition. Accordingly, although they take account of decisions in previous cases, rulings are not bound to follow precedent. There is considerable potential for panels to interpret – critics would say make up – the law themselves, particularly under a new system such as the WTO, whose panel and the legal text it interprets date only from 1994.

WTO panels comprise three from a roster of part-time panellists that includes trade officials, diplomats and academics. Some, oddly, are moonlighting from day jobs as national ambassadors to the WTO, meaning they are negotiating over trade deals one day and ruling on their meaning the next. They do not have to be lawyers, though there is a separate appellate body whose members must have legal expertise. Panels rely heavily on advice from the WTO’s small secretariat to interpret legal questions.

It is hard completely to dismiss the contention that law affecting thousands of businesses, millions of workers and billions of dollars is being determined by panels of part-time amateurs making it up as they go along.

Lawyers active in the system are staunch in its defence. The international law firm, Sidley Austin, is one of the centres of WTO litigation expertise. Andrew Shoyer, a partner in Sidley’s Washington office, says that the panellists and appellate body members have legitimacy from being appointed by member governments and being embedded in active trade policy and analysis. “Insisting that all panellists be full-time would mean that only those at the end of their careers would serve,” he says. “The advantage of having mid-career part-time panellists is that the quality of the judgment reflects the experiences they are having as trade officials every day.”

But even some panellists have criticisms. Gary Hufbauer, senior fellow at the Peterson Institute think-tank in Washington, says the panel he sat on was superbly supported by the WTO’s secretariat. But he adds: “It is better than having nothing, but it is becoming unbalanced, and that will be even more evident if Doha fails. Litigation is not a great way of negotiating agricultural support [subsidies] and market access.” A deal in Doha, he says, would refresh the system’s legitimacy by allowing WTO member governments to review the first 10 years of the dispute settlement system and, where necessary, give updated guidance in a new text.

Without it, the US and other economies big enough to ignore WTO rulings – the WTO can only authorise reciprocal trade sanctions, not levy fines – might feel tempted to do so. A current cause célèbre in Washington is one that involves new international trade law overturning domestic custom: the contentious practice of “zeroing”, on which hangs the ability of American companies to enforce anti-dumping duties. Zeroing permits the US commerce department, when calculating how much a product is being dumped, to ignore (or set to zero) examples where the imported product has a negative dumping margin – that is, where it is sold for a higher price in the US than in the domestic market.

Some involved say that during the last successful “Uruguay round” of multilateral trade talks, which concluded in 1994, the EU and US reached an informal agreement about how zeroing would be treated. Evidently it was either misunderstood or not honoured. The EU, whose own anti-dumping rules were found illegal by a WTO ruling in 2001, unleashed WTO litigation against the US’s zeroing methodology in a range of cases involving products from pasta to steel to chemicals.

Since the word “zeroing” does not appear in the text of the Uruguay round agreement, panels have had little guidance on the issue. Nonetheless, brushing aside guidance that is in the agreement – that panels should give governments latitude to argue that theirs is a reasonable interpretation – the WTO’s appellate body last year in effect struck down the US’s ability to use its existing method and placed zeroing in jeopardy.

For American companies, lawmakers and officials, this is a clear case of panellists legislating from the bench. Warren Maruyama, general counsel for the US trade representative, says the USTR has “substantial problems” with the most recent zeroing case. “If it looks as though the WTO panels or the appellate body are making up law out of whole cloth, that is a problem,” he says. “I think they have to stick to the texts. In situations like [zeroing] the country challenging a measure has the burden of proof, so if the matter is unclear the panel should go negative.”

Panels seem disinclined so to do. And if negotiations are fruitless, litigation takes over. If Doha fails, American farmers are braced for a broadside of WTO litigation over their subsidies. Canada has already filed a new case over corn. Various other countries, such as Uruguay with rice, have potential cases that their lawyers are confident they can win.

Such victories would bring short-term gains to the complainants. But if they erode the legitimacy of a dispute settlement system that has two rare and precious properties – enforceable rulings and the ability of tiny poor countries to take on big rich ones – their costs will be higher than they appear.

Deals with a hidden reach.

For its critics, the most sinister thing about investor-state litigation is that much comes under treaties that few non-experts even know exist.

As overseas commercial presence led by foreign direct investment becomes an indispensable part of the way big companies operate, investors’ rights are increasingly codified in official treaties, either as chapters in bilateral or regional trade deals such as the North American Free Trade Agreement (Nafta) between the US, Canada and Mexico, or as stand-alone bilateral investment accords.

They are often agreed by developing nations keen to achieve respectability in the eyes of international markets. South Africa, for example, now facing investment litigation from Italian mining companies, signed a flurry of agreements shortly after its first African National Congress government came to power in 1994, keen to dispel suspicions that it would be captured by populist economic nationalism.

Enterprising (critics would say ambulance-chasing) lawyers have found creative ways to exploit vaguely worded clauses in these deals saying investors’ property shall not be jeopardised without due cause. Even the US, an eager promoter of investment agreements, became concerned when Methanex, a Canadian methanol producer, sought nearly $1bn in damages over a Californian environmental law banning methanol as a gasoline additive. (It eventually lost.)

Gary Horlick, a trade attorney with the law firm Wilmer Hale in Washington, says: “Bilateral investment treaties often have much more reach than their signatories imagined. Even if a multinational’s home country does not have a BIT with the country where it is invested, it is fairly easy to set up a subsidiary in one that does. This is, after all, what people pay lawyers for.”

Daniel Price, chair of Sidley Austin’s international trade and dispute resolution practice, counters that developing countries feel patronised by campaigners who say they are inveigled into bad deals. “I was a negotiator of some dozen US bilateral investment treaties as well as the investment chapter of Nafta,” he says. “Our counterparts were very skilled and understood exactly what they were signing.”

But if rulings expand the reach of such treaties beyond the signatories’ original intent, it is not clear even richer countries know what they are getting into.