2.1. Redefining Sovereignty in International Economic Law

Redefining Sovereignty consists of 17 essays and is divided into five parts. The first part consists of four essays, including what are probably its most notable contributions – J. H. Jackson's ‘Sovereignty: Outdated Concept or New Approaches’ and R. Howse's ‘Sovereignty, Lost and Found’ – which reflect on the notion of sovereignty in international affairs from an abstract, historic, and theoretical perspective. In the other four sections the interaction with state sovereignty of the specific topic areas of trade, investment, banking, and human rights is discussed.

In the first part Jackson and Howse put forward contrasting viewpoints on the theory of sovereignty and these can be neatly juxtaposed. Vaughan Lowe's short contribution skilfully encapsulates some of the salient points underlying the theory of sovereignty. Unfortunately, Petersmann's essay focuses heavily on the human rights angle and does not fit into the discourse of the first section. The next section deals with the specific relevance of the sovereignty debate to the trade law sphere and features four articles. P. M. Nichols, in ‘Sovereignty and Reform of the World Trade Organization’, provides a clear picture of the discourse between national sovereignty and international trade rules. A. Qureshi, in his ‘Sovereignty Issues in the WTO Dispute Settlement – A “Development Sovereignty” Perspective’, like most of his peers, contends that sovereignty is a multifaceted term which he tries to dissect in relation to WTO adjudication with DC involvement. The subsequent section deals with the issue of sovereignty as reflected in international investment treaties. It consists of three essays, whereby the first, by Sornarajah, strays seriously off-target, digressing into conspiracy theories about a neo-liberal agenda. In contrast, Karl and Shan (one of the co-editors of the book), offer a scholarly review of the status of sovereignty in investment treaties and investment arbitration. Sovereignty is then explored in respect of financial institutions and governance. The three contributions by Chatterjee and Lefcovitch, Guira, and Singh (another of the co-editors) are technically detailed and impressive accounts of how aspects of the banking system work and of the close correlation between a sturdy banking system and a healthy degree of development. The final section closes the circle by returning to the beginning and, in particular, to Petersmann's contribution on the human rights discourse. The articles by Lang, Simons, and Schneiderman are detailed studies of the relationship between DCs, human rights, and the international trade regime, in particular the educational role of the WTO, the rules for agricultural trade, and the case of South Africa.

It is an inherently difficult task to put together a collection of diverse essays connected by an ambitious theme. This book exemplifes the difficulties, as many of its contributions do not fit the ostensible thrust of the book.

2.2. WTO Law and Developing Countries

WTO and DCs picks up on the development theme by examining the status of DCs within the WTO framework in a volume of 12 essays and some related commentary. The two editors, Bermann and Mavroidis, who do not contribute essays of their own, set the bar high, contending in the very first sentence that they have ‘put together an internally coherent series of papers’ (p. 1). Their task is made easier by the fact that this volume is narrower in scope than Redefining Sovereignty. Its emphasis is placed on the term ‘special and differential treatment’ which encompasses (positive) discrimination in favour of DCs under WTO law.

The first chapter, ‘The Legal Status of Special and Differential Treatment Provisions under WTO Agreements’, sees E. Kessie providing the necessary background to understanding the WTO and DCs by setting out and explaining the special and differential treatment standard within the framework of WTO law and by looking at cases and interpretations. N. Limao and M. Olarreaga, in ‘Trade Preferences to Small Developing Countries and the Welfare Costs of Lost Multilateral Liberalization’, then examine the economic case for and against special preferences. Next, F. M. Abbott, in ‘China in the WTO 2006: “Law and Limitations” in the Context of TRIPS’, discusses the case of China and the alleged failure to implement the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).Footnote ⁷ The discussion then moves to the topic of services trade, as regulated in the General Agreement of Trade in Services (GATS).Footnote ⁸ In this area, J. A. Marchetti, in ‘Developing Countries in the WTO Services Negotiations: Doing Enough?’, finds that DCs have been playing an active role in WTO discussions but not necessarily with the effect of advancing liberalization. M. L. Busch and E. Reinhardt, in ‘Developing Countries and GATT/WTO Dispute Settlement’, evaluate DCs’ participation in dispute settlement and identify problems relating to legal representation. N. Meagher, who has personally represented DCs in legal proceedings at the WTO, in ‘Representing Developing Countries in WTO Dispute Settlement Proceedings’, sees practical and resources problems beyond the sphere of legal representation as the biggest obstacles to DC participation. M. Diego-Fernandez, in ‘Compensation and Retaliation: A Developing Country's Perspective’, describes the remedial side of WTO dispute resolution. In an insightful comment J. P. Trachtman argues that the WTO does not normatively demand compliance by all means. Instead, sometimes, a government may choose to bear the costs of remaining in breach if this is to the benefit of its constituents.Footnote ⁹ The next chapter, ‘A Preference for Development: The Law and Economics of GSP’, sees G. M. Grossman and A. O. Sykes revisiting the Generalized System of Preferences (GSP) litigation involving the European Communities (EC) and India. J. Kenners traces the development of the GSP scheme in the EC. In ‘The GSP Fallacy: A Critique of the Appellate Body's Ruling in the GSP Case on Legal, Economic, and Political/Systemic Grounds’, A. Tomazos offers a critique of the Appellate Body's decision in the GSP case, in terms of both its legal merits and its broader implications. In the last section, and in what is effectively a recapitulation of the arguments of this volume, P. Low, in ‘Is the WTO Doing Enough for Developing Countries?’, asks whether the WTO is doing enough for DCs. In a short but insightful comment W. J. Ethier lauds Low's contribution and highlights the role played by the Uruguay Round, which led to the establishment of the WTO, in catalysing reform in many countries.

The collection of essays in WTO and DCs is internally largely coherent, although the authors might have considered repositioning some essays, such as Abbott's contribution, or connecting the special and differential treatment debate with the GSP case, to facilitate a more logical build-up of the narrative.

3.1. Post-Westphalian sovereignty

While it is still individual countries, and not the WTO, which set the terms of trade, adoption of the MFN rule in 1947 signified a move away from Westphalian sovereignty in the area of international trade law. Individual countries were no longer entirely autonomous in setting trade policy. Jackson develops this theme by positing that decision-making powers which used to rest with states are now held by other bodies, such as international organizations. He calls this evolving new system ‘sovereignty-modern’ (p. 7). This system is made up of the constituent parts of a disaggregated understanding of the term ‘sovereignty’. While some elements of traditional state sovereignty should be maintained to endow the new system with legitimacy, other decision-making powers should be transferred to international organizations.

Jackson uses the WTO as his main exemplar. He finds that individual states can no longer effectively regulate market forces in a globalizing economy. The WTO, as an organization whose decisions widely affect national sovereignty, is said to be taking up some of the relevant decision-making powers, in particular through its court, the Dispute Settlement Body (DSB). Transfer of sovereignty, defined as rule-making power, to international organizations is deemed to be important for two main reasons. First, international organizations provide so-called ‘co-ordination-benefits’, which are premised on the assumption that if everyone in international trade acts in their own interests, more harm is done than if such interaction is co-ordinated.Footnote ¹³ Second, the current system implies a ‘race to the bottom’, whereby regulatory competition between sovereign states leads to a degradation of, among others, social and environmental standards.Footnote ¹⁴ While he rarely ventures into specifics, the subtext for Jackson's deliberations is that international organizations must be tasked with setting internationally applicable norms and that this is an ongoing process.

Jackson criticizes the Westphalian system in the context of international organizations generally and within the WTO sphere specifically. He finds that the old system is prone to misuse in various ways. For instance, the strong predisposition of international institutions to operate on a ‘one-country-one-vote’ basis distorts the decision-making processes in those bodies. He points out that this system potentially allows 5 per cent of the world's population to command a majority within the United Nations. This system also means that the EC has 27 votes at the WTO, while the United States has only one. Jackson further criticizes the consensus based decision-making procedures which seem to be the preferred approach in international organizations and which have their roots in the old GATT system. Specifically, the current system is said to be creating difficulties in reaching agreement in areas such as product safety standards, competition policy, environmental protection, and cultural and heritage preservation.Footnote ¹⁵ Jackson argues that the old sovereignty system needs to be overhauled to be able to face these modern challenges.

Nichols's view of sovereignty mirrors that of Jackson in that he regards it as a fluid and evolving concept. Although he argues that sovereignty cannot be defined, he holds that whatever sovereignty entails, all countries have some and some countries have more. In the WTO context, countries have come together to cede some of their sovereignty voluntarily. Historically, in early trade agreements this meant that governments surrendered some control over their customs territories, for example, by agreeing on maximum tariff levels. However, Nichols asserts that this definition no longer suffices. Border tariffs are only one, increasingly small, aspect influencing international trade. A new protectionism, embodied in measures such as restrictive government procurement, product and environmental standards, and safety rules, is said to be emerging. Indeed, in many cases, it is no longer the national government that sets the relevant rules but sub-national entities and firms. Thus, given the evolving understanding of sovereignty, in particular in terms of the protagonists, Nichols surmises that the WTO will need to adjust and include other sovereigns.

3.2. Westphalian sovereignty

In contrast, most commentators in these two volumes believe, as a matter of fact but not necessarily as a matter of preference, that Westphalian sovereignty is alive, well, and here to stay.

In Redefining Sovereignty Howse, while welcoming the recognition of some normative constraints on national sovereignty, for instance in the area of human rights, feels that it would be impetuous to regard this as the advent of a new era of global constitutionalism. His main hypothesis is that, contrary to common wisdom, sovereignty still rests firmly with nation states. What is more, Howse feels that international organizations have smoothed the way for states to expand and entrench their existing sovereignty, providing several examples to underline this proposition. For instance, the Chinese central government is said to have used its accession to the WTO as a means of seizing back powers from provincial and local governments.Footnote ¹⁶ In other words, legislation implementing WTO rules is drafted in Beijing and enforceable throughout the country, thereby extending Beijing's reach. Further, in painting WTO entry as an object of national prestige, the Chinese central government has forced all sub-national entities to toe the line. The example of Panama is also discussed. Here, Howse stresses that entry into the WTO was guided by a belief on the part of the government that, by subjecting Panama to the rigours of international rules, it could combat vested interests and corruption, thereby strengthening sovereignty.Footnote ¹⁷ Other examples provided by Howse are those of Brazil and India, which, although they are nascent ‘big players’ in the world economy, continue to exercise a high degree of control over domestic economic and social policies, as well as outcomes. He cites a 2005 study of the effects of WTO law on political and social outcomes in a number of member countries.Footnote ¹⁸ The study concludes that, in most cases, national governments and domestic structures are instrumental in determining outcomes. The influence of the WTO and its legal regime was found to be limited. While these examples relate mostly to internal sovereignty, the ramifications can extend beyond the domestic setting. A government which is strong domestically will likely have more to say internationally. This is illustrated by the example of China, specifically the dispute between China and the United States over the value of the Chinese currency, the yuan. Although both the WTO and the International Monetary Fund (IMF) provide rules and instruments to deal with such disputes, the two parties chose to address the issue through bilateral negotiations (pp. 67–9). This suggests that international organizations are bypassed and that relative bargaining power remains a significant factor in the outcome of trade disputes.

Howse concludes that international law in general and the WTO in particular, rather than being an instrument for ceding national sovereignty, are used by many states as a means to project their sovereignty domestically and around the world. Although he would prefer more multilateralism, Howse views the sovereignty debate from a realist's perspective, characterized by the mantra of qui regit, rex est.

In WTO and DCs Marchetti makes a very similar argument in the narrower context of services trade, the second main pillar of the WTO. He views the WTO as a debating club, which, although it has some benefits, should be seen as tangential to measures taken domestically. While services are undoubtedly one of the most important aspects of economic development, there are some inherent limitations, which do not apply to goods. One of the biggest stumbling blocks in relation to services is that they often require the presence of natural persons in foreign countries. In this respect trade and immigration laws intersect. Marchetti holds that little has been achieved so far at the WTO in respect of the temporary movement of persons, especially those from DCs. He further postulates that services liberalization is desirable even if it is carried out unilaterally, and that it must include domestic regulatory reform. The author acknowledges the WTO's ‘scapegoat role’ in this process, whereby painful measures are made palatable and credible in the eyes of domestic constituents by ‘blaming’ WTO commitments. The real action, however, is said to take place in the domestic setting, suggesting that sovereignty in services trade rests firmly with national governments.Footnote ¹⁹

In the area of intellectual property, the last of the three main pillars of the WTO, Abbott argues that there is a distinct divide between those countries who benefit from enforcement and those who do not. China, a country which is not yet generating substantial amounts of intellectual property, is said to be currently better off not enforcing intellectual property rights. At some point this balance may tip. Abbott describes how the WTO, through TRIPS,Footnote ²⁰ has created artificial incentives for the enforcement of intellectual property rights, for instance by imposing penalties in cases of non-compliance. Such penalties can include WTO extraneous sanctions, such as sanctioning breaches of intellectual property rights held by firms and individuals of the offending country. However, while Chinese-owned intellectual property rights are in short supply, there are few incentives on the Chinese side to comply with the relevant rules. Abbott suggests striking a balance between what is achievable and what is desirable. The implication is that sovereignty in the area of intellectual property rights enforcement is still largely a matter for national policy- and decision-making, as well as bilateral negotiations.

With regard to DCs, Low, by arguing that DCs must take responsibility for their own outcomes, seems to side with Howse and Marchetti by regarding the traditional system of sovereignty as prevalent. While Low does not endorse the redeeming features of traditional notions of sovereignty in the way that Howse does, he does acknowledge that countries are responsible for their own plight, at least in part. In particular, he points out that DCs have banded together to block liberalization progress at the WTO. In turn, exercise of their sovereignty in this manner is setting them back economically. Similarly, he identifies a problem whereby it is often the DCs themselves that stifle progress in other DCs by employing their sovereignty to impose protectionist trade measures. In other words, even DCs, especially when they act together, have retained sufficient amounts of traditional sovereignty to influence outcomes.

4.1. Free trade areas

The most significant argument against the existence of a post-Westphalian order is that no regulatory powers have actually been conferred on the WTO and countries are bound only by the rules to which they agreed, such as the MFN discipline. In other words, the WTO is not entitled to make rules and all that member states have agreed is to constrain their own rule-making in certain ways. Moreover, even the MFN principle, perhaps the WTO's most prominent restraint on state sovereignty, is increasingly being subverted.

Specifically, according to Limao and Olarreaga, free trade areas (FTAs)Footnote ²⁵ are progressively undermining the efficacy of MFN status. Countries that form an FTA are not obliged to extend the benefits of such agreements to other WTO members. In recent years, FTAs have spawned to an extent where they are suffocating multilateral trade liberalization. Trade benefits are not extended to all WTO members, but only to FTA participants. Further, FTAs, in terms of both their formation and their operation, lend themselves to the old order, to power-based rule-making. Economically powerful FTA partners set the agenda and the rules.Footnote ²⁶ This is particularly relevant in the area of bilateral FTAs.Footnote ²⁷ Aside from unequal bargaining power, Ethier suggests that FTAs can also have a detrimental effect on DCs, as trade is diverted from them to FTA members.

Given the ongoing inability to progress the Doha Round negotiations and the bleak economic outlook, it is expected that dominant trading countries will continue to forge new trade routes by using the FTA path, thereby enhancing their own sovereignty and further diminishing MFN and multilateralism.

4.2. The Generalized System of Preferences

Aside from FTAs, the Generalized System of Preferences (GSP) also undermines the MFN principle. Specifically, with the introduction of the GSP and the ‘Enabling Clause’ in the 1970s, it became allowable for GATT parties to grant special and differential treatment to DCs without having to offer such treatment to other countries.Footnote ²⁸ Although this scheme was aimed at helping DCs in their development efforts by granting them superior terms of trade, it can be argued that the effect has been the reverse, in terms of both development and the surrender of sovereignty.

For instance, says Kenners, the GSP scheme in the EC has transformed itself from having mainly economic aspirations in the early years to its current format, which incorporates a comprehensive policy regime designed to promote human rights, democracy, and other standards. In other words, preferential trade conditions are subject to human rights stipulations or other caveats. While this may be desirable from a normative perspective, the consequences on the WTO side are that the principle of unconditionality which is embedded in the MFN principle has been relinquished, along with the MFN principle itself. In turn, this means that countries that are able to offer special and differential treatment are in a position to dictate the terms of trade.

Limao and Olarreaga point out also that there is empirical evidence to suggest that the stagnation of multilateral liberalization through the Doha Round is having a negative effect on the quantity and quality of unilateral preferences granted to DCs via the GSP scheme. To compound the problem, they suggest that DCs are stifling advancement of WTO negotiations in order to protect their own GSP benefits, which they feel might be watered down if there was more multilateral liberalization. One particular area with potentially huge liberalization benefits is government procurement, but, Low states, DCs have, by flexing their collective muscles, prevented negotiations on this issue. Effectively, special and differential treatment is subverting liberalization as there are incentives for both developed countries and DCs to undermine multilateralism. While Limao and Olarreaga suggest replacing special and differential treatment with alternatives such as an import subsidy regime, such a scheme, even if it could be devised, is unlikely to see the light of day as the current system of special and differential treatment has become an entrenched part of many country's trade policies.

Indeed, Tomazos points out, the WTO's Appellate Body, by ruling that it may sometimes be allowable to discriminate among DCs within the GSP framework, has created further incentives for countries to maintain special and differential treatment regimes. Also, by permitting discrimination in some circumstances, J. L. Dunoff, in WTO and DCs, states that the Appellate Body has assigned itself the role of deciding which preferences are desirable and which ones are not, thereby effectively adjudicating on policy matters rather than on law. Similar problems have also arisen in relation to the GATT Article XX exceptions where the courts have opined on the relative desirability of various policy choices.Footnote ²⁹

Generally, any instance of discrimination invites calls for more discrimination, which is why less discrimination is preferable. Grossman and Sykes make the point that where one country extends preferences on the basis of environmental stipulations, another might wish to do so on the basis of drugs enforcement or any number of other areas. In the context of sovereignty, any scheme which is not based on MFN treatment would tend to have the effect of reviving the old system of determining terms of trade on a basis of who holds the most leverage. This situation is not unlike the Westphalian model. Put bluntly, if a country wants the benefit it needs to do what the stronger country demands. While, in the case of GSP, the bargaining power is ostensibly used to achieve virtuous ends, the questions raised are whether trade policy should be used to achieve non-trade-related ends and who determines the virtuousness of any given policy. Ironically, for all their good intentions, both special and differential treatment regimes and FTAs have led to a dilution of MFN status, which, in turn, has diminished DC sovereignty and thwarted DCs in their quest to achieve equal footing in international trade.

4.3. Dispute settlement

As the Appellate Body's deliberations in the GSP case demonstrate, the WTO courts have assumed powers which seem to go beyond judging whether measures are lawful and reach into the realm of whether or not they are desirable. The difference may be nuanced, but if and when the courts take on oversight over policy preferences, the loss of state sovereignty may extend beyond mere adherence to trade rules.Footnote ³⁰ Thus, having seen how sovereignty has been recaptured by individual countries as a result of the demise of the MFN discipline, the dispute settlement system may stand as perhaps the only area of governance within the WTO where sovereignty has been effectively transferred to the international level.

While it is true that the courts have asserted themselves on numerous occasions, sometimes perhaps going beyond their remit,Footnote ³¹ and while, unlike in the previous GATT regime, WTO dispute settlement is binding on the parties to a case,Footnote ³² in reality the effect of ceding sovereignty to the WTO's Dispute Settlement Body is limited. Trachtman suggests that, since the WTO courts have no bailiff, their powers are limited to the extent that countries can choose to ignore judgments, remain in breach, and simply put up with possible sanctions. Additionally, as the EC – Bananas cases have shown, a lengthy process must be borne out before arriving at the remedial stage.Footnote ³³ Even where a country has gone through this lengthy process, the remedy may be unsatisfactory. A good case in point is the 2005 US – Gambling litigation, in which Antigua and Barbuda successfully challenged a US ban on offering gambling services over the Internet.Footnote ³⁴ Given the unequal bargaining power of the two parties involved, the Antiguan court victory could be regarded as a manifestation of a post-Westphalian order. However, by 2007, the United States had failed to comply with the Appellate Body's decision and a WTO arbitration panel found that Antigua was entitled to retaliate by suspending concessions.Footnote ³⁵ The value of concessions to be suspended totalled a mere US$21 million and thus the United States could easily afford to remain in breach. While the operation of the dispute settlement system has meant a reduction of sovereign power for individual member states, in particular as regards certain aspects of available policy options, the consequences of this sovereignty loss still very much depend on the parties involved. When the opposing party lacks economic clout, the effect is negligible. Only when the parties to a dispute are on a more equal footing can the repercussions of non-compliance be meaningful.Footnote ³⁶ Thus the verdict on the role of the WTO dispute settlement system in capturing sovereignty from nation states is equivocal.

Given that the court-prescribed response to dealing with breaches is retaliation, Diego-Fernandez suggests that the underlying problem seems to be the nature of the available remedies. Lacking traditional enforcement mechanisms, one of the possible solutions might be to outsource retaliation to countries with more clout. In other words, a country which has won the right to retaliate could sell that right to a third country. Indeed, Diego-Fernandez reports, Mexico has proposed to amend existing rules to allow for such ‘tradable retaliation’. However, this proposal is fraught with difficulties, not least because of the res judicata doctrine,Footnote ³⁷ the diplomatic sensitivities this would raise, and the effect retaliation would have on the retaliating country. How would the retaliating country be selected and why should ordinary citizens in the retaliating country bear the cost? Even if these obstacles could be overcome, it is unlikely that countries that benefit from the current arrangements would agree on any changes.

While the WTO dispute settlement system was regarded as effective in its early years, there are now suggestions that with increased non-compliance, perhaps as a result of policy-oriented decision-making by the Dispute Settlement Body, and a wider range of countries participating in the system, it is losing its potency.Footnote ³⁸ Overall, in respect of the dispute settlement system, the evidence seems to show that the old, power-based mechanisms are in good health.