2011 Trade Policy Assessment Maine Citizens Trade Policy Commission September 16, 2011

1. 2011 Trade Policy AssessmentMaine Citizens Trade Policy CommissionSeptember 16, 2011 • Robert Stumberg • Georgetown University Law Center • Harrison Institute for Public Law

2. Roadmap • 1. Introduction • Overview – trade and investment agreements • Current – Trans-Pacific Partnership Agreement • Which agreements affect states? • How people use trade rules • 2. Trade rules that affect states • Pharmaceutical trade rules • Limits on regulation of services • Foreign investor rights • Example – treatment of tobacco in FTAs

3. Overview of trade agreements

5. Which agreements affect states?

6. Legal use of trade rules (rare) • Threat of trade sanctions • Investor compensation • Domestic enforcement / preemption • Political use of trade rules • Lobbying by federal officials • Lobbying by foreign governments • Lobbying by private firms Trade rules that limit government authority State laws that affect trade Intro - How people use trade rules

7. Pharmaceutical trade rules • Australia and Korea FTAs – models for TPPA • Reimbursement policies – must be based on “competitive market-derived” prices • Problems • States use preferred drug lists to reduce prices 50% (Maine) • Affordable Care Act is moving to reference pricing • Coverage –programs operated by central government • Carve-out for federal-state partnerships? • Medicaid – yes • Medicare Part B – no statute defines pharmaceutical prices • Sec 340B Fed. Public Health Act – no statute defines discounts for federally funded clinics

8. Alcohol distribution Civil engineering Construction Financial services Gambling Hospital services Higher education and research Mining services Pipeline transport & storage of fuels Tobacco distribution Urban planning Waste management Electric power - delivery & control Health insurance What does GATS cover?90 U.S. commitments from A-to-Z

9. Notquantitative limits Notdiscriminatory What are GATS rules? National Treatment No discrimination Market Access No quantitative limits Domestic Regulation 70 proposed “disciplines”

10. Notquantitative limits Notdiscriminatory What are GATS rules? Market Access No quantitative limits National Treatment No discrimination Domestic Regulation 70 proposed “disciplines”

11. Proposed GATS “disciplines”Article 11 - applicable to all covered sectors 11. [Domestic regulations] . . . shall be pre-established, based on objective and transparent criteria and relevant to the supply of the services to which they apply.”

12. Proposed GATS “disciplines”Article 11 - applicable to all covered sectors 11. [Domestic regulations] . . . shall be pre-established, based on objective and transparent criteria and relevant to the supply of the services to which they apply.” • Each term is ambiguous. Each has • Benign meanings and • Radical meanings

13. Intrinsic to service External to service Locate near infrastructure Provide storage capacity Preserve environment Preserve coastal access Conserve historic values Preserve scenic vistas RelevanceMeasures ... shall be ... relevant to the supply of the services to which they apply. Licensing of ports, refineries, industrial facilities Most relevant to service Least relevant to service 13

14. Foreign investor rights • Expropriation • Fair and equitable treatment • Most-favorable treatment

15. Example – Treatment of tobacco in FTAs • Trade agreements serve and protect tobacco with the benefits enjoyed by every other sector • How do trade negotiators treat the outliers – the industries that unavoidably threaten public health? • If tobacco succeeds in using trade agreements to protect its market share from new forms of regulation, then any industry will be able to.

16. Prohibitions on promoting tobacco trade • U.S. law prohibits trade negotiators from promoting tobacco trade • Doggett Amendment“Funds shall not be available to “promote the sale or exportof tobacco or tobacco products, or to seek the reduction or removal by any foreign country of restrictions on the marketingof tobacco or tobacco products, except for restrictions which are not applied equally to all tobacco or tobacco products of the same type.”

17. U.S. negotiators have exceeded their authority • U.S. FTAs provide tobacco companies with benefits that only an FTA can provide: • Investor-state arbitration to challenge other countries’ tobacco controls • Outside of domestic courts • Using investor protections not available under domestic law • Trademark protections in foreign markets • Expanded limits on non-discriminatory government regulation • Necessity test for regulation of goods • Emerging limits on cross-border distribution services • Tariff reductions for specific tobacco products

18. Tariff reductions are obvious • U.S. FTAs with Peru, Singapore, Chile, AustraliaCigarettesCurrent statusFTA commitment WTO bound tariff – $1.05/kg + 2.3% Peru – zero tariff eliminated Singapore – 13.1¢/kg + 0.2% staged elimination Chile – 13.1¢/kg + 0.2% staged elimination Australia – 42.0¢/kg + 0.9% staged elimination

19. Tariff reductions are obvious • U.S. FTAs with Peru, Singapore, Chile, Australia Processed tobacco leaf – other than cigarettes • Current statusFTA commitment WTO bound tariff – 37.5¢/kg Peru zero tariff lock in zero Singapore – 4.6¢/kg staged elimination Chile – 4.6¢/kg staged elimination Australia – 15.0¢/kg staged elimination

20. Less obvious • Trade and investment rules that protect tobacco marketing • Example – PMI describes Singapore’s standard for banning marketing terms as “overly broad” discretion, which PMI says could – • “lead to violations of the TBT Agreement” • “threaten to violate existing … agreements with the U.S.” and • “undermine international investment, TBT and IP rights” • Singapore’s standard – The Minister of health may ban use of“any term, descriptor or trade mark, or any figurative or other sign, that directly or indirectly creates the false impression that a particular tobacco product is less harmful than other tobacco products.” • Compare to the U.S. standard:“The Secretary may … require restrictions on … the advertising and promotion of, the tobacco product, if the Secretary determines that such regulation would be appropriate for the protection of the public health.”

21. Less obvious still – Investors are using trade rules • Uruguay prohibited deceptive cigarette brands – “light” and “low tar.” • Tobacco companies shifted to colors – Marlboro Reds, Blue, Gold. • Smoking rates stayed high, so Uruguay limited companies to • A single brand • 80 percent package warning • Pictographs of severe health effects

22. Philip Morris International filed investor arbitration – Switzerland-Uruguay BIT • Among PMI’s arguments – • Uruguay violates fair & equitable treatment and WTO/TRIPS obligations. • Under the BIT’s umbrella clause – Uruguay must “observe the commitments it has entered into with respect to the investments of Swiss investors.” • Commitments include obligations under TRIPS.

23. Lessons from the Marlboro Man v Uruguay • Investors’ lawyers aim to privatize trade litigation. • Incorporating trade rules could lead to “vast” expansion of trade litigation. • Multiple investment clauses could link investors to trade rules.

24. WTO law BIT law Which trade rules are investors trying to use? • TBT necessity tests • TRIPS trademark protections (“IP rights are private rights”) • GATS limits on domestic regulation (“commercial presence” of subsidiaries) • Example – proposal that governments must ensure that regulations are not more burdensome than necessary.

25. Which investment clauses might incorporate trade rules? Most investment agreements (FTA chapters or BITs) have clauses that are designed to incorporate obligations from outside of the agreement. • Minimum standard of treatment(fair and equitable treatment). Ensure compliance with customary international law (CIL) – debatable scope. • International law clauses. Ensure treatment “in accordance with international law” – not limited to CIL. • Umbrella clauses. Observe “any obligation” with regard to investments. • More favorable treatment clauses. If another agreement between the parties provides “more favorable treatment” of investments, it will prevail. • Most-favored nation treatment. Ensure the most favorable treatment provided to investors from any third country. If the expansive clauses above are not available, MFN incorporates them from any third-party BIT.

26. MFN links to clauses in third-part BITs Malaysia Hypothetical TPPA invest. chapter No expansive treatment clause TPPA investment claim NZ investor MFN Malaysia-Belgium BIT: Yes“international law” clause Belgium

27. How might MFN expand protection of foreign investors? Even if the TPPA avoids expansive clauses (international, umbrella, more favorable, etc.), MFN could incorporate similar clauses from older third-party BITs. Examples:

28. MFN Connections Under BITS and FTAs UNCTAD

29. Potential TPPA reforms • Be wary of half-measuresMany reforms proposed for the TPPA have value, but they are half measures. • Carve-out of tobacco from the investment chapter This solution leaves in place the risk of state-to-state disputes under several trade chapters. • Health exceptions for all chapters – Health exceptions would help safeguard domestic regulations, but the standard language includes a necessity test that shift the burden of proof to defending governments. • Limits on investor protections – Clear limits on investor protections are essential, but they leave in place the risk of state-to-state disputes under several trade chapters.

30. Potential TPPA reforms • Adopt effective reforms in the TPPAThree reforms do not suffer from uncertain interpretation or only partial coverage of TPPA chapters. • Carve out tobacco A complete carve-out of tobacco would de-fuse the TPPA as a threat to tobacco controls. • Exclude investor-state remedies • As emphasized by Australia, investor claims could threaten a wider class of public health measures. • Tobacco controls may save more lives than other health measures, but that does not justifyprotecting only tobacco controls from the threat of investor arbitration and trade disputes.