Dealing with Challenges and Opportunities Arising from Next Generation Trade and Investment Agreements

"Economic regulation is entering a new stage of development, one where the traditional role of national governments and multilateral agreements is being supplemented, and in many instances supplanted, by trade agreements."

international lawyers

Economic regulation is entering a new stage of development, one where the traditional role of national governments and multilateral agreements is being supplemented, and in many instances supplanted, by trade agreements. With the ongoing impasse in the current WTO negotiating round, perhaps this is understandable.

Investors, consumers, companies and the legal practitioners who advise them have yet to fully understand the additional layers of regulatory complexity that these new trade agreements have added. Because of their varying forms, scope and operation, they present the private sector with multiple challenges.

Trade agreements can be characterised as follows:

  • Multilateral agreements, such as the WTO, whose members include virtually every nation of economic consequence. For purposes of this article, we also include agreements such as the Information Technology Agreement, the Government Procurement Agreement and the proposed Trade in Services Agreement as part of this layer of regulation, since these agreements rely on the WTO system for their operational foundation. Most importantly, these agreements aspire to be global in scope and coverage, even if not all WTO members are parties.
  • Cross-regional agreements extend beyond the traditional bounds of a regional trade agreement, but are not global in aspiration, such as the agreements creating the EU. Such agreements include the proposed Trans-Pacific Partnership (TPP), the Transatlantic Trade and Investment Partnership (TTIP) and the Regional Comprehensive Economic Partnership (RCEP).
  • Regional agreements include preferential trade agreements and customs unions such as the EU, the North American Free Trade Agreement (NAFTA), the ASEAN Economic Community (AEC), MERCOSUR and the proposed African Tri-Partite Free Trade Agreement (TFTA).
  • Bilateral agreements consist of preferential trade agreements between countries that are not necessarily geographically contiguous, such as the many free trade agreements (FTAs) of the EU, the US and Singapore, the economic partnership agreements (EPAs) of Japan and the many other FTAs around the world.

All of the above agreements go beyond traditional regulatory norms. Before, trade agreements were primarily focused on simply getting the goods, person or investment across a national border. Now the scope and remit of trade agreements overlap with the regulatory remit of the nation-states that are parties, as modern trade agreements usually commit their members to maintain minimum standards regarding market access, product and services regulation, investment and competition.

The private sector thus faces the increasing applicability of trade and investment agreements in their daily operations, presenting companies with both risks and opportunities. The risks involve markets or sectors that heretofore had not been viewed as being covered by traditional trade agreements. For example, in Singapore, the government had to revise property transaction taxes that were to be imposed only on foreigners; Singapore’s commitments under FTAs with the United States and the members of the European Free Trade Association required that the government exclude those countries from the tax increase. Another example is the use of WTO and BIT dispute settlement procedures to challenge Australia’s plain packaging requirements for cigarettes.

However, these trade and investment agreements also offer companies the opportunity to expand and secure market access, thereby improving the terms of trade and investment. For example, Fedex and DHL successfully convinced ASEAN to create a services category for express delivery services. This allowed express delivery services to be treated in the ASEAN trade agreements under industry-specific criteria and avoid potentially different or conflicting treatment under existing industry categories such as postal services or transport. Another example is the geographical intellectual property indicia (geographical indications) adopted by the EU, which it has transposed into its FTAs.

The increasing number of trade agreements thus presents companies with a “spaghetti bowl” of varying and often inconsistent rules for trade and investment, with each agreement offering the private sector a discrete strand of regulation. This is a real phenomenon that often discourages companies from invoking these agreements, particularly when the financial benefits may not outweigh the administrative costs. However, companies that fail to wade their way through the spaghetti bowl may miss out on important opportunities.

The analogy can also be applied to the wide variation in operating approaches applied in trade agreements. The EU depends on very strong regional institutions such as its Commission and courts. NAFTA depends on a detailed treaty text and robust dispute resolution. The AEC has neither strong institutions nor robust dispute resolution, instead using a consensual-yet-slow approach. MERCOSUR has institutions that appear strong on paper but are lacking in real-world authority, which has limited its effectiveness. The new trade agreements such as TISA, TPP, TTIP and RCEP, as well as the TFTA, will also develop their own operational systems; it remains to be seen whether these trade agreements will be centred on institutions (as in the EU), processes (as in NAFTA), or nations/customs territories (as in the WTO).

Different approaches also exist with respect to rules of origin – a concept that remains technically relevant, particularly for RTAs and PTAs, despite the fact that the nature of the trade system has changed and these rules are arbitrary and do not necessarily reflect reality in a globalised economy – such as the value of intellectual property. Rules of origin often determine critical investment decisions. Making correct choices enables preferential access to important markets that are no longer confined to the borders of a nation state or a customs union. At a time when multinational companies no longer depend on access to the EU or US markets for their survival, given the tremendous opportunities arising for them in the rest of the world, engineering the correct type of cross-border production based on rules of origin, and the preferential agreements associated with them, becomes an important element of the decision-making processes.

Competitiveness is also often associated with the capacity to secure access to effective business-related services. The regulatory environment affecting services strongly influences their quality and availability. The new generation of trade agreements not only aims at fostering trade liberalisation in service sectors, but also contains an increasing level of regulatory convergence that may facilitate access to service providers. Depending on the services required and the location where they are available, choosing the right agreement and knowing how to draw benefits from this agreement is also part of the challenge faced by management and in-house counsel, especially in very competitive sectors, such as high-tech.

With technological developments, new industrial opportunities arise. This is the case, for instance, with environmental goods and services. Global demand for these products and services is increasing exponentially, in association with public policies fostering sustainability and environmental protection. This is one of the areas in which progress is expected at the multilateral level. Yet regional initiatives in TPP, ASEAN and in bilateral agreements have all progressed beyond the WTO Agreements and should generate tremendous preferential opportunities for investors.

In this new global context, investors and traders are faced with the increasingly difficult challenge of selecting the location for new investments in order to optimise sales and purchasing policies and thus to insert themselves into global value chains. As a result, globalisation requires law firms to be able to offer services in many jurisdictions. Business and law firm competitiveness will increasingly be determined by the ability to untangle the spaghetti bowl of trade and investment agreements. With similar products and capital, two companies can draw very different benefits from the global trading system, depending on how well they manage their trade and investment opportunities.

It is thus important for law firms to provide businesses with a global vision of trade rules, even if these rules are becoming evermore complex. Knowing the rationale behind trade and investment agreements and the specific rules they contain is critical to business interests. In the face of the untested dispute resolution mechanisms in many preferential trade agreements, trade diplomacy will remain an essential vehicle for resolving disputes with authorities that have created obstacles to trade or investment. Thus, in the short term a good trade lawyer must be knowledgeable of the negotiating context of an agreement and of the forces behind its provisions. A good trade lawyer must also be an excellent diplomat and an able problem-solver.

This is a challenge for international lawyers. Businesses now expect that law firms have the capacity to handle trade diplomacy, resolve international problems, and understand how to profit within global supply chains. Trade practitioners who have actively participated in the negotiation of trade agreements and know the critical players in each region have a strong advantage, as do attorneys with business sense who have worked closely with leading international companies throughout the world.

Appleton Luff, with offices on four continents, can help your company deal with the regulatory risks and opportunities presented by these new trade agreements. We look forward to hearing from you soon.

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