International Economic Law

Giovanna Adinolfi · Freya Baetens
José Caiado · Angela Lupone

Anna G. Micara Editors
International
Economic Law
Contemporary Issues
International Economic Law
Giovanna Adinolfi • Freya Baetens •
José Caiado • Angela Lupone • Anna G. Micara
Editors

Contemporary Issues
Editors
Giovanna Adinolfi Freya Baetens
Department of International, Legal, Faculty of Law
Historical and Political Studies University of Leiden
University of Milan Leiden, The Netherlands
Milan, Italy
José Caiado Angela Lupone

Doctoral College of Law and Economics Department of International, Legal,
University of Hamburg Historical and Political Studies
Hamburg, Germany University of Milan
Milan, Italy
Anna G. Micara
Department of International, Legal,
Historical and Political Studies
University of Milan
Milan, Italy
The publication of this volume has been funded by the Department of International, Legal,
Historical and Political Studies of the University of Milan
ISBN 978-3-319-44644-8 ISBN 978-3-319-44645-5 (eBook)

DOI 10.1007/978-3-319-44645-5
Library of Congress Control Number: 2016960750
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Foreword
‘The greatest thing about big ideas is being able to share them’. The Society of
International Economic Law (SIEL) believes in fostering and sharing ideas among
scholars and academically minded professionals belonging to different generations and
countries, representing various disciplines within the sphere of international economic
law (IEL). This is why the Postgraduate and Early Professionals/Academics Network
of SIEL (PEPA/SIEL) is such an important and successful project for us and for many
young scholars around the world.
PEPA/SIEL offers young academics and professionals a collaborative platform
where they can find ideas to grow with and ideas that they can grow further. Among
its other activities, PEPA/SIEL organizes conferences at which emerging IEL
academics and professionals present and discuss their work in a welcoming and,
at the same time, intellectually challenging environment. I have had the chance to
witness PEPA/SIEL conference through the years, and many participants address
an audience for the first time. This participation can be a defining and decisive
moment for many young scholars. The supportive and welcoming environment of
the PEPA/SIEL conferences encourages this younger generation of academics and
professionals to share and develop further their views. For the early postgraduate
participants, PEPA/SIEL conferences give them a chance to refine an idea that can
take the form of a paper or a project for postgraduate studies. For other participants,
in more advanced stages of research or the early stages of their profession, the
discussions at PEPA/SIEL conferences provide sound reasons to revisit their
findings and to ‘polish’ their works before submitting them for publication.
In April 2015, the 4th PEPA/SIEL conference was organized in collaboration with
the Department of International, Legal, Historical and Political Studies of the Uni-
versity of Milan. I would like to thank José Caiado and Freya Baetens from SIEL and
Giovanna Adinolfi, Anna G. Micara and Angela Lupone from Milan University for
their impressive dedication in organizing the conference. I would also extend my
gratitude to senior colleagues who reviewed proposals or acted as discussants and
without whom the conference would not be a reality. The unique mix of young
scholars and experienced IEL experts has been the hallmark of PEPA/SIEL
v
vi Foreword
conferences, and we would want to continue benefiting from the enthusiasm of young
participants and the wisdom of senior colleagues in the next editions of this event.
SIEL is proud of the mentoring opportunities that it offers to emerging academics and
professionals and of successfully kindling their intellect through mediums such as
PEPA/SIEL conferences. I am very proud, as the president of SIEL, to interact with
these young academics and professionals who are continuously increasing the
vibrancy of the field through their nuanced ideas.
The presenters of the conference deserve a special acknowledgement. As a reviewer
of proposals for the conference, I know that a remarkably high number of proposals
made the selection process extremely challenging. The 4th PEPA/SIEL conference
witnessed presentations from the authors of exceptional proposals, and this volume
contains papers based on some of those proposals. The papers in these conference
proceedings comprise only a small subset of the ideas that were expressed and
discussed during the conference. This volume contains 15 papers; young academics
and professionals who are studying or working in the field of IEL across four different
continents have authored them. Thus, these conference proceedings also represent the
globally diverse opinions that exist on the subject. As the title of the conference
suggests, the papers in this volume introduce the reader to some of the most challeng-
ing IEL topics, including in the areas of trade, investment, finance and monetary law.
In the area of WTO law, the young contributors have added a new dimension to
thought-provoking issues such as private standards, implementation of mutually
agreed solutions in WTO disputes, energy regulations and WTO subsidy rules.
There is also innovative work in the area of international investment law. Other
contributions relate to interesting topics that include investor-state dispute settle-
ment system, sovereign wealth funds and mega-regional trade and investment
agreements like the Trans-Pacific Partnership Agreement, EU-Canada Comprehen-
sive Economic and Trade Agreement and MERCOSUR.
The 4th PEPA/SIEL conference was a success, and I am sure this volume will
inspire stimulating conversations among young scholars, students and practitioners.
I hope that the reader will find this volume an excellent starting point for consid-
ering new problems and challenges in IEL. I am confident that SIEL will continue
to fulfil its objectives of ‘[b]uilding links and networks between and among
international economic law academics and academically-minded practitioners and
officials’ and ‘[e]ncouraging research, practice, service and teaching in the field of
International Economic Law’, by collaborating with various academic institutions
and organizations, with a particular focus on young scholars and those from the
developing countries.
President, Society of International Economic Law Gabrielle Marceau

Counsellor in Legal Affairs Division, WTO
Associate Professor, University of Geneva
Geneva, Switzerland
Preface
This volume consists of a selection of the papers presented at the 4th Conference
of the Postgraduate and Early Professionals and Academics (PEPA) network of the
Society of International Economic Law (SIEL). After the publication of the call for
papers in September 2014, the Conference Committee received more than one
hundred abstracts. Through a double-blind review process, more than forty emerg-
ing scholars were offered the chance to present their papers at the Conference, held
on 16 and 17 April 2015 at the University of Milan. Senior economic lawyers from
the academic world, the business sector and intergovernmental organizations
commented on the paper presentations allowing for stimulating discussion during
the Conference and offering authors thought-provoking input on their work. A
further assessment of the proposals, based on the feedback of the discussants, led
to the final selection of papers published in this book. The contributors are junior
practitioners and academics, in line with the spirit of the PEPA network to foster
‘collaboration and mentoring opportunities for emerging academics and profes-
sionals in international economic law’.
The purpose of this volume is to scrutinize the main challenges faced by states in
their current international economic relations, from an interdisciplinary perspec-
tive, combining legal research with political and economic analysis. The book
offers readers a series of in-depth studies on a rich variety of topics, allowing for
dialogue among scientific disciplines. Its readership is aimed to encompass both
academics and practitioners, those that are junior as well as those more experi-
enced. Our hope is that all readers will find in its chapters fresh insights into
international economic law issues.
The volume is divided into four parts. Part I focuses on a hotly debated topic in
scientific and political circles: how to reconcile states’ interest to benefit from
economic liberalization with their need to pursue social goals (such as the protection
of human rights or the environment) by means of measures which may be viewed as
contrary to their obligations under international economic treaties. International trade
law issues are specifically covered in the contributions included in Part II, where the
authors analyse some of the more recent developments under WTO law and regional
vii
viii Preface
integration processes. International cooperation in the energy sector is dealt with in

Part III, from the perspective of bilateral (EU-Russia) relations, the Energy Charter
Treaty and WTO law. Finally, Part IV is devoted to investment and finance topics,
zooming in on national regulatory developments in the banking sector, sovereign
wealth funds and investor-state arbitration.
The editors would like to express their gratitude to all senior scholars who have
reviewed abstracts and/or participated as discussants at the Conference. Their com-
ments encouraged the revision and the finalization of the contributions published in
this volume. Thanks to the support of SIEL and the University of Milan, the 2015
PEPA Conference could be hosted in Italy. The Department of International, Legal,
Historical and Political Studies of the University of Milan, inspired by its long-
standing aim to facilitate the growth of young academics and professionals, financed
the publication of this volume. Lastly, the editors would like to thank all participants
for their enthusiastic attendance of the Conference and all contributors for their hard
work, which culminated this book. Ut vivat, crescat, floreat!
Milan, Italy Giovanna Adinolfi

Leiden, The Netherlands Freya Baetens
Hamburg, Germany José Caiado
Milan, Italy Angela Lupone
Milan, Italy Anna G. Micara
June 2016
Contents
Part I International Economic Law and Other Concerns

The First Twenty Cases Under GATT Article XX: Tuna or
Shrimp Dear? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Niall Moran
Remarks on the Practice of Regional Development Banks’ (RDBs)
Accountability Mechanisms and the Safeguard of Human Rights . . . . . 23
Domenico Pauciulo
A Waiver for Europe? CETA’s Trade in Services, and Investment
Protection Provisions and Their Legal-Political Implications
on Regulatory Competence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Amalie Giødesen Thystrup and G€uneş Ün€uvar
The Human Right to Health: Reflecting on the Implications of IPRs
as Endorsed by the Trans-Pacific Partnership Agreement . . . . . . . . . . . 61
Sunita Tripathy
Part II International Trade Law

Can (and) Should the WTO Tame Private Standards? Antitrust
Mechanism as an Alternative Roadmap: Lessons from the WTO
Telecommunications Reference Paper . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Tilahun E. Kassahun
The Twenty-First Century Regionalism: Brazil and Mercosur in
the New International Scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Belisa Esteca Eleoterio and Alebe Linhares Mesquita
Regionalization Within the SPS Agreement: Recent Developments . . . . 111
Anna G. Micara
ix
x Contents
The Mutually Agreed Solution Between Indonesia and the United

States in US – Clove Cigarettes: A Case of Efficient Breach
(or Power Politics)? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
Johannes Norpoth
Part III Energy Issues in International Trade and Investment Law

Energy Regulation in International Trade: Legal Challenges in
EU–Russia Energy Relations from an Investment Protection
Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
Natasha A. Georgiou
Renewable Energy and WTO Subsidy Rules: The Feed-In Tariff
Scheme of Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
Jean-François Mayoraz
The Nexus Between the WTO and the ECT in Global Energy
Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
Anna Marhold
“Ain’t No Sunshine”: Photovoltaic Energy Policy in Europe at the
Crossroads Between EU Law and Energy Charter Treaty
Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211
Francesco Montanaro
Part IV Investment and Finance

The Final Volcker Rule and Its Impact Across the Atlantic:
The Shaping of Extraterritoriality in a World of Dynamic
Structural Banking Reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233
Elisabetta Cervone
More Than a Friend? The European Commission’s Amicus Curiae
Participation in Investor-State Arbitration . . . . . . . . . . . . . . . . . . . . . . 253
Olga Gerlich
Sovereign Wealth Funds as Socially Responsible Investors . . . . . . . . . . 271
Xenia Karametaxas
About the Contributors
Elisabetta Cervone is consulting counsel (World Bank, Finance and Markets

Global Practice) and postdoctoral research fellow (University of Milan, Italy).
Former adjunct professor of law at George Washington University and American
University and held visiting positions at Georgetown University and Harvard Law
School. Dr. Cervone holds a PhD in banking and financial markets (University of
Siena, Italy), an LLM (George Washington University, USA) and a JD (University
of Rome La Sapienza, Italy).
Belisa Esteca Eleoterio is a lawyer enrolled in the PhD Program of International

and Comparative Law at S~ao Paulo University (USP) working currently as legal
researcher in the Center for Global Trade and Investment—CGTI at FGV/EESP.
Natasha A. Georgiou is a PhD candidate at the University of Reading, School of

Law, where she is undertaking her research on energy regulation in international
trade with a specific focus on EU-Russia energy relations. Natasha holds a Univer-
sity of Reading School of Law Studentship and comes to the School of Law with
several years of experience as a senior legal consultant/associate at a top-tier firm in
Cyprus where she predominantly worked on cross-border finance transactions with
Russia and the CIS.
Olga Gerlich graduated international relations and law from the University of
Wrocław in Poland. She holds an LL.M. degree in international trade and invest-
ment law from the University of Ottawa in Canada where she studied as the
recipient of Edward Barry McDougall Scholarship. She currently is a trainee
attorney-at-law (aplikantka radcowska) at the Warsaw Bar Association. Her legal
practice focuses on arbitration and litigation matters.
xi
xii About the Contributors
Amalie Giødesen Thystrup is a PhD fellow with the University of Copenhagen,

Centre for Enterprise Liability (CEVIA). Within international economic law, her
scientific focus is on trade in services, mega-regional agreements, WTO law, GVCs
and international investment law. Amalie’s PhD thesis on trade in services builds on
a study of maritime transport. Counting this sector and climate change among her
interests, she is a part of the TRAMEREN network between CEVIA and NYU
School of Law’s Guarini Center.
Xenia Karametaxas is a PhD candidate at the Law School of the University of

Geneva, where she works as a teaching and research assistant for the Department of
Commercial Law. She holds a master’s degree in business law (Universities of
Basel and Geneva) and has been a visiting scholar at the University of California,
Berkeley. Her research interests include corporate law, corporate governance and
social responsibility, international economic law and financial regulation.
Tilahun E. Kassahun is a PhD candidate in international law and economics at

Bocconi University, Milan. He earned an LLM in business law from Addis Ababa
University, Ethiopia, and LLM in international economic law and policy (IELPO)
from the University of Barcelona. Tilahun has taught international trade law in
various universities in Ethiopia. His current PhD research is focused on compara-
tive institutional analysis of competition law and policy in developing countries.
Anna Marhold is assistant professor in energy market regulation at the Tilburg Law
and Economics Center (TILEC), Tilburg Law School. She holds a PhD from the EUI.
Prior to coming to Tilburg, she was a Marie Curie Research Fellow at the Graduate
Institute in Geneva. In 2013–2014, Anna was an EU US Fulbright-Schuman Grantee
and visiting scholar at NYU School of Law. Anna completed parallel degrees in law
(LLB, LLM) and Russian (BA, MA) at the University of Amsterdam.
Jean-François Mayoraz is a PhD student at the University of Zurich, Switzerland.

He studied law at the University of Zurich and Neuch^atel (both Switzerland) and
holds a Master of Law from the latter university. His research interests comprise
international economic law, European law and public administrative law. Cur-
rently, he is working on his PhD thesis, which deals with state aid issues in the
Swiss-EU bilateral agreements.
Alebe Linhares Mesquita is a lawyer enrolled in the Master of International and

Comparative Law at S~ao Paulo University (USP) working currently as legal
researcher in the Center for Global Trade and Investment—CGTI at FGV/EESP.
Anna G. Micara has a postdoctoral fellowship in international law at Universita

degli Studi of Milan (Italy) where she does research on intellectual property law and
the World Trade Organization. She also took part in a research project on food
safety (Multilevel Protection of Food Safety Rights). Anna obtained a PhD in
international law at Universita degli Studi of Milan and spent a year at the Max
Planck Institute for Innovation and Competition in Munich.
About the Contributors xiii
Francesco Montanaro is a dual PhD candidate at Bocconi University, Milan, and

Panthéon-Assas University, Paris. Prior to this, he worked in the litigation and
arbitration departments at Ashurst LLP and at Bonelli Erede Pappalardo Studio
Legale, Milan. His research interests lie in EU law, WTO law and international
investment law. Graduated magna cum laude in law at Bocconi University, Milan,
he holds an LLM in EU law from the College of Europe, Bruges.
Niall Moran is a PhD candidate at Bocconi University, Milan, where he holds a

fellowship in international law and economics. Niall holds a Master of Laws degree
from Université Toulouse 1 Capitole, where he has taught since 2012. He obtained
his Bachelor of Corporate Law (international) and Bachelor of Laws degrees (LLB)
from NUI Galway. He has been a contributor to the International Yearbook of
Italian Law for the past two years and recently completed a traineeship at the
European Commission.
Johannes Norpoth is a research fellow at the Institute of Development Research and

Development Policy at the Ruhr-University Bochum, Germany, with lecturing activ-
ities in Bochum and at the University of the Western Cape, Cape Town, South Africa.
His research focuses on international trade law as well as sociolegal studies of the
regulation of labour, social and environmental standards in global supply chains.
Next to German law degrees, he holds an LLM degree from Maastricht University.
Domenico Pauciulo is PostDoc Research Fellow, International Law, LUISS Guido

Carli University, Department of Law. He held a Ph.D. in International and EU Law,
Università degli Studi del Molise. His main research interests concern the interaction
between social and environmental issues and international economic law; investment
arbitration; sovereign debt; multinational enterprises and international law; social
and economic rights; constitutional rights in time of economic crisis.
Sunita Tripathy is assistant professor of law and assistant director, Centre for
Intellectual Property and Technology Law at Jindal Global Law School, India.
Tripathy researches on law and its role in society with special focus on its nexus
with technology, intellectual property and public policy. She primarily publishes on
issues interfacing intellectual property law and competition policy and leads intel-
lectual property seminars on topics of contemporary relevance.
G€uneş Ün€uvar is a PhD fellow at the Centre of Excellence for International Courts
(iCourts), University of Copenhagen. He is currently a visiting scholar at Columbia
Law School. He is a lawyer admitted to Ankara Bar Association since 2012. His
research interests include international investment and trade law, international arbi-
tration, international courts and dispute settlement. His research concerns the inter-
play between interpretation in arbitral proceedings and how the cumulative
adjudicatory experience affects future treaty making in international investment law.
Abbreviations
Agric. Human Values Agriculture and Human Values

AI Arbitration International
AJP Aktuelle Juristische Praxis
Am. J. Comp. L. American Journal of Comparative Law
Am. J. Int’l L. American Journal of International Law
Am. J.L. & Med. American Journal of Law and Medicine
Am. U. Int’l L. Rev. American University International Law Review
ASIL Proceedings ASIL Proceedings
Berkeley J. Int’l L. Berkeley Journal of International Law
Brook. J. Int’l L. Brooklyn Journal of International Law
BYIL British Yearbook of International Law
CMLJ Capital Markets Law Journal
Colum. J. Transnat’l L. Columbia Journal of Transnational Law
Colum. L. Rev. Columbia Law Review
Cornell L. Rev. Cornell Law Review
Dev. Policy Rev. Development Policy Review
DUDI Diritti umani e diritto internazionale
ECL European Company Law
EJIL European Journal of International Law
ESIL Reflections ESIL Reflections
Eur. Foreign Aff. Rev. European Foreign Affairs Review
EYIEL European Yearbook of International Economic
Law
Fed. Comm. L. J. Federal Communications Law Journal
Fed. Reg. Federal Register
Fordham Int’l L. J. Fordham International Law Journal
Fordham J. Corp. & Fin. Fordham Journal of Corporate and Financial Law
Fordham L. Rev. Fordham Law Review
FSR Financial Stability Review
Geo. J. Int’l L. Georgetown Journal of International Law
xv
xvi Abbreviations
Harv. Int’l L. J. Harvard International Law Journal

Harv. L. Rev. Harvard Law Review
Hous. J. Int’l L. Houston Journal of International Law
ICLQ International & Comparative Law Quarterly
ICSID Review – FILJ ICSID Review – Foreign Investment Law Journal
IELR International Energy Law Review
IJIEL Indian Journal of International Economic Law
Int’l L. Pol. International Law and Politics
Int. Latinoam. Integración Latinoamericana
Int’l Org. International Organization
Int. Lawyer The International Lawyer
IPG Internationale Politik und Gesellschaft
It. YIL Italian Yearbook of International Law
J. Int’l Agr. Tr. & Dev. Journal of International Agricultural Trade and
Development
J. Legal Stud. Journal of Legal Studies
JBE Journal of Business Ethics
JCES Journal of Contemporary European Studies
JECLAP Journal of European Competition Law & Practice
JERL Journal of Energy & Natural Resources Law
JFR Journal of Financial Regulation
JIA Journal of International Arbitration
JIDS Journal of International Dispute Settlement
JIEL Journal of International Economic Law
JWELB Journal of World Energy Law & Business
JWIT Journal of World Investment & Trade
JWT Journal of World Trade
Kyklos Kyklos International Review for Social Sciences
L. & Practice Int’l Courts The Law and Practice of International Courts and
& Tribunals Tribunals
Law Contemp. Probl. Law and Contemporary Problems
LBRA Law and Business Review of the Americas
LIEI Legal Issues of Economic Integration
McGill L. J. McGill Law Journal
Mich. J. Intl’ L. Michigan Journal of International Law
Mich. St. Int’l L. Rev. Michigan State International Law Review
N.C. L. Rev. North Carolina Law Review
New Pol. Econ. New Political Economy
New York Univ. J. Int’l L. & New York University Journal of International Law
Pol. and Politics
Non-State Actors and Int’l L. Non-State Actors and International Law
N.Y.U. Envtl. L.J. New York University Environmental Law Journal
OGEL Oil, Gas & Energy Law Journal
Ohio St. L.J. Ohio State Law Journal
Abbreviations xvii
Pol. YIL Polish Yearbook of International Law

Renew. Sust. Energ. Rev. Renewable and Sustainable Energy Reviews
Rev. Arb. Revue de l’arbitrage
Rev. Bras. Pol. Int. Revista Brasileira de Polı́tica Internacional
Rev. Gen. Dr. Int’l Public Revue Générale de Droit International Public
RIPE Review of International Political Economy
RIS Review of International Studies
S. Cal. L. Rev. Southern California Law Review
SAYIL South African Yearbook of International Law
Seattle L. Rev. Seattle Law Review
South Af. J. Int’l L. South African Journal of International Law
Stan. J. Int’l L. Stanford Journal of International Law
Stan. L. Rev. Stanford Law Review
SZW Schweizerischen Zeitschrift f€ur Wirtschafts- und
Finanzmarktrecht
TDM Transnational Dispute Management
Theor. Inq. L. Theoretical Inquiries in Law
TL & D. Trade, Law and Development
TLCP Transnational Law & Contemporary Problems
U. Rich. Law Rev. University of Richmond Law Review
UCD Law Rev. University College Dublin Law Review
VA J. Int. Law Virginia Journal of International Law
WTR World Trade Review
Yale J. Int. Affairs Yale Journal of International Affairs
Yale J. Int’l L. Yale Journal of International Law
ZBl Schweizerisches Zentralblatt f€ur Staats- und
Verwaltungsrecht
Acronyms
AfDB African Development Bank

ALPDP Areas of Law Pest or Disease Prevalence
APEC Asia-Pacific Economic Cooperation
AsDB Asian Development Bank
ASEAN Association of Southeast Asian Nations
BIT Bilateral investment treaty
CFR Code of Federal Regulations
CIL Customary international law
DSB Dispute Settlement Body
DSS Dispute settlement system
DSU Dispute Settlement Understanding
CETA Comprehensive Economic and Trade Agreement
EBRD European Bank for Reconstruction and Development
ECHR European Convention on Human Rights
ECJ Court of Justice of the European Union
ECLAC Economic Commission for Latin America and the Caribbean
ECT Energy Charter Treaty
EU European Union
FDI Foreign direct investment
FET Fair and equitable treatment
FIT Feed-in tariff
FTAs Free trade agreements
GATT General Agreement on Tariffs and Trade
GATS General Agreement on Trade in Services
GSP General System of Preferences
IADB Inter-American Development Bank
IBRD International Bank for Reconstruction and Development
ICSID International Centre for Settlement of Investment Disputes
ICJ International Court of Justice
IFIs International financial institutions
xix
xx Acronyms
IIA International investment agreement

IMF International Monetary Fund
IMS International minimum standard
ISSBs International standard-setting bodies
LAIA Latin American Integration Association
LDCs Least Developed Countries
MAS Mutually agreed solution
MDGs Millennium Development Goals
MFN Most-favoured nation
MoU Memorandum of understanding
NAFTA North American Free Trade Agreement
NGOs Non-governmental organizations
NGPF-G Norwegian Government Pension Fund Global
NRAs National Regulatory Authorities
NT National treatment
OECD Organization for Economic Co-operation and Development
OPEC Organization of the Petroleum Exporting Countries
PA Partnership agreement
PCA Partnership and cooperation agreement
PDFA Pest- or disease-free areas
PEEREA Protocol on Energy Efficiency and Related Environmental Aspects
PTAs Preferential trade agreements
RDBs Regional development banks
RCEP Regional Comprehensive Economic Partnership
SACU Southern African Customs Union
SCC Stockholm Chamber of Commerce
SCM Subsidies and Countervailing Measures
SDGs Sustainable development goals
SFOE Swiss Federal Office of Energy
SPS Sanitary and phytosanitary measures
SRI Socially responsible investments
SWFs Sovereign wealth funds
TBT Technical barriers to trade
TEP Third Energy Package
TEU Treaty on European Union
TFEU Treaty on the Functioning of the European Union
TiSA Trade in Services Agreement
TP Transit Protocol
TPP Trans-Pacific Partnership
TRIMs Trade-Related Investment Measures
TRIPs Trade-Related Aspects of Intellectual Property Rights
TSCG Treaty on Stability, Coordination and Governance in the Economic
and Monetary Union
TSO Transmission system operator
Acronyms xxi
TTIP Transatlantic Trade and Investment Partnership

UDHR Universal Declaration of Human Rights
UN-PRI United Nations Principles for Responsible Investment
UNCITRAL United Nations Commission on International Trade Law
UNCTAD United Nations Conference on Trade and Development
VCLT Vienna Convention on the Law of Treaties
WBG World Bank Group
WIPO World Intellectual Property Organization
WTO World Trade Organization
Part I
and Other Concerns
The First Twenty Cases Under
GATT Article XX: Tuna or Shrimp Dear?
Niall Moran
Contents
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2 Introducing the General Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3 The Objective of a Measure and the Two-Tier Test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4 Why Measures Have Failed Article XX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
5 Has the Right Balance Been Struck? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Appendix 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Appendix 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Falling Foul of Article XX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
The (Only) Two Successful Claims Under Article XX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Abstract When the general exceptions to the GATT have been invoked before the
Appellate Body, they have only been deemed a legitimate defence in two cases
since the inception of the WTO and its Dispute Settlement Body in 1995. This
article analyses why so many defences taken under the general exceptions to the
GATT have failed and whether this low success rate is indicative of a priority being
given to market access over public policy objectives at the WTO. In August 2014,
the Appellate Body issued its twentieth report in a case appealed under the general
exceptions. These first twenty reports are analysed to see which stage of the two-tier
test measures have failed and why they have failed.
To better understand Article XX’s context, this article first examines its histor-
ical evolution and recent interpretations of its two-tier test. It then turns to appli-
cation of the two-tier test and why measures have failed the necessity test or failed
to comply with Article XX’s chapeau (the two elements of Article XX’s
two-tier test).
Finally, in light of Article XX’s case law and how the two-tier test has been
interpreted, it considers whether the Appellate Body is striking the right balance
N. Moran (*)
Bocconi University, Milan, Italy
e-mail: niall.moran@phd.unibocconi.it
© Springer International Publishing Switzerland and G. Giappichelli Editore 2017 3

G. Adinolfi et al. (eds.), International Economic Law,
DOI 10.1007/978-3-319-44645-5_1
4 N. Moran
between Members’ substantive rights and Members’ rights to pursue public policy
objectives under the general exceptions.
1 Introduction
Twenty years have seen twenty cases appealed under the general exceptions to
GATT Article XX at the WTO. In August 2014, the Appellate Body issued its
twentieth such report in the China – Rare Earths case.1 When the general excep-
tions have been invoked under Article XX of the GATT,2 it has only been deemed a
legitimate defence in two cases since the inception of the WTO and its Dispute
Settlement Body (DSB) in 1995. The general exceptions address the conflict
between trade and other legitimate policy objectives of Members. There are ten
such objectives including public morality, the protection of life and the conserva-
tion of exhaustible natural resources.
The aim of this paper is to analyse recent cases involving Article XX defences
and whether a new interpretation of Article XX is needed in light of this low success
rate of Article XX defences.3 Is this low success rate attributable to systemic
reasons at the DSB or is it indicative of a priority being given to market access
over public policy objectives? This paper considers this question and whether the
Appellate Body is striking the right balance between Members’ rights to market
access and Members’ rights to pursue public policy objectives under the general
exceptions.
Article XX allows the DSB to strike a balance between free trade and other
public policy goals. The US – Tuna I and US – Shrimp II cases are famous in the
WTO lexicon and have become symbolic of the larger trade and the environment
debate. In the former, it was felt that the panel report shifted the balance in the trade
and environment debate in favour of free trade. This balance was seemingly
restored in the US – Shrimp II case in 2001 where a US measure protecting sea
turtles was deemed compliant with the WTO agreements. However, since 2001, no
measure defended under Article XX has been deemed compliant with the WTO
Agreements. In assessing whether a revised way of interpreting Article XX is
needed, this paper considers how well the Appellate Body is striking this balance.
1
WTO doc. WT/DS431/AB/R, Appellate Body Report, China – Measures Related to the Expor-
tation of Rare Earths, Tungsten and Molybdenum, 7 August 2014.
2
The general exception clause is also found under Article XIV of GATS, which has an identical
wording to the GATT in the parts considered here. As the vast majority of cases in this area have
been taken under the GATT, for the sake of simplicity the general exceptions clauses are referred
to as being under GATT Article XX throughout this paper.
3
See Appendix 1 for a table showing the case-by-case success rate of Article XX defences.
The First Twenty Cases Under GATT Article XX: Tuna or Shrimp Dear? 5
The 2014 EC – Seals4 case illustrates recent developments under Article

XX. The interpretative evolution of Article XX is considered in light of this case
in Sect. 3. In particular, the nature of Article XX’s two-tier test, the “rational
connection” test and the distinction between a measure and its application are
considered.
The rest of the paper is structured as follows. Section 2 introduces Article XX
and its two-tiered test for qualifying as a general exception. Section 3 looks at some
of the issues raised under Article XX in the aftermath of EC – Seals. Section 4
examines why measures defended under the general exceptions have infringed
Article XX. Section 5 considers whether or not a revised interpretation of Article
XX is needed given the low success rate for defences. Finally, Sect. 6 concludes.
2 Introducing the General Exceptions
When a government measure is found to restrict trade, Article XX may be invoked

as a defence. A measure is analysed in two stages under Article XX in assessing
whether it qualifies for protection. Firstly, it must be capable of being provisionally
justified under one of the ten policy objectives contained in subparagraphs (a)–(j) of
Article XX. Secondly, a measure must comply with Article XX’s chapeau, or
introductory clauses. The chapeau’s primary purpose is prevention of abuse of the
exceptions listed in the subparagraphs.5
It has been the traditional view at the DSB, that before turning to the chapeau,
the panel or Appellate Body must consider whether a measure is: necessary to
protect public morals (let a), necessary to protect human, animal or plant life or
health (let b), necessary to secure compliance with laws or regulations which are not
inconsistent with the provisions of this Agreement (let d), or relating to the
conservation of exhaustible natural resources if such measures are made effective
in conjunction with restrictions on domestic production or consumption (let g).
Article XX(a), (b), (d) and (g) are the only subparagraphs that have formed the
basis of cases that have come before the Appellate Body. Article XX(a), (b) and
(g) concern moral and environmental issues, which is where the focus of this paper
lies. Article XX(d) is thematically different, dealing with measures necessary for
compliance with laws in areas such as customs enforcement. For this reason, the
content of these cases is not analysed in this paper.
4
WTO doc. WT/DS401/AB/R, Appellate Body Report, European Communities – Measures
Prohibiting the Importation and Marketing of Seal Products, 22 May 2014.
5
Ibid., para 5.327.
6 N. Moran
In determining whether a measure is “necessary” under Article XX(a) and (b),

the Appellate Body balances factors including the contribution of a policy to its
objective, the importance of the objective and its impact on international trade.6 If
confirmed as necessary preliminarily, the measure is then compared to less restric-
tive alternative measures. On whether a measure is “relating to the conservation of
exhaustible natural resources” under Article XX(g), a “substantial relationship”
must exist between the measure and the conservation effort.
To comply with the chapeau, inter alia, a measure must not be applied in a
manner that constitutes “arbitrary or unjustifiable discrimination” or “a disguised
restriction on international trade”. It is a flexible tool provided by the agreements
that gives the Appellate Body a degree of freedom in attributing weight to the
various concerns of the parties. Factors considered by the Appellate Body in its
assessment have included a measure’s design, flexibility, rationale and whether it
has been exercised in good faith.
Article XX functions as a two-tier test, a sequence that has been deemed by the
Appellate Body to be logical and fundamental to the Article.7 Interpreting the
chapeau without this sequence of investigation has been deemed by the Appellate
Body to be difficult “if . . . possible at all”.8 The idea is that the specific exception
should be examined first to set the context before turning to the application of a
measure under the chapeau. This logic of interpreting the provisions before the
chapeau has been disputed and labelled as “arbitrary” by Bartels (2014) though he
cedes that a two-tier test is appropriate on the grounds of judicial economy.9
Whether an examination of the application of a measure under the chapeau is
needed at all has been questioned. Davies believes that “the nexus requirements in
the heads of provisional justification provide ample protection” against the abuse of
Article XX.10 Along this line of thinking, if something is “necessary” to protect life
or “related to” the conservation of exhaustible natural resources it should automat-
ically qualify for an Article XX exemption. The impact of removing the chapeau
from Article XX’s two-tier structure would be to restrict the DSB to solely looking
at the nature of a measure without regard to discriminatory treatment in place
resulting from the measure. The contribution of the two-tier test and interpreting
the chapeau to the low success rate of Article XX defences is considered in the next
sections.
6
See https://www.wto.org/english/tratop_e/envir_e/envt_rules_exceptions_e.htm (accessed 30th
January 2016).
7
WTO doc. WT/DS58/AB/R, Appellate Body Report, US – Import Prohibition of Certain Shrimp
and Shrimp Products, 12 October 1998, para 119.
8
Ibid., para 120.
9
Bartels (2014), p. 7.
10
Davies (2009), p. 32.
3 The Objective of a Measure and the Two-Tier Test
One ongoing question concerning Article XX and its interpretation is whether the
reasons for preliminary justification need to be the same as those provided for
satisfying the chapeau. This question as to whether the reason for discriminating
has to be the same as the reason for restricting trade was addressed in EC – Seals.
In Brazil – Retreaded Tyres, the Appellate Body found that it would be difficult
to find any discrimination compliant with the chapeau where it “does not relate to
the pursuit of or would go against the objective that was provisionally found to
justify a measure under a paragraph of Article XX”.11 The same paragraph tells us
that it is an abuse of the exceptions where there is “no rational connection” between
the objective pursued under the first part of the two-tier test and the discrimination
seeking to be justified under the chapeau.
The WTO website endorses the idea of there being a “rational connection test”
for a trade restrictive measure to be justifiable under the chapeau: “WTO jurispru-
dence has highlighted some of the circumstances which may help to demonstrate
that the measure is applied in accordance with the chapeau. These include . . . an
analysis of the rationale put forward to explain the existence of a discrimination (the
rationale for the discrimination needs to have some connection to the stated
objective of the measure at issue)”.12 Other circumstances listed include a mea-
sure’s design, flexibility and coordination and cooperation activities undertaken by
the defendant.
Bartels suggests that the rational connection test should be viewed as an error13
and that it was overturned in EC – Seals. The Appellate Body found in EC – Seals
that the “relationship of the discrimination to the objective” is one of the most
important factors but not the sole test for compliance with the chapeau. The
Appellate Body’s finding in EC – Seals that the objective for discrimination is
not the sole test but that there are additional factors that may be relevant does not
necessarily run contrary to Brazil – Retreaded Tyres which itself acknowledges one
such factor in assessing compliance with the chapeau. The additional factor con-
sidered was whether the discrimination was being applied in a manner that would
“go against that objective” cited under Article XX’s subparagraph. When consid-
ering the test laid down in Brazil – Retreaded Tyres, this second element of the
analysis must be borne in mind. These two elements are; (1) that a measure may not
discriminate where it is not rationally connected to the objective pursued under the
subparagraph; (2) where not rationally connected, the discrimination must not run
contrary to the initial objective. In Bartels’s example of the medical use of nar-
cotics, it is not necessarily an affront to public morality to allow the use of a narcotic
11
WTO doc. WT/DS332/AB/R, Appellate Body Report, Brazil—Measures Affecting Imports of
Retreaded Tyres, 3 December 2007, para 227.
12
https://www.wto.org/english/tratop_e/envir_e/envt_rules_exceptions_e.htm (accessed 30 January
2016).
13
Bartels (2014), p. 15.
8 N. Moran
for public health reasons. If the two elements of the test are considered, it is difficult
to find that the Brazil – Retreaded Tyres dictum has been overturned in EC – Seals.
This exception to the EU Seal Regime is for seal products derived from hunts by
Inuit or indigenous communities. The assessment of whether the Inuit exception
supported Inuit communities (IC) is seen by Bartels as evidence that Brazil –
Retreaded Tyres has been overturned. Bartels deems that such an analysis would
be “impossible” under it as there is no rational connection between supporting Inuit
communities and the public morals objectives of the EU seal regime.14
Protecting traditional methods is however part of a broader public morality of
upholding ethical standards even if this is not the same specific moral concern that
is expressed when banning the importation of seal products. The EU submitted that
IC hunts were distinguishable from commercial hunts as they contributed to the
subsistence and identity of Inuit. IC hunts were of significance for Inuit “culture and
tradition as well as for their livelihood”.15
The EU contested the panel’s finding that there was no rational connection
between the public morals objective and the exception to it for Inuit communities.16
The EU submitted on appeal that an integral part of legislating based on a moral
standard was to have a “balancing of interests” as reflected in the IC exception,
which was the outcome of “the application of that moral doctrine to the specific
circumstances of seal hunting”.17
Whether or not the rational connection test is desirable in the context of the
general exceptions is another question. Considering the case in which it was laid
down, if a retreaded tyre ban’s objective is to protect the environment, is it
unreasonable to say that the reason for discrimination should be connected to this
objective or at least not run contrary to it?
While this test fits the facts of Brazil – Retreaded Tyres well enough, its
shortcomings are more apparent in a scenario more like the US – Shrimp cases.
Conserving sea turtles may be a conservation objective under Article XX(g) but
discrimination in this measure’s application could be grounded in a moral concern.
E.g. a WTO Member may give a waiver of a particular fishing requirement enacted
for environmental reasons to a small island if this would facilitate the sustainability
of a traditional way of life. The exception is not rationally connected to the
objective pursued, runs contrary to it but may be a justified form of discrimination
based on the balancing of interests concerned.
While there may be some instances where an exception is not rationally
connected to an objective pursued and even runs contrary to it, it is questionable
whether justifications under the subparagraphs and chapeau need to be delinked in a
14
Ibid.
15
European Communities – Measures Prohibiting the Importation and Marketing of Seal Prod-
ucts, (AB-2014-1, 2/DS400, DS401), Other Appellant Submission by the European Union,
29 January 2014, para 142.
16
Ibid., para 16.
17
Ibid., paras 110–11.
general manner. As per EC – Seals, additional factors may be considered but the
relationship of the discrimination to the objective of a measure is one of the most
important factors and will be in the majority of cases.
The traditional basis for the two-tier test is the distinction between a measure and
its application. Bartels claims that EC – Seals has abolished this distinction as
regard was had to the content of a measure in considering its application. The
Appellate Body cited Japan – Alcoholic Beverages, a national treatment case, in
finding that it may be “relevant to consider the design, architecture and revealing
structure of a measure” (para 5.302).18
In EC – Asbestos, the Appellate Body reminded the panel in its report that
Articles III and XX “are distinct and independent provisions”.19 The case involved
considerations of the health reasons behind an Article III measure which was not
deemed to deprive Article XX(b) of its effet utile as different inquiries were made
under the different Articles. GATT Articles III and XX are separate provisions,
which require separate inquiries.
The reference to Japan – Alcoholic Beverages does acknowledge that the
chapeau does not exclusively concern the application of a measure and that the
substantive content of a measure may also be an element. Such an interpretation
widens the scope for interpreting the application of a measure but while the
Appellate Body may consider an element used in an Article III analysis, such a
consideration does not constitute a fundamental re-evaluation of the two-tier test.
As such, it is pre-emptive to say that the two-tier test’s fundamental distinction has
been abolished. In applying the two-tier test, regard is still fundamentally split
between the consideration of a measure under the subparagraphs and the applica-
tion of the measure under the chapeau albeit with a widened interpretation of the
term “application”, which may include additional factors. The question of whether
or to what extent the reference to Japan – Alcoholic Beverages and the design of a
measure will impact upon compliance with the chapeau in future Appellate Body
reports remains to be seen.
The Appellate Body found that in considering the design, architecture and
structure of a measure, its “actual or expected application” is relevant in determin-
ing whether a measure infringes the chapeau.20 This is the first time the “expected
application” of a measure was referred to in an Appellate Body report (it was
repeated by reference to EC – Seals in China – Rare Earths, later in 2014).21 Given
the implications of paragraph 5.302 for future interpretations of the chapeau, the
implications of each word must be considered.
Traditionally, a Member does not have to show that damage has actually
occurred to satisfy the chapeau and has only needed to show a measure to be
18
WTO doc. WT/DS401/AB/R, supra, n. 4 (emphasis added).
19
WTO doc. WT/DS135/AB/R, Appellate Body Report, European Communities – Measures
Affecting Asbestos and Asbestos – Containing Products, 12 March 2001, para 115.
20
Ibid.
21
WTO doc. WT/DS431/AB/R, supra, n. 1, fn 625.
10 N. Moran
discriminatory. As such, the need to introduce the term “expected application” is

questionable when damage does not need to be shown. Paragraph 5.302 refers to
how a measure is “applied” three times before introducing this distinction between
actual and expected application. It is this author’s opinion that the words “actual or
expected” add no value to the concept of what constitutes application under the
chapeau and should be avoided in future reports.
4 Why Measures Have Failed Article XX
This section looks at the reasons why measures have failed the necessity test or
failed to comply with Article XX’s chapeau.22 The success rate for all Article XX
claims has been two out of twenty (10 %). However, for measures relating to public
morals and the environment under Article XX(a), (b) and (g) the success rate is one
in six (16.6 %).
Before the DSB, an Article XX(a) defence has failed on each of the three
occasions it has been invoked. While China – Audiovisual failed the necessity
test, US – Gambling and EC – Seals failed to satisfy the chapeau.
In relation to Article XX(b) and (g), since 1995 two defences have failed the
necessity test (China – Rare Earths, EC – Tariff Preferences) and five have failed to
comply with the chapeau (US – Gasoline, EC – Tariff Preferences, Brazil –
Retreaded Tyres, US – Shrimp (1998 & 2008)).
The necessity test was failed because of the availability of alternatives (China –
Audiovisual), the “piece-meal”23 manner of its application (China – Rare Earths)
and the fact that there was no relationship between the objectives stated and the
measures put in place (EC – Tariff Preferences).
Reasons why measures have been deemed not to comply with Article XX’s
chapeau have included the application of a prohibition to foreign but not domestic
service suppliers (US – Gambling), the lack “comparable efforts” in enabling one
group to qualify for an exception to a ban (EC – Seals) and the existence of an
exception to a ban for neighbouring countries which ran contrary to the objective
invoked for provisionally justifying the measure (Brazil – Retreaded Tyres).
Despite the low success rate of Article XX defences, many measures designed to
protect the environment and public morals have been deemed provisionally justi-
fiable, satisfying the first part of the two-tier test. For Article XX claims, 9/20 have
been deemed provisionally justifiable (45 %). This paper has excluded Article XX
(d) from its analysis for thematic reasons. All eight defences under XX(d) have
failed the necessity test and in the only case where an analysis of the chapeau was
carried out, it was also deemed non-compliant (US – Thai Cigarettes). Taking
Article XX(d) out of an analysis of provisional justification, 9 out of 12 of the
22
Appendix 2 provides a more detailed outline of these decisions.
23
WTO doc. WT/DS431/AB/R, supra, n. 1, para 5.116.
measures defended under Article XX(a), (b) and (g) have been found to be
provisionally justifiable (75 %). Whether this represents a silver lining for public
policy makers is considered in the next section.
5 Has the Right Balance Been Struck?
Section 5 asks whether the right balance has been struck in Article XX’s first twenty
cases. It considers whether a revised Article XX, or way of interpreting Article XX,
is needed given the low success rate for defences. Areas considered include the
adequacy of the two-tier test and whether EC – Seals has shifted the “line of
equilibrium” in interpreting Article XX. In terms of the two-tier test, the necessity
test is looked at before turning to the chapeau and whether there is room for
improving how it operates.
The US – Tuna case (1991) challenged the view that an appropriate balance had
been struck between trade and public policy considerations under free trade agree-
ments when an ostensibly environmental measure taken by the US was deemed to
be inconsistent with the GATT. Following the inception of the WTO in 1995,
greater weight appeared to be given to environmental concerns in 2001 with the US
– Shrimp I case. This was largely viewed as a positive development but was
criticised by Bhagwati who claimed that the Appellate Body had bowed to inter-
national environmental pressure.24 In US – Shrimp I, it was found that to ensure a
measure is compliant with Article XX’s chapeau, a Member must make efforts to
find a cooperative solution to the problem. Secondly, a Member needs to consider
the conditions in other territories when designing measures. This finding appeared
to strike a greater balance and it seemed that in future cases, measures would be
able to comply with these standards. This has not transpired and there has not been a
successful Article XX defence since US – Shrimp II.
On the face of it, the low success rate of Article XX defences may indicate a
priority being given to Members’ substantive rights over concerns such as environ-
mental protection at the DSB. Other reasons that are systemic to the functioning of the
DSB may be put forward in explanation. One reason may be that the environmental
measures may be acceptable under GATT Article XX by themselves, but their
discriminatory application under the chapeau may not be. Thus even if it is a loss
for a specific Member in a case, it may be a win for the public policy objective overall.
Other reasons may be that cases involving discriminatory measures are more
likely to be resolved at the consultation stage or may not be appealed to the
Appellate Body. Furthermore, for diplomatic reasons Members tend to take cases
they believe they have a good chance of winning. The paper analyses Article XX
defences once they come before the Appellate Body rather than the steps
preceding this.
24
Bhagwati (2001), pp. 15–29.
12 N. Moran
While successful defences have been uncommon, the two-tier test has been
passed in EC – Asbestos and US – Shrimp II. This represents two of the twenty
cases where an Article XX exception was invoked and the case went to the
Appellate Body. In US – Shrimp II discrimination was not found once “similar
opportunities” were provided to all exporters. This was the case regardless of the
outcome of these negotiating opportunities. In EC – Asbestos, this decision rightly
affirmed the large degree of discretion Members have when regulating public health
issues. This case shows that when it comes to measures concerning a grievous
potential harm to the health of Members’ citizens and a measure is applied
consistently, it has no difficulty being exempted under Article XX.
As seen in Sect. 4, there has been a 75 % success rate for measures under Article
XX(a), (b) and (g) in terms of being found to be preliminarily justifiable. This
reflects the fact that the panels and Appellate Body are often willing to deem
measures necessary when the aim is to protect life, the environment and public
morals. As the Appellate Body stated in its Korea – Various Measures on Beef
report: “The more vital or important the common interests or values pursued, the
easier it would be to accept as ‘necessary’ the measures designed to achieve those
ends”.25
Environmental, health and public moral defences have often been deemed
preliminarily justifiable. However, this may not be of much consolation to a
Member when the balancing of interests under the chapeau has gone against
them. Perhaps some of these losses can be reframed as wins for public policy
where it was far from certain whether they would constitute a permissible restric-
tion on trade under the subparagraphs in the first place. Although the EU and
Brazil’s measures on the importation of seal products and retreaded tyres failed to
comply with the chapeau, the fact that such measures have been deemed provision-
ally justifiable under WTO law shows that the Appellate Body has acknowledged a
broad range of public policy concerns that permit restrictions on trade.
The Brazil – Retreaded Tyres case shows the Appellate Body’s willingness to
accept environmental and health risks as legitimate and complex concerns that can
be tackled by a wide range of measures. When a measure infringes Article XX’s
chapeau on the basis of discriminatory treatment, it is primarily a question of
fairness in the accordance of rights equally to all WTO Members than one of
favouring trade over public policy interests. A concern of Members in allowing
derogations from the WTO agreements in environmental matters is that these
measures will become a new form of protectionism. In enacting environmental or
moral measures, ensuring that these measures are not discriminatory in their
application should be a starting point for Members in demonstrating that the aim
of a measure is environmental rather than protectionist. Showing that a measure is
non-discriminatory is a necessary but not sufficient condition for a measure to
comply with Article XX.
25
WTO doc. WT/DS161/AB/R, Appellate Body Report, Korea – Measures Affecting Imports of
Fresh, Chilled and Frozen Beef, 11 December 2000, para 162.
Seven of the twelve cases brought under Article XX(a), (b) and (g) have failed to
comply with the chapeau. Two have complied (EC – Asbestos and US – Shrimp II),
while in three cases the second tier of Article XX’s test was not reached (US –
Audiovisual, China – Rare Earths and China – Raw Materials). Given the difficulty
Article XX defences have had in complying with the chapeau, the suitability of its
current formulation has been questioned.
To discard the chapeau would be to deprive the Appellate Body of its ability to
look at the discriminatory effects of measures. Removing the chapeau would render
the first twenty years of jurisprudence on Article XX questionable in its applica-
bility to future cases. This is not to mention the uncertainty that would surround
measures previously found incompatible with the chapeau.
A more plausible proposition would be to relax the requirements of the chapeau
and what constitutes arbitrary or unjustifiable discrimination. One way of doing this
is to delink the objective for a trade restriction and the reason behind discriminatory
treatment under the chapeau. Another way would be for the Appellate Body to look
at other “additional factors” that may be considered which would allow it more
room in its considerations under the chapeau. This was done in EC – Seals where
for the first time reference was made to the design, architecture and revealing
structure of a measure which was deemed “relevant to consider”. GATT Article
III has regard to the application of a measure like Article XX, but a differentiated
analysis is necessarily applied as the Article has no chapeau. The fact that the
Appellate Body referred to Japan – Alcoholic Beverages, a GATT Article III case,
perhaps shows that they are trying to widen the scope for interpretation under the
chapeau. In terms of other additional factors that may be considered in future
Appellate Body reports, guidance may be drawn from disputes under the TBT
Agreement. In US – COOL,26 the even-handedness of measures was determined
based on whether or not they were applied in a manner that “constitutes a means of
arbitrary or unjustifiable discrimination”. This wording largely resembles the cha-
peau test and future interpretations of GATT Article XX may make reference to the
jurisprudence developed under the TBT Agreement and vice versa.27
The difficulty with taking EC – Seals as an example of a progressive interpre-
tation of Article XX’s chapeau is that the infringement of the chapeau was less
clear-cut here than in other cases. In EC – Seals, the EU was found not to have made
“comparable efforts” to allow Canadian Inuit to qualify for the IC exception
compared to efforts made in relation to Greenlandic Inuit. The aim of this measure
was to support hunts for subsistence, an objective different to the one claimed to
provisionally justify the measure. To comply with the Regulation, a certificate from
a recognised body was necessary which the Appellate Body deemed to constitute
arbitrary and unjustifiable discrimination.
26
WTO doc. WT/DS384/AB/R, WT/DS386/AB/R, Appellate Body Report, United States –
Certain Country of Origin Labelling (COOL) Requirements, 29 June 2012.
27
Asmelash (2013), p. 36.
14 N. Moran
In certifying products that would qualify under the Inuit exception, establishing
a recognised body was deemed burdensome as was the “broad discretion” of
recognised bodies in deeming products compliant with the Inuit exception.28 If
the EU aims at protecting subsistence hunting, the establishment of a body to
recognise products as such is reasonable even if “cooperative arrangements” have
not been actively pursued.29
It has been noted that one way for the EU to comply with the chapeau is by
removing the Inuit exception, which would be more trade restrictive and would not
necessarily benefit Canada or its Inuit population.30 Removing the Inuit exception
would be to enact a more trade-restrictive measure to comply with the chapeau,
which is not the ideal outcome for trade or public policy. If a case were to be made
to relax interpretation of the chapeau, EC – Seals could be a starting point.
6 Conclusions
One of the most delicate tasks faced by the Dispute Settlement Body is striking the
right balance between enforcing Members’ rights under the WTO agreements and
ensuring derogations for public policy objectives can be defended under the general
exceptions. These twenty Article XX cases are a small, but vital sample for policy
makers wishing to comply with WTO law.
Compliance with Article XX’s chapeau has proved a sticking point in some
cases, but applying measures in a discriminatory manner without justification is
anathema to the WTO system. The chapeau remains integral in obliging Members
to show that environmental or moral measures do not discriminate between Mem-
bers in an unjustified way. The Appellate Body has shown itself willing to deem
Article XX(a), (b) and (g) defences provisionally justifiable in most of its cases and
where there is no discrimination, such as in EC – Asbestos and US – Shrimp II,
measures have been found to be compliant.
The Appellate Body has shown willingness in recent jurisprudence to consider
factors other than the relationship between the reasons for discrimination under the
chapeau and the objective of a measure under the subparagraphs. EC – Seals shows
the Appellate Body will consider additional factors and in this case referred to the
design, architecture and revealing structure of a measure when looking at its
application. Ultimately it is for the Appellate Body to find the correct balance in
interpreting the chapeau and recent jurisprudence is a testament to the fact that its
interpretative role is not carried out in an overly rigid manner.
The success rate for Article XX defences may be low, but it is not the aim of the
DSB to achieve a 50 % compliance rate for measures. In terms of the cases that have
28
WTO doc. WT/DS401/AB/R, supra, n. 4, para 5.326.
29
Ibid., para 5.337.
30
Catti de Gasperi (2015), p. 17.
appeared before the Appellate Body, to increase the compliance rate to 50 % would
require a dismantling of Article XX and its two-tier test. If the chapeau were
removed from Article XX, such a compliance rate would be achieved. However,
this is not desirable as to ignore the way in which the exceptions are applied would
be to greatly dilute the substance of the WTO Agreements. Allowing measures to be
applied differently to different Members runs contrary to the foundational princi-
ples of the WTO.
Measures aiming to protect the environment and public morality can respect
WTO law and come under the Article XX exceptions. If the system is to be changed
to make it easier for measures to be defended under Article XX, this will come
through the DSB, its jurisprudence and the balancing performed by the Appellate
Body. If this doesn’t develop in a satisfactory manner, change must come multi-
laterally from the Members themselves, however unlikely this appears to be. This
sensitive area involves conflicting values, which are inherent to the WTO system.
An attempt to move away from the balancing carried out by the Appellate Body
towards a more codified, rules-based approach to interpreting the general excep-
tions would be counterproductive.
Acknowledgements The Author would like to thank Marios Iacovides, Giacomo Tagiuri and
Ann-Katrin Poetter for their insightful comments on an earlier version of this paper. This paper
was presented at the 4th PEPA/SIEL Conference at the University of Milan on 16 April 2015. The
author would like to thank panelists Moshe Hirsch and Elisa Baroncini for their valuable feedback
as well as the conference organisers. Of course, all errors are the author’s alone.
Appendix 1
Cases where Article XX invoked by defendant Article XX defence rejected by Appellate Body
US – Gasoline (1996) X
Canada – Periodicals (1997) X
US – Shrimps I (1998) X
Korea – Beef (2000) X
EC – Asbestos (2001)
US – Shrimp II (2001)
EC – Tariff Preferences (2004) X
Canada – Wheat Exports (2004) X
Dominican Republic – Cigarettes (2005) X
US – Gambling (2005) X
Mexico – Soft Drinks (2006) X
Brazil – Tyres (2007) X
US – Custom Bond (2008) X
US – Shrimp I (2008) X
China – Auto Parts (2008) X
China – Audiovisual Services (2009) X
(continued)
16 N. Moran
Cases where Article XX invoked by defendant Article XX defence rejected by Appellate Body
Thailand – Cigarettes (2011) X
China – Raw Materials (2011) X
EC – Seals (2014) X
China – Rare Earths (2014) X
The 20 cases considered here constitute a relatively small sample. If Panel

reports which are not appealed to the Appellate Body are included, a similar
trend of non-compliance can be observed. In Tuna – Dolphin (1991) the Article
XX exception was of course rejected by the panel. In Tuna – Dolphin II (2012) the
case was taken under the Technical Barriers to Trade Agreement.
Appendix 2
Falling Foul of Article XX
In this section, the reason why defendants have unsuccessfully invoked GATT
Article XX before the DSB is considered.
Article XX(a)
US – Gambling (2005)31
A US measure affecting the cross-border supply of gambling and betting services

was contested in this case. The ban was defended under GATS Article XIV(a) and
was found to be designed to protect public morals by both the panel and Appellate
Body. Unlike the panel, the AB considered the measure was “necessary” as the US
had made a prima facie case of necessity and Antigua had failed to give a
reasonably available alternative measure.32 The fact that the US had not entered
into consultations did not render the measure invalid. On appeal, it was found that
the US prohibition was only applied to foreign and not to domestic service suppliers
and so it fell foul of Article XIV’s chapeau.
31
WTO doc. WT/DS285/AB/R, Appellate Body Report, United States—Measures Affecting
the Cross-Border Supply of Gambling and Betting Services, 7 April 2005.
32
See para 336.
China – Audiovisual Services (2009)33
A Chinese measure seeking to reserve the importation of various forms of media

solely for certain Chinese State-owned enterprises was contested in this case.
The ban was defended under Article XX(a). The panel and AB determined that
because there was at least one other reasonably available alternative, China’s
measures were not “necessary” to protect public morals. The AB did not complete
an analysis of the chapeau.
EC – Seals (2014)34
The EU seal regime,35 which sought to ban the importation of seal products into the
EU, was contested in this case. Norway alleged certain exceptions to the ban were
discriminatory and favoured products from the EU certain third countries.
The EU defended the ban under Article XX(a) and as expected, a ban on seal
products came under the traditionally broad scope of moral questions. Proving it to
be “necessary” to protect public morals was more difficult but the EU succeeded
before the panel and at appeal.
The AB corrected the panel’s finding that applying the same legal test as was
applied to Article 2.1 of TBT Agreement was appropriate in analysing Article XX’s
chapeau. Ultimately however it found that the EU had not demonstrated that the EU
seal regime complied with the chapeau and thus could not be justified under Article
XX. The EU had not made “comparable efforts” to allow Canadian Inuits to qualify
for the IC exception compared to the efforts it had made in relation to Greenlandic
Inuits. Furthermore, to comply with the Regulation, a certificate from a recognised
body is necessary. Such a body had been approved in Greenland but not in Canada.
The AB deemed this burdensome.
It has been noted36 that the EU can comply by removing the Inuit exception,
which would be more trade restrictive and would not necessarily benefit Canada or
its Inuit population.
33
WTO doc. WT/DS363/AB/R, Appellate Body Report, China – Measures Affecting Trading
Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Prod-
ucts, 21 December 2009.
34
WTO doc. WT/DS401/AB/R, supra, n. 4, p. 3.
35
Regulation 1007/2009 of 16 September 2009 on trade in seal products, OJ 2009 L 286/36.
36
Catti de Gasperi (2015), p. 17.
18 N. Moran
Article XX(b) and (g)
US – Gasoline (1996)37
This case concerned a US measure seeking to regulate the effects of gasoline on

clean air.
The measure was contested as it treated imported gasoline less favourably but
the US invoked Article XX(g) in its defence. The measure was deemed to be
provisionally justifiable and “related to” conserving exhaustible natural resources.
It fell foul of the chapeau however, as it was applied in a way that discriminated
between domestic and imported products.
EC – Tariff Preferences (2004)38
An EC measure seeking to combat drug production and trafficking was contested in

this case. India deemed the treatment received by 12 countries to be preferential and
that its “design, structure and architecture” showed no relationship between the
objectives stated and the Drug Arrangements. The ban was defended under Article
XX(b) but the EC failed to show the measure was “necessary” for the protection of
human life or health or that it complied with the chapeau. The EC did not appeal on
this point.
Brazil – Retreaded Tyres (2007)39
This case involved a measure banning the import of retreaded tyres for environ-
mental and health reasons. The EC contested it under GATT Article XI while Brazil
claimed Article XX(b) as a defence. When considering Article XX(b), the panel
found that none of the less trade-restrictive alternatives suggested by the European
Communities constituted “reasonably available” alternatives to the ban. The mea-
sure passed the necessity test at first instance and appeal as its objective was deemed
to outweigh its trade-restrictiveness.40 The measure was also deemed appropriate to
achieving its objectives. The Appellate Body acknowledged the difficulty of iso-
lating the contribution of a single policy towards an overarching goal such as
tackling climate change. It recognised that the evaluation of such policies can
only be done in the long term in some instances.
37
WTO doc. WT/DS2/AB/R, Appellate Body Report, United States—Standards for Reformulated
and Conventional Gasoline, 29 April 1996.
38
WTO doc. WT/DS246/AB/R, Appellate Body Report, European Communities—Conditions
for the Granting of Tariff Preferences to Developing Countries, 7 April 2004.
39
40
Ibid., para 151.
When the chapeau of Article XX was considered, it was found that the ban on
imported tyres didn’t extend to Mercosur Members. In light of this exemption, the
ban was deemed arbitrary and to infringe Article XX’s chapeau. The AB found that
whether or not discrimination is arbitrary depends on a measure’s rational connec-
tion to its objective or whether it would go against that objective.41 As an exemp-
tion for Mercosur tyres would “go against the objective that was provisionally
found to justify a measure,” the measure was deemed arbitrary. Once again, it is not
the measure itself that infringes but the inconsistent manner of its application.
China – Raw Materials (2011)42
Chinese export restraints on materials such as magnesium and zinc were at issue in
this case. China claimed it could derogate from its Accession Protocol obligations
based on Article XX exceptions in furtherance of its aim of conserving an exhaust-
ible natural resource. The panel and AB found that there was no basis for appending
GATT Article XX (b) and (g) to the Accession Protocol. Finally, the AB underlined
the mutually exclusive natures of Articles XI and XX of GATT.
China – Rare Earths (2014)43
Like the above case, this case relates to restrictions on the export of raw materials
(in this case tungsten and molybdenum). China sought to defend its measure under
Article XX(b) saying it was “necessary to protect human, animal or plant life or
health”. The US argued that the measures were not necessary for this purpose but
more importantly that Article XX was inapplicable to China’s Accession Protocol.
One panelist took the view that the Article XX exceptions are available to all trade
in goods except where this is stated to not be the case. This view seems controver-
sial given the legal maelstrom that would result from its application. Considering
Article XX(b) on an arguendo basis, the panel found the measure to fail the
necessity requirement.
The panel found China’s export quotas did not amount to conservation within its
traditional understanding of Article XX(g). China’s interpretation of conservation
was tantamount to Chinese control of the international market.
China’s appeal primarily sought clarification of the relationship between its
Accession Protocol and the WTO Agreements.
The AB found that the panel was correct in focusing on the measures’ “design
and structure” rather than on their effects on the marketplace.
41
Ibid., para 227.
42
WTO doc. WT/DS394/AB/R, Appellate Body Report, China—Measures Related
to the Exportation of Various Raw Materials, 30 January 2012.
43
20 N. Moran
In its analysis of Article XX(g), the AB found the panel was incorrect in
suggesting there was a requirement of “even-handedness” when it comes to the
burden of conservation under Article XX(g). This error did not taint the rest of the
panel’s analysis but the idea that conservation efforts must be spread evenly among
foreign and domestic producers and consumer was correctly deemed to be
erroneous.
The (Only) Two Successful Claims Under Article XX
US – Shrimp II (2001)44
The initial US – Shrimp I (1998)45 case was unsuccessful in invoking Article XX

and so analysis is given before turning to this second dispute, which concerned its
implementation. A joint complaint was brought in this case regarding shrimp
imports and their impact upon sea turtles, which were considered an endangered
species. The Act required trawlers to use turtle excluder devices (TEDs) when in
waters containing such turtles. Imports were also prohibited46 unless it could be
shown that the importing nation had a similar regulatory programme and turtle
incidental take-rate to the US or that the environment didn’t contain such risks. This
had a “coercive” effect obliging other Members to enforce the same measures as the
US to ensure compliance. The measure also constituted “arbitrary” discrimination
because of the inflexibility in its application.
The US defended its measure under Article XX(g) but was found to have
discriminated in applying the measure as advantages were accorded to Caribbean
countries that weren’t accorded to the complainants thus violating Article XX’s
chapeau. The US had failed to engage in negotiations towards an international
agreement for the conservation of sea turtles with the complainants and was
instructed to do so.
In US – Shrimp II (2001), the US measure was now deemed to satisfy the
chapeau. The US had undertaken negotiations in “good faith” and as the conclusion
of these negotiations wasn’t a condition of the original report, the implementation
panel and Appellate Body deemed the US compliant.
Regarding the “arbitrary” nature of the discrimination, the US amended the
measure so that programmes were required to be “comparable” rather than “essen-
tially the same”. All exporting countries had been provided with “similar opportu-
nities” and as “comparable efforts” had been made the measure could no longer be
deemed discriminatory.
44
WTO doc. WT/DS58/AB/R, Appellate Body Report, United States – Import Prohibition
of Certain Shrimp and Shrimp Products, Recourse to Article 21.5 of the DSU by Malaysia,
22 October 2001.
45
WTO doc. WT/DS58/AB/R, supra, n. 7.
46
US Public Law 101–102 (1989), section 609.
EC – Asbestos (2001)47
In EC – Asbestos, the EU successfully defended its ban on asbestos under Article

XX(b) and both the panel and Appellate Body upheld its claim that no reasonable
“alternative measure” could be adopted. This shows that WTO rules can be used to
challenge domestic measures protecting citizens against the most dangerous of
materials. France placed a ban on both imported and domestically produced asbes-
tos and so the measure complied with Article XX’s chapeau. Canada claimed that
the measures used by France were more trade-restrictive than necessary and that if
used in a safe manner, chrysotile (the type of asbestos it produces) does not pose
health risks.48 Thus chrysotile was “like” other construction products and should be
protected under the national treatment clause.
The panel concluded that France had violated Article III.4 of the GATT and that
chrysotile and non-asbestos based construction products were like products. In their
view, to consider health risks under Article III.4 was “not appropriate” and would
be to “nullify” the effect of Article XX(b).49 This approach would guarantee market
access subject to the defendant being able to find a non-protectionist justification
under Article XX.
The Appellate Body reminded the panel in its report that Articles III and XX “are
distinct and independent provisions” and so a measure may be deemed unjustifiable
for public health reasons under both.50 Considerations of health reasons under
Article III do not deprive Article XX(b) of its effet utile as different inquiries are
made under the different Articles.
References
Asmelash HB (2013) WTO Case Law In 2012. It YIL 22:299–347

Bartels L (2014) The Chapeau of Article XX GATT: A New Interpretation, Paper No. 40/2014.
University of Cambridge Faculty of Law Legal Studies Research Paper Series 7
Bhagwati J (2001) After Seattle: free trade and the WTO, in efficiency, equity, and legitimacy: the
multilateral trading system at the millennium. R Inst Int Aff 77:15–29
Catti de Gasperi G (2015) WTO case law in 2014 it. YIL 24:395–430
Davies A (2009) Interpreting the Chapeau of GATT Article XX in light of the ‘New’ approach in
Brazil–tyres. JWT 43:507–39
47
48
Chrysotile is considered a human carcinogen by the WHO’s cancer agency (IARC), as per its
1998 Monograph: ‘WHO IARC Monographs on the Evaluation of Carcinogenic Risks to Humans
Overall: Evaluations of Carcinogenicity: an Updating of IARC Monographs,’ Volumes 1 to
42, Supplement 7 (1998).
49
WTO doc. WT/DS135/R, Panel Report, European Communities – Measures Affecting Asbestos
and Asbestos-Containing Products, 18 September 2000, paras 3.450 and 3.512 for the respective
quotations.
50
WTO doc. WT/DS135/AB/R, supra, n. 19, para 115.
Remarks on the Practice of Regional
Development Banks’ (RDBs) Accountability
Mechanisms and the Safeguard of Human
Rights
Domenico Pauciulo
Contents
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2 Human Rights and Lending Activities: The Experience of the International Bank
for Reconstruction and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3 RDBs Accountability Mechanisms: An Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
3.1 Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3.2 Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
3.3 The Social Dimension of RDBs and Accountability Mechanisms’ Practice . . . . . . . . 32
4 Remarks on the Weaknesses of RDBs Accountability Mechanisms . . . . . . . . . . . . . . . . . . . . . . . 35
5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Abstract Based on the experience of the World Bank’s Inspection Panel, Regional
Development Banks (RDBs) have established accountability mechanisms with the
aim to control the compliance of their lending activities with their own operational
policies and procedures. Notwithstanding different models created, weaknesses and
critical issues, RDBs mechanisms are contributing to the promotion and protection
of human rights at the universal level, holding RDBs accountable for violations of
international human rights law. Since they allow individuals to present claims
related to rights and interests affected by an act or omission of the organization,
RDBs accountability mechanisms are innovative instruments in the law of interna-
tional organizations aimed at consolidating objectives related to sustainable devel-
opment, promotion of fundamental rights and freedoms, protection of cultural
heritage and rights of indigenous people, safeguard of environment and
biodiversity.
D. Pauciulo (*)
Department of Law, LUISS Guido Carli, Rome, Italy
e-mail: dpauciulo@luiss.it

DOI 10.1007/978-3-319-44645-5_2
24 D. Pauciulo
1 Introduction
Notwithstanding the promotion of economic interests and the safeguard of fundamen-

tal rights of individuals have long been considered inconsistent, in the last years the
integration of human rights and environmental concerns in international economic law
has been one of the most debated topics by international community and scholars.1
This issue arose since the emergence of a new concept of “development”, which
takes into account the close connection between economic growth and the protec-
tion of different interests, e.g. the implementation of economic, social and cultural
rights; the safeguard of the rights of indigenous peoples; the preservation of the
environment and biodiversity. This new approach originated in 1986 UNGA
Declaration on the Right to Development2 and was confirmed by the adoption of
several documents by international organizations.3
Accordingly, International Financial Institutions (IFIs), of both universal and
regional nature, have progressively devoted greater attention to the protection of
non-economic values in the implementation of their statutory objectives, widening
their functions and responsibilities.
Hence, while the debate on the inclusion of environmental and social concerns in
the law and policies of the World Trade Organization (WTO) dates back to the
creation of this institution,4 in the field of international investment law this issue has
occurred recently, mostly in order to safeguard these interests in the course of
economic activities conducted by private actors operating in Least Developed
Countries (LDCs).
Nowadays, international lending activities are also involved in this process. The
International Monetary Fund (IMF) and the International Bank for Reconstruction
1
The literature on this topic is rather large. See Adinolfi (2014); Baetens (2013); Hirsch (2013);
Petersmann (2011); Dupuy et al. (2009); Cottier (2005).
2
See UN doc. A/RES/41/128, Declaration on the Right to Development, 4 December 1986. This
Declaration contains two important principles: first, there is subordination of development pro-
cesses to the effective enjoyment of human rights and fundamental freedoms, from which
development cannot be separated (see, for example, arts 4, 6 and 8 of the Declaration). In addition,
the importance of international cooperation for the promotion of development on a global scale is
emphasized: this second aspect highlights the possible role of international organizations.
3
The right to development can be rooted in the provisions of the Charter of the United Nations, the
Universal Declaration on Human Rights and the two 1966 International Covenants on Civil and
Political Rights and on Economic, Social and Cultural Rights. It was reaffirmed in several
recommendations adopted by international organizations and evolved in the concept of sustainable
development, affirmed in the Report of the Commission on Environment and Development, Our
Common Future, http://www.un-documents.net/our-common-future.pdf (accessed 1 February
2016), and by the outcomes of the United Nations Conference on Environment and Development
held in Rio de Janeiro in 1992. About the latter, see Vi~ nuales (2015).
4
This process began in the ‘40s, when clauses regarding full employment and fair labour condi-
tions standards were proposed for inclusion in the Havana Charter establishing the International
Trade Organization (ITO), but it had its high-point during the Uruguay Round of multilateral trade
negotiation, which began in 1986.
Remarks on the Practice of Regional Development Banks’ (RDBs). . . 25
and Development (IBRD), in the context of the World Bank Group (WBG),
developed new approaches in order to take into account non-economic values in
their decision-making process, in addition to relevant economic parameters.5
Based on the experience of the IBRD, several Regional Development Banks
(RDBs)6 were created since the ‘60s, in order to promote the development of their
Member States through loans and direct participation for specific investment pro-
jects with a strong social dimension.
This study intends to examine to what extent RDBs guarantee the safeguard of
human rights and environmental concerns in their activities, by highlighting the
role of their accountability mechanisms in pursuing these aims.
2 Human Rights and Lending Activities: The Experience

of the International Bank for Reconstruction
and Development
According to its Articles of Agreement, IBRD main objectives are the reconstruction
of the economies disrupted by the World War II; the promotion of private foreign
investments; the growth of international trade.7 These goals are pursued through the
provision and implementation of long-term loans and guarantees to Member States.
Clearly, the Bank’s mandate has an economic and financial nature, as stated by
the so-called “political neutrality clause” under Art. IV, Sec. 10, IBRD Articles of
Agreement, which prohibits the Organization and its officials to interfere in the
internal affairs (“political affairs”) of States and to be influenced, in the performance
of their duties, by their political orientation (“political character”).8
Consequently, the Bank has based its action on purely economic factors, without
considering human rights and political issues.9
Over the years the Bank finalities slowly changed: with the advancement of the
economic, political and social agenda of the international community, the Bank
became the leading international organization in supporting development and
poverty eradication.
5
On this topic, see briefly Palacio (2006) and Gianviti (2005).
6
For the purposes of this paper, RDBs include African Development Bank (AfDB, www.afdb.org),
Asian Development Bank (AsDB, www.adb.org), European Bank for Reconstruction and Devel-
opment (EBRD, www.ebrd.com), Inter-American Development Bank (IADB, www.iadb.org).
7
See IBRD, Articles of Agreement, art 1.
8
This rule states that lending decisions must then be taken only on the basis of considerations of an
economic character, evaluated impartially and in view of the statutory objectives, so as to avoid
discrimination between Members except the ones relating to their different economic conditions.
In a complementary manner, in accordance with Art. III, Sec 5(b), the IBRD has to ensure that its
loans are used to achieve the purposes for which they were granted, paying attention, again, to
“considerations of economy and efficiency” and neglecting factors of a different nature (“political
or other non-economic influences or considerations”).
9
Coultier et al. (2009).
26 D. Pauciulo
In this context, the studies and opinions embraced by General Counsels

Shihata10 e Da~ nino11 marked a clear evolution from the pre-existing legal mandate
of the Bank, allowing actions in relation to human rights protection and recognizing
its role of facilitator in “helping [its] Members realize their human rights
obligations”.12
In its practice, the Bank began to adhere to the modern notion of development as
enshrined in several international instruments13 and expanded its goals through a
reinterpretation of its Statute and by the implementation of new actions. This new
perspective inspired different initiatives, such as the adoption of the 1999 Comprehen-
sive Development Framework,14 which proposes a different approach to its activities by
the Bank, combining human, social, environmental and structural elements with eco-
nomic and financial data. This new methodology justified also the Bank’s pivotal role in
the implementation of the Millennium Development Goals (MDGs) adopted by the UN
General Assembly with the Millennium Declaration15: this commitment is currently
renewed by supporting the post-2015 development agenda and the Sustainable Devel-
opment Goals (SDGs),16 which replaced the expiring MDGs.
In any case, the Bank de facto developed in a progressive way its mandate and its
scope to include new areas such as environmental protection, sustainable develop-
ment, good governance, democracy and rule of law, cultural development, post-
conflict reconstruction, programs to combat corruption and, of course, protection of
fundamental human rights and liberties. These issues have become an integral part
of the Bank’s strategy against poverty and underdevelopment.17
10
Shihata (1995, 2000a).
11
Da~nino (2006a, b), pp. 295–324, affirming that “The Articles of Agreement permit, and in some
cases require, the Bank to recognize the human rights dimensions of its development policies and
activities since it is now evident that human rights are an intrinsic part of the Bank’s mission”.
12
Palacio (2006).
13
See World Conference on Human Rights, Vienna Declaration and Programme of Action,
25 June 1993, http://www.ohchr.org/EN/ProfessionalInterest/Pages/Vienna.aspx (accessed
1 February 2016), para 10, and the World Conference against Racism, Racial Discrimination,
Xenophobia and Related Intolerance, Durban Declaration and Programme of Action, adopted in
September 2001, http://www.un.org/en/durbanreview2009/pdf/DDPA_full_text.pdf (accessed
25 January 2016), para 19.
14
Wolfenshon (1999).
15
See UN doc. A/RES/55/2, United Nations Millennium Declaration, 18 September 2000.
16
The 17 SDGs are listed in UN doc. A/RES/70/11, Transforming Our World: the 2030 Agenda for
Sustainable Development, 25 September 2015. Previously, in April, the World Bank
(in partnership with IMF and other regional institutions) approved a discussion note which pro-
poses a preliminary vision for the collective role of those institutions in the financing of the
development agenda post-2015, see Development Committee, From Billions to Trillions:
Transforming Development Finance. Post-2015 Financing for Development: Multilateral Devel-
opment Finance, prepared jointly by the African Development Bank, the Asian Development
Bank, the European Bank for Reconstruction and Development, the European Investment Bank,
the Inter-American Development Bank, the International Monetary Fund, and the World Bank
Group, DC2015-0002, 2 April 2015, http://siteresources.worldbank.org/DEVCOMMINT/Docu
mentation/23659446/DC2015-0002(E)FinancingforDevelopment.pdf (accessed 1 February 2016).
17
Mauro (2015), p. 260.
This process culminated in the approval of a series of operational policies and

procedures (OP&Ps),18 adopted by the Bank since the ‘70s, concerning specific
issues of environmental and social nature with the intention of not harming people
and the environment affected by its activities.19 OP&Ps constitute binding inter-
nal rules for the Bank’s staff.
Therefore, the protection of non-economic values now inspire the practice of the
World Bank. This is also established by the creation of an accountability mecha-
nism in 1993, the Inspection Panel (IP), with the mandate of monitoring if the
Bank’s activity complies with its policies and procedures in the elaboration,
evaluation and implementation of a specific project.20
The most innovative aspects of the Panel is its competence ratione personae:
requests for investigations can be presented by individuals (at least two) whose
rights and interests may be adversely affected and this is imputable to an act or to an
omission by the Bank not complying with its OP&Ps. Hence, on several occasions,
the Panel received requests for inspection of projects that affected the rights or
interests of people living in the area of the project concerned: most of these requests
were linked to the environmental impact of the Bank’s activities or to the forcible
transfer of population or to indigenous peoples.21
Notwithstanding the Panel has rarely considered matters expressly related to
human rights violations, its work contributed (and still does) to the protection and
18
These rules are contained in an Operational Manual, including: Operational Policies (OPs),
which set out the mandatory policy requirements for the conduct of Bank operations; and Bank
Procedures (BPs), which are statements describing the general mandatory procedural requirements
necessary for IBRD staff to carry out the policies explained in the OPs. Moreover, the Bank adopts
also Policies (statement of broad substantive policy principles that require, permit or constrain
Bank activities to achieve institutional goals), Directives (a statement normally designed to
implement a Policy), Operational Memoranda (requirements not yet incorporated in the OPs/BPs)
and Good Practices (GPs), as guidance for the Bank and its staff.
19
Specifically, these OPs are denominated Safeguard Polices (SPs) and are designed to prevent
unintended adverse effects on third parties and on environment. Actually, they address: OP 4.01
Environmental Assessment; OP 4.04 Natural Habitats; OP 4.09 Pest Management; OP 4.10
Indigenous Peoples; OP 4.11 Physical Cultural Resources; OP 4.12 Involuntary Resettlement;
OP 4.36 Forests; OP 4.37 Safety of Dams; OP 7.50 Projects on International Waterways; OP 7.60
Projects on Disputed Territories.
20
The Inspection Panel was created by two identical resolutions of IBRD and of the International
Development Agency (IDA) on 22 September 1993 (Resolution IBRD 93-10 and Resolution IDA
93-6), which established the basic mandate and structure of the Panel. In 1996 and 1999 some
clarifications were added to the resolutions, see IBRD, Review of the Resolution Establishing the
Inspection Panel: Clarification of Certain Aspects, 17 October 1996, and Review of the Resolution and
1999 Clarification of the Board’s Second Review of the Inspection Panel, 20 April 1999. The two
resolutions and the documents containing the clarifications are available at http://ewebapps.worldbank.
org/apps/ip/Pages/Panel-Mandate.aspx (accessed 1 February 2016). On the Inspection Panel, see
Bradlow (1993); Shihata (2000b); Alfredsson and Ring (2001); Schlemmer-Schulte (2001),
pp. 483–548; Del Vecchio (2013), pp. 53–54; Hey (2013), pp. 727–738; Mauro (2015), pp. 262–270.
21
According to the World Bank, 105 requests were presented before the Inspection Panel: 66 requests
concerned issues related to environmental impacts and biodiversity and 63 complaints
regarded resettlement and transfer of population. Data available at http://ewebapps.worldbank.org/
apps/ip/Style%20Library/Images/Case%20Analysis.png (accessed 1 February 2016).
28 D. Pauciulo
promotion of human rights. Indeed, the Panel had identified circumstances in which
human rights should be taken into consideration by the Bank22 and adopted reports
and recommendations to the Bank’s management, aimed at creating forms of
redress for affected people or to modify peculiarities of the project-financed.
Although the Panel has been strongly criticised for its limited powers,23 it has
notably contributed to widen the mandate of the World Bank, creating an internal
department dedicated to ascertain the compliance of the Bank with its own rules and
policies. Moreover, this allowed local people to submit claims related to their rights
and interests affected by the Bank-financed projects, and created a system of due
diligence that permits to assess the impact of the Bank’s activities on a variety of
topics of environmental and social nature.24
3 RDBs Accountability Mechanisms: An Overview
Inspired by the creation of the Inspection Panel, RDBs established accountability

mechanisms in their institutional framework. Precisely:
– The Inter-American Development Bank created its Independent Investigation
Mechanism (IIM) in 1994. In 2008, the Mechanism was enhanced, being
renamed as Independent Consultation and Investigation Mechanism (ICIM,
more commonly known by its Spanish acronym MICI).25
– In December 1995, the Asian Development Bank’s Board of Directors approved
the establishment of an Inspection Function (IF). In 2003, the Board replaced the
Inspection Function with a new Accountability Mechanism (AM).26
22
See Inspection Panel, Chad: Petroleum Development and Pipeline Project, Management of
Petroleum Economy Project, and Petroleum Sector Management Capacity Building Project,
2002, Case 22, http://ewebapps.worldbank.org/apps/ip/Pages/ViewCase.aspx?CaseId¼52, paras
210–217 (accessed 1 February 2016).
23
The Panel is a body non-judicial in nature, as it lacks enforcement and restitution powers:
indeed, investigations shall be authorized by the Executive Directors. Moreover, reports of the
Panel are not binding for the Bank: the Board of Executive Directors may decide to follow the
recommendations made by the Panel or to ignore the report.
24
It shall be noted that, in 2012, the World Bank started a review of its environmental and social
safeguard policies, including a variety of new issues, such as human rights; gender equality and
non-discrimination; occupational and labour issues; safety in workplaces; forced and child labour;
climate change; green-house gases emissions; hazardous materials; ecosystem and biodiversity
issues; free prior and informed consent of indigenous peoples; cultural heritage. This process is
divided into three phases and implies the participation of relevant stakeholders. Actually, phase
three is ongoing. For an in-depth analysis, Review and Update of the World Bank Safeguard
Policies: Objectives and Scope, https://consultations.worldbank.org/review-and-update-world-
bank-safeguard-policies-objectives-and-scope (accessed 1 February 2016).
25
See http://www.iadb.org/en/mici/home,1752.html (accessed 25 January 2016).
26
See AsDB, Resolution no. 225–95, Establishment of an Inspection Function, 10 November 1995
(approved 5 December 1995), Manila, and AsDB, Review of the Inspection Function:
– The European Bank for Reconstruction and Development’s Independent

Recourse Mechanism (IRM) was first created in 2003. The IRM was revised
in 2008 and replaced by the Project Complaint Mechanism (PCM).27
– The African Development Bank’s Independent Review Mechanism (IRM) was
created in 2006.28
RDBs mechanisms’ operational aspects are not identical: specifically, taking
apart mere procedural features, the most relevant differences concern eligibility of
complainants and the functions performed. However, common characteristics
can also be identified in their mandates.
3.1 Eligibility
RDBs accountability mechanisms may differ for their eligibility criteria: the main
variation is whether a single individual can file a request for investigation. While in
a first phase a single complaint was allowed also before IADB’s MICI, nowadays
only the EBRD’s PCM considers request filed by a single individual or organiza-
tion.29 In other RDBs’ systems, requests are considered if presented by a group of
two or more persons residing or located in the country where the Bank-financed
project is implemented.30 Moreover, request may be filed also by a qualified
representative of the affected persons.31
Establishment of a New Accountability Mechanism, 2003, http://www.adb.org/sites/default/files/

institutional-document/32108/adb-accountability-mechanism.pdf (accessed 25 January 2016). For
an in-depth analysis of this mechanism, see McGill (2011), pp. 191–208. For an in-depth analysis
of AsDB’ functioning and its policy on human rights, see Fujita (2013).
27
See http://www.ebrd.com/work-with-us/project-finance/project-complaint-mechanism.html
(accessed 25 January 2016).
28
See http://www.afdb.org/en/about-us/organisational-structure/independent-review-mechanism-
irm/ (accessed 25 January 2016).
29
See EBRD, Project Complaint Mechanism, Rules of Procedure, as approved by the Board of
Directors on 7 May 2014 (in force as 7 November 2015) paras 1–2, http://www.ebrd.com/
downloads/integrity/pcmrules.pdf, (accessed 24 January 2016).
30
The AfDB’s IRM has specified some additional criteria to be fulfilled that might exclude the
eligibility of the request, such as cases of corruption handled by other units of the Bank; matters
under judicial or arbitral review; anonymous complaints; complaints about procurement decisions;
complaints regarding human rights violations other than those involving social and economic
rights alleging any actions or omissions on the part of the Bank. See IRM, Resolution B/BD/2015/
03 – F/BD/2015/02, Resolution 2015, adopted by the Board of Directors 28 January 2015, http://
www.afdb.org/fileadmin/uploads/afdb/Documents/Compliance-Review/Boards_Resolution_on_
Establishment_of_IRM_2015.pdf (accessed 24 January 2016).
31
According to AsDB’s AM Policy, non-local representatives may file a request in exceptional
circumstances. Moreover, for the compliance review phase, complaints may be filed by one or
more AsDB Board Members in special cases involving allegations of serious violations of Bank’s
operational policies and procedures relating to an ongoing AsDB-assisted project, after having
30 D. Pauciulo
Generally, the policies regarding the eligibility criteria demand that complain-
ants are directly, adversely and materially affected in their rights or interests32 by
the Bank-financed project and the corresponding harm is attributable to an act or
omission by the Bank which resulted in non-compliance with its own operational
policies and procedures.
3.2 Functions
RDBs mechanisms are generally aimed at reviewing the compliance of acts and
omissions of the Banks’ staff and borrowers with all the requirements set by their
respective OP&Ps. In addition, these forms of grievance might be addressed
to problem-solving, focusing on the harm suffered by affected people, in order to
facilitate a resolution of the issues arisen in connection with the implementation of
the financed project.33 In any case, these principal functions are not exclusive, but
often performed together, as demonstrated by the practice of these mechanisms.
Nowadays, all RDBs accountability mechanisms are explicitly engaged with
problem-solving during the first phase of their procedure: this is the case of the
IADB’s MICI, where the Consultation Phase enables the parties to address in a
voluntary and collaborative manner the questions raised by the complainants.
Similarly, the AsDB Consultation Project, which is led by the Special Project
Facilitator (SPF), is focused on finding satisfactory solutions to the harms caused
by AsDB-assisted projects with the consent and participation of all the parties
concerned.34 As it is generally provided for all RDBs, a problem-solving initiative
raised thse concerns to the Bank Management. See AsDB, Accountability Mechanism Policy
2012, http://www.adb.org/sites/default/files/institutional-document/33440/files/accountability-
mechanism-policy-2012.pdf (accessed 25 January 2016) p. 28.
32
See EBRD, supra, n. 29: “One or more individual(s) . . . who has or have an economic interest,
including social and cultural interests, in an Impacted Area” (emphasis added).
33
On the problem-solving function, see Suzuki and Nanwani (2005), pp. 220 ff.
34
After receiving a complaint, within 21 days, the Office of the SPF determines eligibility and
consults with complainants, the borrower and the operations department concerned. About
120 days after the determination of the eligibility, the SPF completes the review and the
assessment of the complaint, through site visits, meetings between the parties concerned, and
reporting any fact-findings to the President, to the complainants, to the borrower and to the oper-
ation department. If deemed necessary, the SPF proceeds with problem-solving, facilitating a
consultative dialogue between the parties, promoting the resolution of the problem and the
establishment of mediation mechanisms. Upon completion of this process, the SPF presents a
report to the President and to the complainants, to the borrower, to the Compliance Review Panel
and to the Board of Directors, summarizing all the facts and steps taken, and the parties’
agreement, if any. The process ends with a phase of monitoring (for no longer than 2 years) of
the remedial actions agreed between the parties (if any) and the submission of a final report. See
AsDB, supra, n. 31.
might also include independent fact-finding, mediation, conciliation, dialogue

facilitation, investigation or reporting.
The second function, the compliance review, is generally performed through the
creation of an internal department composed of an operational office (in charge of
the organization and of the management of the mechanism’s activities) and of an
investigation unit of independent experts, whose number varies.35 This is the case
of the AsDB, who established a Compliance Review Panel (CRP),36 but also of the
Inter-American,37 European38 and African systems.39
35
See Bradlow (2005).
36
The Compliance Review Panel consists of three members, specifically of a full-time chair and
two part-time members. Two Panel members are from regional Member countries, with one of
them from a developing Member country, and the third member from a non-regional country.
According to its mandate, the CRP, after the determination of the eligibility of the complainant and
upon the authorization of the Board Compliance Review Committee, conducts a compliance
review consulting all the relevant parties and managing meetings, discussions and site visits:
upon completion of the review, the CRP issues a draft report of its findings to the complainants, to
the borrower and to AsDB Management for comments and responses, and after 45 days issues a
final report to be considered by the Board of Directors. If the report concludes that AsDB’s
noncompliance caused direct and material harm, the Management, in 60 days, proposes remedial
actions to the Board, which then issues a final decision. Generally, for no longer than 3 years, the
Panel monitors the implementation of the remedial actions and prepares annual monitoring
reports. See AsDB, supra, n. 31.
37
The investigation is carried out by a Panel, whose members are chosen from a Roster of Experts,
and the fact-findings are contained in a final report, in order to assess whether an action or omission
by the Bank resulted in a failure to comply with one or more OP&Ps and harmed the Requesters. In
the final report, the MICI may provide its recommendations or observations on findings that
provide the general basis for an eventual decision to be taken by the Board of Directors. See IADB,
Policy on the Independent Consultation and Investigation Mechanism, 14 December 2013, http://
idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum¼39629936 (accessed 25 January 2016).
38
The PCM is independent from the EBRD’s banking operations and is administered by a
dedicated PCM Officer who is located within the EBRD’s Office of the Chief Compliance Officer
(OCCO) and is responsible for the overall, day-to-day operations and external relations of the
PCM. Additionally, a roster of independent experts assists the PCM Officer in the process. Their
functions include the assessment, together with the PCM Officer, of the eligibility of complaints,
the undertaking of Compliance Reviews or Problem-solving Initiatives and follow up monitoring.
When a complaint is received and registered, the PCM Officer will appoint an independent expert
from the existing roster. Together with the expert, the PCM Officer will assess the eligibility of the
complaint and makes a decision on whether or not it should proceed to Compliance Review or
to Problem-Solving. See EBRD, supra, n. 28.
39
As with other accountability mechanisms, the African IRM provides a problem-solving function
and a compliance review: the problem-solving process involves a dialogue or a mediation between
the affected people, the Bank and other interested parties, while compliance review may be
initiated at the conclusion of the problem-solving phase and is conducted by three IRM experts
that constitute the Compliance Review Panel. The Panel acts with the support of the Compliance
Review and Mediation Unit (CRMU), the organizational office that administrates the IRM. The
IRM, since its creation, has received a small number of requests for consultation or investigation,
all concluded through the recourse to mediation and conciliation procedures. See supra, n. 27.
32 D. Pauciulo
3.3 The Social Dimension of RDBs and Accountability

Mechanisms’ Practice
In contrast with the institutions of the World Bank Group, RDBs expressly include
the intent to finance projects with a strong social dimension in their statutory
objectives, with the aim of increasing the well-being of the populations concerned,
reducing poverty and improving the status of the most vulnerable, as stated in the
Preamble of the Agreement establishing the EBRD (“The Contracting Parties,
committed to the fundamental principle of multiparty democracy, the rule of law,
respect for human rights...”)40 or by the references to the “social progress” and
“social development” contained in the Agreements establishing the AfDB and the
IADB.41
Accordingly, these institutions started to adopt or modify their OP&Ps in order
to promote sustainable development and to protect human rights of the people
affected by development projects, even though there is no explicit reference to
specific human rights responsibilities in their statutes.
Generally, these policies require RDBs staff and borrowers to comply with a set
of standards the Bank expecting to ensure in its activities, with proper peculiarities
between RDBs. As an example, while IADB42 and EBRD43 have demonstrated
greater attention in the adoption of good international practices relating to sustain-
able development, the AsDB has a unique and comprehensive set of policies
40
Agreement establishing the European Bank for Reconstruction and Development, http://www.
ebrd.com/news/publications/institutional-documents/basic-documents-of-the-ebrd.html%20,
(accessed 1 February 2016).
41
See the Preamble of the Agreement establishing the African Development Bank, http://www.
afdb.org/fileadmin/uploads/afdb/Documents/Legal-Documents/Agreement%20Establishing%
20the%20ADB%20final%202011.pdf, and the Preamble of the Agreement establishing the Inter-
American Development Bank, http://idbdocs.iadb.org/wsdocs/getdocument.aspx?
docnum¼781584 (accessed 1 February 2016).
42
The IADB has proved a strong commitment in ensuring sustainability through the adoption of
specific environmental safeguard policies. Indeed, OP&Ps include strict requirements on the
assessment of environmental and social risks in the financed operations and on the avoidance of
negative impacts on natural habits, cultural sites, indigenous traditions, with a special focus on
resettlement and consequent relocation issues. See http://www.iadb.org/en/mici/relevant-opera
tional-policies,8166.html (accessed 1 February 2016).
43
According to the Bank’s mandate, EBRD-financed projects are expected to be designed and to
operate in compliance with international standards. The Bank adopted numerous set of perfor-
mance requirements (PRs) and standards in the field of social and environmental issues, which
reflected the standards established at international level by several international organizations
(such as labour standards established by the International Labour Organization or environmental
regulation set by the European Union). It should be noted that the EBRD compliance review is
limited to the provisions contained in the EBRD Environmental and Social Policy (ESP). See
EBRD, Environmental and Social Policy 2014, adopted by the Board of Directors on May 7th,
2014, http://www.ebrd.com/news/publications/policies/environmental-and-social-policy-esp.html
(accessed 1 February 2016), para 14.
contained in an Operations Manual, which collects Bank Policies (BPs)44, their

Operational Procedure (OPs) and a specific Safeguards Policy regarding environ-
mental protection, involuntary resettlement and rights of the indigenous people.
RDBs accountability mechanisms have positively considered human rights and
environmental issues in several claims. Indeed, recently, a growing number of
requests for investigations were presented in order to safeguard biodiversity and
environmental concerns in the area interested by the financed project, for example
with regard to the access to water resources45 or to the adverse effects of pollu-
tion.46 On these issues, the European PCM has evidenced growing consideration,
acting “precautionary in its approach to the protection, conservation, management
and sustainable use of living natural resources”,47 highlighting the Bank’s omis-
sions and harmful actions on these topics in several cases,48 and therefore
reaffirming EBRD’s strong commitment to the protection of the natural environ-
ment of the areas affected by its projects.
Increasingly, accountability mechanisms are requested to conduct investigations
concerning the realization of infrastructural projects that had negative impact not
only on the territory but also on human settlements, causing relocations and
44
The Bank Policies are short and focused statements regarding different aspects of the Bank’s
activities, such as regional cooperation, financial partnerships, lending policies, technical assis-
tance, projects administration. Moreover, issues such poverty reduction, gender equality,
good governance, anticorruption, money laundering and financing of terrorism are also included.
The Bank has also adopted a Safeguard Policy Statement, which emphasizes the role of the AsDB
in assisting its Member countries in pursuing “environmentally sustainable and inclusive eco-
nomic growth” and “ensuring the social and environmental sustainability of the projects it
supports”, see AsDB, OM Section F1/BP, Operations Manual Bank Policies, Safeguard Policy
Statement, issued October 1st, 2013, http://www.adb.org/sites/default/files/institutional-docu
ment/31483/om-f1-20131001.pdf (accessed 29 January 2016), para 1.
45
See IADB, MICI, Panama Canal Expansion Program (2011) MICI, PN-MICI002-2011 (MICI),
http://www.iadb.org/en/mici/complaint-detail,1804.html?ID¼PN-MICI002-2011 (accessed
29 January 2016), where seismic risks but also biodiversity and water management issues were
involved, and Pando-Monte Lirio Hydroelectric Power Project (2010) MICI, PN-MICI001-2010
(MICI), http://www.iadb.org/en/mici/complaint-detail,1804.html?ID¼PN-MICI001-2010
(accessed 29 January 2016). The Final Panel Report was considered by the Board of Directors
in October 2012, which decided to create an action plan containing specific activities, responsi-
bilities and deadlines to solve ecological and water quality issues.
46
EBRD, PCM, EPS Koulabara Environmental Improvement Project (2012) PCM, Request no
2012/04 (PCM), registered 2 August 2013, http://www.ebrd.com/downloads/integrity/EPS_
Kolubara__complaint_17.08.2012.pdf (accessed 1 February 2016).
47
See EBRD, supra, n. 43, para 14.
48
See the reports regarding the complaints in Paravani HPP Project [2012] PCM, Request
no. 2012/010 (PCM), registered 4 January 2012; Ombla HPP Project [2011] PCM, Request
no. 2011/06 (PCM), registered 24 November 2011; and Boskov Most Hydro Power Project
[2011] PCM, Request no. 2011/05 (PCM), registered 14 November 2011, all available at http://
www.ebrd.com/work-with-us/project-finance/project-complaint-mechanism.html (accessed
30 January 2016).
34 D. Pauciulo
affecting indigenous peoples’ rights.49 Accordingly, the landmark case facing these
concerns is considered the Greater Mekong Subregion-Rehabilitation of the Rail-
way in Cambodia Project.50 The financed project was intended to reconstruct,
relocate and rehabilitate 594 km of Cambodian railways. The affected people
submitted a request for the harms suffered in violation of the Cambodian Consti-
tution and of international treaties and conventions ratified by Cambodia, such as
the International Covenant on Civil and Political Rights,51 the International Cov-
enant on Economic Social and Cultural Rights52 and the UN Convention on the
Rights of the Child.53 The CRP concluded that the harms alleged by the requesting
part existed, recommending to the Bank’s Board to consider the opportunity to
create a specific compensation fund for the affected people.
In the latter and in all the aforementioned cases, RDBs accountability mecha-
nisms dealt with issues related to human rights of the people located in the area
impacted by Banks-financed projects. Compliance reviews found some of these
projects to be noncompliant with OP&Ps and, therefore, in close cooperation with
the Governments concerned, the Banks took remedial measures to address the
issues highlighted.54
49
See AfDB’s IRM reports regarding the negative impacts of the construction of roads and
highways on property rights of the affected people, which suffered a constraints to their access
to land, water resources or social amenities, Construction of the Marrakech–Agadir Motorway,
Morocco (2010) IRM, RQ2010/1 (IRM); Dakar-Diamniadio Highway Project, Senegal (2011)
IRM, RQ2011/1 (IRM); Road Sector Support Project II, Tanzania (2012) IRM, RQ2012/1 (IRM),
all available at http://www.afdb.org/en/about-us/organisational-structure/independent-review-
mechanism-irm/requests-register (accessed 29 January 2016). See also AsDB, Accountability
Mechanism, Sri Lanka: Southern Transport Development Project [2004] AM, Request no 2004/
1 (AM), 2 December 2004, http://www.compliance.adb.org/dir0035p.nsf/alldocs/BDAO-
7XVBSH?OpenDocument (accessed 29 January 2016).
50
AsDB, Accountability Mechanism, Greater Mekong Subregion—Rehabilitation of the Railway
in Cambodia Project (2012) AM, Request no 2012/2 (AM), 28 August 2012, http://www.compli
ance.adb.org/dir0035p.nsf/alldocs/RDIA-8XT5DA?OpenDocument (accessed 28 January 2016).
This case was object of a supplementary complaint (request no. 2015/1) received on 7 September,
2015. Complaints were related in particular to the prohibition of forced evictions, the right to
adequate housing, the right to water, the right of every child to an adequate standard of living, the
right to health, and the right to an effective remedy. All these rights were recognized in the OP&Ps
adopted by AsDB.
51
International Covenant on Civil and Political Rights, 16 December 1966, UNTS, vol.
999, p. 171.
52
International Covenant on Economic, Social and Cultural Rights, 16 December 1966, UNTS,
vol. 993, p. 3.
53
Convention on the Rights of the Child, 20 November 1989, UNTS, vol. 1577, p. 3.
54
In RDBs practice, remedial measures include: upgrading and restoring the standard of living of
resettlement sites; paying compensation; performing supplemental environmental and gender
studies to minimize any risks of economic, social and environmental nature.
4 Remarks on the Weaknesses of RDBs Accountability

Mechanisms
The recent practice demonstrates that RDBs are taking into consideration human
rights and environmental issues in their lending activities and policies: conse-
quently, RDBs have fixed high standards for States and private contractors,
requesting the respect of social and environmental concerns in the realization of
financed projects.
The most interesting trend regards RDBs accountability mechanisms, which
have become effective form of grievances for the redress of harms suffered by
people affected by Banks’ financed projects, as showed by the growing number of
requests received.
Nevertheless, these bodies appear to have limited effectiveness. Indeed, RDBs’
mechanisms have a narrow mandate: they are entitled to review the consistency of
the Bank’s activities with its policies and procedures only on a case-by-case basis,
without being enabled to evaluate the general adequacy with a specific OP&P.
Hence, they are not able to assess good governance and respect of human rights
obligations by a borrower State, as also stated for the IBRD Inspection Panel.55
The most significant limit, however, affects the independence and impartiality of
RDBs accountability mechanisms: if critical issues emerge from the investigation
process, the Bank’s management still maintains relevant influence. Indeed, Banks’
Boards or Presidents retain the power to authorize (and neglect) the conduct of an
investigation and (more importantly) the right to decide on the follow-up of
the recommendations issued by the mechanism. Hence, only the Executives can
implement remedial actions if a violation is found, adopting proper initiatives or
acting as recommended by the inspection function. This is complicated by the
provisions that the Banks’ management and the departments involved in the project
have the right to present observations, clarifications and responses in different
phases of the investigation process, whereas the complainants lack of ius standi,
strongly reducing their participation (and limiting their rights). Additionally, no
appeal procedure is established. Therefore, it is evident the non-judicial character of
RDBs’ accountability bodies, which do not conform to due process standards but
that also lack any power of enforcement, restoration or full compensation.
Furthermore, it should be highlighted that these mechanisms are not able to
review complaints raising international law issues unless these arise directly from
RDBs’ operational policies, which contain commitments in specialized and limited
areas, for example in environmental protection: as precisely stated, RDBs have
developed their own rules on specific themes that do not reflect related and
accepted international human rights standards.56 Undeniably, RDBs “choose their
own definitions and standards of human rights, influenced by but rarely based
55
See IBRD, supra, n. 27, para 215. On the Inspection Panel and human rights’ issue, see
Schlemmer-Schulte (1998).
56
Crippa (2010).
36 D. Pauciulo
directly on internationally agreed norms. Those choices have as much to do with

what is politically acceptable within and among the participating entities than with
the objective human rights needs”.57 Thus, the legal principles applicable to RDBs’
operations are not neutral, but heavily influenced by the interests and objectives of
the Banks in international and regional economic governance: practically, RDBs’
are determining by themselves what standards apply to their operations.58
Another critical issue regards OP&Ps’ uncertain legal value. While it is
undoubted that OP&Ps are administrative and procedural rules concerning the
implementation of development projects, their normative significance is still
discussed, in particular if they rise to the level of international obligations of
these institutions (which means that they can be used to hold RDBs responsible
for their actions) or if they are mere internal norms aimed at promoting a better
standards in RDBs operations and activities.59
In any case, the establishment of the IBRD Inspection Panel and the subsequent
institution of similar mechanisms in regional contexts constitute an important
innovation in the law of international organizations with regard to the issue of
accountability of IFIs,60 considering that for the first time individuals have the right
to present claims against an international organization for actions that amounted to
a violations of basic human rights.
The essential principle is that, as subjects of international law, international
organizations are “bound by any obligations incumbent upon them under general
rules of international law, under their constitutions or under international agree-
ments to which they are parties”.61 While RDBs (but also IFIs) have not accessed to
any international human rights treaty, customary human rights norms are binding
upon RDBs. Compliance and inspection mechanisms are therefore means to hold
57
See UN doc. E/CN.4/2006/97(2006), UN Special Representative of the Secretary General on the
Issue of Human Rights and Transnational Corporations and Other Business Enterprises, Interim
Report on the Promotion and Protection of Human Rights, para 53.
58
Recent developments with respect to RDBs’ policies relating to labour rights and the rights of
indigenous peoples suggest that RDBs are adopting definitions and standards recognized by
international legal instruments, incorporating conventional legal obligations in their policies and
agreements with public and private borrowers. See, for example, the references to specific ILO
Conventions in the AfDB Operational Safeguard 5—Labour Conditions, Health and Safety, http://
www.afdb.org/fileadmin/uploads/afdb/Documents/Policy-Documents/December_2013_-_AfDB
%E2%80%99S_Integrated_Safeguards_System__-_Policy_Statement_and_Operational_Safe
guards.pdf (accessed 1 February 2016).
59
On the legal value of OP&Ps, see Shelton (2000) and Boisson De Chazournes (2000),
pp. 281–303. Concerning the “hardening” of IFIs’ OP&Ps, see Bradlow and Naudé Fourie (2011).
60
See International Law Commission, Draft Articles on the Responsibilities of International
Organizations (2011), with commentaries, adopted at 63rd session, http://legal.un.org/ilc/texts/
instruments/english/commentaries/9_11_2011.pdf (accessed 2 February 2016). See also Interna-
tional Law Association’s report at Berlin Conference 2004, Accountability of International
Organizations, http://www.ila-hq.org/en/committees/index.cfm/cid/9 (accessed 2 February
2016). Specifically, on the accountability for human rights violations, Wouters et al. (2010).
61
ICJ, Interpretation of the Agreement of 25 March 1991 between WHO and Egypt, Advisory
Opinion, ICJ Reports 1980, p. 73, 20 December 1980, para 37.
international organizations accountable for any violation of human rights which

they commit or contribute to.
5 Conclusions
The growing practical significance of RDBs accountability mechanisms cannot be

ignored. The most recent practice shows that through these bodies thousands of
people received compensation for the adverse impacts on their rights, also in early
stages of the complaints procedure. This was favoured by the provision of a
problem-solving initiative for the negotiation of agreed and amicable solutions
between the parties, which constitutes undoubtedly one of the major innovation
introduced by RDBs accountability mechanisms, Indeed, very recently, this provi-
sion inspired also the IP, that developed a new pilot approach with the purpose to
address and resolve any issue prior to the registration of the request by the Panel,
offering the possibility to consider claims for compensation in an early phase of the
investigation procedure, to be concluded in 3 months.62
This evolution is clearly the result of the experience gained by RDBs mecha-
nisms, which, despite strong limitations in their powers, have achieved considerable
success among people affected by the Banks-financed projects.
However, it deems necessary to rethink also the structure and powers of RDBs
accountability mechanisms, allowing these bodies to adopt binding decisions in
case of violations of OP&Ps. This would create an effective remedy to those
harmed, ensuring impartiality and independence from the managements of the
organizations.
Apart from these remarks, it is unquestionable that RDBs accountability mech-
anisms are nowadays contributing to enforce sustainable development and to create
a new system of IFIs’ governance. Indeed, these bodies were set up to ensure the
transparency and control of Banks’ operations and their accountability towards
beneficiaries of the economic assistance, in order to consolidate the objectives
enshrined in international treaties and conventions or in documents adopted by
international organizations. This is evidence of the recent tendency to guarantee the
affirmation of human, social and environmental concerns in the pursuit of economic
development in the international context and also at regional level. In conclusion,
since RDBs operate in a broad range of countries and projects, the standards set out
in their policies, safeguards and procedures might influence the behaviour of other
subjects: as a result, they have the potential to establish “functional benchmarks that
are then incorporated by other actors—private corporations and States—into their
62
See World Bank, Inspection Panel, Piloting a new approach to support early solutions in the
Inspection Panel process, 6 November 2013, http://ewebapps.worldbank.org/apps/ip/
PanelMandateDocuments/PilotingNewApproach.pdf, (accessed 6 February 2016).
38 D. Pauciulo
laws, policies, and procedures”,63 having a broader and positive impact on

development.
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A Waiver for Europe? CETA’s Trade
in Services, and Investment Protection
Provisions and Their Legal-Political
Implications on Regulatory Competence
Amalie Giødesen Thystrup and G€

uneş Ün€
uvar
Contents
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
2 Cross-Border Trade in Services Under CETA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
2.1 Services; Modalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
2.2 Market Access, National Treatment, and MFN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
2.3 Clarifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
2.4 Scheduling Approach and Reservations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
2.5 Regulatory Competencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
3 CETA’s FET and Expropriation Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
3.1 FET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
3.2 (Indirect) Expropriation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
4 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Abstract The Comprehensive Economic and Trade Agreement (CETA) is a bilat-

eral agreement between Canada and the EU that aims at providing a broad set of
incentives in order to promote trade and business, and bears important legal and
political consequences for trade and foreign investment policies of the parties. This
paper aims at exploring CETA’s trade in services and investment provisions on fair
and equitable treatment and indirect expropriation. In the section on cross border
services, the paper discusses the scheduling modality and the adjustments intro-
duced, with a view to the parties’ regulatory competencies. In the section on
investment provisions, it delves further into whether or not it bears the potential
This research is partially funded by the Danish National Research Foundation Grant no.
DNRF105.
A.G. Thystrup (*)
Faculty of Law, Centre for Enterprise Liability, University of Copenhagen, Copenhagen, Denmark
e-mail: agt@jur.ku.dk
G. Ün€uvar
Faculty of Law, Centre of Excellence for International Courts (iCourts),
University of Copenhagen, Copenhagen, Denmark
e-mail: gunesunuvar@gmail.com

DOI 10.1007/978-3-319-44645-5_3
42 A.G. Thystrup and G. Ün€
uvar
to live up to parties’ promises of further clarity, coherence, addressing public

expectations relating to unhindered sovereign regulatory authority.
1 Introduction
The Comprehensive Economic and Trade Agreement (CETA)1 is an ambitious

trade and investment deal between Canada and the EU, aiming to “increase bilateral
trade and investments flows and contribute to growth in times of economic uncer-
tainty”.2 The negotiations had lasted 5 years between 2009 and 2014. On
29 February 2016 the legal review of CETA was completed, and the same day
the parties released the final text of the treaty. In their joint statement, the European
Commissioner for Trade and Canada’s Minister of International Trade declared that
Once finalized, we will focus on the swift ratification of CETA so that individuals and
businesses, both large and small, are able to benefit from the opportunities offered by this
gold-standard agreement. We are confident that CETA will be signed in 2016 and will enter
into force in 2017.3
Both Canada and the EU attest great importance to CETA. As is repeatedly

reflected by the parties during negotiations, protection of foreign investors is
tantamount and adjacent to free trade. In a broader perspective and despite the
parties’ systemic efforts to highlight the socio-economic appeal of the deal, it has
been criticised along with its contemporaries such as the TTIP4 and the TPP.5 One
prominent criticism was that the impending clash between the economic goals
pursued through mega-regional agreements like CETA, namely more trade, and
an elaborate, articulated framework for foreign investment, might come at the
expense of regulatory authority in the public interest. Another characteristic is
their widespread publicity, with TTIP being called “an inherent assault on
1
See, Comprehensive Economic Trade Agreement EU-Canada (CETA), final text, published on
29 February 2016, http://trade.ec.europa.eu/doclib/docs/2016/february/tradoc_154329.pdf
2
European Commission, Country Report on Canada http://ec.europa.eu/trade/policy/countries-
and-regions/countries/canada/ (accessed 6 February 2016).
3
EU Commission, Joint Statement http://europa.eu/rapid/press-release_STATEMENT-16-446_
en.htm (accessed 29 February 2016). An earlier draft, dated September 2014, is also publicly
available.
4
Transatlantic Trade and Investment Partnership between the United States of America and the
European Union. The EU negotiation text on investment available via the European Commission,
TTIP Negotiation text, http://trade.ec.europa.eu/doclib/docs/2015/september/tradoc_153807.pdf
5
Trans-Pacific Partnership. Among its signatories are Canada, the US, Australia, New Zealand and
Japan. Full text available via the Office of the United States Trade Representative website https://
ustr.gov/trade-agreements/free-trade-agreements/trans-pacific-partnership/tpp-full-text (accessed
6 February 2016).
A Waiver for Europe? CETA’s Trade in Services, and Investment. . . 43
democracy” due to its “introduction” of investment arbitration.6 During its negoti-

ations and following its completion, CETA also has attracted significant attention
with regard to its legal-political implications.7
As stated by the European Commission, an open and fair international trading
system is one of the foundations of Europe’s competitiveness.8 According to the
Canadian Government, CETA is by far Canada’s most ambitious trade initiative,
broader in scope and deeper in ambition than the North American Free Trade
Agreement (NAFTA), seeking to open new markets to Canadian exporters through-
out the EU.9 CETA will support trans-Atlantic bilateral trade between Canada and
the EU by opening new markets for the benefit of the parties and by providing for
deeper provisions “behind the border” on important issues such as regulatory
cooperation while maintaining a harmonized domestic regulatory structure.
CETA’s provisions on the promotion and protection of foreign investments are
considered to provide for a stronger investment protection mechanism than previ-
ous EU Member States’ bilateral investment treaties (BITs). The Commission is
confident that “the EU has introduced strong additional guarantees to make sure that
the investment protection provisions fully preserve the right of governments to
regulate, implement public policy objectives and avoid any abuse of these rules”.10
With the latest legal review, the parties have also agreed on an investment court and
appeal mechanism.11 The core question of this paper is therefore, whether the
economic goals pursued through CETA conflict with the objective of retaining
regulatory competencies. In answering this question, it discusses certain key ser-
vices trade and investment provisions.
The first section will focus on CETA’s trade in services regime. This is important
for understanding the legal-political implications of CETA because liberalisation of
trade in services is subject to both Canadian and European sensitivities, and is of
great potential for economic gain in accessing new markets and increasing trade
given the size of the services sector as a proportion of GDP in both jurisdictions.12
6
Williams (2015).
7
For a recent example, see Canada moves a step closer to ratifying “gold-plated” trade deal with EU,
CBS News, 29 February 2016, http://www.cbc.ca/news/politics/canada-europe-trade-deal-
amended-1.3468802 (accessed 1 March 2016); Mas (2016) and for an earlier example, see The
Canada–EU trade deal: Atlantic accord, The Economist, 26 October 2013, http://www.economist.
com/news/americas/21588418-landmark-agreement-could-show-way-future-deals-atlantic-accord
(accessed 6 February 2016); Wagstyl (2014).
8
European Commission, Accessing Markets http://ec.europa.eu/trade/policy/accessing-markets
(accessed 12 March 2015).
9
Government of Canada, CETA http://international.gc.ca/trade-agreements-accords-
commerciaux/agr-acc/ceta-aecg/understanding-comprendre/overview-apercu.aspx?lang¼eng
(accessed 12 March 2015).
10
European Commission Memorandum (2014) http://trade.ec.europa.eu/doclib/docs/2014/decem
ber/tradoc_152982.pdf (accessed 6 February 2016).
11
CETA, supra, n. 1, arts 8.23–8.45.
12
Ibid.
uvar
Examples of often-traded services between both parties include travel, financial

services, communication, and transportation services. In focusing on CETA’s
chapter on Cross-Border Trade in Services, the section builds on the strong bond
between services and investment as frontiers of international trade, in a Trans-
Atlantic context and globally. The second section addresses CETA’s investment
regime, and analyses two of its core protection principles (arts 8.10 and 8.12
concerning the Fair and Equitable Treatment (FET) and expropriation respectively)
compared to the parties’ previous investment treaties. The paper discusses the FET
and Expropriation clauses specifically due to their non-contingent nature, or
so-called “objective” interpretation, as opposed to contingent protection provisions
such as the Most-Favoured Nation (MFN) and National Treatment (NT). It is their
vague nature and consequential divergent interpretation in arbitral awards that lead
to their consideration as the most controversial principles in the investment arbi-
tration practice.13
2 Cross-Border Trade in Services Under CETA
With CETA, the EU and Canada are establishing a free trade area consistent with
art XXIV of the General Agreement on Tariffs and Trade (GATT) 1994 and art V of
the General Agreement on Trade in Services (GATS).14 The impasse at the World
Trade Organisation (WTO) in advancing the Doha Round of multilateral trade
negotiations has resulted in many WTO Members negotiating bilateral and regional
trade agreements.15 Along with the TPP, signed on 4 February 2016, and the TTIP
being negotiated between the USA and the EU, CETA is such an example of this
shift. Operating on a large scale across the Atlantic, CETA may even be regarded as
a pre-cursor for the TTIP. As opposed to traditional FTAs and Preferential Trade
Agreements (PTAs), this development sees mega-regional agreements come to life,
shaping economic growth within these sub-sets of participants in world-trade and
the narrative in world trade at large. Another characteristic of recent developments
in trade negotiations is the rise in so-called “deep” FTAs. This group of FTAs count
the EU-Singapore Free Trade Agreement and CETA as prominent examples.
Ongoing trade negotiations pursuing the “deep” FTA approach include TTIP, the
Trade in Services Agreement (TiSA), and the Regional Comprehensive Economic
Partnership (RCEP) between the ten Member States of the Association of Southeast
Asian Nations (ASEAN) and the six States with which ASEAN has existing FTAs.
CETA is an ambitious undertaking that combines regulatory aspects of trade like
regulatory cooperation with a comprehensive scope covering trade in all major
13
Dolzer and Schreuer (2012).
14
CETA, supra, n. 1, art 1.4.
15
On new markets for trade in services in a bilateral and multilateral context, see Marchetti and
Roy (2008).
areas.16 The 2008 joint study carried out by Canada and the European Commission
that supported the launch of negotiations found that “[parties] can expect to gain
from a closer bilateral trade relationship”.17 The stakes are high—the Canadian
market holds 34 million consumers, while the size of the EU market is almost
500 million consumers.18 The Commission attributes great economic significance
to CETA stating that, “[o]nce implemented, the agreement is expected to increase
two-way bilateral trade in goods and services by 23 % or €26 billion, fostering
growth and employment on both sides of the Atlantic”.19
2.1 Services; Modalities
With services being important for EU-Canadian trade and with services attracting
more attention in general, with TiSA as case on point, CETA had to deliver on this
issue. It has been said that the services chapters of CETA form “the most sophisti-
cated packages ever negotiated by the EU and Canada”.20 Complimenting or
extending the central chapter 9 on Cross-Border Trade in Services, CETA’s ser-
vices regime consists of chapters on temporary entry of workers, mutual recog-
nition of professional qualifications, domestic regulation, chapters on specific service
sectors (including financial services and maritime transport), regulatory coopera-
tion, and domestic transparency as well as the chapter on investment.21
GATS applies to measures by Members affecting trade in services, and for
purpose of GATS, art I.2, defines trade in services as the supply of a service
16
For an (EU) overview see European Commission, CETA—Summary of the final negotiating
results http://trade.ec.europa.eu/doclib/docs/2014/december/tradoc_152982.pdf (accessed on
26 February 2016); European Commission (DG Trade), Public Procurement http://ec.europa.eu/
trade/policy/accessing-markets/public-procurement/ (accessed on 14 February 2016); European
Commission Country Report on Canada supra, n 2.
17
European Commission and Government of Canada (2008), Joint Study, Assessing the Costs and
Benefits of a Closer EU Canada Economic Partnership, http://trade.ec.europa.eu/doclib/docs/
2008/october/tradoc_141032.pdf (accessed on 14 February 2016). Also see European Commission
Country Report on Canada.
18
Chaitoo (2012), p. 2.
19
European Commission Country Report on Canada supra, n. 2. Also, Europe is the world’s
largest exporter of manufactured goods and services, and is at the same time the biggest export
market for around 80 countries, according to the Commission, see the European Commission,
EU’s Position in World Trade http://ec.europa.eu/trade/policy/eu-position-in-world-trade/
(accessed on 18 March 2015).
20
Sauvé (2015), p. 2.
21
Also see Sauvé (2015), p. 3. Except for briefly touching on the chapter on temporary entry of
workers, these CETA chapters, their interconnectedness, and their wider implications on services
are beyond the scope of this section. See Hoekman (2015) for a recent contribution on one of the
main innovations in CETA (its framework for regulatory cooperation, including CETA’s Regu-
latory Cooperation Forum), extending this discussion to the rise of global value chains.
uvar
(a) from the territory of one Member into the territory of any other Member (mode
1); (b) in the territory of one Member to the service consumer of any other Member
(mode 2); (c) by a service supplier of one Member, through commercial presence in
the territory of any other Member (mode 3); (d) by a service supplier of one
member, through presence of natural persons of a Member in the territory of any
other Member (mode 4).22 GATS-like PTAs adopt these modalities and deal with
them in separate chapters. However, a NAFTA-type PTA will typically deal with
modes 1, 2, and 4 in a chapter on cross-border trade in services while disciplines
relating to mode 3 form part of a chapter on investment.23
CETA’s services regime builds on the NAFTA model for scheduling modalities
in providing that the chapter on cross-border trade in services applies to “measures
adopted or maintained by a Party affecting cross-border trade in services by service
suppliers of the other Party . . .”. In conjunction with the definition of cross-border
supply of services as “the supply of a service (a) from the territory of a Party into the
territory of the other Party; or (b) in the territory of a Party to the service consumer
of the other party”, excluding “the supply of a service in the territory of a Party by a
person or an enterprise of the other Party”, it is clear that the chapter covers mode
1 and 2, but not mode 4.24 Thus, CETA differs from the NAFTA model for cross
border services supply by dealing with mode 4 issues in separate rules on temporary
entry and stay of natural persons for business purposes, or so-called “fitting rules”,
in chapter 10.
This chapter supports trade in goods and services regimes by facilitating a strong
mode 4 component. The chapter provides for so-called “fitting rules”, allowing for
installers, repair/maintenance personnel, and other such persons possessing
specialised knowledge to supply services based on services contracts incidental to
the sale or lease of equipment and machinery without requiring the issuing of work
permits issued by or prior approvals from the party where the fitting will take place,
if the workers’ stay is for a limited period.25 While on the outset CETA’s modalities
resembles NAFTA-like agreements, CETA did adjust this model somewhat to the
parties’ own needs, and CETA’s fitting rules exemplify this.
2.2 Market Access, National Treatment, and MFN
Unlike NAFTA itself, the new generation of NAFTA-like agreements include a

provision on market access, as does CETA’s chapter 9 on cross-border trade in
services in art 9.6. Neither Canada nor the EU may adopt or maintain, either on the
basis of its entire territory or on the basis of the territory of any level of government,
22
GATS, art I:1.
23
Roy et al. (2007), p. 158.
24
CETA, supra, n. 1, art 9.2 and art 9.1.
25
CETA, supra, n. 1, chapter 12, art 9.
measures that impose limitations on market access.26 Canada’s NAFTA-based

FTAs negotiated since the NAFTA include a GATS market access policy space
reservation that allows Canada to reserve the right to adopt or maintain any measure
that is not inconsistent with Canada’s obligations under art XVI of the GATS.
However, Canada did not include this in CETA.
The National Treatment (NT) obligation stipulates how each party shall accord
to service suppliers and services of the other party treatment no less favourable than
that it accords, “in like situations”, to its own service suppliers and services.27 The
wording is different from the GATS provision28 which provides that in the sectors
inscribed in its schedule, and subject to any conditions and qualifications set out
therein, each Member shall accord to services and service suppliers of any other
Member, in respect of all measures affecting the supply of services, treatment no
less favourable than that it accords to “its own like services and service suppliers”.
However, CETA’s cross border services regime’s NT is also different from
NAFTA’s NT obligation29 which compares to treatment accorded “in like circum-
stances” to the party’s own service suppliers.30 As the comparator is different, the
wording of CETA’s NT seems like a compromise on the substance of the obligation
between the GATS and the NAFTA, though closer to the NAFTA language. This
resonates with the substance of the MFN obligation, too. The MFN provides that
each party shall accord to service suppliers and services of the other party treatment
no less favourable than that it accords, “in like situations”, to service suppliers and
services of a non-party.31 In contrast, the GATS art II on MFN is framed with the
words “its own like services and service suppliers” while NAFTA’s MFN compares
to treatment accorded “in like circumstances”.32
It has been argued that if the substance of the obligations is the same, the
difference in forms between NAFTA-like agreements and GATS-like agreements
with regard to scope and modalities carries no significance.33 Indeed, CETA shows
how the modality of a FTA/PTA does not itself determine the quality or the
commitments made by its parties. Here, CETA encapsulates negotiations changing
the language as a manifestation of the political will to reach agreement suggesting
its legal-political implications. Beyond this, often the modality does matter for
transparency in the commitments made and for future-proofing commitments.
26
Ibid., art 9.6.
27
Ibid., art 9.3.
28
GATS, art XVII.
29
NAFTA, art 1202.
30
Roy et al. (2007), p. 158.
31
32
NAFTA, art 1203.
33
Roy et al. (2007), p. 158.
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2.3 Clarifications
Characteristic for CETA, the cross border services NT obligation is followed by a

second paragraph stipulating what this means in the context of Canada’s gover-
nance levels and with EU Member States. Likewise, the MFN provision is followed
by stipulations outlining what this means, “for greater certainty”. Additionally, the
NT obligation is followed by a clarification in Annex 9-A outlining what Canada
and the EU understand by NT with respect to the Cross-Border Provision of
Services, with reference to Canada’s Internal Trade Agreements. The parties
agree that treatment no less favourable than the most favourable treatment
accorded, in like situations, by that government to its own service suppliers and
services, does not extend to more favourable treatment accorded to service sup-
pliers from other EU Member States. As for Canada, the same is applicable for any
other governing level of Canada where such more favourable treatment is accorded
pursuant to specific mutual rights and obligations applicable between these gov-
ernments. This clarification carves-out EU and Canadian sensitivities from the
scope of the NT. CETA also provides for clarification on new services not classified
in the CPC, 1991, relating to CETA’s chapter on domestic regulation and the Cross-
Border Trade in Services provisions on NT, MFN, and Market Access, in Annex
9-B.34 In CETA’s cross border services regime, clarifications contribute to ensuring
regulatory competencies in areas parties are sensitive to and in new services sectors
while also mitigating potential ambiguity over the scope of obligations.
2.4 Scheduling Approach and Reservations
NAFTA and GATS encompass two different approaches to liberalization and so the
chosen approach is a key element in distinguishing services FTAs as either GATS-
like or NAFTA-like.35 GATS is based on the concept of progressive liberalization
and characterized by a positive listing of commitments in scheduling approach, in
that Members take commitments “bottom-up” in sectors listed. However, CETA
negotiators applied the top-down scheduling approach associated with NAFTA.
These FTAs build on a negative-list scheduling modality whereby everything
within the scope is liberalised, unless the parties have indicated otherwise in lists
of reservations in the form of annexes. Typically, parties to a NAFTA-like agree-
ment will have an Annex 1 for existing non-conforming measures that are subject to
a standstill, whereby they freeze the legislative and regulatory status quo and a
ratchet clause which captures autonomous liberalisation for the future. These
mechanisms help future-proof the results and provide certainty. In addition to the
Annex I, NAFTA-like agreements will typically have an Annex II for future
34
CPC (1991), Annex 10.
35
For this paragraph see Roy et al. (2007), p. 158; Adlung and Mamdouh (2014).
non-conforming measures where the parties require wide policy flexibility for
present and future measures.36 Canada and the EU are allowed to derogate from
the liberalisation disciplines or special provisions to be made when specifically
listing the reservations made in the schedules in the additional two annexes
accompanying CETA.37
In CETA’s cross border services regime, art 9.7 on reservations stipulate how
NT, MFN, and Market Access do not apply to what the parties have set out in their
schedules to Annex I, and here the parties list all the existing non-conforming
measures and restrictions that Canada and the EU maintain, which cannot be made
more restrictive.38 Like other top-down FTAs adopting the North American model,
in Annex I CETA’s services regime includes a stand-still clause to bind the
legislative and regulatory status quo in specific sectors upon accession to the
agreement. It also employs a ratchet clause to bind subsequent easing or removal
of regulatory restrictions. Article 9.7(2) provides that the liberalization disciplines
do not apply to measures that a party adopts or maintains with respect to sectors,
subsectors or activities,39 i.e. future non-conforming measures that Canada and the
EU want to maintain, as set out in its schedule to Annex II listing reservations on the
right to adopt different, even more restrictive measures in the future, even if said
measures are increasingly restrictive. This annex includes those sectors where the
parties maintain even greater policy sensitivity than those listed in Annex I.
With CETA, the EU has for the first time abandoned its own bottom-up GATS-
like European model for the North American model. However, the NAFTA-like
scheduling approach is known for providing a high degree of transparency.40 In
CETA, the Commission itself makes a strong case for the transparency that the
NAFTA-like scheduling approach provides for when arguing that “[t]he clear and
comprehensive listing of the reservations provides unprecedented transparency on
existing measures, in particular on provincial level”.41 Beyond this, the stand-still
and ratchet clauses embodied in CETA and typical for NAFTA-like agreements
future-proof the negotiated results. Thus, in CETA’s cross border services regime,
the parties maintain their regulatory competencies to maintain harmonized domes-
tic regulation of services in sensitive service sectors such as health care, public
education, other social services, and culture, by listing these areas in Annex I and
Annex II.42 What matters on a substantive level are the commitments made by the
parties, and where the parties make such commitments and show the political will,
36
Roy et al. (2007) p. 158.
37
Ibid.
38
CETA, supra, n. 1, art 9.7 on reservations and arts 9.3 (NT), 9.5 (MFN) and 9.6 (Market Access).
39
CETA, supra, n. 1, art 9.7(2).
40
Roy et al. (2007), p. 158.
41
Ibid.
42
This resonates with the preamble which outlines how, in pursuing their economic policies by
means of CETA, Canada and EU commit to preserving the right to regulate and their flexibility to
achieve legitimate policy objectives, supra, n. 1, Preamble.
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the different scheduling approaches are of less importance though they embody
different approaches.43 However, in CETA, the scheduling approach provides
certainty in pursuing these goals, while also taking sensitivities into account with
a view to the parties’ regulatory competencies.
2.5 Regulatory Competencies
Maintaining regulatory competencies have been a priority for Canada and the EU
that they have incorporated into a NAFTA-like agreement encapsulating the North
American model but adjusting this model to their own needs, e.g. the separate
chapter on mode 4. In the case of CETA’s cross-border trade in services, it delivers
in providing for strong market access. As for the provisions, the adjustments
introduced in the wording of the NT suggests a compromise between the NAFTA
and the GATS models. Further, it is noteworthy that CETA includes several
clarifications, even annexing clarifications to the provisions that discipline cross-
border services trade. When listing reservations to their obligations in the two
annexes “top down”, Canada and EU pursue their economic interests, and lock-in
existing and future liberalisation while maintaining their regulatory competencies,
taking sensitivities into account. This framework provides for transparency in the
commitments made, and is the result of a number of adjustments to the parties’
needs and sensitivities in committing to uphold their regulatory competencies to
maintain harmonized domestic regulation of services. Thus, the economic goals
pursued by the parties do not seem to conflict with the objective of retaining
regulatory competencies. Though it is yet difficult to foresee the legal-political
implications of CETA’s services regime on Trans-Atlantic trade, the negotiated
result in this mega-regional context seems balanced.
3 CETA’s FET and Expropriation Provisions
During the CETA negotiations, Canada and the EU had shown remarkable efforts to
highlight prescribed remedies in the treaty aimed at addressing perceived short-
comings embedded in the investment protection system. The European Commis-
sion, for instance, pointed out that the CETA would address “public concerns” by
defining “clearer and more precise investment protection standards”.44
The emphasis on clearer rules relates, inter alia, to the interpretation of vaguely
drafted protection provisions under the CETA’s investment chapter, such as FET
43
For an analysis suggesting that the scheduling approach is less significant and boiling it down to
political impetus, see Adlung and Mamdouh (2014), p. 17.
44
European Commission, Negotiation summary supra, n. 16.
and expropriation. This vagueness is famously linked with alleged inconsistencies

related to their interpretation and application. This lack of consistency seems to
have caused perturbation for respondent host States, for it is known that FET and
indirect expropriation claims have given rise to unanticipated claims against certain
regulatory measures.45 While some States attempt to clarify the content of FET, to
which the CETA serves as an example; some others, such as India and Indonesia,46
omitted FET provisions entirely from their model BITs due to this interpretative
uncertainty. In line with this vagueness and a variety of State responses, critics of
the system also maintain that States, wishing to avoid foreign investor claims, could
refrain from regulating for the public good. This phenomenon is referred to as
regulatory chill.47
While CETA is not yet in force (and therefore its precise applicatory conse-
quences are not yet certain), it is possible to make predictions in retrospective by
facilitating previous North American or European IIAs and past arbitral awards. A
number of draft texts of the CETA were released (or leaked) in the course of its
negotiations. They are, when examined collectively, useful in demonstrating the
parties’ input to final text CETA. Below sections will scrutinize the FET and
expropriation clauses to determine whether they inject any clarity to their prospec-
tive interpretation and grant any level of certainty to States with regard to the
legal consequences of their regulatory acts and undertakings with regard to foreign
investor claims.
3.1 FET
Article 8.10 of the CETA incorporates a lengthy FET provision which elaborates on
what is meant by “fair and equitable” in unprecedented specificity. The article states
that “[e]ach [p]arty shall accord in its territory to covered investments of the other
45
Methanex Corporation v. United States of America, NAFTA Case, UNCITRAL Rules of
Arbitration, Final Award of the Tribunal on Jurisdiction and Merits, 3 August 2005; for more
recent arbitral disputes see Vattenfall AB and others v. Federal Republic of Germany, ICSID Case
No. ARB/12/12 (pending) and Philip Morris Asia Limited v. Australia, PCA Case No. 2012-12,
Award on Jurisdiction and Admissibility, 17 December 2015 (case rejected due to lack of
jurisdiction).
46
See, Indian Model BIT (BIPA) http://finmin.nic.in/the_ministry/dept_eco_affairs/
icsection/Indian%20Model%20Text%20BIPA.asp (accessed 6 February 2016). New Indonesian
Model BIT has not been made public.
47
UNCTAD (2010). See Ethyl Corporation v. Canada, NAFTA Case, UNCITRAL Rules of
Arbitration, Award on Jurisdiction, 28 June 1998, as an illustration of regulatory chill within the
NAFTA context. Also see, generally, Footer (2009); Beharry and Kuritzky (2015) pp. 383–429.
More recently, Bilcon et al. v. Canada, PCA Case No. 2009-04, Award on Jurisdiction and
Liability, 17 March 2015. See also Behn and Letourneau-Tremblay (2015) for a concise analysis
of regulatory chill discussions concerning the Bilcon case.
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[p]arty and to investors with respect to their covered investment fair and equitable
treatment . . . in accordance with paragraphs 2 and 6”.48 The referenced paragraphs
contain a negative list of acts that the parties deem to be in breach of FET. They
include denial of justice; fundamental breach of due process; lack of transparency;
manifest arbitrariness; targeted discrimination on manifestly wrongful grounds
(gender, race and religious belief are given as examples to manifestly wrongful
grounds); and finally, abusive treatment such as coercion, duress and harassment.49
In addition to these elements, CETA also includes a progressive clause in its FET
provision so that the FET provision, despite this list of exhaustive considerations,
can capture “[a] breach of any further elements of the [FET] obligation adopted by
the parties”. The article also states that “specific representation[s]” made by parties
to an investor to induce investment may be taken into account.50 This allows the
arbitral tribunal to take into account legitimate expectations of an investor, as long
as these expectations have prompted the investor to make the said investment. In
this line, it could be argued that a simple ‘frustration’ at investors’ end will not
suffice to invoke a legitimate expectations argument.51
Earlier drafts of the FET provision reveal that the parties had intended to draft a
non-exhaustive set of considerations, and furthermore, Canada had attempted to
add a customary international law (CIL) qualifier. Both attempts were eventually
discarded.52 In the final CETA text, the FET subsets are bound to an exhaustive list
as to give arbitrators more guidance and less discretion with regard to what
constitutes FET.53
The explicit reference to the subset is important for clarity of the content of FET.
Numerous arbitral tribunals, before pinpointing the constituent elements of the FET
had remarked on the relationship between the CIL rule of international minimum
standard of the treatment of aliens (IMS)54 and FET. Despite different positions on
the question of whether FET is an autonomous standard (or whether it is the
extension of the equally vague IMS)55 the application does not seem to differ
significantly. An early NAFTA tribunal, Pope and Talbot Inc v. Canada56 ruled
that art 1105 NAFTA incorporated an autonomous reading of the principle, and
contended that fairness elements were additive to IMS rather than inclusive;
48
49
Ibid.
50
Ibid.
51
A broad reading of legitimate expectations is effectively prevented. See Nyer (2015).
52
Bernasconi-Osterwalder (2013).
53
UNCTAD (2012).
54
International Minimum Standard refers to a CIL rule with regard to how foreigners should be
treated abroad. Root (1910), Borchard (1940), p. 445.
55
Mann (1981).
56
Pope & Talbot Inc v. Canada, NAFTA Case, UNCITRAL Rules of Arbitration, Award on the
Merits of Phase 2, 10 April 2001, para 111.
implying that art 1105 included an obligation for the host State broader than that
required under CIL.57 As a result, the NAFTA parties perceived such broad reading
as a threat to their domestic regulatory authority. Therefore, the Free Trade Com-
mission (FTC) of the NAFTA released an interpretative note in 2001 which
maintained that FET should not require any treatment beyond what was required
under CIL.58 Despite this seeming delimitation, neither Pope and Talbot tribunal,
nor the FTC interpretation elaborate on the actual content of CIL in this regard.
Mondev award,59 rendered slightly after the FTC note, acknowledged the
NAFTA parties’ interpretation. In its reasoning however, there are no visible
applicatory divergences from Pope and Talbot case and it does not explicitly
articulate the practical difference between a CIL reading and an autonomous
interpretation of FET. On top of all, the Mondev award extended the list of features
and emphasized on the dynamic nature of the FET principle and CIL, underlining
that CIL on the issue is not limited, as had been occasionally claimed, to the Neer
case rendered in 1920s.60
This dynamism, embedded within the inherent vagueness of FET and IMS,
attests to the unreliability of CIL as a qualifier which allegedly sets a threshold
for the FET analysis. The acceptance of such an evolutionary character also seems
to have found its way into the CETA, which incorporates a possibility for the parties
to further agree on other, additional acts which can be added to the provision in the
future, as evident by art 8.10(3). However, this dynamism acknowledged by the
parties builds upon an articulated subset, instead of an undetermined threshold.
A “list” approach may be useful to tackle the controversies linked to vague,
non-contingent principles such as FET. Arbitral practice has consistently demon-
strated that there exists uncertainty as to the content of the FET principle, which
stems to a large extent from the absence of any tangible elaboration on the principle
in any treaty up until CETA. This being said, arbitral tribunals have also produced a
roughly framed and partially consistent set of considerations which seem to stem
from substitutable elaborations. The oft-cited Waste Management61 award,
interpreting art 1105 of NAFTA on the treatment of foreign investors (which,
according to its parties, was limited to the IMS), articulated what it considered to
be the subset of the FET principle: the treatment should be arbitrary, grossly unfair,
unjust or idiosyncratic. Discrimination, sectional and racial prejudice and lack of
due process were also counted among constituent elements of what would be
deemed unfair treatment. Other tribunals, interpreting varying (IMS-linked or
autonomous) provisions, either articulated the same list of subset or identified
comparable elements according to which the tribunal would apply the principle to
57
Ibid., para 113.
58
FTC Interpretation (2001).
59
Mondev International Ltd v. United States of America ICSID Case No. ARB(AF)/99/2, Award,
11 October 2002.
60
L. F. H. Neer and Pauline Neer (U.S.A.) v. United Mexican States (1926). IV RIAA 60.
61
Waste Management, Inc. v. United Mexican States ICSID ARB(AF)/00/3, Award,
30 April 2004.
uvar
the facts of the case. For instance, in Saluka award, the tribunal adopted the Waste
Management formulation mentioned above despite the Netherlands—Czech Repub-
lic BIT being unqualified (i.e., being silent on whether FET stems from IMS).62
In addition to this accumulated evidence from arbitral practice, prominent
scholars, most notably Vandevelde, claim that “virtually all” tribunals had reached
the same legal reasoning as to what constituted FET, and counted (a) reasonableness,
(b) non-discrimination, (c) consistency, (d) transparency and (e) due process as the
subset of FET principle regardless of their qualification or association with the IMS.
He maintains that “differences in the contexts in which the standard appears have
made little difference to tribunals interpreting the standard”.63 The identified subset
under the CETA seem to largely overlap with what arbitral tribunals have identified
over the years. CETA’s FET provision embraces arbitral experience, effectively
pinpoints FET elements, and consolidates these considerations under an exhaustive
list. Some claim the draft codifies CIL subset.64 More accurately, it distances itself
from the largely hollow and unsubstantial FET–IMS discussion which plays little or
no substantive role in the application of the principle to the facts of a case.65
3.2 (Indirect) Expropriation
Indirect expropriation requires a higher threshold than FET: the investment needs to
be rendered worthless or completely destroyed; or alternatively, the investor should
lose control of her investment through an arbitrary State act.66 In practice, most
cases that do not qualify as indirect expropriation may still qualify under the FET
provision,67 as the latter does not necessarily require the total destruction or
complete loss of control of the investment.
Article 8.1268 by itself is a vague, open-ended provision which excludes the
definition or the limits of expropriation from the wording. The CETA provision,
however, goes beyond the article itself. When read in conjunction with its Annex 8.
A,69 the influence of the North American method is visible, and it does not differ
greatly from post-2000s North American practice.70 This aside, there is a stark
62
Saluka Investments B.V. v. The Czech Republic, UNICTRAL Rules, Partial Award, 17 March
2006; Agreement on Encouragement and Reciprocal Protection of Investments Between the
Kingdom of the Netherlands and the Czech and Slovak Federal Republic, 1991.
63
Vandevelde (2010), p. 47.
64
Dumberry (2015).
65
Berman (2013).
66
Lopez Escarcena (2014).
67
Ibid.
68
CETA, supra, n. 1, Annex 8.A.
69
Ibid.
70
Model US BIT (2012); Canadian Model FIPA (2004). Also see, Singapore–US FTA art 15.6 and
letter exchange on expropriation; Canada–Peru FTA, art 812 and Annex 812.1; Colombia–US
FTA, art 10.7 and Annex 10-B; Oman–US FTA, art 10.6 and Annex 10-B.
divergence from the European States’ practice which, in contrast, had generally
refrained from annexes.
The annex aims at clarifying “indirect” expropriation by delimiting its scope and
carving out certain measures. It reads that indirect expropriation covers acts which
“substantially deprive the investor of the fundamental attributes of property in its
investment . . . without formal transfer of title or outright seizure”. Furthermore,
“the economic impact of the measure”, despite its adverse effect, will not by itself
establish an indirect expropriation.71 This view makes the application of
pro-investor analysis methods such as sole effects doctrine72 (which largely dis-
regards the reasoning behind a regulatory measure as long as the investment in
question is destroyed) less likely, and gives way to analyses invoking a balance with
regard to the regulatory competences of the host State and the economic interests of
investors. Arbitral tribunals, even in cases of expropriation provisions which do not
include a clarification annex, have a growing inclination to take into account the
purpose and nature of challenged regulatory acts.73 Other important considerations
are listed as the duration, the extent and the character of the measure.
The third and final sub-paragraph of the Annex reads as follows: “For greater
certainty, except in the rare circumstance where the impact of the measure or series
of measures is so severe in light of its purpose that it appears manifestly excessive,
[non-discriminatory] measures of a Party that are designed and applied to protect
legitimate public welfare objectives, such as health, safety and the environment, do
not constitute indirect expropriations”.74
The paragraph explicitly carves out regulatory measures from the scope of
expropriation, provided that they are to realize legitimate public purposes. Health,
safety and environment are non-exhaustively listed; therefore, it is possible to
extend this list in arbitral practice.
Annexing clarifications to expropriation provisions are a relatively new method in
IIA drafting. They appeared after 2004, when the US and Canadian Model BITs were
prepared and used in subsequent trade and investment agreements. Due to its relatively
recent appearance, there are only a few such expropriation clauses that appeared in
arbitral proceedings. Given the CETA provision largely resonates from North Amer-
ican practice and provisions already in force, examination of pari materia provisions
and awards can shed some light on how the CETA expropriation provision may be
applied to future disputes. Such awards demonstrate the streamlined expropriation
analysis, as opposed to analyses conducted pursuant to provisions without annexes.
A CAFTA-DR75 dispute, RDF v. Guatemala76 is the first case available to the
authors’ knowledge which stemmed from such annexed expropriation provision.
71
72
Its application is “quite infrequent” according to some scholars. Brower and Blanchard (2014),
p. 729; also see Kriebaum (2007).
73
Brower and Blanchard (2014), p. 730.
74
75
Central America–Dominican Republic Free Trade Agreement (CAFTA-DR).
76
Railroad Development Corporation v. Guatemala, ICSID Case No. ARB/07/23, 29 June 2012.
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The tribunal examines challenged acts with regard to the annex, excluding argu-
ments whether the purpose of the government act is relevant vis- a-vis its effects:
“[The tribunal] will . . . proceed to analyse the nature of the [act], its public purpose,
whether the Government interfered with reasonable investment backed expecta-
tions and their economic impact on Claimant’s investment”. The significance of the
award is the visibly streamlined expropriation analysis.
Second example is Al Tamimi v. Oman.77 While the tribunal found no expropri-
ation, it briefly referred to several elements of the Annex 10-B of the US–Oman
FTA,78 and skipped discussions as to how legitimate regulatory acts for public
goods relate to the fact that an investment may be expropriated. The tribunal
asserted that “[A claim] for indirect expropriation based on the Respondent’s
actions . . . would also have to confront the express stipulation in Annex 10-B.4
(b) of the US–Oman FTA that non-discriminatory regulatory actions by a State
designed and applied to protect legitimate public welfare objectives . . . do not
constitute indirect expropriations”.79
In the light of these cases, CETA’s expropriation clause will likely streamline
the expropriation analysis and largely discard arguments on the subset of indirect
expropriation. This being said, it does not guarantee coherence, as the treaty
language retains a high number of subjective criteria for the arbitrators to shape
based on the facts of the case. Although the provision clearly reflects the importance
of regulatory competences of its signatory parties (including the EU Member States
as well as the EU itself), it does not guarantee the exclusion of all regulatory
measures from its scope: the criteria of the legitimacy of public purposes are not
clear, and the general mention of the object, context and intent of the regulation as a
part of the analysis do not prescribe in what manner these considerations shall be
taken into account. This very junction is arguably where the delimitation ends and
arbitral discretion begins.
4 Conclusions
In CETA, Canada and EU have agreed to a NAFTA-like agreement that delivers on

strong market access while introducing adjustments to the North American model.
This was found in the cross-border services regime’s modalities and obligations.
Further, the cross border services regime quite interestingly adopts several clarifi-
cations, even annexing clarifications on the substance of the obligations and the
commitments. In this framework, the economic goals pursued by the parties do not
seem to conflict with the objective of retaining regulatory competencies because of
77
Adel A Hamadi Al Tamimi v. Sultanate of Oman, ICSID Case No. ARB/11/33, Award,
3 November 2015.
78
US–Oman FTA.
79
Railroad Development, supra, n. 75, para 368.
the adjustments introduced to the framework ensuring new market access while
building-in the parties’ regulatory sensitivities by means of reservations and clarifi-
cations. The negotiated result seems balanced and though it is yet difficult to
foresee the legal-political and economic implications of CETA’s services regime,
the new market access and the transparency regarding commitments made seems
encouraging for a closer bilateral trade relationship in services. Having abandoned
the European model, still, the EU would be advised to tread carefully, especially in
the TTIP negotiations, as the USA will accept no less than what Canada secured
under CETA.
The picture does not seem disappointing for investment protection provisions
either. As far as (indirect) expropriation is concerned, CETA’s promise of “better”
protection will probably remain highly hypothetical from a North American per-
spective, given similar provisions have already been put in place in a number of
North American FTAs currently in force. However, on the other side of the
Atlantic, the implications are noteworthy. With one of its first FTAs to include an
investment protection chapter, the EU has opted in for a more streamlined expro-
priation analysis as to what constitutes indirect expropriation, and how regulatory
measures and takings interact with the public good.
FET provision includes a fairly new approach to the drafting of this clause. By
incorporating an exhaustive yet expandable list of elements to be taken into account
while determining a possible breach, it can be said that the CETA parties have, to a
certain extent, ensured that arbitrators do not employ excessive interpretative
discretion. Overall, both provisions entail a streamlined, clear analysis to be
facilitated by arbitral tribunals.
Whether or not the policy shift in the EU towards the North American model,
with adjustments and clarifications, will result in increased trade, investment and
arbitral coherence across the Atlantic is yet to be seen. In effect, there are as many
political implications in CETA’s trade in services and investment provisions as
there are legal consequences. In short, there seems to be a regional policy spill-over
from North America to Europe towards further regulatory protection, and caution
with regard to clear interpretation and consistent application of investor protection
principles.
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The Human Right to Health: Reflecting
on the Implications of IPRs as Endorsed by
the Trans-Pacific Partnership Agreement
Sunita Tripathy
Contents
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
2 The Right to Health as a Human Right . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
2.1 A Human Rights Approach to Health Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
3 TPP and the Maximalist Intellectual Property Agenda: A Primer . . . . . . . . . . . . . . . . . . . . . . . . . 67
3.1 The TRIPs-Plus Provisions of the TPP That Affect Public Health . . . . . . . . . . . . . . . . . . . 68
3.2 Public Health and Patent Extremism: Analysing the TPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
3.3 IP Enforcement and Dispute Settlement Under the TPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
4 Conclusions and Positive Steps for the Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Abstract With the aim of technology innovation, transfer and capacity building,
the World Trade Organisation established a new regime for harmonizing the laws
related to intellectual property which included certain flexibilities in the nature of
compulsory licensing and parallel imports. At the same time a progressive concept
of development which includes a mandate for Member countries to adopt a “right to
health” within the economic, social and cultural rights framework emerged. The
Agreement on Trade Related Aspects of Intellectual Property Rights required
Member States to include relevant amendments to the existing laws within its
policy space to ensure adherence to the minimum agreed criteria of intellectual
property protection. The Trans-Pacific Partnership (TPP) agreement seems to be
shifting this regime towards extreme privatization of R&D and stronger protection
of intellectual property rights. The author analyses the implications of the TPP
while focusing on chapters pertaining to intellectual property and reflects on the
right to health as a human right in such context. It is argued that stringent
intellectual property protection in the TPP will disadvantage trade, economic
development and patient welfare objectives. The TPP should be revised to include
S. Tripathy (*)
Jindal Global Law School (JGLS), Center for Intellectual Property and Technology Law,
Haryana, India
e-mail: stripathy@jgu.edu.in

DOI 10.1007/978-3-319-44645-5_4
62 S. Tripathy
suggestive changes for consensus building and dispute resolution that can aid in
developing modern international economic law and practice.
1 Introduction
A study on the trends in compulsory licensing of pharmaceuticals since the incep-

tion of the World Trade Organisation (WTO) Agreement on Trade Related aspects
of Intellectual Property Rights (TRIPs) explains that 24 verified compulsory
licenses in 17 nations have been reported until 2012.1 These include licenses
granted to incentivize control of the communicable diseases caused due to Anthrax
by High Income Countries (Canada and United States of America). The flexibilities
accorded within TRIPs have evidently not only benefitted Low and Middle Income
Countries (LMICs) but also advantaged High Income Countries. This clearly
identifies access to healthcare as a global problem awaiting effective resolution.2
In the Indian context specifically, the National Health Policy 2015 aims at achiev-
ing universal health coverage since over 63 million persons are faced with poverty
due to healthcare costs alone.3 Even the post-TRIPs judicial decisions of Bayer
v. Natco4 leading to the issuance of the first compulsory license in favour of a
generic company, as well as that of Novartis v. Union of India5 where the applica-
tion for a mere improvement in an already patented drug was struck down as a
non-patentable invention by the Supreme Court, are indicative of India experienc-
ing high healthcare costs. As a prime exporter of generic versions of branded
pharmaceuticals in several countries, India’s exclusion from the seven yearlong
trade negotiations of the Trans-Pacific Partnership agreement6 can have serious
1
Beall and Kuhn (2012), p. 9. The study specifically describes the classification of compulsory
license episodes by outcome, disease and national income groups. Panel C which is devoted to
income groups explains that High Income Countries (HICs) allowed 3 compulsory licenses, Upper
Middle Income Countries (UMICs) allowed for 13, Low Income Countries (LICs) allowed for
5 while the Least Developed Countries (LDCs) allowed only 3 such compulsory licenses during
the same period of time.
2
Correa (2011), p. 12. See also UNAIDS, UNDP and WHO (2011). For report discussing dire
consequences of unpaid medical bills in US, see Hamel et al (2016).
3
The National Health Policy 2015 draft (2015) para 2.10; see also Planning Commission of India
High Level Expert Group on Universal Health Coverage for India Report (2011).
4
Intellectual Property Appellate Board, Chennai (IPAB), Bayer v Natco, 14 September 2012.
5
Supreme Court of India, Novartis v Union of India 1 April 2013, AIR 2013 SC 1311. As also the
decision in Roche v. Cipla (Delhi High Court, Roche v. Cipla, 19 March 2008, I.A 642/2008 IN CS
(OS) 89/2008) upholding the generic manufacturer’s public interest defence of having served
patient needs by ensuring that affordable versions of the patented drug are available as a ground for
not awarding any interim injunction but only account for profits so made to compute damages.
6
The Trans-Pacific Partnership Agreement is part of a triad of free trade agreements led by
US. The triad comprises of the Trans-Pacific Partnership Agreement (TPP), Transatlantic Trade
and Investment Partnership Agreement (TTIP) and Trade in Services Agreement (TiSA).
The Human Right to Health: Reflecting on the Implications of IPRs as. . . 63
implications for healthcare related expenditure worldwide. The agreement which

grew from secret negotiations amongst an initial four countries to eventually
include a dozen Pacific Rim nations7 was joined by the US in 2008 and Japan in
early 2013, to have now grown to encompass nearly 40 % of the global GDP
thereby presenting a tremendous opportunity to effectuate medical progress and
health related innovation at the global level by foreign direct investment.8
Described as a “new generation agreement for the 21st century” seeking to expand
trade agendas from traditional tariff regulations to increased protection and
enforcement of intellectual property across signatory countries, the TPP will in
all likelihood impact the law and policy related to the production and distribution of
medicines and the overall market pertaining to health services worldwide.9 It is the
author’s contention that the provisions pertaining to enhanced protection and
enforcement of intellectual property rights (IPRs) in the agreement in their current
form will aggravate healthcare cost-related concerns not only in countries such as
India, but also Canada and US.
The chapters pertaining to “intellectual property” and “investment” in the TPP
have overlapping implications for public health. Arguably, public goods such as
healthcare and commodities such as textiles are treated under same measurable
standards and need analysis.10 This paper traverses these provisions as available in
the US country proposal and the final text of TPP, to especially outline its influence
on the access and availability of medicines in countries which are consumers of
live-saving drugs and those that are manufacturers and exporters of generic versions
and biosimilars.
For the sake of brevity, this paper is structured into three parts: the first part
contextualizes the “right to health” as a human right in the international discourse to
7
This paper limits its scope to discussing relevant provisions in the TPP only, mainly because
access to the other two agreements were not made available to any other save the multinational
firms for review, scrutiny or critical comments. They will be traversed as future work by this
author.
8
The negotiations include 12 States of the Asia Pacific region, including Australia, Brunei,
Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and
Vietnam, with South Korea considering its incorporation. See TPP Full text as available on USTR.
9
For references, see Rajagopal (2015). According to Kajal Bhardwaj of India’s Lawyer Collective,
other negotiations such as the Regional Comprehensive Economic Partnership which involves
India and 16 ASEAN countries are also likely to be impacted by the TPP.
10
See Oxfam Briefing Paper (2011). This Author finds it unsuitable for the US to rely on World
Bank’s income classification to judge a country’s capacity to afford costly medicines; for two
specific reasons. Firstly, it is an old classification drawn in 1980s and secondly, it only deals with a
country’s per-capita average of total income. In the last three decades the poverty map has changed
considerably and world’s poor people no longer live in poor countries, but rather in rich countries
with high inequalities. The US social health programme (Medicaid) defines poverty line at $21.50
per person/day. The research by Doctors-without-Borders and Oxfam reveals that more than a
quarter of a billion people will live below this line in eight Member countries of TPP. Accordingly,
the high-income countries of TPP which have to adopt all the provisions of the agreement will
have huge percentage of population living under poverty line. Following this flawed method will
cause increased poverty.
64 S. Tripathy
harmonize economic interests and public policy imperatives of Nation States. The
middle part explains the relevant provisions of TPP and reflects on the probable
implications of patent extremism and standardized treatment of IPRs in the
healthcare sector for countries such as India. Finally, the last part concludes the
Chapter by suggesting ways that TPP could be made more accommodating and fair.
It is submitted that the international norm-setting agenda be based on consensus that
enhances capacity for domestic production and distribution of pharmaceuticals with
cost-saving benefits.
2 The Right to Health as a Human Right
The World Intellectual Property Organisation (WIPO) has reported previously that
incentivising inventions through patents has not materialised in favour of public
interest in the pharmaceutical sector.11 The TRIPs Agreement promoted by the
WTO has preserved some policy space for countries to tailor intellectual property
protection to their domestic policy priorities, as affirmed in the 2001 Doha Declaration
on TRIPs and Public Health.12 TRIPs which was negotiated in the 1986–1994
Uruguay Round led to the culmination of international efforts to reduce and manage
IPRs for public health, through rules into the multilateral trading system for the first
time. The rationale for such negotiations is implementing stricter IPR regimes in low
and middle income countries (LMICs), so as to incentivize research into their disease
burden. TRIPs lays down the minimum requirements for IPR protection to enable such
implementation, which focuses on four broad areas: (1) how basic principles of the
trading system and other international intellectual property agreements should be
applied; (2) how to give adequate protection to IPRs; (3) how should Member
countries enforce these IPRs adequately in their own territories; (4) how to settle
disputes on intellectual property between Members of the WTO. The Members can
adopt higher and extensive levels of IPR protection so long as they apply the general
principles of national treatment and most favoured nation as per Articles 3 and 4 of the
TRIPs Agreement and subject to relevant exceptions thereto.
11
See specifically WHO Report (2006) “[W]hile developing countries (excluding least developed
countries) with little technological and innovative capacity are bearing the cost of implementing
the TRIPs Agreement, there are no documented cases of positive impact on innovation in the
medical field yet”. For references on previous discussion on difficulty in accessing pharmaceuti-
cals in developing countries, see WHO (2001). See also UNDP (2010), p. 9 (“However, since the
signing of the TRIPs Agreement in 1995, consumers have not witnessed a significant increase in
the output of new medicines, despite the substantially higher levels of IPR protection on a global
scale”). See, Economist (2015) in “Time to fix patents”. Arguably, the patent system could benefit
from a shortening of its term of protection depending on the nature of inventions in specific sectors
of innovation.
12
It is to be conclusively proven whether every increase in intellectual property protection,
especially in developing countries, necessarily leads to increase in investment, innovation or
well-being which can be understood as indicators of development. For references, see Fink and
Braga (1999), p. 21; Su (2000); Raghavan (2004), p. 777.
It was the Doha Declaration in 2001 that affirmed the right of the WTO Members
to interpret and implement TRIPs in a manner supporting the protection of public
health.13 The 30 August decision of the TRIPs Council in 2003 clarified the
safeguards in the TRIPs Agreement so that LMICs and other importing countries
were able to invoke provisions related to compulsory licensing and parallel impor-
tation in the interest of public health.14 The 6 December 2005 decision further
adopted a protocol amending TRIPs to include specific provisions for compulsory
licensing viz Article 31bis along with a descriptive annex and an appendix to the
annex for guidance in assessment of manufacturing capacities in the pharmaceutical
sector of developing and least developed economies.15 In 2007, the WIPO Devel-
opment Agenda further highlighted the need to fully integrate the development
dimension into intellectual property and these have led to emergence of a human
rights based perspective to accessible healthcare and development.
2.1 A Human Rights Approach to Health Care
Historically, right to health is not found to be part of the human rights discourse. It
first found mention as part of the general comments of the Committee on Economic,
Social, and Cultural Rights.16 The three main components to this special right
include: right to the highest attainable standard of physical and mental health,
access to care and obligation of the Nation State to address specific health issues
through an adept healthcare delivery system. Within these core obligations on a
Nation State lie the contents of a per se “right to health,” which are availability,
accessibility, acceptability and quality. Measures that WTO Members must under-
take towards progressive realization of a “right to health” within the economic,
social and cultural rights came to be deliberated.
The Members ought to undertake such measures to the maximum extent of their
available resources and where needed, within the framework of international
cooperation.17 The “right to health” does enjoy a superior and sanctified status
13
WTO doc. WT/MIN(01)/DEC/2, Ministerial Declaration on the TRIPS Agreement and Public
Health, 14 November 2001.
14
Ibid. WTO doc. WT/L/540 and Corr.1, Implementation of paragraph 6 of the Declaration on the
TRIPS Agreement and Public Health, 30 August 2003, also known as “August 30th Decision”.
15
WTO doc. WT/L/641, Amendment of the TRIPs Agreement, 6 December 2005, https://www.
wto.org/english/tratop_e/TRIPs_e/wtl641_e.htm (accessed 6 February 2016).
16
UN doc. E/C.12/2000/4 (2000): Committee on Economic, Social and Cultural Rights, General
Comment 14, The right to the highest attainable standard of health (Twenty-second session, 2000).
This can be read with Article 12 of the International Covenant on Economic, Social and Cultural
Rights.
17
Marks (2012).
66 S. Tripathy
within Constitutional aims of several Nation States.18 Articles 42 and 47 of the

Indian Constitution restate the importance of “right to health” as Directive Princi-
ples of State Policy.19 The idea that health must be a justiciable fundamental right
(similar to education) is also mooted.20 The legal status of such a right is reinforced
through judicial reasoning. In Francis Coralie Mullin v. The Administrator, Union
Territory of Delhi, the Supreme Court of India held that the right to life includes:
“The right to live with human dignity and all that goes along with it, namely, the
bare necessities of life such as adequate nutrition, clothing and shelter. . .[more than
mere animal existence]”.21 In Bandhua Mukti Morcha v. Union of India,22 it was
held that right to live with human dignity also involves right to “protection of
health”. The Court has in Consumer Education and Research Centre v. Union of
India,23 for the first time read the fundamental right to life guaranteed under
Article 21 with the directive principles guaranteed under Articles 39(e), 41 and
43 of the Indian Constitution to explicitly hold that, [t]he right to health and medical
care . . . is an integral fact of [a] meaningful right to life”.24 Courts have also
observed that failure on the part of public health centres to provide timely medical
treatment can be construed as being violative of the patient’s right to life.25 As per
the study conducted by Hans V Hogerzeil et al:
[Out of the 71 essential medicines cases] in 59 cases, access to essential medicines as part of
the fulfilment of the right to health could indeed be enforced through the courts, with most
coming from Central and Latin America. Success was mainly linked to constitutional
provisions on the right to health, supported by the human right treaties. Other success
factors were a link between the right to health and the right to life, and support by public-
interest non-government organisations.26
Evidently, access to healthcare and related concerns have come to be included in

the international human rights discourse as also national statutes in slow but definite
terms. The official draft of the national intellectual property (IP) policy of India also
18
Research findings indicate that 1/3 to 2/3 of world’s constitutions include health rights/access to
health care. See also Backman et al. (2008), pp. 2047–2085 and Todres (2014).
19
Articles 42 and 47 of the Part IV of the Constitution of India.
20
Ramachandran SK (1 January 2015).
21
Supreme Court of India, Francis Coralie Mullin v. The Administrator, Union Territory of Delhi,
13 January 1981, AIR 1981 SC 746, pp. 752–753. Other examples include the matter of Minister of
Health and Others v. Treatment Action Campaign and Others (No 2), 2002 (5) SA 721, 2002 in
South Africa.
22
AIR 1984 SC 802.
23
Consumer Education and Research Centre v. Union of India (1995) 3 SCC 42.
24
Ibid.
25
Supreme Court of India, Pachim Baga Khet Mazdoor Samiti v State of West Bengal, 6 May 1996,
AIR 1996 SC 2426. See also Supreme Court of India, Parmanand Katra v. Union of India,
28 August 1989, 4 SCC 286, where the Court held that no procedure as prescribed under the
CrPC should hinder a medical practitioner from treating an emergency case, saving a patient’s life
should be the primary action and other legal formalities ought to be secondary in such cases.
26
Hogerzeil et al. (2006), pp. 305–311.
identifies “protect[ing] public health” as one of the missions that will establish a
dynamic, vibrant and balanced intellectual property system in India.27 Therefore,
health is a main socio-economic goal for India and needs careful policy making and
implementation.
3 TPP and the Maximalist Intellectual Property Agenda:

A Primer
Since 2000, regional trade agreements signed by USA, European Union and Japan
have contained substantial IPR provisions that exceed the TRIPs minimum stan-
dards requirements and are often referred to as TRIPS-plus obligations.28 These
obligations have had serious implications for drug pricing and severely disfavour
public health imperatives to the advantage of State Owned Enterprises (SOEs).29
For instance, in Jordan the prices of medicines increased by 20 % in 5 years after
TRIPs-plus provisions were implemented through US-Jordan FTA.30 In Costa Rica
the TRIPs-plus provision of CAFTA is expected to increase the cost of medicines
by 50 % until 2030.31 TPP similarly goes beyond trade and tariff negotiations and
makes explicit reference to IPRs as a form of investment.32 Being a mega FTA,
signed between developed economies and resource rich developing economies, it is
bound to have wider cross-border implications which may countervail concerns
related to health and human rights as a non-issue on the global setting.33 Effectu-
ally, when Article 31(2) of the Vienna Convention on the Law of Treaties is applied
27
See specifically p. 5 of the India’s draft National IPE Policy 2015, and for comments see
Tripathy et al. (2014). See also Government of India, “The National IPR Policy” (2016) http://
dipp.gov.in/English/Schemes/Intellectual_Property_Rights/National_IPR_Policy_12.05.2016.pdf
28
Liberti (2010).
29
UNITAID’s Policy brief (2014), p. 101. To retain the benefits of TRIPs flexibilities, countries at
a minimum should avoid entering into FTAs that contain TRIPs-plus obligations that can impact
pharmaceutical price or availability.
30
http://www.oxfam.org/en/files/bp102_jordan_us_fta.pdf/download (accessed 10 January 2016).
31
Pharmacotherapy Department of the Costa Rica Social Security System, 2003.
32
The TPP includes 29 chapters ranging from issues of market access, technical barriers to trade,
sanitary and phytosanitary measures, rules of origin, customs cooperation, investment, services
and legal and institutional aspects of the negotiation, and it further includes government procure-
ment, competition, intellectual property, labour and environment issues.
33
PSI Strategic briefing (2014). In order to achieve “competitive neutrality” TPP advocates
restricting the type and number of advantages such as subsidies, low cost credit, preferential
access to government procurement, and trade protection available for SOEs. These advantages
which are not enjoyed by private companies, when restricted will threaten public health care
institutions leading to degradation and eventual removal of government health insurance pro-
grams. See also Doctors Without Borders (2012), p. 1. TPP will increase the price of medicine for
nearly 800 million people across the Pacific Rim region.
68 S. Tripathy
to interpret the non-exhaustive asset-based definition of investment under the TPP to

include IPRs, it protects rights of investors who use IP as a mode of investment.
Therefore, although TPP does not set specific high standards of protection for IP it
makes way for privileges favouring foreign investors (also known as IP right holders)
which can strengthen IPR protection through the unqualified operation of most
favoured nation and national treatment34 and expropriation provisions triggering
wider impact for IPR protection. Relevant provisions are analysed hereinafter.
3.1 The TRIPs-Plus Provisions of the TPP That Affect Public

Health
The final text of TPP includes only one objective (out of the many mentioned in the
earlier drafts) as stated in Article 18.2 of the agreement. The article states:
[t]he protection and enforcement of intellectual property rights should contribute to the
promotion of technological innovation and to the transfer and dissemination of technology,
to the mutual advantage of producers and users of technological knowledge and in a manner
conducive to social and economic welfare, and to a balance of rights and obligations.
The previous list of objectives expressly included references to maintaining

balance across all IP rights and ensuring that they do not create barriers to
legitimate trade or hinder access to affordable medicines. Downsizing of the
objectives considerably tilts the balance in favour of the right holders prioritizing
their profit motives over those of the patients who are the consumers of health
related goods and services. Thus timely access to affordable medicine is likely to be
blocked.35 TPP requires Nation States to accede to at least nine international IP
treaties and significantly alter their IP laws in compliance to them. Article 18.7
especially requires ratification to the Patent Cooperation Treaty as amended in
1979, the Paris Convention as revised in 1967 and the Berne Convention as revised
in 1971; six more treaties are identified, such as the Protocol relating to the Madrid
Agreement Concerning the International Registration of Marks of 1989, the Buda-
pest Treaty on the International Recognition of the Deposit of Microorganisms for
the Purposes of Patent Procedure as amended in 1980, the International Convention
for the Protection of New Varieties of Plants as revised in 1991 (UPOV Conven-
tion); the Singapore Treaty on the Law of Trademarks of 2006 and the two WIPO
34
TPP Article 2.3 provides for the principle of national treatment. In the international context, a
State must provide equal treatment to those citizens of other States that are participating in the
agreement. Imported and locally produced goods should be treated equally—at least after the
foreign goods have entered the market. When TRIPs-plus provisions in the TPP outweigh
corporate interests over better access to medicines and healthcare for the patients, it will lead to
an incorrect application of this principle.
35
Geist (2016). Developed economies such as Canada have opposed the alteration. For reference,
see the Early versions of the draft IP Chapter of TPP (2016) and Later drafts of the IP Chapter of
TPP (2016). See also, TPP Investment Chapter (2015).
Internet treaties of 1996 (WCT and WPPT). These provisions clearly indicate that
the agreement seeks to harmonize and standardize the regulatory framework and
compliance requirements for IPRs for all Nation States. Over and above these
treaties, all TPP countries are required to amend and include patent term extensions
as well. This would limit the competition given by generic manufacturers, increase
drug prices and hinder innovation in Asia-Pacific region.36 Article 18.6 in the IP
chapter contains a list of understandings regarding public health measures. This
article is applicable to the IP chapter alone and not to the other TPP chapters on
investment. Such disjunction is impractical in this author’s view, as an overlap as
regards implications consequent of the two sets of chapters when looked at from a
holistic perspective for public health is inevitable. In fact, the cumulative effects of
the provisions pertaining to various forms of IPR, data exclusivity, patent linkage,
pharmaceutical pricing, financing and reimbursement of medicines along with IP
enforcement are expected to negatively influence access to healthcare in importing
countries with severity. The following section discusses consequences of such
disjunction that will lead to embracing patent extremism within the TPP.
3.2 Public Health and Patent Extremism: Analysing the TPP
Patents have a monopolistic market effect which can dictate the nature of public
health policies and healthcare related pricing mechanisms in a country.37 One of the
primary challenges in driving down high mortality rates of cancer patients in
LMICs and addressing the issue of access to cancer medication in those regions
has been the difficulty to reconcile small, incremental and significant improvements
in the management of cancer with increasing costs of new treatments. A 2013 study
on access to cancer treatments in India finds that generic substitution for commonly
used originator (mainly patented) chemotherapy drugs has enormous potential to
generate significant cost-savings to the extent of Rs. 4,700 crore per year.38
Evidently, Bayer’s patented medicine (Nexavar) for renal and liver cancer is priced
at Rs 2,80,428/- per month and the generic version by NATCO Pharma (Sorafenib
Tosylate) is available for Rs. 8,800/- per month in India.39 With such stark
differences in drug pricing, lack of balance within TPP is bound to burden the
public exchequers. Important ramifications are spelled out herein below.
36
See generally Bharadwaj et al. (2014).
37
For references, see Managing IP (May 2006).
38
Lopes (2013).
39
Natco Pharma Limited v. Bayer Corporation, Compulsory License Application No. 1 of 2011;
and as directed by the Controller of Patents in NATCO Pharma Limited v. Bayer Corporation.
Similarly, in (2013) 6 SCC 1, while Novartis’s patented medicine (Gleevec) for blood cancer care
is priced at Rs. 1,20,000/- per month, the generic version (Imatinib Mesylate) is priced at
Rs. 10,380/- per month by NATCO Pharma and Rs. 9,000/- per month by Cipla in India.
70 S. Tripathy
3.2.1 Increased Scope of Patentability
The TRIPs Agreement allows countries to determine their own patentability stan-
dards such as the degree of novelty, inventive step, utility as also subject-matter of a
patentable invention. These flexibilities check instances of evergreening of patents,
wherein pharmaceutical companies could enjoy a new term of patent grant for an
existing invention by making minor changes (which may not be clinically effica-
cious) into the composition of their existing patents. This would further delay entry
of generic versions of pharmaceuticals in the market. TPP provides opportunities
for terminating such flexibilities. Canada along with eight other Member countries
have opposed it, as this leads to evergreening of already existing patents and
subsequently increases the cost of medicines.
3.2.2 Patent Term Adjustment
TRIPs Agreement allows protection of 20 years for a patent. The US country

proposal identifies the delays caused due to the tedious process for patent prosecu-
tion and grant by the patent office as being an “unreasonable curtailment” of the
term of patent. Article 18.48 of the TPP mandates countries to allow patent term
adjustment in favour of pharmaceutical patentees, so as to accommodate for such
delays in regulatory approval.
According to Article 18.46
an unreasonable delay at least shall include a delay in the issuance of a patent of more than
five years from the date of filing of the application in the territory of the Party, or three years
after a request for examination of the application has been made, whichever is later.
It means that if the drug regulatory authority of a nation extends a certain period
(specified in the provision above), then the term of such patent is extended.
Pre-grant opposition proceedings in patent prosecutions in TPP countries will be
restricted, making opposition of patents and the process of pharmaceutical patent
procurement costlier. This proposal has been opposed by New Zealand, Japan and
Canada. The extension of patent term beyond 20 years, referred to as “adjustment”,
will delay the entry of low cost medicines into the market which will severely affect
government health programs. The adjustment provision will lead to legislatively
amending Patent Acts to include additional market exclusivity in favour of phar-
maceutical patentees. The use of pre-grant opposition safeguard has resulted in
rejection and at times withdrawal of patent applications on vital HIV/AIDS med-
ications, which has allowed generic companies in India to continue to manufacture,
supply and export essential medicines to other developing countries at affordable
rates.40 The new process will stifle generic entry and competition in the pharma-
ceutical sector. TPP further enables originator companies to claim infringement
40
For references on the Indian pharmaceutical sector, see Gopakumar (2010).
action and prevent parallel importation of drugs which is expected to delay market
entry of competing generics as well.41 Overall, hike in medicine prices, low
investment in research and development and the ever increasing demands for future
patent protection and increased instances of infringement actions is expected.
3.2.3 Data Exclusivity
Article 18.52 of the TPP provides at least 8 years of protection or 5 years of biologic
specific data protection plus other measures to facilitate comparable outcome in the
market. This would reduce market incentives that support biologic competition and
innovation as also formulation of alternatives in the nature of biosimilar versions.42
Furthermore, the proposal of 5 years data exclusivity for new chemical entities and
3 years for drugs containing already approved active compound will establish a data
monopoly period, forcing generic manufacturers to conduct their own clinical trials
of which the outcome is already known.43 This provision will lead to delayed entry
of generic medicines into the market and increase their cost when they finally enter
into market. This provision has been opposed by eight Member countries.
3.2.4 Marketing Authorization and Regulatory Review for Devices

and Data Collection
Chapter 8 of TPP which is devoted to technical barriers to trade imposes data

restriction barriers upon national regulators. The restriction entails disclosure of
certain information as part of the regulatory review process for pharmaceutical
products and medical devices. Annex 8-C 11 of the agreement requires each party
to make its determination on whether to grant marketing authorization for a specific
pharmaceutical product on the basis of factors such as clinical data, manufacturing
quality, and labelling information. It provides, “[n]o Party shall require sale or
related financial data concerning the marketing of the product as part of such a
41
See specifically Articles 4.2 and 4.6 of the US proposal (TPP Article 2.12) which extends the term
of copyright to “life of the author plus 70 years” or “not less than 95 years from the first publication
or 120 years from creation”. At the International trade level, this implies that even if the patent
rights are exhausted by the importing country’s exhaustion regime, if the copyright over the product
information and labels of a pharmaceutical product subsists within the packaging material, the
originator company can sue for copyright infringement, prevent parallel importation and conse-
quently delay market entry of competing generics. Similarly, TPP reformulates the justification for
trademark protection and term extensions from being consumer centric to being a return on the
investment made by the originator company in advertising and promoting its pharmaceutical
products and services (TPP, Article 2.3 read with Article 2 and its sub-clauses Articles 2.1 and
2.4 especially and Article 2.5). These provisions will impair the effectiveness of trademark regimes
and increase the instances of originator companies suing generics for trademark infringement.
42
For references, see WHO SEARO WPRO (2006).
43
For references, see Baker (2008), pp. 303–344; For discussion concerning ambiguity in invest-
ment clauses of TPP, see also Baker (2012) p. 8.
72 S. Tripathy
determination. Further, each Party shall endeavour not to require pricing data as
part of the determination”. Annex 8-E 12 for the approval of marketing of medical
devices is similar: “[n]o Party shall require sale, pricing or related financial data
concerning the marketing of the product as part of such a determination”. This
provision will influence regulatory transparency as regards grant of marketing
rights. Given its stringency, it may prevent the use of bolar provision for marketing
approval in other countries which means that a generic company would have to
manufacture the medicine locally in every country where it seeks early marketing
approval. Establishing quality-assured manufacturing sites in all developing coun-
tries is not economically feasible, therefore in sum this proposal will lead to late
entry of generic medicines into export markets.
3.2.5 Patent-Linkage Provision
TRIPs does not provide for patent linkage system.44 The inclusion of such a
provision will require drug regulating authorities of TPP countries to conduct
assessments of whether a generic drug could potentially infringe existing patents
before approving its registration. The traditional patent system allows the patent
owner to identify and pursue potential patent infringements through the court of
law. That practice ensures that the validity of a patent can be publicly questioned
and held up to scrutiny before it is enforced. However, this new provision requires
drug regulatory authorities of TPP countries to perform a role akin to (patent)
police, which would mean that they will be evaluating patent validity in addition to
their original task of judging the safety and effectiveness of a drug. The drug
regulatory authorities are not qualified, trained or well-versed to undertake such
evaluations, which will in all definiteness delay the process and consequently lead
to unnecessary delay of affordable generics into TPP markets.
3.2.6 National Pharma Care Program
Chapter 26 of TPP, when read with Annex 26-A discusses “transparency and
procedural fairness for pharmaceutical products and medical devices”45 and pre-
scribes that mandatory requirements for a national pharma care program be
established to address high cost of drugs and develop efficient systems in consul-
tation with the healthcare community. This requirement for establishing a national
pharma care programme is a carefully drafted budget-friendly provision which will
establish transparent systems for allocating resources for enlisting newer pharma-
ceutical products, services and devices. However, a good reformatory measure can
44
For references, see Bouchard et al (2010), p. 174.
45
TPP Transparency and Anti-corruption Chapter https://ustr.gov/sites/default/files/TPP-Final-
Text-Transparency-and-Anti-corruption.pdf (accessed 2 January 2016).
be severely effected as TPP includes within its dispute settlement mechanism a

foreign investor privilege clause that allows foreign companies to challenge
national laws meant to protect public healthcare services, which can have a serious
bearing on the national pharma care programme expenditure.
3.3 IP Enforcement and Dispute Settlement Under the TPP
The TPP allows excessive opportunities for IP enforcement, by including IPR as an

“investment” in clear definitional sense, to favour big investors such as the drug
companies. Chapter 9, Article 9.1 of the proposed TPP text defines “investment” to
mean “[e]very asset that an investor owns or controls, directly or indirectly, that has
the characteristics of an investment, including such characteristics as the commit-
ment of capital or other resources, the expectation of gain or profit, or the assump-
tion of risk. Forms that an investment may take include . . . (f) Intellectual property
rights . . .”
Extensive private enforcement rights that right holders already have, in addition
to administrative remedies at borders and judicial remedies for infringing conduct
have been provided for; these remedies are to enhance drug companies’ proclivities
to bring suits against governments (for expected profits as well). The enhanced
nature of remedies available can heavily burden the Nation States and serve to
impede domestic production of drugs. Furthermore, the bracketed limited exception
to IP-related investment rights for compulsory licenses does not provide the secu-
rity against investor claims that TPP parties might need to safeguard TRIPs-
compliant measures. Finally, the investment chapter prevents certain performance
requirements that in the IP context might give developing countries the opportunity
to develop domestic pharmaceutical manufacturing capacity in order to ensure a
self-sufficient, uninterrupted supply of medicines and to legitimately promote their
own industrial development.
Article 18.76 of TPP mandates that applications to detain goods with confus-
ingly similar trademarks as well as procedures for right-holders to suspend the
release of those goods as “special requirements related border measures” be
allowed. The provision establishes enhanced border measures which can lead to
seizure and detention of generic drugs upon cross-border transit on the basis of mere
suspicion of being confusingly similar trademark goods. This detention is to be
carried out by custom officers or border guards who are not skilled to distin-
guish genuine from counterfeit. Enforcing provisions with lack of court oversight
in respect of border measures will add to delays in generic entry in TPP markets.
The IP chapter additively expands private IP enforcement mechanisms via manda-
tory injunctions, enhanced damages and imposition of newer obligations in terms of
border measures and criminal enforcement against infringement of IPR. TPP sets
out newer risks in the nature of newer enforcement strategies. Chapters 9 and 28 of
the TPP which include the dispute settlement mechanism under the investment
chapter (known as the ISDS clause) provide investors (IP right holders) the right to
74 S. Tripathy
submit an arbitration claim under the International Centre for Settlement of Invest-
ment Dispute (ICSID), or the United Nations Commission on International Trade
Law (UNCITRAL), or any other arbitration institution, thereby allowing for a
private supranational arbitration procedure to be instituted outside the country’s
judicial system. IPR holders now IP “investors” will have new substantive “invest-
ment rights” which enable them to base ISDS claims against sovereign govern-
ments’ regulations and adjudicatory decisions. This could even result in private
arbitration proceedings to supersede national laws and policies that are important
for enabling accessible and affordable healthcare. Foreign firms can sue and claim
for reasonable expectation about future profits arising from IP filings and any
changes to IP laws or standards that impact their expectations of profits. This is
clearly a fair and equitable treatment (FET) violation. Therefore, international
economic laws require revisiting.
4 Conclusions and Positive Steps for the Future
The stringent intellectual property rules and lack of implementation flexibility

within the TPP is a major concern. Globally, generic competition has reduced
prices for first-line antiretroviral medicines for HIV/AIDS by 99 % in developing
countries over the course of a decade, which has scaled up to more than 12 million
people.46 Medicine prices have tripled in the US since 1987, outpacing consumer
prices, which have only doubled in such time.47 The incidence of pharmaceuticals
price escalation in the US market can also be viewed as what could follow if TPP is
not revised.
Futuristically speaking, in a real time sense for treaty making which relies upon
international custom, the investment chapter of the TPP has the potential to be the
baseline for international trade. The ISDS safeguards which allow corporations to
sue governments in private supranational arbitration over pro-public health regu-
lations which interfere with anticipated profits can sideline the importance of
healthcare objectives and become a burden on the public exchequer.48 A case in
point is when the Canadian government was sued by Eli Lilly to the tune of $500
million,49 based on similar provisions in North American FTA (NAFTA), because
the corporation objects to a Canadian Supreme Court ruling rejecting the patent for
two blockbuster drugs.
This author advocates that constructing a full positive agenda is required,
characterized with a complementary process at the national and international
46
Ibid.
47
Doctors Without Borders (2014).
48
For reference, see Lester (2015), p. 1. Also see Weisman (2015).
49
Eli Lilly and Co. v The Government of Canada, Notice of intent to submit a claim for arbitration
under NAFTA Chapter Eleven, 7 November 2012.
level. Transparency, data driven policy making and evaluation of public welfare
objectives can be made possible by means of a transparent norm-setting process that
welcomes and solicits the input of academics, public interest organizations and a
full range of public and private stakeholders. As a systemic reform, the evaluation
process and information brokerage can begin by means of consultative participation
from the academia, industry, reputed civil society groups and policy regulators at a
national level. At the international level, arbiters and experts can be enjoined to
form a cohesive advisory set up that functions as a specialist small claims arbitra-
tion forum as well as resolves concerns related to price regulation and competition.
Stakeholder participation through amici before the forum will encourage fairness in
this new system.50 For policy reform and legislative amendment, the TPP can
provide for small and medium enterprises and start-ups in the pharmaceutical sector
who will be beneficiaries of the new ISDS regime. Procedural rules with low
administrative costs can be tailored to encourage their participation.
Finally, intellectual property protection is an important policy area and its scope
needs to be examined in a robust, value-based public debate from a micro to macro
scale. Global norm setting demands a higher degree of transparency and account-
ability which will further the interests of international trade and economic law in a
more sustainable manner. For the purposes of India, Shamnad Basheer advises that
it will serve the interest of countries such as India to endorse a “compensatory
patent commons” regime as a government measure to meet the growing concerns
related to affordable and accessible healthcare.51 Such alternatives when adopted
can bring objectivity into the pressing issue of access to healthcare for all stake-
holders. In conclusion, it is submitted that if the TPP can be revised to uphold public
welfare objectives more, it can reform the dynamics of manufacture, distribution
and sale of essential drugs to make way for new international economic laws that
merit compliance and consensus.
Acknowledgements The author extends gratitude to Professor Angela Lupone of University of

Milan and Professor Laurent Manderieux of Bocconi University, Italy for their valuable feedback
as discussants to the initial draft of this paper and to Professor Anna G. Micara of University of
Milan for patiently reviewing the format of the entire text and Professor Annika Styczynski of OP
Jindal Global University for proof-reading first draft of this paper. She acknowledges and
appreciates the efforts of her undergraduate student, Sandeep Bhalotia for assistance in the
preliminary literature review phase of writing. Author email: stripathy@jgu.edu.in.
50
For a set of principles that might guide such a fuller agenda, see Washington Declaration on
Intellectual Property and the Public Interest (2011).
51
Basheer (2015).
76 S. Tripathy
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Part II
International Trade Law
Can (and) Should the WTO Tame Private
Standards? Antitrust Mechanism as an
Alternative Roadmap: Lessons from
the WTO Telecommunications Reference
Paper
Tilahun E. Kassahun
Contents
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
2 Private Standards and the WTO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
3 The Nature of WTO Obligations and the Limits of State Responsibility . . . . . . . . . . . . . . . . . . 87
4 Market Dominance Approach: Lessons from the Framework of the WTO
Telecommunications Reference Paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
4.1 Comparative Analysis of Private Standards Within the Framework of the WTO
Telecommunications Reference Paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
4.2 A Role for WTO Reference Paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Abstract The question of private standards within the WTO has gradually devel-
oped from a mere theoretical and academic discussion to a full blown policy and
legal debate. This debate however is still far away from reaching consensus. First of
all, it is still unclear whether the issue of private standards should be discussed
within the WTO framework. Second there are still plenty of confusion on the
manner of approaching the discussions and regulating the trade externalities of
private standards and the future shape of any WTO discipline in this regard, if any.
The objective of this contribution is to develop an alternative roadmap towards
private standards within the WTO framework. In doing so it examines the role that
market power plays in private standard-setting and the possibility of adopting
comparable competition law governance mechanisms incorporated within the
WTO, such as the WTO Telecommunications Reference Paper.
T.E. Kassahun (*)

e-mail: tilahun.kassahun@phd.unibocconi.it

DOI 10.1007/978-3-319-44645-5_5
82 T.E. Kassahun
1 Introduction
[P]rivate standards have become the prime determinants of access to most western food
markets. In light of these evolutions, the logic behind the SPS Agreement appears some-
what flawed, and the latter is increasingly regarded as having lost its grip . . ..1
The issue of private standards has become one of the highly debated and
unsettled issues in the global trade and development policy discussion. Of course,
despite its recent resurgence, the issue is an old phenomenon, especially in the area
of product safety.2 Food safety represents a historical example of self-regulation by
foodstuff producers, often combined with some degree of public regulation.3
Meanwhile, in the recent years we have seen an explosive growth in private
standard setting and certification schemes for virtually every product in the
world; goods or services. Assessment studies by the European Commission pre-
pared more than a decade ago indicated the existence of around 400 different
schemes.4 Today, private standards are seen as the norm rather than the exception.5
In line with these market place developments, private standards have grabbed
the attention of trade policy makers, Nation States and international trade organi-
zations such as the WTO as it shades its effects on the global trade regulation
instruments. Within the WTO framework, the question of private standards has now
developed from a mere theoretical and academic discussion to a full blown policy
and legal debate. This debate however is still far away from being distilled. First of
all, there is no consensus on whether the issue of private standards should be
discussed within the WTO framework or the ways of approaching the discussions.
Regulating the trade externalities of private standards is numerous, diversified and
dynamic and there is uncertainty on future shape of any WTO discipline in this
regard, if any.6
Within the above framework however various developments have now started to
surface and research in the area has grown significantly. In the same context two of
the most relevant WTO committees, both the Technical Barriers to Trade (TBT)
and Sanitary and Phytosanitary (SPS) committee, have also devoted a number of
their formal and informal sessions to discuss the issue at hand. Among the most
important in this area is the contribution of the WTO SPS Committee commis-
sioned work by the WTO Secretariat on the “possible actions that could be taken by
1
Wouters et al. (2008), p. 29.
2
Cafaggi (2010), p. 1.
3
Ibid.
4
European Commission, Impact Assessment Report for a Communication on Agricultural Product
Quality Policy, Annex D, Certification Schemes for Agricultural Products and Foodstuffs, 8 April
2009, http://ec.europa.eu/agriculture/quality/policy/com2009_234/ia_en.pdf (accessed 13 November
2015), p. 3.
5
Wolff and Scannell (2008), p. 25.
6
For instance, “No consensus had been reached by the e-WG on a working definition” (WTO doc.
G/SPS/R/74, Summary of the Meeting of 25–26 March 2014, 26 September 2014).
Can (and) Should the WTO Tame Private Standards? Antitrust Mechanism as an. . . 83
the SPS Committee and/or Members to enhance the benefits of private standards
and address their negative effects on market access, especially for producers/
exporters in developing countries”.7 The Secretariat’s Note recommended, inter
alia, seeking clarification as to whether the SPS Agreement applies to private SPS
standards, to develop guidelines on the implementation of art 13 of the SPS
Agreement and/or develop a Code of Good Practice which would function similar
to the TBT Agreement. Yet, despite its attempt to be comprehensive, the Secre-
tariat’s note is short of being complete. Among many others, the note is entirely
restricted in its scope referring to private SPS standards and most of its recommen-
dations fail to show why a pragmatic and legal link should be drawn between the
efforts to “regulate” private standards and the legal nature of existing instruments
within the WTO framework.
The objective of this Chapter is to contribute to these recent efforts by develop-
ing an alternative roadmap of discipline towards private standards within the WTO
framework. In doing so, the research examines the role that market power plays in
private standard-setting and the possibility of adopting comparable governance
mechanisms incorporated into the WTO, in particular the WTO Telecommuni-
cations Reference Paper. The Chapter raises three background questions; first,
whether there should be a case for the regulation of private standards within the
WTO framework; second, whether WTO Members could develop an objective
discipline regulating private action; and if so, third, whether there exists political
and legal precedent to show positive State action in this regard. In order to address
these questions, this Chapter builds a comparative analysis that shows how the
theoretical and legal notions and underpinnings laying behind the WTO Telecom-
munications Reference Paper can also be logically adopted to develop a theo-
retically stable and a common institutional framework for understanding and
further regulating private standards within the WTO framework.
2 Private Standards and the WTO
It is clear today that the large number of private standards evolved in response to
regulatory developments and, more directly, consumer concerns in the market.8
High profile food scares and the raise in consumer awareness levels have served to
erode confidence in the prevailing mechanisms of food safety or environmental and
human right protection which is predominantly focused on public regulation.9
Indeed a major drawback of public standards is their lack of flexibility. Public
standards do not adjust, at least in time, to changes in consumer preferences or
7
WTO doc. G/SPS/W/247, Possible Actions For The SPS Committee Regarding Private SPS Stan-
dards, Note by the Secretariat, 20 October 2009, p. 2.
8
Henson and Humphrey (2009), p. 11.
9
Henson (2008), p. 75.
84 T.E. Kassahun
social and environmental concerns. To this extent it can be argued that the failure of
public regulation to provide the desired level of protection and confidence to
consumers has been part of the cause for stimulating private standards.10
Meanwhile, like any other non-tariff barrier to trade, the proliferation of private
standards can have various trade and consequently development challenges. Most
standard setting organs are seldom participatory, transparent or scientific.11 The
immediate implication of this is that the introduction of private standard regimes
that are not adapted to the needs and capacities of the various stakeholders in the
industry will tend to reinforce the already existing imbalance of the terms of
international trade.12 This challenge is greater for those producers and exporters
of mostly primary and light manufactured goods in developing countries.13 In
general, private standards can be trade-impeding as any other public standards.14
It is therefore imperative that one investigates the relevance of multilateral trade
organizations such as the WTO to this concern.
The TBT Agreement is one of the most important WTO agreements which is
relevant to investigate the multilateral regulation of private standards. The TBT
Agreement applies to three major types of technical barriers to trade; technical
regulation, standards and conformity assessment procedures.15 In order to make
sure Members bear the responsibility concerning non-governmental entities, Art
4 of TBT Agreement provides WTO Members are to ensure that non-governmental
standardizing bodies accept and comply with a Code of Good Practice.16
Meanwhile, it can be said that majority of observers would agree with the
general proposition that WTO rules are imposed on WTO Members rather than
on individuals. Thus “recognized body” under the Agreement refers to those organs
which are delegated with standardization function which traditionally is part of the
function of State organs.17 Unfortunately, while various WTO dispute settlement
cases have raised important issues relevant to the question of the legal regime over
private standards, the scope of the analysis by the WTO dispute settlement panels
and the Appellate Body has not yet directly addressed the WTO consistency of any
private standard in question.18
Of course there have been important dispute settlement cases, most of which
have dealt with labelling and marking requirements, which examine substantive
10
Henson and Humphrey (2009), p. iv.
11
Liu (2009), p. 1.
12
Ibid.
13
Ibid., also see Graffham (2007), p. 7.
14
Martinez and Poole (2004), p. 230.
15
WTO Agreement on Technical Barriers to Trade (TBT Agreement), Annex 1 A of the Agree-
ment Establishing the World Trade Organization, 15 April 1994, https://www.wto.org/english/
docs_e/legal_e/legal_e.htm, Annex 1.
16
Ibid., art 4.1.
17
Ibid., Annex 1, para 8.
18
Gandhi (2007), p. 4.
provisions of the TBT Agreement. Yet, according to Samir R. Gandhi, “WTO

panels have been reluctant to extend the scope of State responsibility under the
GATT Agreement to actions of private parties”.19 He mentions Argentina Hides
dispute in which a “WTO Panel chose not to hold a State responsible for the trade
restricting activities of private parties within its territories”.20 This seems to have
been confirmed by the panel in China – GOES, which held that “the WTO covered
agreements are international agreements between the WTO Members” and that “the
obligations embodied in them are binding only upon Members and not upon private
actors”.21 The Appellate Body has also emphasized in US – COOL the importance
of identifying the underlying link between the actions of the State vis- a-vis the
underlying measure taken by private actors.22 The most recent dispute, US – Tuna II
has addressed the issue of what a standardizing body is for the purpose of the TBT
Agreement.23
Another essential centrepiece for the discussion in this section is the question
about the interaction between private standards and the WTO SPS agreement.
Simply put—does the SPS Agreement apply to private standards? One can start
by saying that the SPS Agreement establishes disciplines that ensure various SPS
measures implemented by WTO Members are not applied unfairly or discrimi-
natorily.24 The underlining principle under the Agreement is that such measures can
be undertaken only with the objective of addressing justified health measures and
only to the extent necessary.25 In the same line the SPS Agreement mandates
Member States to take “reasonable” measures to ensure that “non-governmental
entities” comply with the SPS Agreement.26 Yet, given that the SPS Agreement was
negotiated before private sector standards became widespread, it is not surprising
that the SPS Agreement contains no direct mention of private standards. This,
hence, opens the door to questions over the application of the Agreement to
measures that are adopted by private entities.27 Again, the question here is not
whether private actors engaged in standard formulation can be directly bound by the
19
Ibid., p. 16.
20
Ibid., WTO doc. WT/DS155/R, Panel Report, Argentina – Measure Affecting the Export of
Bovine Hides and the Import of Finished Leather, 19 December 2000.
21
WTO doc. WT/DS414/R Panel Report, China – Countervailing and Anti-Dumping Duties on
Grain Oriented Flat-Rolled Electrical Steel from the United States, 16 November 2012, upheld by
WTO doc. WT/DS414/AB/R Appellate Body Report, para 7.50.
22
WTO doc. WT/DS384/AB/R WT/DS386/AB/R, Appellate Body Report, United States – Cer-
tain Country Of Origin Labelling (COOL) Requirements (US – COOL), 29 June 2012, para 291.
23
WTO doc. WT/DS381/AB/R Appellate Body Report, United States – Measures Concerning the
Importation, Marketing and Sale of Tuna Products (US – Tuna II), 16 May 2012, paras 365 ff.
24
WTO Agreement on the Application of Sanitary and Phytosanitary Measures, Annex 1 A of the
Agreement Establishing the World Trade Organization, 15 April 1994, https://www.wto.org/
english/docs_e/legal_e/legal_e.htm, Preamble.
25
Stanton (2007), p. 3.
26
SPS Agreement, art 13.
27
Prévost (2008), p. 6.
86 T.E. Kassahun
SPS Agreement. The SPS Agreement, like other WTO agreements or general
principle of international law, binds only WTO Members. Therefore, only actions
(or omissions) by WTO Members can be challenged. The inquiry rather is about the
circumstances under which WTO Members can be held responsible for the actions
of private parties in their territory.28
Unfortunately, in the absence of any WTO jurisprudence, Members have diver-
gent and conflicting opinions about the issue. The debate is mainly centred on the
scope of art 13 of the SPS Agreement.29 The issue was formally raised within the
WTO SPS Committee in June 2005 when St. Vincent and the Grenadines
complained about the requirement for EurepGAP certification in exporting
bananas.30 In the same meeting, Jamaica expressed its concerns with respect to
EurepGAP standards for fresh fruit and vegetables.31 Further support was also
given to these concerns by a number of other developing countries. The significance
of the issue was markedly reflected by Argentina:
[T]he international community had generated international agreements to ensure that trade
standards were not unnecessarily stringent so as to act as barriers to international trade and
countries had devoted time and financial and human resources to attend all the international
meetings where standards were discussed, developed and implemented. If the private sector
was going to have unnecessarily restrictive standards affecting trade and countries had no
forum where to advocate some rationalization of these standards, twenty years of discus-
sions in international fora would have been wasted.32
Since then, a number of developing countries expressed their concerns that

“private standards could undermine the disciplines negotiated in the SPS Agree-
ment”.33 Yet, on the other side of the debate, the EU relied on the purely private
character of such standards. In particular the EU upholds;
[W]ithout any dispute ruling to provide legal interpretation, it remains unclear whether the
SPS Agreement obliges governments to take responsibility for private standards. Therefore
Members should focus on the costs of complying with the standards and ways to deal with
this, such as through aid to help suppliers meet the requirements.34
While various discussions concerning the impact of private standards and the
legitimacy of the WTO TBT and SPS committees to have a discussion on these
issues have been made, there is still no formal determination within the WTO on
28
Ibid.
29
Wolff and Scannell (2008), p. 5.
30
WTO doc. G/SPS/R/37, Summary of the Meeting Held on 29–30 June 2005, 11 August 2005,
p. 6. Also see Henson (2008); and Gascoine and O’Connor Company (2006), p. 23. EurepGAP is a
European wide certification for farm management practice organized by supermarkets within
Europe. GAP stands for Good Agricultural Practices.
31
Ibid.
32
Ibid., p. 7, also See Wouters et al. (2008), p. 18.
33
WTO (2010).
34
WTO (2007b).
whether the issue falls under the jurisdiction of the TBT and SPS agreements.35 For
the moment, one can say that private standards fall within a markedly contested and
at best grey area territory of the TBT and SPS Agreements. But one should expect,
at least in the near future, private standards will have a greater impact on trade terms
than public standards.36
3 The Nature of WTO Obligations and the Limits of State

Responsibility
The preceding section highlighted how private standards might affect world trade.
This can have serious implications to the current multilateral trading regime.
Meanwhile the underlying ideological question as analysed by one author is:
[W]hether private companies can be forced to contract with entities, which they do not wish
to contract with for some reason . . . and whether they can be forced to distribute products
that they simply do not want to distribute. . . . Even putting all elements of costs and
efficiency aside, the question is whether it would be acceptable for governments to
determine what types of consideration private companies may or may not use when
procuring goods or services.37
Indeed, at first glance any “imposition or interference” from the side of the
government on the freely working setup of the market and argument furthering any
such intervention appears insensible. Especially if one considers that the concept of
market access in the WTO should be limited to formal access to markets against
State intervention that might contravene basic WTO obligations. According to the
above author:
[T]he controversy between both camps is about the meaning of market access that WTO
membership was to guarantee: a formal access (i.e., the ability to offer imported product to
importers, distributors and customers, who may decide to distribute or buy it), or actual
increased market share (e.g., guaranteed sales) . . . in a very concise summary.38
Despite the above argument, pre-existing WTO practice shows that such trend
has already been both politically and legally acceptable to WTO Members. This is
the case of the WTO Telecommunications Reference Paper that essentially regu-
lates the practice of private enterprises in terms of protectionist and discriminatory
trade practices against foreign competitors. The Reference Paper was essentially a
response to the concern that domestic/internal dynamics of the telecommunication
sector needs further disciplines and guidance so as to make the market access
commitments effective and to ensure that major suppliers do not abuse their
35
WTO doc. G/SPS/53, Review of the Operation and Implementation of the SPS Agreement,
Report adopted by the Committee, 18 March 2010, p. 23.
36
Disdier et al. (2008), p. 13.
37
Włostowski (2010), p. 210 (emphasis added).
38
Ibid. (emphasis added).
88 T.E. Kassahun
dominant position. This document laid down important competition policy con-
cepts; such as essential facilities and market dominance.
It is within this framework one can notice many theoretical and practical
similarities between telecommunication services and private standards. Like tele-
communication services, today, the retail sector has become a sector with high level
of market concentration and hence power. Additionally, a characteristic shared by
both sectors, besides the presence of large incumbents, is their dependence on
networking and economies of scale. Considering this similarity, it is thus logical
to inquire whether the WTO should “regulate private standards”. This is parti-
cularly the case if—due to the omnipresence of a particular private standard—it is
difficult or impossible to enter the distribution chain without adopting the standard.
This fact would support the argument that private standards undermine WTO
market access commitments. For these reasons, it seems appropriate to raise an
argument that the Reference Paper on Telecommunication services can be a
guiding example for future efforts to create pro-competitive rules to discipline
private standards in the WTO regime.
4 Market Dominance Approach: Lessons from

the Framework of the WTO Telecommunications
Reference Paper
The WTO Basic Telecommunications Agreement (BTA) is an Annex incorporated

to GATS through which certain WTO Members liberalize their markets for tele-
communications services.39 The result of this agreement lays the distinction
between “basic” and “value-added” telecommunication services. Before the WTO
Telecom Agreement was conceived, “basic” and “value-added/enhanced” telecom-
munications were essentially concepts used by US regulatory agencies.40 It was
used by the Federal Communication Commission (FCC) to make distinction
between what it considered competitive part of the industry which is to be left for
market competition and others that were considered in need of public regulation.41
In doing so the Agreement aimed at improving market access for telecommuni-
cations service providers by ensuring that “all service suppliers seeking to take
advantage of scheduled commitments are accorded access to and use of public basic
telecommunications”.42 While the results of the negotiation are to be multilateral-
ized through the most-favoured nation (MFN) clause, the system allowed Members
to add a list with exceptions.43 Most importantly, over 80 Members have committed
39
Magallanes (2012).
40
Bronckers and Larouche (2008), p. 324.
41
Ibid.
42
WTO (1997).
43
Ibid.
to abide by the rules and principles underlined under the “Reference Paper” to the
Telecommunications Agreement, described as “a blueprint for sector reform that
largely reflects best practice in telecoms regulation”.44 This mainly has to do with
the fact that the Basic Telecoms Agreement also addresses concerns related to the
establishment of a regulatory environment conducive to market entry. This concern
is of course vital and topical for its time. Since its inception the telecommunication
services industry has been operated under monopolistic tendencies whether in the
hand of private sector or the State.45 But in late twentieth century the forces of
liberalism, free market, and privatization reinvigorated the political economy of
the services sector in most part of the world especially in the more developed
economies.46
For this reason, many participants of the telecommunications negotiation
suggested that the establishment of provisions on regulatory discipline “as a way
of safeguarding the value of the market access commitments undertaken”.47 The
result was a unique multilateral agreement that included important principles for the
trading regime such as competition safeguard principles, interconnection, trans-
parency in licensing, and the independence of regulators, i.e. the Telecommunications
Reference Paper.48 GATS art XVIII provided the framework for undertaking
commitments with regard to measures not falling under market access or national
treatment.
In doing so, the Telecommunications Reference Paper provided principles that
serve as a guide on domestic regulation. Hence, the Reference Paper does not
address detailed specifications on how WTO Members will carry out their obli-
gations. Mainly aimed at accommodating the different economic, political, legal
and administrative differences that exist between Members, the Reference Paper
left sufficient level of flexibility to accommodate policy variances among the
various participants. In particular, Members have flexibility to decide how to
manage their obligations.49 “The objective was to ensure certain results, a level
playing field for new entrants, not to determine the means by which the results
would be achieved”.50 It generally imposes an obligation on Member States: (a) to
take necessary measures that domestic telecom providers do not engage in anti-
competitive practices; (b) to make sure that interconnection is not denied by service
providers51; (c) transparency in licensing conditions52; and (d) guaranteeing the
fairness and independence of the regulator.
44
WTO (2016).
45
Noam (1998).
46
Ibid.
47
See WTO (1997).
48
Ibid.
49
Sherman (1998), p. 72.
50
Ibid.
51
Reference Paper, para 2.1.
52
Ibid., para 4.
90 T.E. Kassahun
4.1 Comparative Analysis of Private Standards Within

the Framework of the WTO Telecommunications
Reference Paper
As it can be seen from the preceding paragraphs, one of the most important
contributions of the WTO Telecommunications Reference Paper is a change in
the perspective and the sphere of international trade regulation. Specifically, it
changed the WTO from being an exclusive public sector instrument towards
becoming a tool for regulating private conduct that would interfere with inter-
national trade. This approach is different from the aforementioned discussion with
respect to WTO agreements that contain certain obligations on WTO Members with
respect to non-governmental entities.
On the contrary, experience from the same participating Member States shows
that the Reference Paper has provided clear obligations on Member States in terms
of regulating, disciplining and overseeing the conduct of private entities and
markets within their jurisdiction. Generally, the Reference Paper obliges Members
to follow rules on private market competition of telecommunication service and on
abuse of dominant positions, discriminatory practices and transparency. In this
sense, two experiences come out as lessons learned from instrument and practice
in the area of basic telecommunications services: one, defining major suppliers as
subjects of discipline under the Reference Paper and second, an obligation of
competitive safeguards. The following paragraphs discuss these issues one by one.
First, there is now ample evidence that private standard-setters dominate the
food safety, environment protection and various other regulatory environments and
thus “have become the prime determinants of access to most western . . . mar-
kets”.53 Thus, although often labelled as “voluntary” standards, in that they are not
imposed by regulatory authorities, such requirements often act as “entry tickets”
into the market—producers must comply with the standards, and be able to demon-
strate that they have done so, or their products will not reach the supermarket
shelves.54 As indicated by a joint UNCTAD/WTO Session on Private Standards,
“the term ‘voluntary’ may be misleading”.55 Some private standards, although not
legally mandatory, are de facto mandatory as large buyers require compliance with
them. Accordingly, “although not legally binding in a regulatory sense, private-
sector standards are, de facto, increasingly becoming mandatory because of the
market power of certain large, globally acting retailers and importers”.56
53
Wouters et al. (2008) [emphasis added].
54
Vorley and Fox (2004).
55
UNCTAD, Joint UNCTAD/WTO informal information session on private standards Geneva,
25 June 2007, http://www.unctad.org/trade_env/test1/meetings/wto1/Background%20info%20for
%20website.pdf (accessed 1 August 2013).
56
Ibid.
Second, it is also cognizable that private standards and their certification

schemes may completely rely on specific local conditions and circumstances.57
“At the local level, many of these schemes have also become a de facto market
standard against which local consumers judge all other similar goods”.58 This has
effect on the market access opportunity of foreign goods.59 In particular, some
standards have been criticized for operating to protect “western” industries against
imports from developing countries”.60 In this sense various interest groups argue
that private standards, just like public regulations, may be “used to gain strategic
trade advantages for domestic firms over foreign competitors”.61
Accordingly, the very process through which private standards are developed is
valuable to interest groups.62 Lack of transparency and accountability will give to
the sponsors of the various private standards setting schemes the opportunity to
abuse their strategic location in the overall global value chain. There are various
evidences that show “certification is highly influenced by previous trade relation-
ships”.63 The growing influence of such non-State actors and the potential for
capture has thus resulted in what some call the “privatization of [food safety,
environmental and social] governance”.64 Accordingly, there is at least a potential
risk that private standard setting organs will fall victims of industry capture.65 For
example, according to Appleton, while the Bio Suisse scheme appears neutral on its
surface, “it emphasizes on a sensitive portion of a product’s life-cycle that appeal to
local agricultural producers”.66 Hence, “the Bio Suisse scheme favours Swiss
farmers and their neighbours, to the detriment of more distant developing coun-
tries”.67 Moreover, “in addition to being shrewd marketing schemes, these private
labelling and certification schemes often have protectionist motives”.68
Equally, trade disturbing protectionist pressures are also visible in broader
labelling schemes such as environmental labelling, eco-labelling and food mile.69
According to Wilson, “if food miles campaigners were genuine in their concern for
reducing food production’s CO2 footprint, they would focus on the CO2 footprint
of the life-cycle of production”.70 In doing so the trade repercussion of some of
57
Vitalis (2002).
58
Ibid.
59
Ibid.
60
World Growth (2011), p. 24.
61
Otieno and Ogalo (2009), p. 13.
62
Gandhi (2006), p. 3 (emphasis added).
63
Herzfelda et al. (2011), p. 25.
64
Generally, see Konefal et al. (2005) and Higgins et al. (2008).
65
Vitalis (2002), p. 6.
66
Appleton (2006), p. 10.
67
Ibid.
68
Ibid.
69
Wilson (2007), p. 41.
70
Ibid.
92 T.E. Kassahun
these standards is immense and runs counter to the established principles under the
WTO.71
4.2 A Role for WTO Reference Paper
The preceding paragraphs highlighted that access to the telecom supply infrastruc-
ture is key in order to access markets. In the absence of a right to connect to existing
standard and distribution chains, competition can hardly be safeguarded, hence the
similarity between the telecommunication services and other sectors in trade in
goods. As simple market access remains useless without access to distribution
chains that may grant access to the large consumer group. This access is a necessary
complement to the liberalization of trade in goods.
Hence a regime can and should be conceivable which will mandate WTO
Members to regulate domestic private standard-setting organs. This can be
designed in the form of legally binding principles to regulate major private
standard-setting schemes and major suppliers which administer or implement the
standards. Major suppliers can affect the market by control of “essential facilities”
and “substantial market power”. The discipline towards private standard setting
schemes should put restrains against anti-competitive use of market power and
should promote competitive market-like outcome. In terms of the aspired WTO
framework, this obligation can be put as a requirement that WTO Member countries
maintain appropriate measures for preventing certain anti-competitive practices in
these sectors.
After incorporating this linkage between the activities of private standard-setting
organs and the WTO, the details of the disciplines can be tailored to the current and
factual circumstances of the standards. As an illustration, one option is the adoption
of an approach similar to that of “non-governmental organizations” under the WTO
TBT Agreement.72 Annex 3 to the TBT Agreement provides a Code of Good
Practice for the Preparation, Adoption and Application of Standards. Article 4.1
TBT Agreement obliges WTO Members to take reasonable measures to ensure that
non-governmental and regional bodies accept and comply with the Code. In doing
so, just like its TBT counterpart, the “Code” could require national private stan-
dardizing bodies and major players to follow principles and rules that are compa-
rable to those specified under the TBT Agreement. Thus it may require WTO
Member countries to encourage the use of international standards as a basis for
private standardization schemes within their national jurisdiction. It imposes on
Member States and thus private standards-setters to acquaint foreign producers and
their national governments with their work and on the standardization being
undertaken. At the time of publication, the national private standard-setting bodies
71
Appleton (2006).
72
Wouters and Geraets (2012), p. 10.
can also be required to notify the WTO of information regarding the newly
developed private standards and indication as to where further information can be
obtained. The “Code” could also require private standardizing organs to allow and
make available a reasonable period of time for the submission of comments on draft
standards by interested parties from other WTO Members.
4.2.1 Tackling Certification Bias: Access and Costs of Certification

to Private Standards
One area that the proposed “Code” could be useful is in the issue of tackling biases
related to certification activities by private standard-setting bodies. Today, it is not
an overstatement to say that the private standard-setting and certification regime has
become a lucrative business.73 According to Washington and Ababouch “the big
winners in the proliferation of private standards are undeniably certification bodies
that conduct audits and certify against private standards”.74 Developing country
Members to the WTO have raised concerns about the costs of certification. Among
others, the limited availability of accredited certification institutions and the high
cost of certification, which in large part is covered by producers in developing
countries, has brought an important challenge.75
According to a survey by the WTO Secretariat, a growing number of developing
country exporters consider compliance with private standards as a prerequisite to
accessing valuable supply chains.76 However, compliance costs to these require-
ments is excessively high, mainly because of the costs of certification.77 This has
negatively affected developing country exporters “who are frequently small and
medium-sized enterprises where margins are ‘razor thin’”.78 It is debatable, how-
ever, whether the WTO should in principle be involved with private standard-
setting decisions, such as prices. In so doing the same debate on the normative
scope of international trade regulation could be raised. Yet as duly reflected above,
past experience and precedent set by WTO Members with the example of the WTO
Telecommunications Reference Paper has very well illustrated that WTO law and
practice of Member States could and should regulate the activities of private parties
to the extent that the latter unreasonably distorts the free flow of international trade.
As discussed in the preceding sections, one of the main objectives of the
Reference Paper is to regulate the pricing practices of incumbent telecom service
providers in terms of access to newcomers. For instance, in the provision of
telecommunication services, the determination of what is a reasonable amount of
73
See Lee (2006), p. 27.
74
Washington and Ababouch (2011), p. 116.
75
Ibid., p. 105. Also see Otieno and Ogalo (2009), p. 22.
76
WTO (2012), p. 148.
77
Ibid.
78
See Vitalis (2002), p. 7.
94 T.E. Kassahun
charge to be imposed as an interconnection fee can be a major factor determining

the level of participation by entrants in the downstream market. Hence the Refer-
ence Paper incorporated a principle that mandates Members to make sure that
interconnection charges are aligned to the cost of rendering the service. This can
bring us to a logical premise to argue that costs of access to certification and
labelling rates in the private standard-setting realm should be transparent, cost-
oriented and reasonable having regard to economic feasibility. Thus just like its
telecommunication services counterpart, it will not be unjustified or unprecedented
if a WTO instrument obliges Members to cast a watchful eye on the pricing and
implementation practices of private standard setting and certification institutions
access to which is essential to access national or regional markets. Furthermore,
prohibition on discrimination and abuse of the conformity assessment procedures
should be central to the discipline. This can among others be achieved by adopting
similar instruments as art 8 of the TBT Agreement that provides relevant obligation
with the aim to discipline the conduct of conformity assessment procedures by
non-governmental bodies.
4.2.2 Transparency, Accountability and Legitimacy
Like any other regulatory regime affecting trade, transparency in the development,
administration and follow up of private standards is a key to making sure that the
standards do not end up being discriminatory, abusive or arbitrary. Henson explains
that, a major concern in the development of private food safety and quality
standards is its impact on transparency.79 Various private standard-setting initia-
tives have been criticized for their lack of transparency and accountability in
standard-making process. This is of particular concern to the WTO given that
transparency and accountability are key objectives of both the SPS Agreement
and the TBT Agreement.80 These concerns were clearly expressed in various
committees and working groups of the WTO.81 One of the primary reasons what
makes transparency a trade factor has to do with its economic and trade impli-
cations. Lack of transparency in private standards plays a key role in trade and
competitiveness. According to Wouters et al., “the criticism is that these standard-
setters do not use a transparent procedure which contains several criteria with which
private standards should comply and which is open to independent review”.82
The Reference Paper essentially imposes obligations in terms of making infor-
mation available on a timely basis, even when this has to do with purely private
entities operating in a market independently of government control. In this sense,
the experience of the Reference Paper has plenty to share to the other corners of the
79
Henson (2008).
80
Casey (2007), p. 73.
81
WTO (2007a).
82
Wouters et al. (2008), p. 16.
WTO legal regime. Under the Reference Paper examples of such information
subject to transparency disciple include among others; an obligation on major
suppliers to make public information on the availability and terms “interconnection
agreements or a reference interconnection offer”.83 It also contains provisions in
relation to anti-competitive practices such as “not making available to other ser-
vices suppliers on a timely basis technical information about essential facilities,
commercially relevant information”84 and public availability of licensing criteria.85
It also contains provisions on the allocation of scarce resources. It obliges Members
that clear, objective, non-discriminatory and timely procedures are articulated with
respect to allocation and use of scarce resources.86
5 Conclusions
This Chapter examined the trade and development implication of private standards
in an effort to raise a normative argument towards the possibility of incorporating a
regulatory agenda within the WTO multilateral trade framework. In doing so, it
briefly analysed the causes of the emergence of private standards and existing legal
challenges and its status quo within the WTO framework. As highlighted above,
there seems to be broadly irreconcilable differences on the view of some WTO
Member States with respect to the issue, while the large part of observers of the
system argue that the two relevant agreements, TBT and SPS, are not designed to
regulate the activities of private standard setting organs.
Accordingly, this contribution has raised a more forward looking question as to
whether WTO Members should and could come up with an objective discipline
regulating private action to be incorporated as part of the WTO legal framework. In
addressing this issue, it initially approached the question by investigating if there
has been the political and legal precedent to show positive action by WTO Mem-
bers in this regard. It has found that the historical and unprecedented achievement
of the WTO Telecommunications Reference Paper can be used as a comparative
instrument to show how theoretically similar market governance challenge as
private standards has been addressed by the system. The introduction of the
Reference Paper has vividly reflected a change towards a more dynamic norm of
State responsibility within the framework that makes sure that WTO Members will
bear certain obligations imposed by WTO law to discipline private behaviour
within their jurisdictions.
Without doubt, it will take a bitter negotiation and stiff political struggle if such
proposal is ever to be put to use. However, it may not be completely out of support
83
Telecommunications Reference Paper, para 2.4.
84
Ibid., para 1.2(c).
85
Ibid., para 4.
86
Ibid., para 6.
96 T.E. Kassahun
as we have seen similar developments in the internal jurisdictions of some of

WTO Members to regulate the supply chain dynamics and relationship between
major retail and distribution networks vis-a-vis small and medium enterprise (SME)
suppliers.87
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The Twenty-First Century Regionalism:
Brazil and Mercosur in the New International
Scenario
Belisa Esteca Eleoterio and Alebe Linhares Mesquita
Contents
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
2 The Waves of Regionalism: From Regional Integration to Multidimensional
Interdependence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
3 Regionalism in Latin America: An Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
4 The Insertion of Brazil and Mercosur in the Context of the Twenty-First Century
Regionalism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
5 Final Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Abstract The present paper intends to investigate the main characteristics of

regionalism in the twenty-first century as well as the role played by Brazil and
Mercosur in this new global scenario. This discussion is analysed through the
perspective of the third wave of regionalism. Therefore, this article is divided
into three main sections. Firstly, the theory of the regionalism waves will be
explained. Secondly, the process of regional integration in Latin America will be
analysed. At last, the insertion of Brazil and Mercosur in the context of the new
regionalism will be investigated. This discussion is very important for developing
countries, since it is directly linked to the prospects and challenges of their
integration into the global economy. In conclusion, it can be asserted that the
deep economic transformations observed in recent years have caused the break-
down of the stability of various economic blocs, including Mercosur. The search for
new models of integration may solve common problems between neighbouring
countries that often go beyond the merely economic domains. Hence, regional
development depends not only on economic integration, but it is also often associ-
ated with physical integration and infrastructure improvement.
B.E. Eleoterio (*) • A.L. Mesquita

Center for Global Trade and Investment – CGTI at FGV/EESP, S~ao Paulo University (USP),
S~ao Paulo, Brazil
e-mail: belisa.eleoterio@gmail.com; alebe_linhares@hotmail.com

DOI 10.1007/978-3-319-44645-5_6
100 B.E. Eleoterio and A.L. Mesquita
1 Introduction
The interaction between sovereign States has always been marked by different
forms of integration. From cooperation initiatives to models of deep political,
economic, financial, and infrastructure integration, many factors link the States’
decision-making process to the international circumstances in which they are
found. Recent changes in the world production structure combined with the recog-
nition of multiple issues that overpass State boundaries are redefining the role of
Nation-States, and consequently their strategic performances internationally.
It is, for instance, usually recalled that technological advances have reduced
physical distance in the world and contributed to overcome many differences
among countries. This phenomenon may be observed, for example, in international
conferences, such as the G20 and BRICS summits, in which countries are brought
together in order to discuss topics of common concern. Currently, there are some
global problems that can only be solved with the cooperation of all countries. In this
regard, regional integration is also seen as an important tool to boost economic
growth and promote development among States.
In this context, although not intending to exhaust such a vast theme, the present
paper intends to analyse the main characteristics of regionalism in the twenty-first
century as well as the role played by Brazil and Mercosur in this new global
scenario. The importance of this article resides in the relevance of regionalism for
the developing countries’ successful integration into the global economy.
2 The Waves of Regionalism: From Regional Integration

to Multidimensional Interdependence
In order to understand the phenomenon and the relevance of regional interaction,

one needs to revive the meaning of the concept of region. Traditionally, a region
may be understood as a part of the Earth’s surface with one or many similar
characteristics that make it unique from other areas, and these characteristics may
be related to climate, environmental factors, economy, culture, politics, etc.1
Nevertheless, recent interaction movements not directly connected to the phys-
ical location of each country could suggest that geographical proximity may be
losing importance. This is a misconception, since regional proximity still plays an
important role in the international relations. However, one should also bear in mind
that a region may also be the result of political coordination.2
The expressions regional integration, regionalism, regionalisation, regional
governance and regional cooperation have been used in a somewhat loose manner
1
Haesbaert (2010).
2
Haesbaert (2010).
The Twenty-First Century Regionalism: Brazil and Mercosur in the New. . . 101
in the literature.3 The lack of accuracy in the use of these terms and the lack of a
systematic approach in the analysis of different types of integration may lead to a
misconception, limiting the results of comparative studies in the field. Since the
European model of integration is usually the one used in comparative process, the
main elements used in the comparison may not take into consideration the pecu-
liarities of a given region and therefore may not permit that these characteristics are
the ones responsible for defining its nature.4
Regarding the process of regionalism, the great majority of the scholars recog-
nize two well defined waves.5 The first one, dating back to the post-war period
(1950s and 1960s) corresponds to the earliest integration movements of the then
European Economic Community.6 The success of the European integration gave
rise to multiple analyses of the community formation at the international level. The
renowned theory proposed by Bela Balassa that defines the economic evolution of
regionalism from a free trade area to customs union, common market, economic
union and complete economic integration is an example of the academic efferves-
cence of that period.7
Simultaneously, developing countries observed the outbreak of preferential
arrangements among themselves as a mean of fostering their national growth and
reducing the costs of their import-substitution industrialization. The regional expe-
rience of the previous years was reduced during the 70s and the early 80s, notably
due to the growing efforts made in the multilateral arena in order to promote the
reduction of trade barriers among countries.
The main driving force of the second wave of regionalism was the decision of
the United States of shifting from multilateralism to regionalism with the negoti-
ation of North American Free Trade Agreement (NAFTA) and its Enterprise for the
Americas Initiative. The proliferation of regional trade agreements was also
observed in Latin America (Andean Community of Nations, Mercosur), Asia
(ASEAN Free Trade Area—AFTA and commitments to achieve trade liberalization
in Asia-Pacific Economic Cooperation—APEC), and Africa (negotiations for the
creation of an economic and political union).
Product of a post-hegemonic period in which new and important actors emerged
in the international scenario, the definition of the so-called third wave of regional-
ism is not a unanimous concept in the literature. Still, many scholars emphasize
some aspects that can affirm this new tendency of regional integration.8
In this sense, the concept of regional integration adopted in the first wave could
be described by Nye’s view as: a limited number of States linked together by a
3
Hameiri (2013), p. 316.
4
De Lombaerde (2012), p. 32.
5
Bhagwati (1993), p. 28.
6
Balassa (1961).
7
Ibid.
8
See, for example: Hameiri (2013); De Lombaerde (2012); Matthews (2003); Lloyd (2002);
Mansfield and Milner (1999).
geographical relationship and by a degree of mutual interdependence.9 This defi-

nition, although not entirely old-fashioned, no longer keeps up with the new idea of
regionalism. The old regionalism, characterized mainly by State-based regional
organizations of the post-war period, has been expanded to include new organiza-
tions, actors and issue areas.
Amidst the new international conformation, in which the States’ role in the
regional integration process must be performed in order to converge their interests
and those of new actors with the capacity of national and international action, one
must overcome what Agnew called territorial trap, that is, the conventional idea
that States are fixed sovereign spaces; that the political and economic aspects of a
nation have clear separation between the national and international levels; and that
both economy and society are defined by national boundaries.10
In order to address the changes recently observed and the flexibility of the
concept of regionalism, De Lombaerde proposed what should be an updated
definition of the phenomenon:
A multi-dimensional process of social transformation whereby actors, associated with (sub)
national governance levels and belonging to a limited number of different states, intensify
their interactions through the reduction of obstacles, the implementation of coordinated or
common actions and policies, and/or the creation of regional institutions, thereby creating a
new relevant (regional) space for many aspects of human behaviour and activities.11
When comparing both definitions, it may be noticed that the latter contains,
indeed, elements that emphasize the features of new regionalism: its
multidimensional nature, the multiplicity of actors and the difference between
regional interdependence and the construction of regional institutions. Other fea-
tures may be also included, such as public-private partnerships; differences between
the concepts of government and governance; and the increased focus on negotiation
and cooperation processes, including their informal and not institutionalized
aspects.12 These elements reinforce the idea that neither the government nor the
non-governmental sector has the necessary characteristics for isolation when deal-
ing with issues of contemporary governance and regional integration. Therefore,
both must act jointly.
In order to explain the variations in the concept of regional integration, several
authors have attempted to distinguish between what is considered regionalism—
formal policies and projects where State and non-State actors seek strategies of
coordination and cooperation within a certain region, which may result in some
degree of institutionalization—and regionalization—processes of cooperation,
integration and cohesion on specific or general subjects. It is noteworthy that
there is no hierarchical relationship between the two modalities, i.e., the absence
of formal institutions of the regionalization process does not imply inferiority
9
Nye (1971), pp. 16–17.
10
Agnew (1994).
11
12
Sagan (2009), p. 95.
regarding what is called regionalism; on the contrary, there is constant intersection

between the policy objectives of regionalism and regionalization process, as parts
of the same system.13
By proposing a broad definition that comprises the components of new region-
alism, De Lombaerde asserts that a region can be characterized by different kinds of
boundaries: geographic or not; jurisdictional or not; open, closed or porous. He also
states that a region may be also characterized by the occurrence of internal and
extra-bloc transactions at the same time. At last, the scholar highlights that all forms
of integration should be included in the concept of region, whether shallow or deep,
formal or informal, institutionalized or not institutionalized, legal or illegal, micro
or macro, endogenous or exogenous, confirming, once again, the dynamic charac-
teristic of this social phenomenon.14
Hence, the third wave of regionalism represents the integration process of
countries in the twenty-first century. As noted by Baldwin, twenty-first century
regionalism is not primarily about preferential market access as was the case for
twentieth century regionalism; it is about disciplines that underpin the trade-
investment-service nexus.15 In other words, regionalism is driven by a different
set of political economy forces and it is largely about regulation rather than tariffs.
In the light of the regionalism waves’ theory above described, it is important to
analyse the regionalism processes in Latin America, its development’s strategies,
its achievements and its new challenges. Thus, the next section intends to investi-
gate these and other relevant aspects of the integration process in Latin America.
3 Regionalism in Latin America: An Overview
Over the last decades, several attempts of regional integration have been observed
in Latin America. The influence of the Economic Commission for Latin America
and the Caribbean—(ECLAC) is remarkable and makes important contributions to
a better understanding of the regionalist phenomenon in Latin America.16 The
Commission perceives regional integration as a strategy to promote social and
economic development among Latin American countries.
In this sense, Amado Cervo called development paradigm of Latin American
international relations some shared characteristics of the foreign policy of Latin
American countries from 1930s up to the late 1980s.17 These characteristics
encompassed concerns with the external national vulnerability and the way Latin
American countries were inserted in the global markets. Amid an import
13
Hameiri (2013), p. 318.
14
15
Baldwin (2011).
16
Economic Commission for Latin America and the Caribbean (1994).
17
Cervo (2003).
substitution policy, such a paradigm would make foreign policy responsible for
raising the necessary resources to enhance internal development through: (1) open-
ing markets for export products; (2) obtaining foreign investment to sustain growth
of the national economy; and (3) transferring technology.18
Also during the 1980s, the debt crisis has made regional integration blossom
again: the recognition of structural weaknesses meant that integration became an
outlet for the recovery from the crisis. According to Baumann, regional integration
at that time began to understand the need for coordination of production structures.
It has become a platform for increased exports and turned the coordination in the
international scene into a priority.19 A hallmark of this period is the pursuit of
productive complementarity between Brazil and Argentina, in what would be the
embryo of Mercosur.
In the early 1990s, there was progressive trade liberalization in Latin American
countries and the decline of US hegemony in the post-war period. Integration was
then understood as a means of introducing Latin American economies into the
international economy. In this context, emerged the concept of open regionalism, as
defined by ECLAC as:
A process of increasing interdependence at the regional level, promoted by preferential
integration agreements and other policies in the context of liberalization and deregulation
able to strengthen the competitiveness of the region and, insofar as possible, allow the
formation of blocs for a more open and transparent global economy.20
By combining the phenomena of growing regional interdependence and the ten-

dency to promote trade liberalization, it is understood that the new theory proposed by
ECLAC school does not see regional integration as an obstacle, but as a step in the
liberalization process, combining deepening regional integration in the international
integration of neoliberal strategies of States in a world of global flows.
The market came to be understood as the means of overcoming the model of
industrialization already exceeded by diversifying the production structure and
reducing external vulnerability. The open regionalism promoted a structural
break with historical thinking presented by ECLAC hitherto, since, instead of
promoting ingrowth, it started to turn out with the aim of ensuring international
competitiveness. Mercosur comes amid this context, as a result of the rapproche-
ment between Brazil and Argentina that took place in the previous decade.21
In 1986, Puig identified challenges posed by the regional integration model
adopted by Latin American countries that still can be verified nowadays. In
accordance with the scholar, the concept of integration can be defined as the social
phenomenon whereby two or more human groups adopt a permanent regulation of
certain matters which until that moment belonged to its exclusive jurisdiction.22
18
Cervo (2007).
19
Baumann (2005).
20
Economic Commission for Latin America and the Caribbean (1994), p. 8.
21
Scheibe (2013), p. 45.
22
Puig (1986), p. 41.
As previously mentioned, De Lombaerde, when analysing the evolution of the

concept of integration, found that, traditionally, attempts to define this phenomenon
were based primarily on regional aspects, in which there were a limited number of
States linked by a geographical relationship that sought a certain degree of
interdependence. On the other hand, De Lombaerde found that the most current
definitions take into account the multidimensional process of social transformation,
where there is a multiplicity of actors interacting with the goal of creating a relevant
regional space for various aspects of human behaviour.23
In order to clarify the definition proposed, Puig points out that the human groups
to which he makes reference encompasses many actors beyond the State. The
author also explains that integration should make these social groups abandon
their individual action in certain matters in order to act together and permanently
with the other participants of integration.24 Thus, it can be stated that the concept of
regional integration by Puig back in the 1980s has very modern aspects in accor-
dance with the definition suggested by De Lombaerde.
According to Puig, when the Institute for the Integration of Latin America and
the Caribbean (INTAL) was created in 1965, it had the intention to carry out the
integration in Latin America in a broader sense, encompassing economic, social,
historical, political, legal and institutional aspects. However, the socio-political
aspect of integration was gradually abandoned by Latin America according to
changes in the political orientation of governments, which began to focus its efforts
on economic integration based on interdependence and complementarity of
national markets.25
In addition to interdependent integration, Puig highlights the path of integration
through solidarity, most likely between countries with large disparities in potential.
In this case, there are two possible scenarios. In the first one, the solidarity
integration relates to the status that States have before the international community,
such as similar positions, comparable social structures and shared perspectives and
interests. In the second scenario, solidarity integration refers to the values that
States have in common, such as autonomy in the case of Latin America.26
It should be noted that the featured integration modalities are not mutually
exclusive. The Cartagena Agreement, which gave birth to the Latin American
Integration Association (LAIA),27 was created as a sub-regional economic integra-
tion agreement based on interdependence, but with supportive objectives among
which predominates the search for greater autonomy of the signatory countries.
With respect to autonomy, Puig describes as an optimal situation one in which
23
De Lombaerde (2012).
24
Puig (1986), p. 41.
25
Ibid., p. 42.
26
Ibid., p. 44.
27
LAIA includes Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador, Mexico, Panama,
Peru, Uruguay and Venezuela.
government resolutions correspond to the potential margin of autonomous decision

of the State: increasing national autonomy means increasing the margin of the
decision itself.28
On this view, the next section aims to investigate the insertion of Brazil and
Mercosur in the context of the twenty-first century regionalism. This issue is
analysed through the perspective of the regionalism waves regarding how it
impacted the Latin American integration process.
4 The Insertion of Brazil and Mercosur in the Context

of the Twenty-First Century Regionalism
Historically, Brazilian foreign policy favours multilateral sphere as the main forum
for negotiations because it is believed that multilateral negotiations offer the best
conditions for developing countries to ensure more balanced results in their areas of
interest. It is also worth noting that the attempts to strengthen South-South coop-
eration at the expense of North-South relations has been a priority of the Brazilian
government in the last decade.
Since the early 1990s, Brazil has been privileging an integration plan focused on
South America. Mercosur, an economic integration agreement that includes Brazil,
Argentina, Paraguay, Uruguay and Venezuela, rises from the exhaustion of the
import substitution policy, at a time when it was needed to reverse protectionism
and open up national markets. As noted above, this moment was called open
regionalism.
The creation of Mercosur was driven by the intention of forming a common
market that would cover the free movement of goods, services and factors of
production; the elimination of tariff and non-tariff trade restrictions; the establish-
ment of a common external tariff; the adoption of a common trade policy; and the
coordination of macroeconomic and sectorial policies.
However, more than 20 years after its foundation, the success of Mercosur has
been regularly questioned. Brazilian Ambassador Rubens Barbosa29 has declared in
several opportunities that the Mercosur is facing a critical moment regarding its
primary objective, in other words, to consolidate a full economic integration
through the creation of a common market.30 Even though the bloc was able to
promote a significant increase in trade flows among its Members in its beginning,
nowadays, its advancement lies prevented by the adoption of protectionist barriers,
schedule slippage, lack of compliance with the goals initially established and
political unwillingness in order to intensify integration.
28
Puig (1986), p. 51.
29
Barbosa (2013).
30
See, for example Thorstensen (2013a); Thorstensen (2013b).
Already in the 1980s, Puig had predicted that integration based on a broad
market among nations with significant asymmetries, especially when one of them
has a developed industrial market and strong pressure groups, without taking into
account the non-State integrationist demands that follow economic integration,
would be doomed to failure.31 This seems to be the current situation faced by
Mercosur’s Member States.
Besides, it is important to stress that Brazil is isolated from the new international
economic trend of entering into Preferential Trade Agreements (PTAs). In the last
decades, the world has witnessed the increasing proliferation of PTAs concluded in
parallel to the World Trade Organization (WTO) system. At the beginning of the
1990s, there were only 70 PTAs in force. In 2013, 546 PTAs have already been
reported to the WTO, of which 256 are currently in force.32 These numbers
demonstrate a shift in how trade is being regulated and negotiated internationally.
According to Baldwin, this new wave of agreements can be understood as a
response to the demands of the twenty-first century regionalism that has as its core
the trade-investment-service nexus.33 On the opposite direction of this new trend,
Brazil presents only few PTAs. On continental sphere, the country is a founding
Member of Mercosur, embedded in the Latin American Integration Association
(LAIA), and it has PTAs (all currently in force) with Chile, Bolivia, Mexico
(general and for the automotive sector), Peru, Cuba, Guyana and Suriname (only
rice) and Colombia, Ecuador and Venezuela. On the extra-continental sphere,
Brazil, jointly with Mercosur, has signed PTAs with India, Israel, Egypt, Palestine,
the Southern African Customs Union (SACU),34 of which only the first two are
currently in force. Besides, it important to stress that Brazil has also recently gotten
back the PTA’s negotiation with the European Union.35
Compared to other countries actively engaged in the world trade, Brazil is
practically isolated from this new dynamic of negotiation and rule setting. In this
sense, the proliferation of PTAs constitutes one of the major challenges faced by the
country. It is extremely important to understand its consequences to the Mercosur’s
system and analyse its consequences for the development of its Member States.
As already explained, regional integration initiatives are a complex and multi-
faceted phenomenon, and often a complete economic and political integration may
prove unachievable in the short and medium term. This, however, does not mean
that other forms of integration are also unfeasible. According to Celli:
Perhaps, this rethinking could allow the perception of a model under which integration is
not circumscribed to market mechanisms, but, on the contrary, it also employs instruments
31
Puig (1986), p. 44.
32
Thorstensen and Ferraz (2013).
33
Baldwin (2011).
34
The Southern African Customs Union (SACU) is formed by Botswana, Lesotho, Namibia,
South Africa and Swaziland.
35
Thorstensen and Ferraz (2013).
and procedures that could conduct to an autonomous and sustainable development for the
benefit of the participating populations.36
In a similar vein, the joint integration described by Puig could represent a way
out so that Mercosur’s Member States can achieve sectorial objectives based on
shared values.37 The integration through infrastructure serves as an example of
possible alliances within the joint integration. At the regional level, this type of
integration may have strategic value and would be of great importance to leverage
growth and achieve higher levels of development in the region.
When dealing with the physical integration, also known as silent integration, the
ECLAC lists some characteristics that show the importance of this mode of
integration, such as: (1) it leads to the effective realization of economic, business
and political integration; (2) it allows the progressive and joint problem solving,
e.g., physical bottlenecks, while stimulating the creation or reorganization of supply
chains, provides decentralized development and decreases the commercial and
distribution costs; (3) it has great potential to foster unity, peace and development
and to achieve greater social equity and reduce disparities between countries and
within countries; (4) it undertakes the long and medium term, making investments
in the infrastructure sector safer and allowing execution of projects continuously,
including in times of crisis; (5) it may incorporate participation and decision of
local governments and the private sector through the development, financing,
construction and operation of works of physical integration, etc.38
From the perspective of physical integration, we can address the issue of energy
integration. The benefits of establishing an energetic link between two or more
countries to form a regional energy market are numerous, both for countries with
surplus energy as for importing countries. Among this advantages, it can be
highlighted the markets expansion, the optimization and complementarity in use
of natural resources, the exploitation of shared resources, the increase in the
security of supply and other environmental benefits.
As we have seen before, regionalism and regionalization is not only a matter of
economics. This is just one of the many possible alternative paths for Mercosur. As
described above, the economic bloc is not experiencing its best moment. However,
new perspectives can be delineated through a multidimensional view of the inte-
gration process. Only then, the goals once envisaged can be achieved.
36
Celli (2006), p. 21.
37
Puig (1986).
38
Tomassian (2009), p. 2.
5 Final Remarks
The points discussed herein represent only a small portion of the immense universe
of issues related to the new regionalism. Thus, the complexity of regionalism/
regionalization processes should continue to be studied in order to achieve a better
understanding of the topic.
The profound economic transformations observed in recent years have caused
the breakdown of the stability of various economic blocs, including Mercosur.
Hence, it is necessary to rethink its regional integration process in order to adapt
it to the new global reality. This could provide more economic competitiveness and
development for its Member States.
As can be observed, Brazil is isolated from the new world economic trend of
entering into PTAs. This foreign policy could be rethought so that the country may
have a voice in the way trade is being regulated internationally. Besides, the search
for new models of integration may solve common problems between neighbouring
States, problems that often go beyond merely economic perspectives.
In this particular sense, it is important to stress that regional development
depends not only on economic integration, but it is also associated with physical
integration and infrastructure improvement. One can even say that the economic
and physical integration are two sides of the same coin, i.e., complementary and
indispensable to integration’s goals.
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Regionalization Within the SPS Agreement:
Recent Developments
Anna G. Micara
Contents
1 Regionalization Within the SPS Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
2 The Adoption of the Guidelines to Further the Practical Implementation of Article
6 of the SPS Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
3 The Relevance of International Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
4 The Recent Case-Law on Regionalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
4.1 Article 6 as a Whole . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
4.2 The Role of the Importing Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
4.3 The Role of the Exporting Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
5 SPS-Plus Measures in FTAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
Abstract The SPS Agreement includes a significant provision according to which

SPS measures are to be adapted to regional conditions (art 6). However, its
implementation faces several problems, especially concerning complex and slow
administrative procedures and the obtaining of recognition of international organi-
zations’ standards. This Chapter will examine the process of adoption by the SPS
Committee of the “2008 Guidelines to Further the Practical Implementation of
Article 6 of the Agreement on the Application of Sanitary and Phytosanitary
Measures” and will then focus on the interpretation of art 6 in the very recent
WTO case law, so as to assess to what extent it gives more guidance. Finally, given
the relevance of Free Trade Agreements, it will be appropriate to analyse SPS-plus
measures in those agreements, especially the EU context as it includes regionali-
zation’s provisions going far beyond art 6.
A.G. Micara (*)

Department of International, Legal, Historical and Political Studies, University of Milan,
Milan, Italy
e-mail: annagiuliam@gmail.com

DOI 10.1007/978-3-319-44645-5_7
112 A.G. Micara
1 Regionalization Within the SPS Agreement
The Agreement on the Application of Sanitary and Phytosanitary Measures (SPS

Agreement) of the World Trade Organization (WTO) aims at regulating the right of
WTO Members to take measures for the protection of human, animal or plant and to
provide their appropriate level of protection (ALOP) while ensuring that these
measures do not result in disguised restrictions to free trade or are applied in a
discriminatory manner.1 In the event of risks arising, for example, from animal or
plant diseases, Members may adopt sanitary and phytosanitary (SPS) measures
such as import bans, testing or certification procedures or labelling requirements
related to food safety, which may therefore affect international trade.2 In order to
assess the consistency of these “obstacles to trade” with the SPS Agreement it is
crucial to evaluate whether they are “based on scientific principles” (art 2.2). The
scientific evidence criterion is specified in art 5.1 according to which “Members
shall ensure that their sanitary and phytosanitary measures are based on an assess-
ment, as appropriate to the circumstances, of the risks to human, animal or plant life
or health”. Another main feature of the Agreement is that it encourages harmoni-
zation through a requirement for Members to base their SPS measures on interna-
tional standards, guidelines and recommendations adopted by the so-called “sister
organizations” e.g. the International Office of Epizootics (OIE), now World Orga-
nization for Animal Health, the International Plant Protection Convention (IPPC)
and the Codex Alimentarius Commission. SPS measures that conform to those
international standards are presumed to be consistent with the Agreement.3
It may occur that, due to a case of Bovine Spongiform Encephalopathy (BSE) in
livestock in a WTO Member, other Members ban imports of meat from that country
in order to prevent the spreading of that disease within its own territory.4 However,
the disease may be localized only in a little part of a big exporting country so that
exports of animals and meat from other regions of that country are restricted but in
principle they may be safe and restrictions may not be justified by scientific
evidence. Therefore, restrictions based on political borders could cause enormous
losses to food industries and could be a problem for many WTO Members such as
the EU, the US, China, Canada, Brazil, as well as for smaller countries which are
net food exporters. Furthermore, in certain circumstances it may be too costly for
the exporting country to have the whole country free of a disease. Acknowledging
this, the SPS Agreement includes a provision concerning adaptation to regional
1
WTO Agreement on the Application of Sanitary and Phytosanitary Measures, Annex 1 A of the
Agreement Establishing the World Trade Organization, 15 April 1994, https://www.wto.org/
english/docs_e/legal_e/legal_e.htm.
2
On the notion of SPS measures see Annex A of the SPS Agreement and see, among others, Scott
(2007), pp. 10 ff.
3
For a general overview of the SPS Agreement see, among others, Gruszczynski (2010), pp. 35 ff.
Marceau and Trachtman (2014), pp. 351 ff. Alemanno (2007), pp. 239–290.
4
Loppacher and Kerr (2005), pp. 427 ff.
Regionalization Within the SPS Agreement: Recent Developments 113
conditions, so-called “regionalization” or “zoning”, which establishes the obliga-

tion for WTO Members to ensure that SPS measures are adapted to the SPS
characteristics of the areas of origin and destination of the products (art 6.1).
Regionalization “may be seen as a specific reflection of the necessity test provided
by Article 2.2 and the least-trade-restrictive obligation of Article 5.6”5 and it is a
much significant provision since it makes possible to enhance health protection at
national level while improving market access for products from regions which meet
the ALOP.
In order to adapt their SPS measures, Members assess the SPS characteristics of
a region (in the exporting or importing country) taking into account a
non-exhaustive list of factors such as “the level of prevalence of specific diseases
or pests, the existence of eradication or control programmes, and appropriate
criteria or guidelines which may be developed by the relevant international orga-
nizations” (art 6.1). Article 6 then specifically refers to the so-called pest- or
disease-free areas (PDFAs) and areas of low pest or disease prevalence (ALPDPs).
PDFAs are defined as areas “whether all of country, part of a country, or all parts of
several countries, as identified by the competent authorities, in which a specific pest
or disease does not occur” (Annex A(6) SPS Agreement); while ALPDPs are areas
“whether all of a country, part of a country, or all parts of several countries, as
identified by the competent authorities, in which a specific pest or disease occurs at
low levels and which is subject to effective surveillance, control or eradication
measures” (Annex A(7) SPS Agreement). Indeed importing countries are required
to recognize the concept of PDFA and ALPDP and, in order to determine them, they
must consider factors such as geography, ecosystems, epidemiological surveillance,
and the effectiveness of sanitary or phytosanitary controls (art 6.2), while exporting
countries claiming PDFAs and ALPDPs “shall provide the necessary evidence
thereof in order to objectively demonstrate to the importing Member that such
areas are, and are likely to remain, pest- or disease-free areas or areas of low pest or
disease prevalence, respectively” (art 6.3).
At the beginnings of 2000s several exporting countries complained within the
SPS Committee about the lack of implementation of this provision.6 After exam-
ining the issues raised by WTO Members and the Guidelines on implementation
adopted in 2008, the paper will focus on the interpretation of art 6 of the SPS
Agreement in the recent WTO case-law in order to assess to what extent it gives
more guidance, therefore improving implementation. Finally, since nowadays
WTO-plus measures are concluded through Free Trade Agreements (FTAs), it
will be interesting to analyse the provisions on regionalization in the FTAs of the
EU because, compared to other FTAs, they often include SPS-plus measures on this
aspect.
5
Gruszczynski (2010), p. 251.
6
The SPS Committee was established “to provide a regular forum for consultations” and carries
out “the functions necessary to implement the provisions of this Agreement and the furtherance of
its objectives” (SPS agreement, art 12).
114 A.G. Micara
2 The Adoption of the Guidelines to Further the Practical

Implementation of Article 6 of the SPS Agreement
Already in the 1999 review of the SPS Agreement, only 4 years after its entry into
force, the SPS Committee noted that implementation of regionalization proved to
be difficult due to
divergences in interpretation and implementation of international guidelines; an exces-
sively lengthy administrative process in importing countries for recognizing pest- or
disease-free areas or areas of low pest or disease prevalence; and the complexities often
involved in risk assessment.7
In 2003 a number of WTO Members, mainly from Latin America such as

Mexico, Peru, Chile and Argentina, proposed to the SPS Committee to develop
guidelines to improve the implementation of regionalization.8 These countries, as
well as the EU,9 complained that many exporting Members which successfully
managed to achieve pest- or disease-free status in a certain area experienced
difficulties and lengthy delays in the process of getting recognition of PDFAs and
ALPDPs by importing Members. Implementation problems were mainly due to
very complex and slow administrative procedures in the importing countries.10 This
was regrettable since the possibility to reduce trade barriers through regionalization
is an incentive to improve disease control; moreover, creating PDFA and ALPDP
and maintaining them entails large investments and efforts that could take many
years,11 in particular for developing countries.
Several WTO Members underlined the need to avoid duplications with the work
of international standard-setting bodies (ISSBs). According to some Members, such
as the EU,12 the SPS Committee should have dealt with clear and predictable
administrative guidelines while the ISSBs should have focused on the technical
and scientific guidelines. According to others (US, Canada, New Zealand, Japan) in
7
WTO doc. G/SPS/12, Review of the Operation and Implementation of the Agreement on the
Application of Sanitary and Phytosanitary Measures, 11 March 1999, para 21.
8
See WTO doc. G/SPS/R/31, Summary of the Meeting held on 29–30 October 2003, 23 December
2003, para 90 ff. see also in particular WTO doc. G/SPS/W/140, Draft Decision on the Imple-
mentation of Article 6 of the Agreement on the Application of Sanitary and Phytosanitary
Measures, Proposal by Chile, 23 October 2003.
9
WTO doc. G/SPS/GEN/461, Review of the SPS Agreement, Update on adaptation to regional
conditions, Submission by the European Communities, 12 December 2003, para 24.
10
WTO doc. G/SPS/GEN/388, Comments on Article 6 of the SPS Agreement – Regionalization,
1 May 2003 para 2; WTO doc. G/SPS/GEN/640/Rev.1, Issues on the Application of Article 6 of
the Agreement on the Application of Sanitary and Phytosanitary Measures. Background Docu-
ment, Note by the Secretariat, 14 September 2006, para 7 ff.
11
WTO doc. G/SPS/W/148, Article 6 of the Agreement on the Application of Sanitary and
Phytosanitary Measures, Adaptation to Regional Conditions, Including Pest- or Disease-Free
Areas and Areas of Low Pest or Disease Prevalence, Proposal by Peru, 7 July 2004, paras 3–4.
12
WTO doc. G/SPS/R/42, Summary of the Meeting of 27–28 June 2006, 25 September 2006, para
84.
order to avoid duplications, scientific and technical guidelines should have been
developed first and the SPS Committee should have only dealt with potential
gaps.13 The first view, supported also by OIE,14 prevailed. However, it is not
possible to neglect the close connection between technical and administrative
procedures and the overlaps with administrative steps developed by ISSBs.
Another relevant topic was whether guidelines should have included binding
timeframes concerning the administrative procedures. Given the importance that
adaptation is done within a reasonable period of time, several Members, such as
Brazil and Peru, encouraged the development of clear time schedules in order to
avoid undue delays while enhancing transparency.15 However, this was opposed by
many developed countries, especially Japan, a large food importing country, but
also US and Korea. These countries seemed to be concerned that setting timeline
recommendations would have disregarded peculiarities of single diseases from a
scientific and technical perspective and the diverse regulatory environments.16
Overall, on the one hand exporting countries suggested that difficulties were
protectionist-motivated while importers argued that it was necessary to act with
caution to avoid spreading diseases and pests and were reluctant to lose their
leeway.17
In 2008 the Guidelines to Further the Practical Implementation of Article 6 of
the Agreement on the Application of Sanitary and Phytosanitary Measures18 (here-
after: the Guidelines) were adopted. They are not binding and recall that “Members
have the sovereign right to determine their own processes for the evaluation of
requests for recognition of pest- or disease-free areas or areas of low pest or disease
prevalence” (para 19). At the same time, they set important principles, which are
transparency, non-discrimination, predictability, confidence and credibility, and
they contribute to clarify and set out procedural steps that exporting and importing
countries should follow to adapt their SPS measures. After initial discussion upon
request of the exporting Member aimed at clarifying general issues on the evalu-
ation of the request, typical administrative steps include: the exporting Member
requests information about procedures for the evaluation of PDFAs and ALPDPs
and/or for recognition of those areas, which may be supported by scientific
13
WTO doc. G/SPS/R/37, Summary of the Meeting held on 29–30 June 2005, Note by the
Secretariat, 11 August 2005, para 101.
14
WTO doc. G/SPS/R/44, Summary of the Meeting of 28 February-1 March 2007, 30 May 2007,
para 106.
15
WTO doc. G/SPS/R/38, Summary of the Special Meeting on Article 6 (Regionalization) held on
30–31 January 2006 27 February 2006, paras 6–8–10.
16
Ibid., para 7. See also in particular, WTO doc. G/SPS/W/195, The Implementation of Article 6 of
the Agreement on the Application of Sanitary and Phytosanitary Measures (Regionalization)
Communication from the Republic of Korea, 31 May 2006, para 12.
17
On the debate within the SPS Committee see, among others, Scott (2007), pp. 186–190;
Loppacher et al. (2007), pp. 678–679.
18
WTO doc. G/SPS/48, Guidelines to Further the Practical Implementation of Article 6 of the
Agreement on the Application of Sanitary and Phytosanitary Measures, 16 May 2008.
116 A.G. Micara
information; the importing Member then explains its requirements so that the
exporting Member may provide relevant documentation. The importing Member
evaluates the documentation and gives a feedback to the exporting Member and, if
necessary, it may request additional information. After the exchange of relevant
information between the countries and, if applicable, after on-site verification by
the importing Member in order to verify the information provided, the importing
Member makes a determination. Concerning timeframes, the final text leaves broad
latitude to Members: there is a general provision according to which “[m]embers
should proceed with a recognition process without undue delay” (para 5) but few
provisions specify a precise timeframe: initial discussions should be undertaken
“within a reasonable period of time, and normally within 90 days of a request or as
otherwise mutually decided” (para 15) and in certain circumstances, in particular
whether a “relevant international organization” has officially recognized a PDFA or
ALPDP, Members may apply an “expedited process” to evaluate the request for
their recognition (para 32).
3 The Relevance of International Standards
Another main issue raised by several WTO Members within the SPS Committee
was that “importing Members do not, in most cases, give effect to the recognition
granted by the international reference organizations”19 of disease- or pest-free
sanitary and phytosanitary status or they give effect to such recognition with
delay. During negotiations of the Guidelines, certain Members proposed that
among the administrative steps there should be a request of recognition by ISSBs
as a prerequisite for bilateral recognition20 and that when a country obtains ISSB
recognition the administrative process “may” be “expedited”. While the latter was
in the end adopted, as noted above, the former was not included in the final version
since several Members, such as US, South Korea and Brazil, underlined that
“emphasis should be on the bilateral pursuit of regionalization determination in a
transparent and predictable manner”21 and that decisions on regionalization should
be based on relevant facts (therefore determinations by ISSBs would be only one of
them).22 This second approach better fits with the interpretation of art 6.1 according
19
WTO doc. G/SPS/GEN/388, supra, n. 10, para 2.
20
WTO doc. G/SPS/GEN/640, Issues on the Application of Article 6 of the Agreement on the
Application of Sanitary and Phytosanitary Measures. Background Document, Note by the Secre-
tariat, 20 March 2006, para 27.
21
See US and EC in WTO doc. G/SPS/R/42, supra, n. 13, paras 83 and 85 as well as WTO doc.
G/SPS/W/189, Comments On Background Document G/SPS/GEN/640 “Issues in the Application
of Article 6 of the Agreement on the Application of Sanitary and Phytosanitary Measures”,
Document Submitted Jointly By Argentina, Brazil, Colombia, Ecuador, Paraguay And Uruguay
24 May 2006, p. 1.
22
WTO doc. G/SPS/R/42, supra, n. 12, para 83.
to which it has to be read as “lex specialis to a general obligation of Article 3.1”.23

Indeed art 3.1 obliges Members to “base” their SPS measures on international
standards, guidelines or recommendations whereas according to art 6.1 appropriate
criteria or guidelines which may be developed by the relevant international orga-
nizations are to be “taken into account”, something which does not imply that SPS
measures should be “based on” international standards so that those measures may
contradict relevant standards.24 Furthermore, it is not clear yet whether ISSBs
official recognition of PDFA and ALPDP should be considered as guidelines,25
and, in any case, exporting Members should also prove that relevant areas are
“likely to remain” free (art 6.2).
However, standards adopted by OIE and IPPC26 have in practice a very signif-
icant role. Regionalization had been part of OIE’s work since its inception but, in
parallel with the discussion on administrative guidelines within the SPS Committee,
both OIE and IPPC started to make more efforts in developing international stan-
dards on regionalization and on the designation of PDFAs and ALPDPs. In partic-
ular, OIE has included in its Terrestrial Animal Health Code (Terrestrial Code)
general requirements to obtain and maintain disease-free status (Chapter 4.3.1) and
specific requirements for many diseases such as Foot-and-Mouth Disease, Classical
Swine Fever, Newcastle Disease, Avian Influenza; moreover, OIE may recognize
officially the disease free status of a country or part of it.27 There is therefore a
number of standards which WTO Members often take into account: when the SPS
Committee deals with specific trade concerns (which according to some authors are
“akin to an informal form of resolution of trade conflicts that operates in parallel to
the Dispute Settlement mechanism and covers a broad range of non‐tariff barriers of
a regulatory nature”28) reliance on those standards has been much relevant.29
23
Gruszczynski (2010), p. 253. On harmonization and autonomy see also Arcuri (2013), pp. 164 ff.
24
See, among others, WTO Doc. WT/DS245/R Panel Report, Japan – Measures Affecting the
Importation of Apples, 15 July 2003, para 8.241 “We recall that Article 5.1 requires the ‘risk
assessment techniques developed by the relevant international organizations’ to be ‘taken into
account’. We note first that this expression does not impose that a risk assessment under Article 5.1
be ‘based on’ or ‘in conformity with’ such risk assessment techniques. This suggests that such
techniques should be considered relevant, but that a failure to respect each and every aspect of
them would not necessarily, per se, signal that the risk assessment on which the measure is based is
not in conformity with the requirements of Article 5.1”.
25
Gruszczynski (2010), pp. 256–257.
26
Art 6.1 refers to “relevant international organizations” without specifying which ones so other
organizations’ standards may be taken into account but mainly the sister organizations deal with
the adoption of those standards: Scott (2007), p. 180.
27
See, for example, OIE Resolution No. 17 Recognition of the Foot and Mouth Disease Status of
Member Countries http://www.oie.int/fileadmin/Home/eng/Animal_Health_in_the_World/docs/
pdf/2015_A_RESO_R17_FMD.pdf.
28
Horn et al. (2013), p. 1.
29
See, among others, WTO doc. G/SPS/GEN/204/Rev.15, Specific Trade Concerns, 24 February
2015, para 2.79; WTO doc. G/SPS/GEN/204/Rev.13, Specific Trade Concerns, 26 February 2013,
paras 2.118 and 2.167.
118 A.G. Micara
On the other hand, recently Chile complained again about implementation of art
6 and underutilization of the Guidelines since “specific trade concerns were proof
that Members did not always accept international recognition of a country’s
particular disease status”.30 Indeed regionalization remains a sensitive process
involving trust on the counterpart and especially on the veterinary/phytosanitary
system in place in the exporting Member, as acknowledged also by the Guide-
lines,31 and this is particularly relevant for developing countries having underde-
veloped SPS regulatory regimes. That aspect was underlined by the EU with respect
to the problem of inconsistencies in the application of regionalization procedures to
different Members.32
4 The Recent Case-Law on Regionalization
Within this framework, it is interesting to analyse the case-law on regionalization in

order to assess to what extent it gives more guidance. In order to proceed, it is
relevant to consider that art 6 SPS Agreement sets out very limited procedural
requirements and is silent on many relevant issues, such as how to recognize the
concepts of PDFA and ALPDP and how the exporting Member has to objectively
demonstrate that certain areas are and are likely to remain PDFA and ALPDP.
Article 6 has been interpreted for the first time in 2014 in the panel report India –
Measures Concerning the Importation of Certain Agricultural Products,33 which
was followed by the Appellate Body’s report in 2015.34 As the case dealt with
Avian Influenza (AI), it is necessary to underline that there are two AI groups based
on their pathogenicity (i.e. their ability to cause disease in birds): highly pathogenic
avian influenza (HPAI) is extremely infectious, and low pathogenic avian influenza
(LPAI) has low virulence and is endemic in various species of wild birds.35 The US
notified to OIE occurrences of LPAI in poultry since 2006 but did not notify HPAI
30
WTO doc. G/SPS/R/76, Summary of the Meeting of 15 and 17 October 2014, 2 December 2014,
para 7.4.
31
“Any determination under Article 6 should consider the strength and credibility of the veterinary
or phytosanitary infrastructure of the exporting Member in accordance with the importing Mem-
ber’s appropriate level of sanitary or phytosanitary protection” (WTO Doc. G/SPS/48 supra, n. 18,
para 8).
32
See WTO doc. G/SPS/R/42 supra, n. 12, para 84: “the ultimate decision to recognize remains
with the importing Member and very much depends on the trust in the competent authority of the
exporting Member. This trust builds on the veterinary/phytosanitary system in place and previous
experience with the exporting Member”. See also Canada and US in WTO doc. G/SPS/R/38,
supra, n. 15, paras 13 and 18.
33
WTO Doc. WT/DS430/R, Panel Report, India – Measures Concerning the Importation of
Certain Agricultural Products, 14 October 2014.
34
WTO Doc. WT/DS430/AB/R, Appellate Body Report, India – Measures Concerning the
Importation of Certain Agricultural Products, 4 June 2015.
35
WTO Doc. WT/DS430/R, supra, n. 33, paras 2.7–2.12.
outbreaks since 2004,36 while India notified to OIE 95 outbreaks of HPAI from
2003 to 2013.37 In 2011 India’s Central Government Department of Animal
Husbandry, Dairying, and Fisheries (DAHD) issued a statutory order (S.O. 1663
(E)) establishing import restrictions of various agricultural products, such as ducks,
turkeys, meat products and eggs, due to concerns related to AI. The DAHD was
entitled to adopt this measure thanks to power conferred by the 1898 Livestock
Act38 which empowers the Central Government to regulate the import into India of
any livestock which may be liable to be affected by infectious or contagious
diseases.39 With its claim before the WTO, the US asserted that India did not
adapt its measures to regional conditions and had not taken into account relevant
factors that should be assessed in order to adapt them, such as relevant OIE
guidelines (i.e. Chapter 10.4 of the Terrestrial Code), as required by art 6.1.
Moreover, India had not recognized the concept of PDFA and ALPDP, as required
by art 6.2.40 India agreed that relevant guidelines were provided by the OIE
Terrestrial Code, but argued that according to art 6.1 the guidelines should be
“taken into account” so that it is up to importing countries to decide whether to
recognize zones according to their ALOP while taking into account also other
factors. In addition, art 6.3, concerning the role of the exporting countries, was
critical in the interpretation of arts 6.1 and 6.2 since it would have placed the burden
upon the exporting country to initiate the proposal to recognize regionalization and
to provide relevant evidence so that only when a party complied with art 6.3
requirements of arts 6.1 and 6.2 were triggered.41
A month after the Appellate Body report on India – Agricultural Products, a
second panel dealing with regionalization has been issued. The report US – Mea-
sures Affecting the Importation of Animals42 concerned measures taken to avoid
spread of Foot-and-Mouth Disease (FMD), a highly contagious viral disease affect-
ing livestock and wildlife which can survive in contaminated materials and in the
environment for several months. The US prohibited imports of FMD-susceptible
animals and animal products (i.e. fresh beef chilled or frozen) from regions where
FMD existed.43 Argentina claimed that the import ban of FMD-susceptible animals
and animal products from Patagonia was inconsistent with arts 6.1 and 6.2 since the
US did not take into account OIE region-specific disease status determinations, the
level of prevalence of specific diseases or pests of certain regions of Patagonia, and
36
Ibid., paras 2.45–2.46.
37
Ibid., paras 2.47.
38
Live-Stock Importation Act, Act No. 9 of 1898, as amended by the Live-Stock Importation
(Amendment) Act (No. 28 of 2001).
39
WTO Doc. WT/DS430/R supra, n. 33, para 2.3.
40
Ibid., paras 7.618–7.619.
41
Ibid, paras 7.631–7.645.
42
WTO Doc. WT/DS447/R, Panel Report, US – Measures Affecting the Importation of Animals,
Meat and Other Animal Products from Argentina, 24 July 2015.
43
Code of Federal Regulations, Title 9, Part 94.1.
120 A.G. Micara
the eradication and control programme put in place in order to adapt its measures to
the SPS characteristics of the areas of origin and destination of the products.
Moreover, maintenance of the measure was not based on factors listed in art
6.2.44 According to the US a claim to evaluate new information concerning disease
freedom led the existing measure to be a provisional measure falling within art
5.7,45 the fact that APHIS was still in the process of adapting its measures was due
to justified uncertainty as to whether Argentina objectively demonstrated that
Patagonia was and was likely to remain FMD-free, and OIE status determination
did not constitute relevant guidelines (something that unfortunately was not
clarified).46
4.1 Article 6 as a Whole
The Appellate Body (AB) in India – Agricultural Products affirmed that “all three
paragraphs of Article 6 are interconnected”47 and that the panel statement that art
6.1 is a free standing obligation did not take into account “important
interlinkages”48 among the paragraphs. Indeed according to the previous panel,
art 6.3 “refers to a situation distinct from those of Article 6.1 and 6.2”49 since it is
not addressed to WTO Members generally but only to exporting countries claiming
PDFAs and ALPDPs.50 The AB properly noted, from a substantive perspective, that
art 6.1 sets out the main and overarching obligation and that this can be fulfilled “in
particular” with respect to PDFAs and ALPDP. Then arts 6.2 and 6.3 elaborate on
specific elements and provide for duties of both importing and exporting coun-
tries.51 Along the same line, the panel US – Measures Affecting the Importation of
Animals stated that the fact that art 6 includes obligation for both the importing and
the exporting country “indicates that Article 6 contemplates an interaction in good
faith between the two Members, ultimately aimed at adaptation of a measure under
Article 6.1”.52
This interpretation has effects on the relationship between the single paragraphs:
concerning the relationship between arts 6.1 and 6.2, the panel in India – Agricul-
tural Products was of the view that it was not possible to comply with the general
44
WTO Doc. WT/DS447/R, supra, n. 42, paras 7.626–7.629.
45
On the link between art 6 and art 5 see WTO Doc. WT/DS447/R, supra, n. 42, paras 7.644 and
7.651.
46
Ibid., paras 7.630–7.635.
47
WTO Doc. WT/DS430/AB/R, supra, n. 34, para 5.141.
48
Ibid., para 5.152.
49
WTO Doc. WT/DS430/R, supra, n. 33, para 7.674.
50
Ibid., para 7.674.
51
52
obligation to adapt to regional conditions (art 6.1) without having recognized the
concepts of PDFA and ALPDP (art 6.2)53 and came to the conclusion that, being
inconsistent with art 6.2, Indian measures were also inconsistent with art 6.1 first
sentence,54 i.e. that India did not adapt its measures to regional conditions. How-
ever, the AB stated that the concepts of PDFAs and ALPDPs are “a subset of all the
SPS characteristics of an area that may call for the adaptation of an SPS measure”55
and that PDFA/ALPDP recognition is “one particular way through which a Member
can ensure that its SPS measures are ‘adapted’ as required by Article 6.1”56: this
means that adapting does not always presuppose recognition.57
As to the relationship between arts 6.1 and 6.3, the panel in India – Agricultural
Products affirmed that it could not be argued, as India did, that “adaptation occurs
only after a measure is taken pursuant to a specific request for recognition made by
an exporting Member”58 although “a link may be made between information
required for the assessment of SPS characteristics envisaged by Article 6.1, second
sentence, and the obligation of an exporting Member to provide ‘the necessary
evidence’ under art 6.3, first sentence . . .”.59 However, the AB expressed concern
on the panel statement that steps in art 6.3 presuppose compliance of the importing
country with arts 6.1 and 6.2.60 Furthermore, it noted that the obligation to adapt in
art 6.1 “does not apply only at one specific point in time (e.g. when an SPS measure
is adopted) but is, instead, an ongoing one”.61 Therefore, it concluded that it can
happen that a Member objectively demonstrate the existence of a PDFA after the
adoption of the relevant SPS measure.62
Also, the AB in India – Agricultural Products affirmed that
we understand the relationship of Article 6.3 with the remainder of Article 6 to mean that,
. . . an exporting Member claiming . . .that an importing Member has failed to determine a
specific area within that exporting Member’s territory as “pest- or disease-free” – and
ultimately adapt its SPS measures to that area – will have difficulties succeeding in a claim
that the importing Member has thereby acted inconsistently with Articles 6.1 or 6.2, unless
that exporting Member can demonstrate its own compliance with Article 6.3.63
Therefore art 6.3 may amount to a rebuttable presumption.64 At the same time,
even in the absence of objective demonstration according to art 6.3 a Member may
53
54
Ibid., para 7.709.
55
56
Ibid., para 5.133.
57
Ibid., para 5.143.
58
59
Ibid., para 7.676.
60
61
Ibid., para 5.132.
62
Ibid., para 5.154.
63
Ibid., para 5.156.
64
Arcuri (2015), p. 9.
122 A.G. Micara
be found in breach of art 6.165 and the AB agreed with the panel that “the
obligations in Articles 6.1 and 6.2 are not triggered by an invocation of Article
6.3, as argued by India”.66
In conclusion, as stated by the AB in India – Agricultural Products, the three
paragraphs of art 6 need to be read together and compliance has to be verified case-
by-case depending on the specific circumstances of the case and the nature of the
claims.67
4.2 The Role of the Importing Countries
As mentioned above, the SPS Agreement requires importing countries to recognize

the concept of PDFA and ALPDP (art 6.2 first sentence) and, in order to determine
them, WTO Members must consider some relevant factors (art 6.2 second sen-
tence). According to the panel in India – Agricultural Products art 6.2 imposes an
obligation to recognize the idea, the “concept” of PDFA and ALPDP in the abstract,
not referring to a specific area,68 and “recognize” means “acknowledge the exis-
tence, legality, or validity of [especially] by formal approval or sanction; accord
notice or attention to; treat as worthy of consideration”.69 However, this definition
did not clarify whether recognition should be explicit and, in this case, how it
should be implemented so that “to comply with Article 6.2, SPS measures adopted
by WTO Members must at minimum not deny or contradict the recognition of the
concepts of such areas when these concepts are relevant with respect to the disease
at issue”.70 By consequence, while the panel acknowledged that the Indian Live-
stock Act does not include specific procedures on recognition but general pro-
visions that could give the possibility to a recognition, as India argued,71 it affirmed
that the Indian implementation act (S.O. 1663(E)) did not include anything “that
allows for the recognition of disease-free areas and/or areas of low disease preva-
lence within a country that notifies NAI [Notifiable Avian Influenza] to the OIE”.72
It merely imposed a ban on a country-wide basis and therefore contradicted the
requirements to recognize,73 bringing to the conclusion that India did not adapt its
measures to regional conditions.
65
66
Ibid., para 5.157.
67
Ibid., paras 5.155–5.156.
68
69
Ibid., para 7.698.
70
Ibid.
71
Ibid., para 7.701.
72
Ibid., para 7.702.
73
Ibid.
Before the AB, India mainly argued that the panel should have relied on the
Livestock Act but the AB supported the panel scrutiny of the relevant SPS measures
as a whole and found correct the conclusion that S.O. 1663(E) contradicts the
requirement to recognize the concepts of PDFA and ALPDP.74 Here again there
is no detailed explanation on why there is contradiction but the AB gives (little)
more insight on how to fulfil that requirement. Overall art 6 leaves wide latitude on
how to ensure adaptation (not prescribing particular steps) and on recognition of
PDFA and ALPDP concepts (not clarifying whether recognition must be done in
writing through a governmental act, or whether it may be accomplished in some
other manner).75 Moreover, the assessment of compliance depends on the specific
circumstances of the case and the nature of the claims, involving scrutiny of specific
steps and acts taken or not taken (even though the AB seems to stress as particularly
relevant related international standards76). However, some concrete guidance on
recognition of PDFA and ALPDP concepts is included in a footnote: indeed
“compliance with the obligations in Articles 6.1 and 6.2 will be facilitated in
circumstances where WTO Members put in place a regulatory scheme or structure
that accommodates adaptation of SPS measures on an ongoing basis”77 and “[t]his
would be the case, for example, where a Member has established a mechanism for
recognition of specific pest- and disease-free areas and areas of low pest and disease
prevalence upon a properly substantiated request being made by an exporting
Member seeking such recognition and allowing verification of the same”.78 Finally,
the AB also made clear that “recognize” does not mean implementing,79 therefore
upholding the panel conclusion that recognition occurs in the abstract.
More insight was given by the following panel in US – Measures Affecting the
Importation of Animals, according to which art 6.2 implies that Members must
provide for the possibility that certain areas be determined to be pest- or disease-free areas
or areas of low pest and disease prevalence, as well as specify the requirements that an area
has to meet in order to fall within one of those categories.80
In this case the US Animal and Plant Health Inspection Service (APHIS)
maintained a list of regions that it declared FMD-free (from which imports were
not prohibited) following a detailed procedure involving the country that requested
recognition,81 and even products originating in regions not included in that list may
have been eligible for import if they complied with certain sanitary regulations.
Therefore, the panel found that US APHIS’ general regulatory framework for FMD
74
WTO Doc. WT/DS430/AB/R, supra, n. 34, paras 5.161–5.175.
75
Ibid., paras 5.136–5.137.
76
Ibid., para 5.137.
77
Ibid., para 5.138.
78
Ibid., ft 503.
79
Ibid., para 5.174.
80
81
Ibid., paras 2.11–2.16.
124 A.G. Micara
recognizes the concept of PDFA and ALPDP since the measure at issue (9 CFR
94.1.a)82 refers to regions that APHIS declared to be free of FMD and 9 CFR 94.0
defines region including a “part of a national entity”.83 In this respect, it is
interesting to underline that according to the panel this interpretation is supported
by the Guidelines which recommend to “publish the basis for recognition of pest- or
disease-free areas and areas of low pest or disease prevalence and a description of
the general process used, including the information generally required to evaluate
such requests” (para 4). Also, the panel on India – Agricultural Products referred to
the Guidelines84 while the AB did not. Indeed, although they may be a useful
interpretation tool, it has not to be forgotten that they are not binding and that they
“do not provide any legal interpretation or modification to the Agreement”.85
4.3 The Role of the Exporting Countries
According to art 6.3 exporting countries claiming PDFAs and ALPDPs

shall provide the necessary evidence thereof in order to objectively demonstrate to the
importing Member that such areas are, and are likely to remain, pest- or disease-free areas
or areas of low pest or disease prevalence, respectively.
In India – Agricultural Products, the panel and the AB mainly dealt with the
relationship between arts 6.1 and 6.3, analysed above, while the panel in US –
Measures Affecting the Importation of Animals went further.
As mentioned, in the latter case the US regulatory framework was compliant
with art 6.2 so that art 6.3 became relevant for the recognition of the specific area.
Although acknowledging that art 6.3 does not specify what constitutes the neces-
sary evidence, the panel clarified that in order for the exporting country to objec-
tively demonstrate the disease free status “the information submitted should address
the factors listed in Article 6.2 in addition to any other information that would assist
the importing Member in making its determination”.86 Then, in assessing specifi-
cally whether US did not adapt because of failure to objectively demonstrate by
Argentina that Patagonia was and was likely to remain FMD-free, the panel found
that Argentina fulfilled its obligation: indeed the previous analysis on art 8 and
Annex C(1)(a) SPS Agreement (concerning control, inspection and approval pro-
cedures), revealed that APHIS was satisfied with Argentina’s information
82
On the measure at issue see WTO Doc. WT/DS447/R, supra, n. 42, para 2.2.
83
Ibid., para 7.658.
84
85
WTO doc. G/SPS/48, supra, n. 18, para 2. See, instead, WTO Doc. WT/DS392/R, Panel Report,
US – Certain Measures Affecting Imports of Poultry from China, 29 September 2010, paras
7.132–7.136 concerning the Decision on the Implementation of Article 4 of the Agreement on
the Application of Sanitary and Phytosanitary Measures.
86
concerning FMD in Patagonia, as proved, inter alia, by the fact that “APHIS sent a
letter to SENASA [Servicio Nacional de Salud Animal (National Animal Health
Service)] stating that no additional information was currently required to proceed
with APHIS’ rulemaking”.87 Furthermore, under analysis of art 5.6 the panel had
found that “information available to APHIS showed that Patagonia was free of
FMD and that allowing imports of FMD-susceptible animals . . . from that region
. . . would achieve the United States’ ALOP”.88 In this regard, it is interesting to
underline that the panel took into consideration the OIE FMD-free status recogni-
tion but also other factors such as the degree to which Patagonia is separated to
adjacent regions or the extent to which movement of animals is controlled from
regions of higher risk, therefore confirming that international recognition is relevant
but is only one of the elements to be taken into account.89 Secondly, the panel found
that the delay in recognition was unjustified since “in light of our prior findings, the
fact that the United States had not yet completed its review of Patagonia, cannot
serve to excuse it from its obligations under Article 6.1”.90 In conclusion, since
Argentina objectively demonstrate that Patagonia was and was likely to remain
FMD-free, the US measure was inconsistent with art 6.1, i.e. the US did not adapt
its measure to regional conditions.
5 SPS-Plus Measures in FTAs
Nowadays, due to the Doha Round deadlock, major advancements concerning

regulatory issues are occurring at bilateral and regional level through the large
number of FTAs that include so-called WTO-plus provisions, i.e., provisions going
beyond those of the WTO agreements.91
Several FTAs reaffirm respect of SPS obligations or incorporate some SPS
provisions. However, it is interesting to underline that EU FTAs of “new genera-
tion” (concluded with Korea, Canada, Singapore, Peru, Colombia and others) often
include specific measures on regionalization, going beyond the SPS Agreement,
and, even before that, the EU included significant provisions in certain agreements
such as the 2002 Agreement with Chile. Although these treaties present substantive
differences, a common feature is that, when determining PDFAs and ALPDPs,
parties
shall in principle base its own determination of the animal and plant health status of the
exporting Party or parts thereof, on the information provided by the exporting Party in
87
Ibid., para 7.671.
88
Ibid.
89
Ibid., paras 7.518 ff.
90
Ibid., para 7.673.
91
On regulatory issues see, among others, Wiener and Alemanno (2015), pp. 103 ff.
126 A.G. Micara
accordance with the SPS Agreement and OIE and IPPC standards, and take into consider-
ation the determination made by the exporting Party.92
In the Agreement with Canada sanitary measures of the importing party

concerning certain diseases (including FMD and other significant diseases) should
be even based on the zoning decisions made by the counterpart, if the importing
Party is satisfied that the exporting party’s zoning decisions are in accordance with
certain procedural requirement (not agreed yet) and if they are based on relevant
international standards, guidelines and recommendations.93 Of course the
importing party is not obliged to conform to the counterpart determination but
still these provisions show a very high level of cooperation and also the importance
of relevant international standards. Moreover, they are strengthened by other pro-
visions according to which in the event determinations made by a party are not
accepted, the counterpart “shall explain the reasons and shall be ready to enter into
consultations”94 or “upon request of the exporting Party, shall provide the infor-
mation on the basis on which such decision was made, and/or hold consultations, as
soon as possible, in order to assess a possible alternative agreed solution”.95
Overall, cooperation and confidence building, also through the establishment of
a SPS Sub-Committee,96 are much relevant whereas the “new generation” of EU
FTAs are less focused on administrative procedures: in the agreement with Canada
principles and guidelines for the recognition of regional conditions have not been
agreed yet; with Korea a commitment to “establish an appropriate procedure for the
recognition of such areas, taking into account any relevant international standard,
guideline or recommendation”97 has been agreed. Instead, the agreement with
Chile, concluded in 2002 before the adoption of the Guidelines, included more
detailed administrative procedures and even time horizon.98
92
Trade Agreement Between the European Union and its Member States, of the one part, and
Colombia and Peru, of the other part, OJ 2012 L 354/3, art 94.5; Free Trade Agreement between
the European Union and its Member States, of the one part, and the Republic of Korea, of the other
part, OJ 2011 L 127/6, art 5.8.4; Agreement establishing an Association between the European
Union and its Member States, on the one hand, and Central America on the other, OJ 2012 L 346/3,
art 149.4.
93
Comprehensive Economic Trade Agreement EU-Canada (CETA), final text, published on
29 February 2016, available at http://trade.ec.europa.eu/doclib/docs/2016/february/tradoc_
154329.pdf (accessed 29 February 2016), art 5.5.1(c).
94
EU-Korea supra, n. 92, art 5.8.4; EU-Central America supra, n. 92, art 149.5.
95
EU-Peru-Colombia, supra, n. 100, art 94.6.
96
See EU-Korea, supra, n. 92, art 5.8.3; Peru-Colombia, supra, n. 92, art 94.2; EU-Central
America, supra, n. 92, art 149.1.
97
In particular, EU-Korea, supra, n. 100, art 5.8.1; Peru-Colombia, supra, n. 100, art 94.2. See also
EU-Vietnam Free Trade Agreement, Chapter on Sanitary and Phytosanitary Measures, http://trade.
ec.europa.eu/doclib/docs/2016/february/tradoc_154209.%20institutional%20-%20for%20publica
tion.pdf (accessed 29 February 2016), p. 6.
98
Agreement on sanitary and phytosanitary measures applicable to trade in animals and animal
products, plants, plant products and other goods and animal welfare, Annex IV of the Agreement
Finally, several EU FTAs go beyond regionalization since parties recognize the

concept of compartmentalization,99 which addresses animal health and is based on
management criteria100 (while art 6 of the SPS Agreement is based on geographical
elements), and the “principle of pest-free production sites” of the IPPC.101
The agreements with Ukraine102 and Georgia103 also include extensive measures
and probably the Transatlantic Trade and Investment Partnership (TTIP)104 agree-
ment with the US, building on a previous 1999 agreement,105 would follow the
same pattern; instead, Economic Partnership Agreements (EPAs) include less
significant provisions106 and according to some authors they represent a missed
opportunity to improve regionalization.107
6 Conclusions
Regionalization is a sensitive issue. It is important to foster market access but

avoiding outbreaks remains crucial. Notwithstanding attempts to improve imple-
mentation at multilateral and bilateral level it is not possible to neglect that, as the
AB underlined in India – Agricultural Products, every case has to be considered in
the light of its specific circumstances so that it is difficult to set detailed procedures
covering all cases. At the same time, the adoption of the Guidelines, although not
binding, improved to a certain extent the implementation of regionalization
concerning administrative procedures; recent case-law gave insight on how
establishing an association between the European Community and its Member States, of the one
part, and the Republic of Chile, of the other part, OJ 2002 L 352/3, art 6.5.
99
CETA, supra, n. 93, art 5.5.1.e; EU-Peru Colombia, supra, n. 92, art 94.8; EU-Central America,
supra, n. 92, art 149.7; EU-Vietnam, supra, n. 97, p. 6.
100
On this concept see Gruszczynski (2010), pp. 255–256 and OIE, Terrestrial Code, ch. 4.3, art
4.3.1.
101
EU-Peru Colombia, supra, n. 92, art 94.8.
102
Association Agreement between the European Union and its Member States, of the one part,
and Ukraine, of the other part, OJ 2014 L 161/3, art 65.
103
Association Agreement between the European Union and the European Atomic Energy Com-
munity and their Member States, of the one part, and Georgia, of the other part, OJ 2014 L 261/4,
art 56.
104
See EU-US Transatlantic Trade and Investment Partnership, Sanitary and phytosanitary issues,
Initial EU position paper, http://trade.ec.europa.eu/doclib/docs/2013/july/tradoc_151625.pdf
(accessed 29 February 2016) and Sanitary and Phytosanitary Measures, Consolidated proposals,
https://ttip-leaks.org/andromache/doc11.pdf (accessed 27 May 2016).
105
Agreement between the United States of America and the European Community on sanitary
measures to protect public health and animal health in trade in live animals and animal products
(Veterinary Equivalence Agreement), OJ 1998 L118/3.
106
See, among others, Economic Partnership Agreements Between the European Union and its
Member States, of the one part, and the SADC EPA States, of the other part, 15 July 2014, art 63.4.
107
Prévost (2010), p. 40.
128 A.G. Micara
importing and exporting Members should fulfil their obligations. The work of
ISSBs to elaborate international standards has been relevant so that those are
more and more significant, although determinations on regionalization have to be
based on other relevant factors such as trust on the sanitary system of the counter-
part. Furthermore, significant developments occur at bilateral and regional level
within which mutual trust and cooperation make possible to agree on advanced
provisions especially on animal health issues, as EU FTAs show.
References
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regulation of goods: the technical barriers to trade agreement, the sanitary and phytosanitary
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ship agreements between the European Union and the ACP countries. ICTSD, Geneva
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learning process toward a global policy laboratory. Law Contemp Probl 78:103–39
The Mutually Agreed Solution Between
Indonesia and the United States in US – Clove
Cigarettes: A Case of Efficient Breach
(or Power Politics)?
Johannes Norpoth
Contents
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
2 The Concept of Efficient Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
3 WTO Law: Protection by Property or Liability Rule or as Inalienable? . . . . . . . . . . . . . . . . . 132
4 The US – Clove Cigarettes Dispute and Its Solution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
4.1 The US – Clove Cigarettes Dispute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
4.2 The Content of the Memorandum of Understanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
5 The MAS Between Indonesia and the US: A Case of Efficient Breach? . . . . . . . . . . . . . . . . . 143
6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
Abstract The Mutually Agreed Solution (MAS) to the US – Clove Cigarettes case
between the United States and Indonesia evokes the idea of the WTO dispute
settlement system allowing for efficient breach. Through the MAS, the case was
declared settled based on mutual commitments of the two parties, while the original
violation by the US remains in place. The paper first discusses whether MAS are a
means through which WTO law allows such flexibility, concluding that such a view
is tenable despite valid objections. Then, it inquires whether the MAS found
between Indonesia and the US can be considered an efficient breach. In this context,
the paper analyses the mutual commitments of the US and Indonesia with specific
attention to the potential role of power in the settlement. The paper argues that from
a legal perspective the MAS between Indonesia and the US cannot be considered a
case of efficient breach, although politically the situation established through the
MAS resembles a situation of efficient breach. The paper finds that power imbal-
ances played a role in the settlement and suggests that the case study of this specific
MAS highlights systemic risks in the current handling of WTO dispute settlement
through MAS.
J. Norpoth (*)
Institute of Development Research and Development Policy, Ruhr-University Bochum,
Bochum, Germany
e-mail: Johannes.Norpoth@rub.de

DOI 10.1007/978-3-319-44645-5_8
130 J. Norpoth
1 Introduction
In October 2014 the US and Indonesia notified to the Dispute Settlement Body
(DSB) a Mutually Agreed Solution (MAS) to the US – Clove Cigarettes case.1 One
of the implications of the Memorandum of Understanding (MoU)2 reached between
the two States3 could be that the violation by the US remains in force in exchange
for specific concessions to Indonesia, mainly under the US General System of
Preferences (GSP). Such a solution challenges the idea of the WTO dispute
settlement system’s (DSS) focus on compliance with WTO rules. Instead, it evokes
the idea that the system allows for efficient breach.4 The paper addresses the
question whether MAS are a means through which WTO law allows such flexibility
and inquires whether the MAS found between Indonesia and the US is an efficient
breach measure.
The MAS is also significant in that the US—the non-compliant respondent in the
original dispute—managed not to commit to amend its WTO-incompatible mea-
sure, while Indonesia—the successful complainant of the original dispute—com-
mitted to addressing US trade concerns about insufficient protection of US
intellectual property (IP) rights. At a closer look, even commitments made by the
US seem to reflect a rather strong negotiation position of the WTO “culprit”.
Therefore, the paper analyses the mutual commitments of the US and Indonesia
with specific attention to a potential role of power imbalances.
The paper proceeds by first summarising the concept of efficient breach
(Sect. 2), before discussing whether WTO law protects entitlements of its Members
by a property or liability rule or as inalienable (Sect. 3). Then, it outlines facts of the
dispute between the US and Indonesia and analyses details of the settlement
(Sect. 4). Subsequently, the paper discusses the MAS between Indonesia and the
US in light of the theory of efficient breach (Sect. 5) before offering conclusions
that focus on potential systemic risks for the WTO associated with this kind of
settlement (Sect. 6).
1
WTO doc. WT/DS407/17, Notification of a Mutually Agreed Solution, United States—Measures
Affecting the Production and Sale of Clove Cigarettes (US – Clove Cigarettes), 9 October 2014.
2
Through the MoU the two States have fixed a set of mutual commitments which they consider as
the basis to declare the dispute settled. In terms of the WTO dispute settlement system an
agreement between disputing parties to settle the case is a MAS. After notification of a MAS to
the DSB the dispute is considered to be settled under the WTO dispute settlement system.
3
Memorandum of Understanding between the Government of the United States of America and the
Government of the Republic of Indonesia, 3rd Oct 2014, https://ustr.gov/sites/default/files/US%
20Indo%20MOU.pdf (accessed 21 January 2016).
4
Whether WTO law allows States to “buy out of” their obligations or whether it requires States to,
eventually, comply with their obligations has been a matter of long-standing academic debate,
cf. Hippler Bello (1996); Jackson (1997); Schwartz and Sykes (2002); Trachtman (2007);
Pauwelyn (2010), pp. 34–65.
The Mutually Agreed Solution Between Indonesia and the United States in US. . . 131
2 The Concept of Efficient Breach
Before addressing the question whether MAS are a mechanism allowing for
efficient breach in the WTO DSS, it is expedient to revisit the concept of efficient
breach. The concept emanates from the economic theory of contracts. Put simply,
the concept of efficient breach is concerned with situations in which deviation from
a contractual obligation by one party to a contract leaves both parties to the contract
in better overall positions than if the obligation was fulfilled. In the words of
Schwartz and Sykes, breach is efficient “whenever the costs of compliance to the
promisor exceed the benefits to the promisee”.5 The “breach” in “efficient breach”
could refer to a deviation of expected behaviour according to, or against the rules of
the contract.6
In this context, the distinction between property and liability rules needs to be
revisited.7 An entitlement protected by a property rule is transferable when the
entitlement holder consents to the transaction. The assumption is that the entitle-
ment holder will only consent to the transaction once the buyer offers a price that
matches the value attached to the entitlement by its holder.8 A property rule thus
requires the obligated party to renegotiate in order to obtain the consent of the
entitlement holder. Based on the general assumption of law and economics that all
actors are rational utility-maximizers,9 such renegotiations will only be successful
(and deviation efficient), when the benefit to the party wishing to deviate exceeds
the value attached to the entitlement by the other party. Only under these condi-
tions, the deviating party will pay the price of the value requested from the
entitlement holder in exchange for consent.10 Provided the respective consent is
given, a property rule system would allow for efficient “breach” of the original
entitlement to specific performance.11
In comparison, an entitlement that is protected by a liability rule may be taken
without the holder’s consent, provided the original holder of the entitlement
receives an objectively determined compensation for it.12 The shift of the
5
Schwartz and Sykes (2002), p. 181.
6
Pauwelyn introduces in so far the distinction between “intra-contractual behaviour”, which he
does not consider to constitute efficient “breach”, and “extra-contractual behaviour”, which he
considers to be the actual content of the theory of efficient breach, Pauwelyn (2008), p. 14. In his
view the theory of efficient breach thus “questions the legally binding nature of the law”, ibid.
7
Calabresi and Melamed introduced these concepts in reference to domestic law settings,
distinguishing entitlements as being protected by property, liability or inalienability rules,
Calabresi and Melamed (1972).
8
Ibid., p. 1092.
9
Cf. Dunoff and Trachtman (1999). The approach rests on the value of individual choice consid-
ering each person to be “in charge of his or her own utility function” (ibid., p. 11).
10
Cf. Schwartz and Sykes (2002), p. 182.
11
A narrower understanding of efficient “breach” would consider only those situations as efficient
breach in which a deviation occurred without consent. Cf. Pauwelyn (2008), p. 14.
12
Calabresi and Melamed (1972), p. 1092.
132 J. Norpoth
entitlement is thus dependent on compensating the original holder of the entitle-

ment which should put her in a position as good as if the original entitlement had
been fulfilled.13 If a party, wishing to deviate from its obligations finds the benefits
from deviation to exceed the cost of compensation, deviation or “breach” becomes
efficient.14
Clearly, there is no room for efficient breach when entitlements are protected as
inalienable, meaning that the entitlement cannot be transferred, even if the entitle-
ment holder agrees to it.15
The introduction to the main tenets of efficient breach highlights the importance
of first establishing whether entitlements are protected by a property or a liability
rule or as inalienable in the contractual setting in question, before turning to the
question of whether breach is efficient.
3 WTO Law: Protection by Property or Liability Rule or

as Inalienable?
The pertinent question is whether WTO law, and in particular the legal framework
of MAS, permits deviation from its rules. Should it allow for deviation, does it do so
based only on consent, indicating a protection by a property rule, or based on
compensation, indicating a liability rule?
There is general agreement that the system for modification of individual
specific commitments of Members, for instance, under the General Agreement on
Tariffs and Trade (GATT) 1994 employs protection by a liability rule,16 as the
respective rules explicitly allow for unilateral adjustments in exchange for com-
pensation of some sort. Less agreement exists with regard to the rules on remedies
to non-compliance with a DSB recommendation in the Dispute Settlement Under-
standing (DSU).
Some argue that the limitation of suspension of concessions or obligations to a
level equivalent to the prospective harm in art 22.4 DSU indicates that this remedy
has a compensatory rather than an enforcement function. Based on this argument
they conclude that WTO law does not require specific performance, but allows for
the “take-and-compensate” approach of a liability rule.17 Others concede that the
letter of the law might require specific performance, but maintain that practice
13
Cf. Pauwelyn (2008), p. 13; Schwartz and Sykes (2002), p. 182.
14
Schwartz and Sykes (2002), p. 182. Again, a narrow understanding of efficient breach would
consider only those situations as efficient breach in which a deviation occurred without full
compensation, cf. Pauwelyn (2008), p. 14.
15
Calabresi and Melamed (1972), pp. 1092 ff.
16
Cf. Pauwelyn (2008), p. 134; Schwartz and Sykes (2002), pp. 186–188; Zimmermann
(2011), p. 397.
17
Cf. Schwartz and Sykes (2002), pp. 191 f. and 20 ff.
indicates that Members may disregard specific performance of their obligations,

provided they “compensate” by accepting the suspension of concessions and other
obligations of the successful complainant.18
This view, however, is rejected by those who contend that art 22 DSU is rooted
in the law of countermeasures of general international law,19 linking suspension of
concessions or other obligations (so-called “retaliation”) stronger with the aim of
inducing compliance, at least eventually.20 The latter view finds strong support in
the wording of the DSU. The remedies mentioned in art 22 DSU are only temporary
measures.21 This confirms that they are not treated as compensation in exchange for
an indefinite shift of an entitlement and from a legal perspective do not terminate
the dispute over compliance with the violated WTO rule.22 This interpretation also
finds support in decisions of the Appellate Body (AB).23 Those viewing WTO law
as protected by a liability rule disregard the fact that due to their prospective nature
the remedies of art 22 DSU never achieve full compensation.24 Moreover, they
overlook that through these mechanisms the WTO only tolerates a temporary safety
valve for non-compliant Members.25 Therefore, the primary remedies to
non-compliance with a DSB recommendation in art 22 DSU do not entail a transfer
of an entitlement to compliance, and, hence, do not allow for efficient breach.
18
Trachtman (2007), pp. 146 and 149.
19
Cf. Mavroidis (2000), p. 800.
20
Jackson (1997); Pauwelyn (2000); Hudec (2000); Charnovitz (2001); van den Broek (2003);
Nzelibe (2005); Bronckers and van den Broek (2005); Choi (2007); Eeckhout (2009); Pauwelyn
(2010); Shaffer and Ganin (2010); Zimmermann (2011); Bronckers and Baetens (2013); Vidigal
(2013); Tijmes (2014). Cf. also arbitrators in these proceedings under art 22.6 DSU, WTO doc.
WT/DS27/ARB, European Communities (EC) – Regime for the Importation, Sale and Distribution
of Bananas III (EC – Bananas III), 9 April 1999, para 6.3; WTO doc. WT/DS27/ARB/ECU EC –
Bananas III, 24 March 2000, para 166; WTO doc. WT/DS26/ARB, EC – Measures Concerning
Meat and Meat Products (Hormones) (EC – Hormones), 12 July 1999, para 40; WTO doc.
WT/DS46/ARB Brazil – Export Financing Programme for Aircraft, 28 August 2000, para 3.43
ff.; WTO doc. WT/DS108/ARB, US – Tax Treatment for Foreign Sales Corporations, 30 August
2002, para 5.52; WTO doc. WT/DS136/ARB, US – Anti-Dumping Act of 1916, 24 February 2004,
para 5.5.
21
Art 22 DSU envisages either mutually agreed compensation or unilateral suspension of conces-
sions or other obligations by the complainant towards the non-compliant respondent as potential
remedies. Both measures are explicitly considered temporary, cf. art 22.1 sent. 1 and art 22.8 sent.
1 DSU.
22
Jackson (1997), p. 116; Zimmermann (2011), p. 394.
23
WTO doc. WT/DS320/AB/R, Appellate Body Report, US – Continued Suspension, 16 October
2008, paras 304–310. “The requirement that the suspension of concessions must be temporary
indicates that the suspension of concessions, as the last resort available under the DSU when
compliance is not achieved, is an abnormal state of affairs that is not meant to remain indefinitely.
Members must act in a cooperative manner so that the normal state of affairs, that is, compliance
with the covered agreements and absence of the suspension of concessions, may be restored as
quickly as possible” (ibid., para 310).
24
Zimmermann (2011), p. 398.
25
Ibid., p. 402.
134 J. Norpoth
Still, the question remains whether a MAS between the non-compliant respon-
dent and complainant could be seen as effectuating such a transfer. To be clear,
since MAS necessarily involve the consent of the original entitlement holder—the
complainant entitled to compliance by the respondent –, MAS would only allow for
efficient breach under a property rule.
This question necessitates closer analysis of the entitlement to be transferred and
the legal framework for MAS. The idea of a complainant consenting to
non-compliance by the respondent presupposes that the entitlement is of a bilateral,
instead of a collective nature. Put simply, in a multilateral treaty, entitlements of a
collective nature cannot be transferred by bilateral agreement of two parties to that
treaty because these entitlements are held by all parties to the treaty.26 Thus,
entitlements of a collective nature are, at least from the point of view of two
disputing parties, closer to a system of inalienability.
On the one hand, it is important to recall in this context that a MAS, as an
agreement between the disputing parties only, is explicitly foreseen as a possible,
even preferable solution to disputes.27 Hence, bilateral agreements are undoubtedly
envisaged by the DSU to settle an otherwise ongoing dispute over compliance. On
the other, the substantive and procedural requirements for MAS stipulated in art 3.5
and 3.6 DSU reflect collective aspects, such as protection of third-party rights,
non-derogation from essential treaty provisions, and transparency among WTO
Members.28 According to art 3.5 DSU MAS shall be consistent with the covered
agreements and “shall not nullify or impair benefits accruing to any Member under
these agreements, nor impede the attainment of any objective of those agreements”.
Moreover, according to art 3.6 DSU MAS “shall be notified to the DSB and the
relevant Councils and Committees, where any Member may raise any point relating
thereto”. In particular, the requirements of consistency with WTO law and
non-impairment of benefits of third parties may be read as indications for a
collective relationship which cannot be distorted through bilateral shifts of entitle-
ments between the disputing parties.
26
Pauwelyn (2008), p. 115.
27
Art 3.7 sent. 3 DSU explicitly states: “A solution mutually acceptable to the parties to a dispute
and consistent with the covered agreements is clearly to be preferred”. Article 22.8 sent. 1 DSU
states: “The suspension of concessions and other agreements shall be temporary and shall be only
applied until such time as . . . a mutually satisfactory solution is reached”.
28
These requirements reflect customary rules of general international law on inter se agreements in
multilateral treaty settings as codified in art 41 Vienna Convention on the Law of Treaties (VCLT).
If a multilateral treaty does not provide explicitly for the possibility to modify rights and
obligations among a sub-set of parties (art 4.1(a) VLCT), inter se agreements need to conform
to two central substantive requirements: the modification shall “not affect the enjoyment by the
other parties of their rights” and shall “not relate to a provision, derogation from which is
incompatible with the effective execution of the object and purpose of the treaty as a whole” (art
41.1(b) VCLT).
Previous interpretations from the AB provide limited clarification. The AB has

recognized bilateral shifts of entitlements by confirming that rights to demand
compliance with the DSB ruling through art 21.5 DSU may be waived in MAS,29
provided the text of the agreement clearly reveals the intention of the party to
relinquish such rights.30 At the same time, a collective understanding finds support.
With regard to art 22.8 DSU, the AB has stressed that an MAS must bring about a
“final and substantive resolution to the dispute”31 and clarified that “substantive
resolution” refers to remedying the inconsistencies found by the DSB.32
Both statements may be reconciled if a MAS is considered to modify both the
procedural situation and the substantive balance of the mutual rights and obliga-
tions of the two disputing parties through a subsequent bilateral agreement within
the meaning of art 30.4(a) Vienna Convention on the Law of Treaties (VCLT).
Pauwelyn suggests that MAS are subsequent inter se agreements containing the
complainant’s dispute-specific, prospective consent to further non-compliance by
the respondent and waiver of its dispute settlement rights under art 21.5 DSU.33 The
consent is considered to preclude further findings of inconsistency and, hence, to
effectuate also a substantive resolution of the dispute that is considered consistent
with the covered agreements. Clearly, the deviation allowed by consent is limited,
as the substantive obligation violated in the original case remains valid and appli-
cable in all subject matters arising between complainant and respondent other than
the original dispute. Moreover, other WTO Members who shall be notified about
the MAS may judge whether they consider action against the non-compliant
Member fruitful34 since their balance of rights and obligations is not touched.
This understanding resonates with a general idea of what a MAS is about, in
particular in a situation after a finding of non-compliance. The disputing parties
settle an ongoing dispute over compliance with the consequence that the dispute
ceases to be surveyed by the DSB. The respondent receives an assurance that its
measures will not be challenged in exchange for arranging a state of affairs that the
29
WTO doc. WT/DS27/AB/RW2/ECU, Appellate Body Report, EC – Bananas III, 2nd Recourse
by Ecuador to art 21.5 DSU, 26 November 2008, paras 212–222.
30
Ibid., para 217.
31
Cf. WTO doc. WT/DS320/AB/R, supra, n. 23, para 304 (emphasis added). Article 22.8 DSU
specifies the conditions under which the suspension of concessions has to be terminated.
32
Ibid., paras 304 and 305.
33
Pauwelyn (2008), p. 109 in fn 6. In light of the 2001 Draft Articles on Responsibility of States for
Internationally Wrongful Acts, the MAS would function as a consent precluding wrongfulness
pursuant to art 20 and a loss of the right to invoke responsibility according to art 45(a) of the Draft
Articles. Since the DSU focuses prospectively on conformity with the covered agreements, art
19.1 DSU, the only prospective nature a consent/waiver under general international law would still
mean that the case would be moot under the rules of the DSU.
As arts 30.4 and 30.5 VCLT require conformity with the conditions of art 41 VCLT for inter se
agreements in multilateral treaty settings, Pauwelyn apparently asserts that the DSU provides for
the possibility of inter se agreements through MAS in line with art 41.1(a) VCLT. One may reject
this argument based on art 3.5 DSU that reflects the more restrictive conditions of art 41(b) VCLT.
34
Cf. art 3.7 sent. 1 DSU.
136 J. Norpoth
complainant considers sufficient to settle the case. In this sense, there is clearly a
shift of the complainant’s entitlement to demand compliance from the respondent
by consent, hence, a situation of intra-contractual efficient breach.
Overall, the reasoning suggested by Pauwelyn describes a legally tenable way
how MAS may allow for efficient breach. As this reasoning may also be acceptable
to WTO Members and the AB, the MAS between the US and Indonesia will be
considered in light of Pauwelyn’s reasoning, albeit not without acknowledging
valid arguments against or at least qualifying his view. First, viewing a MAS as a
subsequent inter se agreement diminishes the difference between the explicitly
temporary remedies foreseen in art 22.1 DSU and a final substantive resolution of
the dispute. In fact, MAS may then validate and extend indefinitely a bilateral legal
situation that was envisaged as temporary pending full compliance. Only a stricter
reading of the condition of MAS to be consistent with the covered agreements
would maintain the focus on remedying the original violation.35 Second,
Pauwelyn’s reasoning only remains valid if the obligation modified through the
MAS is of a bilateral nature. Even Pauwelyn, who characterizes WTO agreements
as bundles of bilateral obligations between the parties,36 acknowledges that some
rules of WTO law, in particular prohibited subsidies pursuant art 3 of the Agree-
ment on Subsidies and Countervailing Measures, could be considered to exist in the
collective interest of all Members, thereby transcending the interests of the Mem-
bers individually and thus to fulfil the criteria for collective obligations.37
4 The US – Clove Cigarettes Dispute and Its Solution
4.1 The US – Clove Cigarettes Dispute
The measure at issue in US – Clove Cigarettes was a US ban on flavoured

cigarettes. The measure prohibited cigarettes containing “. . . an artificial or natural
flavour (other than tobacco or menthol) . . . that is a characterizing flavour of the
tobacco product or tobacco smoke”.38 Indonesia, the largest exporter of clove
cigarettes to the US market, had successfully complained in WTO dispute
35
The AB’s statement in WTO doc. WT/DS320/AB/R supra, n. 23 that all solutions to a dispute
mentioned in art 22.8 DSU must be substantive and remedy the inconsistencies found by the DSB
can be seen to support this argument.
36
Pauwelyn (2003), p. 925 ff. Contra to this view Carmody (2006).
37
Cf. Pauwelyn (2003), pp. 939–940. Therefore, MAS in subsidies-related cases that allow the
original inconsistency to remain in place would be more problematic.
38
Section 907 (a)(1)(A) Federal Food, Drug and Cosmetic Act, added by Section 101(b) of Family
Smoking Prevention and Tobacco Control Act, Public Law No. 111-31, 123 Stat. 1776
(22 June 2009).
settlement proceedings39 that the measure exempted (primarily) domestic menthol

cigarettes from the ban and thus discriminated against (imported) clove cigarettes in
violation of, inter alia, art 2.1 of the Agreement on Technical Barriers to Trade
(TBT Agreement).40
Whereas the reasonable period of time (RPT) for the US to implement the DSB’s
recommendation to bring the measure into conformity with WTO law expired on
24 July 2013, the respective provision remained unchanged until now. Given that
the AB took particular issue with the fact that the exemption of menthol cigarettes
from the ban of flavoured cigarettes could not be explained by a legitimate
regulatory objective,41 the US was essentially faced with two unattractive alterna-
tives to bring the measure into conformity: repealing the whole ban of flavoured
cigarettes or extending the ban to menthol cigarettes. Although the latter alternative
appeals stronger to the public health rationale of the measure, it would not have
resulted in renewed market access for Indonesian clove cigarettes (and presumably
met the same national opposition that had prevented the extension of a ban on
menthol cigarettes in the first place).
Indonesia reacted promptly after the expiration of the RPT by requesting autho-
rization from the DSB to suspend concessions and other obligations towards the US
under Art 22.2 DSU.42 Interestingly, Indonesia’s request to authorize retaliation did
not indicate any plans to suspend obligations under the Agreement on Trade-related
Aspects of Intellectual Property (TRIPs Agreement) (so-called “cross-retaliation”),
which has often been considered to be the main credible enforcement option in
disputes between a smaller, developing country and a larger trading power.43
Instead, Indonesia announced that it would suspend obligations under the GATT
1994, the TBT Agreement and the Agreement on Import Licensing.44 It seems that
the choice of obligations to suspend was mainly influenced by a separate dispute
between the US and Indonesia in which the US had complained of violations of
these agreements.45 Presumably, the fact that the USA could remedy the
WTO-inconsistency of its measure, simply by including menthol cigarettes into
the ban without renewing market access for clove cigarettes, led Indonesia to take a
rather defensive stance. The right to suspend obligations was rather employed to
defend Indonesia’s own potential violations in another dispute instead of inducing
39
Cf. WTO doc. WT/DS406/R, Panel Report, US – Clove Cigarettes, 2 September 2011; WTO
doc. WT/DS406/AB/R, Appellate Body Report, US – Clove Cigarettes, 4 April 2012.
40
The obligation at issue in US – Clove Cigarettes is of a bilateral, instead of a collective nature
since it can be differentiated and individualized as can be seen from the facts of the case.
41
Cf. WTO doc. WT/DS406/AB/R, supra, n. 39, para 225.
42
Cf. WTO doc. WT/DS406/12, US – Clove Cigarettes, Recourse to art 22.2 DSU by Indonesia,
13 August 2013.
43
Instead of many other commentators see Abbott (2010).
44
Cf. WTO doc. WT/DS406/12, supra, n. 42.
45
Cf. WTO doc. WT/DS455/1, Request for consultations by the US, Indonesia – Importation of
Horticultural Products, Animals and Animal Products (Indonesia–Horticultural Products),
14 January 2013.
138 J. Norpoth
compliance by the US with the DSB ruling by inflicting harm on influential US

interest groups.46 Taking into account that a WTO Member can substantially drag
on the process until finally bringing a WTO-inconsistent measure into conformity,
such a defensive stance would not appear necessary. However, Indonesia lacks the
political clout and resources to pursue such a strategy which is sometimes virtu-
ously applied by major trading powers.47
The US objected to the proposed suspension of obligation,48 prompting arbitra-
tion proceedings under art 22.6 DSU. A circulation of formal determinations of the
arbitrators to the DSB was prevented in June 2014 by a joint communication of the
parties that indicated that they were in negotiations to resolve the dispute amica-
bly.49 The final notification of a MAS followed later on 9 October 2014,50 which
according to art 22.8 DSU terminated any right to retaliate and made arbitration
pursuant art 22.6 DSU obsolete.51
Quite remarkably, the MoU itself was not annexed to the notification of the MAS
to the DSB, thereby disregarding the formalized transparency rules set forth in art
3.6 DSU. The text of the MoU is still not accessible through the WTO, but has been
made accessible through the website of the US Trade Representative (USTR) a few
months after it was concluded.52 Interestingly, although transparency in the DSB is
considered to safeguard interests of other Members and to provoke community
costs for non-compliance,53 other WTO Members have not commented officially
on the MAS, the omission to notify the MoU, or any content of the MoU according
to the Minutes of the Meetings of the DSB.54
46
Cf. commentators cited supra, n. 21, in particular in favor of the public choice-based logic
delineated here Nzelibe (2005).
47
The following cases can be cited as examples of a tactic to prolong proceedings WTO doc.
WT/DS27, EC–Bananas III; WTO doc. WT/DS285, US–Measures Affecting the Cross-Border
Supply of Gambling and Betting Services.
48
Cf. WTO Doc. WT/DS406/13, US – Clove Cigarettes, Recourse to art 22.6 DSU by the US,
23 August 2013.
49
Cf. WTO Doc. WT/DS406/16, US – Clove Cigarettes, Recourse to art 22.6 DSU by Indonesia—
Communication from the Arbitrator, 27 June 2014.
50
Cf. WTO Doc. WT/DS406/17, US – Clove Cigarettes, Notification of a Mutually Agreed
Solution, 9 October 2014.
51
Cf. WTO Doc. WT/DS406/18, US – Clove Cigarettes, Recourse to art 22.6 DSU by the US—
Communication by the Arbitrator, 9 October 2014.
52
Cf. MoU, supra, n. 3.
53
Trachtman (2008), p. 141; Pauwelyn refers in this regard to the importance of the “kicker” of
community costs to back up protection of entitlements by a property rule, Pauwelyn (2008), p. 175.
Cf. for the general importance of reputation costs in international law Guzman (2008).
54
Minutes of the Meetings of the DSB from October 2014 to November 2015 were checked.
4.2 The Content of the Memorandum of Understanding
The MoU specifies that, subject to the notification of the resolution of the dispute,55
the US and Indonesia commit to specified measures.56 Hence, fulfilment of the
commitments is conditioned by the parties having taken the formal steps to remove
the dispute from the DSB’s surveillance list. Quite counterintuitively, formal
resolution of the dispute precedes the fulfilment of commitments.57
Interestingly, the commitments specified in the MoU include neither a commit-
ment by the US to amend its WTO non-compliant measure nor a waiver by
Indonesia of its right to initiate compliance proceedings against the US under art
21.5 DSU. The latter point is relevant, as the AB has rejected the idea that any MAS
may bar recourse to art 21.5 DSU. Instead, it has taken an objective approach in
determining whether an agreement between parties resolves a dispute in such a
manner.58 It has stressed that the text of such an agreement must clearly reveal the
intention of the party to relinquish such rights.59 The MoU fails to mention any
waiver by Indonesia,60 instead clarifying in Section C that the MoU is “otherwise
without prejudice to the rights and obligations” of the parties under the WTO
agreements. Thus, at least legally, Indonesia may still initiate proceedings against
the US for lack of compliance with the DSB ruling.
The commitments in the MoU relate to product eligibility for Indonesian prod-
ucts under the US GSP scheme (4.2.1), IP protection in Indonesia (4.2.2), the
treatment of cigars and cigarillos from Indonesia in future US legislation (4.2.3),
and an Indonesian export restraint measure for certain minerals (4.2.4).
4.2.1 Product Eligibility Under the US GSP Scheme
The US committed to “give favorable consideration, consistent with U.S. laws and
regulations, to . . . redesignate insulated ignition wiring sets for vehicles . . . as a
GSP-eligible product for Indonesia” by presidential determination after
55
As specified in Section B of the MoU. Section B explicitly mentions the notification of a MAS of
the whole dispute to the DSB.
56
As specified in Section A of the MoU.
57
At least by its wording the MoU does not constitute an “interim solution” which merely
anticipates a final solution of the dispute once the agreed commitments have been fulfilled. For
the recent trend on such “interim solutions” in MAS, see Alschner (2014), pp. 84 ff.
58
WTO doc. WT/DS27/AB/RW2/ECU, supra, n. 29, paras 212–222. Moreover, the AB has
emphasized the requirement of substantive resolutions to a dispute, cf. WTO doc. WT/DS320/
AB/R, supra, n 23, paras 304–310.
59
WTO doc. WT/DS27/AB/RW2/ECU, supra, n. 29, para 217.
60
Ibid., para 221, the AB considered a wording of the MoU between Ecuador and the EU that was
similar to the wording in Section B of the MoU between the US and Indonesia as neutral and not
giving a clear indication of a relinquishment of the right to compliance proceedings under art
21.5 DSU.
140 J. Norpoth
reauthorization of the GSP programme by US Congress.61 Moreover, Indonesia

received assurance that for the next 5 years the GSP benefits for the product would
not be withdrawn pursuant the competitive need limitation test of the US GSP
scheme.62
This commitment by the US must be seen against the backdrop of the status of
the US GSP scheme at the time of negotiation of the MoU. Parliamentary autho-
rization for the GSP scheme had expired in July 2013 and US administration and
Congress were negotiating a re-authorization of the scheme.63 The language of the
commitment reveals that in this domestic political situation, the US only signed a
carefully drafted commitment that would not prejudge any legislative procedures or
outcomes.64
Beyond that, Indonesia had already received a preferential duty-free rate com-
pared to the 5 % most-favoured nation tariff for wiring harnesses under the previous
authorization phase of the GSP scheme.65 Thus, the US commitment only ensured a
status quo for Indonesian exporters.
4.2.2 IP Protection in Indonesia
Overall, Indonesia’s position under the US GSP scheme was threatened. Even
before the previous GSP scheme lapsed, the International IP Alliance, an American
industry association, had solicited a still on-going review of Indonesia’s eligibility
under the GSP scheme based on the allegation of insufficient protection of
61
MoU, supra, n. 3, Section A—Generalized System of Preferences Product Eligibility, para 1.
62
The MoU again uses the rather soft language of giving “favorable consideration, at the appro-
priate time and consistent with U.S. laws and regulations, to a request from Indonesia for a
competitive need limitation waiver”; cf. ibid., Section A—Generalized System of Preferences
Product Eligibility, para 2.
63
Office of the USTR, GSP Expiration: Frequently Asked Questions https://ustr.gov/sites/default/
files/FAQs-on-GSP-Expiration-Nov2014_4.pdf (accessed 14 January 2016).
64
Such commitments of “best endeavor” raise concerns as they are hardly enforceable, even if one
were to accept the argument in favour of enforceability of MAS within the WTO DSS (see
Alvarez-Jimenez (2011)); rejecting this argument Alschner (2014), p. 89. However, the point
about enforcement has become moot in this case since the US has fulfilled its commitment by
re-authorizing the GSP scheme (see Sec. 201 of the Trade Preferences Extension Act of 2015) and
designating wiring harnesses from Indonesia as an eligible product. However, the reason for
designating wiring harnesses as eligible product is apparently explained by the fact that imports
from Indonesia were too minimal to apply the competitive need limitation. Thus, a waiver of this
test as anticipated in the MoU was not necessary to achieve the result, cf. Office of the USTR, GSP:
Results of the GSP Limited Product Review, Including Actions Related to Competitive Needs
Limitations, Federal Register, Vol. 80, No. 194, 7 Oct 2015, 60731, http://www.regulations.gov/#!
documentDetail;D¼USTR-2015-0007-0037 (accessed 14 January 2016).
65
Cf. Office of the USTR, GSP-eligible Products from All Beneficiary Countries, https://ustr.gov/
sites/default/files/GSP%20eligible%20all%20BDCs%20%282012%29%20Revised%20August%
202012.pdf (accessed 14 January 2016).
intellectual property.66 Indonesia’s commitments with regard to IP protections in

the MoU must be seen against this background.
Indonesia has committed to develop with the US an “action plan for the purpose
of achieving improved protection and enforcement of intellectual property rights in
Indonesia” which shall “address concerns identified with respect to Indonesia in
recent Special 301 Reports”.67 Indonesia has long been on the US Intellectual
Property Priority Watch List in Special 301 Reports for its alleged insufficient
protection of US intellectual property rights.68
This commitment allows the US to maintain its current policy with regard to
GSP country eligibility and IP protection, safeguard the interests voiced by the
International IP Alliance and further its external IP policy. Thus, it has to be
regarded as closely linked with the US commitment regarding its GSP scheme
and the wider US foreign policy on IP.
It is likely that the action plan to be agreed with the US will include commit-
ments with regard to IP by Indonesia that are additional to its obligations under the
TRIPs Agreement.
4.2.3 Treatment of Cigars and Cigarillos from Indonesia in Future US

Legislation
The US, as the non-compliant respondent, does not make any commitment to
withdraw or amend its original WTO-inconsistent discriminatory tobacco regula-
tion. The measure at issue in the original dispute remains completely untouched by
the MoU. With respect to future tobacco regulation, the US only commits not to
“arbitrarily or unjustifiably discriminate against cigars or cigarillos (HS 2402.10)
from Indonesia”.69 Cigars and cigarillos, however, are a different product category
than cigarettes, which is the product at issue in the original dispute. The
66
Cf. Office of the USTR, Active GSP Country Practices Reviews, Updated November 2014,
https://ustr.gov/issue-areas/trade-development/preference-programs/generalized-system-prefer
ence-gsp/current-review-0 (accessed 15 January 2016). According to Sec. 2462 (c) (5) under the
GSP-chapter of the US Trade Act of 1974 adequate and effective protection to intellectual
property rights is a factor affecting country eligibility under the GSP-scheme. In fact, this threat
may have been an additional reason for Indonesia not to retaliate against the US for
non-compliance with the WTO ruling by suspending obligations under the TRIPs Agreement.
67
Cf. MoU, supra, n. 3, Section A—Intellectual Property Rights.
68
Indonesia has been on the IP Priority Watch List at least since 2010. The IP Priority Watch List is
compiled by the Office of the USTR as part of an annual Special 301 Report pursuant to
Section 182 of the Trade Act of 1974, as amended by the Omnibus Trade and Competitiveness
Act of 1988 and the Uruguay Round Agreements Act (19 U.S.C. § 2242). Countries placed on the
Priority Watch List are considered to have particular problems with respect to IP rights protection
and enforcement and shall be the “focus of increased bilateral attention” on IP issues, including
through bilateral agreements. Determinations in this report may also influence country eligibility
for GSP-preferences under the US GSP scheme, cf. US Trade Act of 1974, Section 2462(c)(5).
69
Cf. MoU, supra, n. 3, Section A—Cigars or Cigarillos.
142 J. Norpoth
commitment is limited to a US pledge to honour its obligations under WTO

agreements in future tobacco regulation on cigars and cigarillos and not to repeat
a violation of WTO law by favouring menthol flavoured tobacco over clove
tobacco. It does not alter the balance of rights and observed obligations between
Indonesia and the US. Since Indonesian producers of clove cigarettes reportedly
circumvented the ban on clove cigarettes by marketing clove cigars and cigarillos
instead,70 this commitment must be seen as political assurance to Indonesian
producers.
4.2.4 Indonesian Export Restraint Measure
The final commitment by the US not to challenge Indonesia’s mineral ore export
restraint measure through WTO dispute settlement proceedings deserves closer
analysis.71 Indonesia aims to increase national value extraction from its mineral
resources through the export restraint measure. The measure requires beneficiation
and processing of nationally mined raw mineral ores in Indonesia combined with a
gradual phase-in of export restrictions on certain raw materials.72 Especially the
implementation of strict export restrictions in January 2014 led Newmont Mining
Corporation, one of the US-headquartered mining company holding large-scale
mining licenses in Indonesia, to initiate arbitration proceedings at the International
Centre for the Settlement of Investment Disputes (ICSID) against Indonesia
through a Dutch-Indonesian Bilateral Investment Treaty (BIT).73 In what appears
to have been a battle of mutual threats, Indonesia came to an agreement with
US-based mining companies, partly by conceding to grant export licenses in
exchange for commitments by the companies to build smelters for the processing
of the mineral ores.74 Only after this settlement was reached, the US committed in
the MoU not to bring the case to the WTO.
The US commitment is drafted carefully. The relinquishment of the right to
dispute settlement relates only to the current application of the Indonesian measure,
which includes concessions to US investors. Future changes in the application of
the Indonesian measure would re-establish a right to WTO dispute settlement for
70
Cf. International Centre for Trade and Sustainable Development, Bridges (2014).
71
Cf. MoU, supra, n. 3, Section A—Mineral Ores Export Restraint.
72
The Indonesian Mining Law of 2009 already foresaw the requirement that mining companies in
Indonesia process raw materials within Indonesia before exporting them. In January 2014, the
provisions (art 103 and 107 Mining Law of 2009) that set forth the export ban took effect and
implementing regulations were issued. Cf. for a summary of the respective measures Tivey
et al. (2014).
73
Cf. Nusa Tenggara Partnership B.V. and PT Newmont Nusa Tenggara v. Republic of Indonesia,
ICSID Case No. ARB/14/15, 15 July 2014. Cf. for an explanation why the Dutch-Indonesian BIT
was used see van der Pas and Damanik (2014).
74
Cf. for details the following reports New York Times (2014); Indonesia-Investments (2014); van
der Pas and Damanik (2014).
the US.75 At first sight, this seems to be a major commitment. With the current
settlements between US mining companies and the Indonesian government in
place, however, the US presumably has little interest in initiating a dispute against
Indonesia and it strategically retains the right to WTO dispute settlement once the
interests of US companies are threatened again. Indonesia, however, was apparently
seeking assurance to be able to proceed with its natural resources policy based on
the settlements with US companies without any further challenge.
5 The MAS Between Indonesia and the US: A Case

of Efficient Breach?
Considering that WTO law may allow for efficient breach by inter se modification
of entitlements through MAS, the MoU between Indonesia and the US arguably
does not meet the legal conditions for efficient breach. A crucial element of efficient
breach under a property rule is a transfer of entitlement by consent. The pertinent
entitlement of Indonesia was US compliance with its obligations under the TBT
Agreement, which would be shifted by a relinquishment of the right to initiate
compliance proceedings and related consent to further non-compliance by the
US. As outlined above, the MoU does not fulfil the criteria established in previous
AB decisions for such a relinquishment76 since it lacks a clear expression of such an
intention of the parties. Moreover, the MoU also lacks any expression of consent to
further non-compliance and is instead explicitly without prejudice to any further
rights under the WTO agreements. Thus, legally speaking, a transfer of the original
entitlement has not occurred and hence, a substantive resolution of the dispute
through an inter se agreement is still missing.
Nevertheless, it is quite likely that the dispute has come to a final conclusion.
The US apparently considers the MoU to represent a final resolution of the
dispute.77 From the US perspective, the negotiated result is clearly positive. The
US has one controversial case off the DSB’s surveillance list. Its menthol cigarette
producers still enjoy the benefits of a discriminatory product regulation. It can
follow its other dispute against Indonesia without “disturbance” by suspension of
obligations from Indonesia. It can make a claim to the International IP Alliance that
their concerns about lack of IP protection in Indonesia are addressed. Its mining
companies with investments in Indonesia can be assured that their interests can still
be pursued at the WTO once their situation worsens. Equally, Indonesia might
prefer to consider the dispute settled. While it risks not to gain economically from
US compliance, it may instead use the US commitments to communicate “positive
75
Cf. MoU, supra, n. 3, Section A—Mineral Ores Export Restraint.
76
Cf. WTO doc. WT/DS27/AB/RW2/ECU, supra, n. 29, paras 212–222.
77
Cf. statement by the US in WTO doc. WT/DSB/M/351, Minutes of the Meeting, 20 October
2014, para 8.1.
144 J. Norpoth
results” to national stakeholders: it can tell its export-oriented wiring harnesses

industry depending on GSP-preferences that a status quo of its market access to the
US was ensured; its clove cigarillo exporters may learn that the US commits to
observe WTO law with respect to clove cigarillos in its future tobacco regulation; it
can tell the Indonesian public that its natural resources policy can be maintained.
This may distract from the fact that in substantive terms Indonesia has not received
much more than securing a status quo, while even committing to improved IP
protection.
This political result can be described as a de facto transfer of the entitlement by
consent. Thus, one could consider the MAS as a case of efficient breach, although
not in the form envisaged by WTO law. However, it needs to be clarified that the
efficiency of this “breach” lies in the promotion of joint political welfare78 as both
governments can more easily communicate positive outcomes to their national
constituencies than under a situation of an ongoing dispute.
Overall, the finding deserves critical reflection. Claiming that the MoU simply
depicts the values attached by the two governments to all negotiation elements
involved, turns a blind eye to the influence of power imbalances on the result. In
fact, the case study is illustrative of the problems that arise when larger trading
powers hold more negotiating chips in their hands than developing countries.
Dependency on conditioned GSP-preferences, latent threats of insufficient IP
protection through Section 301 reports and WTO law as a potential second order
protection for national investors harmed by developing country legislation were all
factors that apparently weighed into the deal finally struck between Indonesia and
the US—a deal which appears overall more favourable to the US than to Indonesia.
Against this backdrop it seems problematic that the theory of efficient breach with
its basic assumption that all players act as rational utility-maximizers turns a blind
eye to potential power-based distortions of the individual choices of actors which
may become relevant in a negotiation context between large trading powers and
developing countries.
In light of these findings, it is particularly remarkable that the MAS and the lack
of notification of the MoU were not commented in the meetings of the DSB.
Surveillance by the DSB is generally considered important to ensure that
non-compliance entails community cost.79 However, a bilateral solution between
strikingly different trading partners in matters of power that did not lead to
substantive compliance has not sparked any opposition of the central collective
organ in the WTO DSS.
78
This is exactly what Schwartz and Sykes argue is the metric of welfare for decision-makers in the
trade context. Schwartz and Sykes (2002), pp. 183 ff.
79
Hudec (2000), p. 34; Trachtman (2008), p. 141; Pauwelyn (2008), p. 172 ff.
6 Conclusions
With regard to the operation of the DSS at the compliance stage, some troubling
findings can be drawn from the foregoing. Firstly, the case study highlights how
power imbalances weigh into MAS, entailing results that seem more favourable to
the original wrongdoer than the complainant. Secondly, a MAS may apparently
serve as an instrument to prevent both further surveillance of compliance by the
DSB and further challenge by the original complainant, although substantive
compliance has not been achieved. This is possible as a MAS allows for politically
efficient exchanges between the two disputing parties which do not seem to raise
objections by the other WTO Members represented in the DSB. The uncritical
treatment of the MAS by the DSB suggests that most WTO Members follow the
idea of a bilateral relationship between complainant and respondent.80 Moreover, it
calls into question that the DSB is indeed the forum to ensure that non-compliance
with WTO law entails community costs. One needs to bear in mind, however, that
an important explanatory factor for the MoU between the US and Indonesia was
that the US could remedy non-compliance with the non-discrimination obligation
without any economic gain for Indonesia. Hence, the systemic problems described
here seem to be most prominent in such constellations.
Whether stricter mandatory review of the content of MAS with a view to ensure
substantive compliance or devising a specialized category of entitlements that
follow a separate logic of dispute resolution or protection would be valuable
solutions to the problem at the WTO is, however, beyond the scope of this paper.
Its main proposition is that the WTO as an institution has reason to worry about
settlements of disputes such as the one analysed here.
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Part III
Energy Issues in International Trade
and Investment Law
Energy Regulation in International Trade:
Legal Challenges in EU–Russia Energy
Relations from an Investment Protection
Perspective
Natasha A. Georgiou
Contents
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
2 Gaps in the Legal Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
3 The WTO as an Effective Legal Framework? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
4 Prevailing Legal Challenges in EU–Russia Energy Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
4.1 Lack of Reciprocal Energy Market Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
4.2 Investment Protection in EU–Russia Bilateral Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
4.3 Call for Solidarity and Coherence in External Energy Relations . . . . . . . . . . . . . . . . . . . 161
5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
Abstract The EU–Russia energy partnership is a highly strategic relationship that

has profound implications for the international arena as far as energy security and
stability are concerned. The Ukraine crisis and subsequent sanctions brought this
realization to the fore, with the future of this partnership hanging in the balance.
Bilateral relations have come under increasing pressure in recent years, following a
series of trade disputes and supply disruptions, bringing Russia’s reliability as a
trade partner into question. Tensions have been further exacerbated by Russia’s
withdrawal from the ECT which has effectively rendered energy cooperation based
on political dialogues and commitments that lack legally binding norms. With the
unlikelihood of a revised Partnership and Cooperation Agreement following the
EU’s suspension of all talks in response to Russia’s annexation of Crimea, the basis
of legal ties between these two powers has been brought into question. However,
with Europe heavily dependent on Russian energy resources, the EU has a vested
interest in keeping Russia firmly entrenched in the global trading system. This
Chapter will assess the role of international law in EU–Russia relations; in partic-
ular, whether the ECT and WTO provide an appropriate legal framework in the
context of energy trade from an investment protection perspective.
N.A. Georgiou (*)

University of Reading, Reading, UK
e-mail: n.a.georgiou@pgr.reading.ac.uk

DOI 10.1007/978-3-319-44645-5_9
152 N.A. Georgiou
1 Introduction
The EU–Russia energy partnership is potentially one of the most important inter-
national relationships to have evolved in the twenty-first century. Despite the
partnership being relatively young, it is a highly strategic relationship, the devel-
opment of which will have profound implications for the international arena, as far
energy security and stability are concerned. However, EU–Russia energy relations
do not exist in a vacuum—they have evolved against a wider geopolitical backdrop
of strained relations between Russia and the West and an ever-growing concern
about energy security.1 Energy security is therefore an issue of bilateral tension and
remains to be the ultimate test of the EU–Russia relationship. The matter was
brought to the fore following the January 2009 gas crisis when gas supplies to
Europe were brought to a halt following a transit dispute between Russia and
Ukraine.2 The gas crisis revealed the EU’s vulnerability in its energy dependence
on Russia, which subsequently pushed energy security to the top of the EU foreign
policy agenda. As a result, energy security emerged as a contentious issue in
EU–Russia relations which has contributed to the steady deterioration of mutual
relations in recent years.3 Nevertheless, the EU and Russia are condemned to be
partners.4 This is exacerbated by the fact there is simply no justifiable alternative to
Russia as a supplier in the short term (as holder of the world’s largest gas reserves)
and in turn the EU as a buyer (with the most lucrative market for a heavily oil-and-
gas dependent Russia). This strong interdependence and mutual interest mean that
energy remains a strategic sector within which relations can be further developed
for an EU–Russia energy partnership.5 True partnership coupled with a common
legal framework appear to be the fundamental components necessary to ensure
energy security and prosperity in the twenty-first century.6
This Chapter will look at current EU–Russia relations in the energy field through
the prism of international law. As a broad topic too extensive to cover in its entirety,
this Chapter will limit its scope by focusing on energy relations in the gas sector and
will scrutinise the legal aspects of this strategic relationship specifically from a
trade and investment protection perspective. By identifying the major legal chal-
lenges which have inhibited any constructive engagement between these two
powers, the Chapter will assess to what extent these recurring issues can be
addressed moving forward. The Chapter will argue that one of the predominant
problems and ever-prevailing issues in EU–Russia energy relations is the fact that
there is no solid over-arching international legal framework regulating energy in
international trade and investment between these two powers. This has resulted in a
1
Cameron (2009), p. 20.
2
Pirani et al. (2009), p. 4.
3
Petrovic et al. (2009), p. 91.
4
Cameron (2009), p. 26.
5
Leal-Arcas (2009a), p. 409.
6
Mandelson (2008).
Energy Regulation in International Trade: Legal Challenges in EU–Russia. . . 153
void in the legal infrastructure. As a result, there is a deficiency in the legal

framework in terms of an effective legal solution for potential trade disputes and
supply disruptions which are a threat to security of European energy supply.7 Other
simmering issues include the absence of reciprocity in energy market access and the
lack of coherence amongst Member States in their external energy relations with
Russia. These issues are interrelated and closely affiliated to the need for a revised
bilateral and international legal framework, as diverse positions and a lack of
cooperation amongst Member States undermine collective EU actions and legisla-
tive initiatives8 Inevitably what this Chapter is trying to advocate is that a solid
legal framework between the EU and Russia can help stabilise relations between
both parties by preventing any trade disputes and supply disruptions, which would
ultimately diffuse any potential threats and an imminent gas crises. Nevertheless, it
needs to be stated from the outset that, whilst this Chapter proposes that a revised
legal framework will facilitate security of energy supply through legal certainty and
stability, it does not purport to suggest that this will provide a blanket solution to all
issues in EU–Russia relations which are in essence, geopolitical at heart.
2 Gaps in the Legal Framework
Bilateral relations between the EU and Russia have predominantly been based on
the Partnership and Cooperation Agreement (PCA), which was signed in 1994 and
entered into force on 1st December 1997 for an initial duration of 10 years. The
agreement, which has been renewed annually since 2007, has provided a legal
framework for bilateral trade and has regulated political, economic and cultural
relations between the EU and Russia. The PCA remains the basis for EU–Russia
relations until replaced by a new agreement.9 Nonetheless, there is an urgent need
for a revision of this framework, as the legal basis of this agreement has increas-
ingly been brought into question given that several provisions of this agreement are
outdated and no longer reflect the current state of affairs.10 From an international
perspective, the Energy Charter Treaty (ECT)11 and its Transit Protocol
(TP) constitute the only intergovernmental agreement in the energy field that has
7
Marhold (2011).
8
De Jong and Wouters (2011), p. 47.
9
http://eeas.europa.eu/delegations/russia/eu_russia/political_relations/legal_framework/index_en.
htm (accessed 8 March 2015).
10
The EU and Russia have both changed substantially since the signing of the PCA as a result of
internal developments—the EU has undergone enlargement and institutional reform whilst Russia
has developed into a market economy and has acceded to the WTO.
11
The Energy Charter Treaty and the Energy Charter Protocol on Energy Efficiency and Related
Environmental Aspects were signed in December 1994 and entered into legal force in April 1998.
The ECT aims at strengthening the rule of law on energy issues, by creating a level playing field
and in so doing, mitigating risks associated with energy-related investment and trade.
154 N.A. Georgiou
legally binding rules backed by a dispute settlement mechanism.12 The ECT is

therefore significant in that it is the first binding multilateral instrument aimed at the
promotion and protection of foreign investment in the energy sphere; and in
addition thereto, it is the first multilateral agreement with detailed provisions on
energy transit.13 Nonetheless, Russia never ratified the treaty and instead opted for
provisional application under art 45 ECT,14 having finally announced on the
20 August 2009 that it would be terminating its provisional application.15
The issues concerning an obsolete PCA and Russia’s withdrawal from the ECT
are interrelated given that from an EU perspective, the new bilateral Partnership
Agreement (PA) which is supposed to replace the PCA, is expected to be strongly
based on the principles of the Energy Charter and other principles fundamental to
EU values, such as reciprocity, transparency and non-discrimination.16 From a
Russian perspective however, the ECT, which proposes free access to Russia’s
strategic gas sector as well as its production and transit infrastructure, is to its
detriment, offering it no reciprocal gain.17 The inability to reconcile these matters is
a fundamental problem that has hindered further development on a bilateral and
international legal framework.
Moscow’s biggest gripe with the ECT (with the exception of the Yukos case which
has prevented ratification), is the concern that Russia’s “State champions” such as
Gazprom would be obliged to open their network to Central Asian countries with
cheaper gas. However, the ECT does not impose mandatory “third party access”18 to
energy infrastructure and as such these alleged concerns appear to be unjustified.
Russia’s subsequent withdrawal from the ECT has therefore somewhat tarnished
Russia’s reputation within the international community as Moscow’s termination of
its provisional application was construed as a disregard of standards of international
law.19 Furthermore, it ironically deprived Russian investments of additional protec-
tion abroad20 which should have been a source of concern, given Russia’s issues with
the EU’s Third Energy Package (TEP). Nevertheless, Russia’s withdrawal did not
have immediate consequences for European investments on Russian soil given that the
12
Selivanova (2010b), p. 61.
13
Ibid.
14
Art 45 of the ECT states that despite non-ratification, the ECT is provisionally applicable
provided that it is not inconsistent with existing domestic legislation.
15
Carlson et al. (2009).
16
European Commission, External Energy Relations—From principles to Action, COM (2006)
590, 12 October 2006; European Commission, Review of EU–Russia Relations, COM (2008)
740, 5 November 2008.
17
Lukyanov (2008), p. 1110.
18
The ECT includes provisions confirming the principle of national sovereignty over energy
resources in art 18. The contracting parties are therefore free to decide the extent to which they
wish to open their energy sector to foreign investment. See also Selivanova (2010a).
19
Konoplyanik (2009), p. 23.
20
Ibid.
arbitral Tribunal in the Yukos21 case held that Russia was bound by the ECT for
investments pre-dating its withdrawal on the 19 October 200922 despite not having
ratified the treaty.23 This meant that all investments prior to the withdrawal date would
be protected for an additional 20 years.24 The ECT’s deeply enshrined investment
protection rules and the ECT’s extensive membership therefore make any proposal to
replace the ECT, as the legal architecture in the energy sector, highly unlikely.25
3 The WTO as an Effective Legal Framework?
Given the fragmented legal framework in EU–Russia relations, the question that
ultimately follows is whether the WTO can address the gaps in the legal infrastruc-
ture regulating energy in international trade. Although EU–Russia legal relations
have benefitted from Russia’s WTO accession, to the extent that Russia is bound by
enforceable international trade rules, many areas of energy trade are perceived to
fall outside the scope of the WTO agreements which are not specifically addressed
in this broad trade framework.26 There is a clear distinction within the WTO
discipline between trade in goods and trade in services, with specific rules appli-
cable to trade in goods by way of the General Agreement on Tariffs and Trade
(GATT) and trade in services through the General Agreement on Trade in Services
(GATS).27 This distinction has raised concerns as it is neither prevalent nor clear in
the energy sector.28 The extent to which energy matters can effectively be
21
The Yukos case, which was believed to be politically motivated, is arguably the most contro-
versial investment arbitration case of all time. As CEO of Russia’s largest oil firm, Mikhail
Khodorkovsky was arrested for alleged tax fraud and Yukos was subsequently dismantled and
auctioned off. See also Youngs (2009), p. 61.
22
ECT provisions on arbitration and investment protection remain valid for 20 years from the date
of Russia’s withdrawal, until 2029. This follows from art 45.3(b) ECT. See also Yukos Universal
Limited (Isle of Man) v. The Russian Federation, PCA Case no. AA 227, Interim Award on
Jurisdiction and Admissibility, 30 November 2009, para 339.
23
Konoplyanik (2009), p. 23.
24
Ibid.
25
In April 2009, President Medvedev launched an alternative to the ECT, inviting Europe to join a
new charter. See President of Russia, Conceptual Approach to the New Legal Framework for
Energy Cooperation (Goals and Principles), 21 April 2009, http://archive.kremlin.ru/eng/text/
docs/2009/04/215305.shtml (accessed 8 March 2015). Medvedev’s proposal was too broad and
incompletely structured to be seen as a credible alternative to the ECT. See Nappert (2010), p. 11.
Having dismissed Medvedev’s proposal, the Commission upheld that any new proposal should be
considered within the ECT framework and any deviation benchmarked against the Charter. See De
Jong and Wouters (2011), p. 32.
26
This is arguably due to the fact that the major energy exporting countries at the time were not
founding Members of the GATT. See Selivanova (2010a).
27
Leal-Arcas and Abu Gosh (2014), p. 18.
28
Cossy (2009).
156 N.A. Georgiou
addressed by the WTO agreements, in particular the GATT, is therefore a matter

that is highly debated,29 which has been further complicated by the emerging
debate regarding the dichotomy of goods and services.30
Some of the prevailing legal challenges, which have revealed limitations in the
WTO system, include the nature of energy materials and products that are funda-
mentally different to manufactured goods, which the WTO predominantly deals
with.31 In addition thereto, the traditional focus of GATT has been on market access
of foreign products rather than access to foreign supplies. This means that trade
rules are designed to address import barriers rather than export barriers, which is
problematic, as trade restrictive practices in global energy trade stem from export
taxes and restrictions.32 Furthermore, legal challenges have been brought to the fore
with doubts raised as to whether GATT art V which establishes a general rule on
freedom of transit of goods, is applicable to transportation of energy through fixed
infrastructure.33 Given energy trade is conducted through pipelines and transmis-
sion grids, this is cause for concern and ultimately raises the question whether the
WTO is able to address issues pertinent to the energy field.34 Additional concerns
relate to whether GATT art V addresses issues crucial to energy trade such as
disruption to transit and new infrastructure for insufficient capacity.35 In contrast,
the trade provisions of the ECT which draw largely on GATT/WTO, are better
tailored to address the requirements of energy trade given the extensive definition of
energy products and services and the fact that gas pipelines are included as a means
of transport in art 7 ECT.36 Nevertheless, the ECT has its limitations given Russia’s
termination of provisional application, which makes its effectiveness as a legal
instrument in EU–Russia energy relations a moot point.
The new PA which was under negotiation, following Russia’s WTO member-
ship, was expected to provide a comprehensive framework for bilateral trade and
investment relations, with a view to improving the regulatory environment by
building upon the WTO rules and going beyond the PCA provisions.37 However,
in response to Russia’s illegal annexation of Crimea, the EU has suspended all talks
on the new PA and sanctions have been imposed.38 The challenges surrounding
modernisation of EU–Russia bilateral relations therefore need to be addressed as
Russia’s withdrawal from the ECT has essentially reduced EU–Russia energy
29
Marhold (2013), p. 1.
30
Leal-Arcas and Abu Gosh (2014), p. 18.
31
Selivanova (2010a).
32
33
Cossy (2009).
34
Selivanova (2010a).
35
Ibid.
36
Marhold (2013), p. 1.
37
http://ec.europa.eu/trade/creating-opportunities/bilateral-relations/countries/russia (accessed
8 March 2015).
38
http://eeas.europa.eu/russia/index_en.htm (accessed 8 March 2015).
cooperation to non-legally binding dialogues and commitments, such as that of the

EU–Russia Energy Dialogue. Such instruments are at best described as “soft law”
mechanisms, which lack legal force in matters of investment protection, transit and
dispute resolution.39 This is significant given that Russia is the EU’s third biggest
trading partner with supplies of oil and gas making up a large proportion of the
country’s exports to Europe.40 EU–Russia relations are therefore in desperate need
of legislative and institutional reform which increasingly necessitates calls for
international governance, at a bilateral and multilateral level.41
4 Prevailing Legal Challenges in EU–Russia Energy

Relations
The current political climate has taken its toll on the EU–Russia energy partnership.
Bilateral ties have been somewhat tarnished by the Crimea crisis and the subsequent
sanctions imposed which have been detrimental to bilateral relations between these
two powers. Nevertheless, a solid legal framework is required to foster cooperation
and in turn facilitate trade and investment in the energy sphere. As one of the EU’s
largest trading partners and a major supplier of energy exports, there is no justifiable
alternative to Russian energy sources in the short to medium term.42 It is therefore
imperative that the current basis for cooperation is revised as a matter of urgency
and that negotiations regarding the new PA are resumed so that a more compre-
hensive framework can be put in place. However, both partners have different
strategic interests and manifestly inconsistent views of the legal framework
required. For Russia, security of demand is a priority, and as such the Gazprom
model of vertically integrated national gas champions, delivering gas through
pipelines with no freedom of access, is in Russian interest and consequently,
fundamental to Russian energy policy.43 For the EU, on the other hand, security
of supply is a key concern and for this reason, diversification of energy sources is
mandatory and has been facilitated by the unbundling requirements of the EU’s
TEP.44 Inevitably, the legal requirements under the TEP45 are difficult to reconcile
with the Gazprom strategy, which further complicates the energy dynamic between
39
Van Elsuwege (2012), p. 6.
40
http://eeas.europa.eu/russia/index_en.htm (accessed 8 March 2015).
41
Westphal (2006), p. 45.
42
Boncourt (2014).
43
44
Ibid., p. 24.
45
The TEP included rules on energy unbundling which entailed the separation of networks from
production and supply activities. See European Commission, Proposal for a Directive of the
European Parliament and of the Council amending Directive 2003/55/EC concerning common
rules for the internal market in natural gas, COM (2007) 529, 19 September 2007.
158 N.A. Georgiou
the EU and Russia.46 Moscow wants access to EU markets but is not prepared to
reciprocate with similar arrangements for EU companies. The European Commis-
sion has therefore warned Gazprom that it will fall privy to competition law within
the EU, pursuant to principles of market liberalization.47 The Commission’s
unbundling requirements would in effect be loosening Russia’s energy grip within
Europe by preventing any downstream movement into energy activities.48 These
diametrically opposed policy objectives and agendas have inevitably hindered any
constructive engagement and reduced negotiations on a revised legal framework to
a piecemeal manner.49 This stalemate validates the view that the EU and Russia
appear to be talking in different languages,50 given their inability to reach a
compromise on their fundamentally different approaches in the energy domain.
This stand-off has been further exacerbated by a number of simmering issues in the
energy sphere including amongst others: reciprocity; investment protection; and
solidarity, which will be discussed in further detail below.
4.1 Lack of Reciprocal Energy Market Access
In the absence of a new PA, the concept of reciprocity emerged as the principle of
access to energy resource and infrastructure. In this context, restrictions on energy
investments to gain political leverage became the new order of the day in EU–-
Russia energy relations.51 The Kremlin’s strategy of collecting key energy assets
and pipelines in Central and Eastern Europe to control domestic markets as
leverage in negotiations with the EU are seen as obstacles for foreign investments
in the energy sector.52 Reciprocity in energy market access is thus a contentious
issue in EU–Russia relations that has come to mean different things from each
player’s perspective.53
The TEP and the reciprocity clause were intended to address concerns in
Brussels regarding restrictions imposed on EU companies trying to invest in
Russia’s energy market.54 The Yukos case of 2003 served as a blunt reminder of
the lengths to which the Russian State would go to retain control over its oil and gas
46
47
EU Observer, Putin and Barroso in Public Scrap on EU Energy Law, 24 February 2011, https://
euobserver.com/foreign/31869 (accessed 10 March 2014).
48
Cameron (2009), p. 23.
49
Leal-Arcas (2009b), p. 348.
50
Romanova (2008), p. 226.
51
Belyi (2009), p. 123.
52
Woehrel (2009), p. 9.
53
Belyi (2009), p. 128.
54
Ibid., p. 124.
sector. However the cases of Sakhalin II55 and Shtokman56 in 2006 raised most
concerns within the Union. Further alarm bells began reverberating in Brussels with
Russia’s adoption of the Law on Foreign Investments in Strategic Companies (Law
No. 57-FZ) in April 2008.57 The subsequent amendment of a number of laws, in
particular the 2008 revision of the Russian Law on the Subsurface (Law
No. 58-FZ), constituted a further cause for concern for the EU.58 Law No. 57-FZ
and Law No. 58-FZ drew widespread criticism given that they were fundamentally
inconsistent with the ECT’s investment provisions of non-discrimination and inter-
national business practice.59 The different views held by Moscow and Brussels with
regard to their respective foreign investment legislation continue to be a source of
contention in EU–Russia relations.60
55
Sakhalkin II, an oil and gas development project on Sakhalin Island in Russia, was governed by a
Partnership Sharing Agreement (PSA) which meant that the Russian State could not receive any
profit until all costs incurred by the foreign company had been recovered. Shell was criticised for
cost overruns which brought about massive losses to the State, including serious environmental
damages to the region. All environmental concerns regarding the project were later resolved when
Shell agreed to sell a majority stake in the project to Gazprom. See New York Times, Shell Cedes
Control of Sakhalin-2 to Gazprom, December 2006, http://www.nytimes.com/2006/12/21/busi
ness/worldbusiness/21iht-shell.3981718.html (accessed 8 March 2015).
56
Shtokman is one of the world’s largest gas fields, for which Gazprom was in need of a partner as
it lacked the necessary advanced technology to extract gas from this field. A short list of candidates
was announced in September 2005 for which lengthy negotiations ensued until a decision was
finally made in 2007 when Total, Statoil and Norsk Hydro agreed to become partners with
Gazprom. See Romanova (2008), p. 224.
57
The Law on Foreign Investments in Strategic Companies (Law No. 57–FZ) adopted in April
2008, set out the oil and gas sector as a strategic sector for which investment now required
government approval. As a result, foreign investors were required to obtain consent for any
acquisition in excess of 50 % in companies deemed to be strategic, which enabled the designated
authority to monitor the activities of foreign investors in the energy sector. See Law No. 57–FZ
‘On the Procedure for Contributing Foreign Investments in Legal Entities which are of Strategic
Importance for the Defence of the Country and Security of the State’ (Law on Foreign Investments
in Strategic Companies), http://www.russland.no/filestore/57FZ.27.html (accessed
8 December 2010).
58
Law No. 58–FZ amended and repealed certain legislative provisions including the Law on the
Subsurface, which was the fundamental legislative act and general framework for licensing,
exploration and development of activities relating to natural resources in Russia. The amendment
enabled the Russian government to grant approval to terminate the right to mineral exploration and
production whether the foreign entity had a license or not. See Hóber (2009), p. 438. Significantly,
the license to use subsoil parcels of federal significance on the Russian continental shelf could only
be granted to Russian entities controlled by the State, with at least a 5-years’ experience in this sort
of exploration. As a result of these limitations, only Gazprom and Rosneft qualified for the
licenses. See Seliverstov (2009), p. 17.
59
Nappert (2010), p. 12.
60
Russia views its laws on foreign investment as a necessity for the purpose of protecting its
strategic industry, which is a lifeline of the Russian economy. However, Moscow views the EU’s
TEP as detrimental to the investment climate between the EU and Russia, vital to the internal
energy market and the EU’s energy policy. See EU Observer, EU and Russia to Sign Trade Memo
Amid US Mockery, 7 December 2010, http://euobserver.com/9/31442 (accessed 8 March 2015).
160 N.A. Georgiou
4.2 Investment Protection in EU–Russia Bilateral Relations
International trade and investment requires solid legal foundations—multilateral

trade regimes and bilateral rules are necessary to provide an efficient regulatory
framework for cross-border trade and investment. This is particularly important for
the EU as Russia’s most important investor.61 According to the European Com-
mission, it is estimated that up to 75 % of foreign direct investment (FDI) stocks in
Russia come from EU Member States.62 The EU therefore has a contingent interest
in ensuring its investment protection rights are not fettered and any potential risks
mitigated in its dealings with Russia.
European investors have generally erred on the side of caution with Russia
following incidents such as the Sakhalin dispute and the Yukos case. This has
made investment protection a thorny issue that needs to be addressed as the
investment provisions of the ECT (Part III) will eventually lapse in 2029. Despite
there being no immediate urgency, this is significant given that the regulation of
investment is largely absent in the WTO. The WTO does not deal with investment
policy except to a limited extent through the GATS,63 whereas the ECT has deeply
enshrined investment protection provisions in place, which are bolstered by the
dispute settlement mechanism that includes both State-to-State and Investor-to-
State arbitration.64 The GATT/WTO focus on traditional issues of market access
has meant that prevailing issues such as investment protection have largely been
left unaddressed. The WTO regime therefore seems to entail deficiencies in its
ability to effectively regulate energy in international trade and investment, when
compared to the ECT.65
As a result of the lacuna in the legal architecture, bilateral investment treaties
(BITs) have emerged as the default international law instrument in EU–Russia
energy relations. Although BITs are not specifically drafted for energy, their pro-
visions apply to a broad range of investments which inevitably include investments
in the energy sector.66 BITs therefore provide a legal framework for EU–Russia
energy relations from an investment perspective given that Russia has concluded
BITs with approximately 24 EU Member States.67 However, by virtue of the Lisbon
61
European Commission, Trade–Russia (EUROPA, 9 September 2014), http://ec.europa.eu/trade/
creating-opportunities/bilateral-relations/countries/russia (accessed 8 March 2015).
62
Ibid.
63
WTO agreements prohibit investment measures that are inconsistent with obligations of national
treatment and the prohibition of quantitative restrictions. These prohibitions concern trade in
goods, not services, whereas the GATS covers investments linked to trade through mode 3 (com-
mercial presence). See Selivanova (2010b); Selivanova (2009), p. 7.
64
Under art 26 ECT an investor can litigate directly against a government. See Konoplyanik and
Wälde (2006), p. 523.
65
Selivanova (2009), p. 7.
66
Lehavi and Licht (2011), p. 115.
67
See http://unctad.org/sections/dite_pcbb/docs/bits_russia.pdf (accessed March 2014).
Treaty68 and arts 207.1 and 206 of the TFEU, the scope of the common commercial
policy has been extended to FDI bringing this within the realm of the EU’s
exclusive competence.69 Although the change in the EU’s competence will not
have an immediate effect on existing BITs pursuant to Regulation 1219/201270
which establishes a transitional regime, it is anticipated that all exiting BITs
(including those signed with Russia) will eventually be replaced by new agreements
with the EU pursuant to art 207 TFEU.71 Therefore, despite BITs playing a
significant role in EU–Russia energy investments in the absence of a comprehen-
sive and reliable legal framework, the fact that the entire BIT regime between
Russia and the EU Member States is expected to be replaced following the extended
competence of the EU, means that the current BITs do not provide an adequate
investment framework for EU–Russia relations in the future.
4.3 Call for Solidarity and Coherence in External Energy

Relations
The EU Council made repeated references to solidarity during the 2009 gas crisis
which made energy security a top priority on the EU agenda. Sustainable and
reliable energy supplies has subsequently become a source of bilateral tension as
Brussels endeavours to overcome EU dependence on Russia by seeking to diversify
its energy supplies.72 The Treaty of Lisbon introduced solidarity in matters of
energy supply within the EU. Significantly art 194 stipulates that the aims of the
Union’s energy policy shall be pursued “in a spirit of solidarity” between Member
States. In this respect, the signing of bilateral deals with Russia’s State-run gas
monopoly Gazprom could be seen as undermining solidarity and the development
of a coherent external energy policy within the EU.73 Given that sustainable and
reliable energy supplies are source of tension between the EU and Russia,74
bilateral gas deals with Moscow may not be completely consistent with the EU’s
policy of diversification in its quest for energy security, as it potentially risks
entrenching the EU further in its energy dependence on Russia.
68
The Treaty of Lisbon entered into force on 1 December 2009 as the latest landmark in the
Union’s evolved constitutional architecture. It amended the EU treaties and renamed them into the
current Treaty on the European Union (TEU) and the Treaty on the Functioning of the European
Union (TFEU).
69
Strik (2014), p. 2.
70
Regulation (EU) No 1219/2012 of the European Parliament and of the Council of 12 December
2012 establishing transitional arrangements for bilateral investment agreements between Member
States and third countries, OJ L 351/40.
71
Bungenberg (2010), p. 143.
72
Leal-Arcas (2009b), p. 346.
73
Barysch (2010), p. 4.
74
Petrovic et al. (2009), p. 91.
162 N.A. Georgiou
More recently, these bilateral gas deals have included Nord Stream75 and
Turkish Stream.76 Both proposed pipelines are deemed to be controversial by the
EU due to concerns that the construction of Turkish Stream and the extension of
Nord Stream would lead to overcapacity. Turkish Stream (replacing the cancelled
South Stream) in particular is considered to be in direct competition with
EU-backed pipelines.77 Furthermore, both pipelines would need to comply with
EU unbundling rules78 which is significant given that South Stream, the failed
pipeline to which Turkish Stream is a successor, was aborted in December 2014 due
to inconsistencies with EU legislation, in particular the EU’s network ownership
unbundling.79 Such deals are predominantly viewed by many countries within the
EU—mostly Central and Eastern European States—as a flagrant example of quick
bilateral politics with negotiations at EU level largely absent and thus perceived as
lacking any form of solidarity.80 Fragmentation within the energy market is there-
fore rife and remains an obstacle yet to be overcome.
The EU has much to gain from a united stance towards Russia, given the
recurring energy cuts, lack of equal market access and the protracted negotiations
on a revised bilateral agreement, all of which are detrimental to energy coopera-
tion.81 However, different priorities, historical ties, national loyalty, energy mix and
market positions have resulted in a discord within the EU in its approach towards
Russia.82 This impasse within the Union has made it easier for national govern-
ments to justify bilateral ties with Moscow which has in turn facilitated the Putin
regime to pursue its own agenda through barter deals with individual Member
States pursuing national interests on matters that ought to have been negotiated at a
75
Nord Stream is an existing 55 bcm/y pipeline that connects Russia to Germany via the Baltic
Sea. It is to be extended to double its capacity following an agreement between Gazprom, Royal
Dutch Shell, E.ON and OMV.
76
Turkish Stream is a 63 bcm/y pipeline connecting Russia to Turkey via the Black Sea, intended
to carry Russian gas to South East Europe.
77
Turkish Stream is considered a rival to the Western-backed Trans Adriatic Pipeline (TAP)
pipeline project which will carry Azeri gas to European markets. TAP is part of the Southern
Gas Corridor and is seen as Europe’s alternative to its reliance on Russia. See Raszewski
(2015), p. 4.
78
EurActiv, Barroso Warns Bulgaria on South Stream, 28 May 2014, http://www.euractiv.com/
sections/energy/barroso-warns-bulgaria-south-stream-302467 (accessed 10 July 2014).
79
The Commission confirmed that the breach of EU law related to three major issues which
included: firstly, the EU’s network ownership unbundling which prohibits Gazprom as both
producer and supplier of gas to simultaneously own production capacity and its transmission
networks; secondly, non-discriminatory third party access to the pipelines which means that
Gazprom does not have exclusivity as the only shipper; thirdly, the tariff structure which needs
to be addressed. See EurActiv, South Stream Bilateral Deals Breach EU Law, Commission Says,
4 December 2013, http://www.euractiv.com/energy/commission-south-stream-agreemen-news-
532120 (accessed 1 December 2014).
80
81
Rosner (2009), p. 166.
82
Alcaro and Alessandri (2010), p. 191.
multilateral level.83 With bilateralism emerging as the default approach of engage-

ment with Russia, the EU’s endeavours to bolster its energy policy towards Russia
has been hindered by the lack of coherence amongst Member States in their stance
towards Russia. It is posited that a call for EU solidarity in Brussels’ diversification
efforts will prove more beneficial in the long run than individually negotiated
bilateral deals amongst select Member States dependent on Russian gas.84 This
was recently reaffirmed in the Commission’s gas stress test results, which con-
cluded that greater solidarity was required between all Member States and greater
diversification amongst their suppliers.85
In this respect, the solidarity mechanism of art 122.1 TFEU warrants special
attention as it anticipates that the EU institutions act “in a spirit of solidarity
between Member States” should there be any shortage of supply of energy or
similar products.86 The specific mention of “energy” in relation to “supply” creates
a legal basis whereby the Union can intervene to the extent that there are any supply
disruptions.87 As such, the solidarity principle sets a platform for the measures to be
taken during a time of crisis to ensure energy security.88 However, there appear to
be some inconsistencies between art 122.1 TFEU and the Union’s policy on energy
under art 194 TFEU.89 Significantly art 194.2 TFEU imposes limitations on the
measures to be undertaken to achieve the objectives of art 194.1 TFEU, as they
“shall not affect a Member State’s right to determine the conditions for exploiting
its energy resources, its choice between different energy sources and the general
structure of its energy supply”. The extent to which art 194.2 impacts the solidarity
measures under art 122.1 and the EU’s ability to act in the event of a supply
disruption is therefore unclear but inevitably allude to a potential conflict between
these two provisions.90
Therefore, whilst the Commission’s calls for supranational coordination and
integration in energy policy have been bolstered by the formation of an Energy
Union,91 the aims of the Union’s energy policy cannot be implemented in a manner
83
Gawlikowska-Fyk et al. (2015), p. 14.
84
EurActiv, Cameron: EU–Russia Relations Should Be More Positive, 9 April 2008, http://www.
euractiv.com/en/foreign-affairs/Cameron-eu-russia-relations-positive/art-171457 (accessed
1 April 2014).
85
European Commission, Communication from the Commission to the European Parliament and
the Council on the Short Term Resilience of the European Gas System. Preparedness for a Possible
Disruption of Supplies from the East during the Fall and winter of 2014/2015, COM (2014)
654, 16 October 2014.
86
Lorca (2009), p. 108.
87
88
Ibid.
89
Article 194 TFEU states that the aims of the Union’s energy policy shall be pursued “in a spirit of
solidarity” between Member States.
90
91
On 25 February 2015 the European Commission put forward a proposal for an Energy Union
with the aim of achieving a “sustainable, low-carbon and climate-friendly economy that is
164 N.A. Georgiou
which impinges on the sovereign rights of States to exploit their energy resources as
they deem appropriate. Although the 2006 and 2009 gas crises prompted Member
States heavily dependent on Russian gas to call for greater integration in the form of
an Energy Union, Member States which are less reliant on Russian natural
resources have been reluctant to agree to this integration in energy policy. In this
respect, while art 122.1 TFEU can be seen as a test of Member States’ dedication to
the Lisbon Treaty’s solidarity provision, based on the level of implementation
amongst Member States,92 solidarity is not a definitive or quantifiable concept.93
It is nebulous and therefore subject to Member States’ interpretation and the amount
of backing it is afforded in a time of crisis.
Nevertheless, if there is any lesson to be learnt from the South Stream project, it
is that failure to comply with EU legislation is likely to lead to political controversy
and a defunct pipeline. EU leaders therefore have a vested interest to ensure that any
intergovernmental agreement signed with third party States and non-EU energy
suppliers are consistent with EU law. It is only by upholding the rule of law and in
‘a spirit of solidarity’ that concrete diversification efforts can be achieved to the
ultimate benefit of all EU Member States, rather than through individual pipeline
deals for cheaper gas that may have damaging consequences for Europe’s energy
security as a whole. It follows that the EU’s inability to speak with one voice is
partly the reason why the EU has thus far failed to develop a coherent strategic
approach towards Russia.94 A lack of solidarity and coherence in external energy
relations therefore remains one of the pivotal challenges that lie ahead for the EU in
its energy dependence on Russia and in turn security of its energy supply.
5 Conclusions
The EU–Russia energy relationship is a complex partnership driven by strong

interdependence and mutual reliance. The future of this strategic relationship very
much depends on whether an agreement can be reached on the issues addressed
above which have complicated this relationship and are making cooperation
increasingly more difficult. Reciprocal market access remains to be a contentious
issue in EU–Russia relations. Russia is unlikely to move on reciprocity and change
its perception of the TEP as unfair and riddled with double standards.
designed to last”. The Commission’s Energy Union initiative calls on Member States to move
away from a fragmented system of uncoordinated national policies, market barriers and energy-
isolated areas having identified an inherent need for a common European approach in the energy
sector. See below, n. 101.
92
Ibid., p. 525.
93
94
A more pressing issue is the need for a revised legal framework by way of a new
bilateral agreement and a solution to the future role of the ECT. On a close analysis
of the legal instruments in place, it is evident that there are gaps in the legal
infrastructure. The PCA is outdated and the effectiveness of the ECT in EU–Russia
energy relations, despite its potential as a legal instrument to regulate energy, is
limited given Russia’s termination of provisional application. However, the ECT
still has an important role to play in the investment protection architecture, given its
provisions are still applicable for 20 years from the date of Russia’s withdrawal as a
result of the legacy provision.95 The Energy Dialogue as a forum for discussion
does not result in any legally binding norms and at best can be described as an
institutional mechanism of political cooperation. Despite Russia’s accession to the
WTO, which was hailed as a breakthrough for EU–Russia relations, there are
doubts as to whether this general trade framework can specifically address cooper-
ation in the energy sphere as many areas of energy trade appear to fall outside the
scope of the WTO agreements.96
The fragmented legal framework and patchwork of legal instruments97 address
only some problematic aspects of EU–Russia energy relations such as trade in
goods and services under the WTO and investment protection under the ECT. As a
result, several issues remain unresolved which continue to jeopardise cooperation
between these two powers. Amongst the substantive issues, such as the nature of a
new PA which has been suspended and the WTO’s effectiveness in regulating
energy, Russia believes its concerns as a major energy producer have not been
adequately addressed.98 It would appear, however, that the EU is unlikely to
abandon the legal nature of such an agreement and the rules of the ECT, in its
entirety; and that ultimately a less controversial way forward will need to be agreed
to address thorny issues such as a new PA and the role of the ECT.99
Finally, as mentioned above, coherence in external energy relations is a matter
closely related to the above mentioned issues of reciprocity and the need for a
bilateral and international framework, as a lack of cooperation between EU Mem-
ber States can undermine solidarity and collective EU legislative actions. Inconsis-
tent manoeuvres between old and new Member States on how to deal with Russia
have ultimately created a rift within the EU, with old Member States preferring to
cut bilateral deals.100 Given the fragmented EU energy market, the Commission has
undertaken a more active role in the bilateral negotiations of EU Member States and
external suppliers. Whilst the EU’s energy policy is far from ideal, the EU’s
commitment to its plight for a coherent approach in its energy policy has been
95
Riley (2010), p. 37.
96
Selivanova (2010a).
97
98
99
Ibid.
100
The signing of bilateral deals with suppliers such as Gazprom, are repeatedly seen as
undermining the development of a coherent external energy policy. See Barysch (2010), p. 4.
166 N.A. Georgiou
reinforced with the unveiling of the Energy Union initiative.101 Due to the incon-
sistency between Member States internally, the external dimension of the EU’s
energy policy has not been accurately developed.102 The EU’s inability to speak
with one voice therefore gives credence to the mantra “too little Europe, too little
union” which is arguably one of the reasons why the EU has thus far failed to
develop a coherent strategic approach towards Russia.103
Challenges surrounding a revised legal framework need to be addressed and
negotiations regarding a new PA resumed for the purpose of deepening EU–Russia
trade relations. Although this has been partially resolved with Russia’s accession of
the WTO, an updated bilateral framework is still imperative for reasons of legal
certainty and to ensure EU–Russia energy relations are based on a solid institutional
structure.104 Whilst energy trade has always been covered by the GATT/WTO,
energy trade has de facto, not de iure, been perceived as excluded from its scope.105
This Chapter is therefore of the view that a more specialised legal framework is
required to deal with energy specific matters. Despite the ECT being a more
specialized international instrument tailored to regulate trade and investment in
the energy sector, its effectiveness as a legal framework in EU–Russia relations,
with the exception of the investment protection provisions, is superfluous. The
deeply enshrined investment protection provisions of the ECT have served to
illustrate why the EU has been adamant to negotiate a new PA incorporating an
energy chapter heavily based on the ECT. Ultimately, whether negotiations regard-
ing the new PA resume, with Russia conceding on provisions strongly based on
principles of the Energy Charter, would be a welcomed eventuality that yet remains
to be seen.
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The Feed-In Tariff Scheme of Switzerland
Jean-François Mayoraz
Contents
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
2 Subsidies to Renewable Energy in WTO Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
2.1 Defining a Subsidy Under WTO Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
2.2 Feed-In Tariff Schemes and the Notion of Subsidy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174
2.3 A Comment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176
3 The Feed-In Tariff Scheme of Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
3.1 Electricity Market in Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
3.2 Legal Framework for Feed-In Tariffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
3.3 Mechanism of the FIT-Program in Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180
3.4 Support of Hydropower in Particular . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
4 Analysing Switzerland’s FIT-Scheme in the Light of WTO Law . . . . . . . . . . . . . . . . . . . . . . . . 182
4.1 The Role of Swissgrid and EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
4.2 Relevance of the New Benefit Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
5 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
Abstract In recent years, States around the world have been starting to facilitate
the production of renewable electricity by providing subsidies to producers in order
to address climate change. As a consequence, policy makers have been developing
various forms of instruments to support renewable electricity production. Amongst
them, a popular tool is the feed-in tariff (FIT), which is currently used by around
73 countries.
Switzerland is one of the 73 countries, which has been using a FIT-scheme as an
instrument to support the production of renewable electricity since 2009. According
to art 7a.1 of the Swiss Energy Act network operators are obliged to take all
electricity from producers of renewable electricity and to compensate them with a
fixed tariff. With the new energy strategy 2050 the State support of renewable
energy has become even more important. Interestingly, renewable energy composes
J.-F. Mayoraz (*)

Institute of Law, University of Zurich, Zurich, Switzerland
e-mail: jean-francois.mayoraz@rwi.uzh.ch

DOI 10.1007/978-3-319-44645-5_10
170 J.-F. Mayoraz
already a majority of the total electricity production in Switzerland, namely from

hydropower.
This research aims to contribute to the current discussion of the compatibility of
FIT-schemes with WTO subsidy rules. By analysing Switzerland’s FIT-program,
the research question is asked whether the current WTO subsidy regime allows
Switzerland enough policy space to pursue its objective to raise its production of
green electricity by using a FIT-program.
1 Introduction
The desire and aim to shift electricity production from conventional energy sources to
renewable energy sources has been developing around the world in recent years.
Reasons for this desire are various but concentrate mainly around securing energy
supply, mitigating climate change, more independency in energy matters or concerns
towards nuclear energy. As the production of electricity from renewable energy sources
cannot compete (yet) with conventional electricity production, States aiming at chang-
ing their energy supply mix have been starting to promote renewable energy sources.
Thereby, feed-in-tariffs (FIT) are the most common tool that policy makers
introduced for supporting the production of green electricity. Currently, around
73 countries are using FIT-schemes in order to promote renewable energy sources.1
A FIT guarantees a fixed and above the market price tariff for purchases of green
electricity from eligible producers paid over a defined term. In addition, power
companies are usually required to purchase all electricity from these producers at
this premium rate.2 On the one hand, FIT-schemes offer investment security. On the
other hand, however, producers feel no competition pressure and may miss oppor-
tunities to optimize their cost structure.3 As a consequence, FIT-schemes may
distort competition and it is thus legitimate to ask, whether these schemes should
be disciplined under international subsidy rules.
The use of FIT-schemes for the promotion of renewable energy has been
recently called into question by a WTO dispute. Japan and the European Union
(EU) challenged the compatibility of a FIT-program introduced by the Canadian
Province Ontario with WTO subsidy law.4 In this case, the WTO judiciary has been
confronted with the question whether a FIT should be qualified as a subsidy in the
1
REN21 (2015), p. 88.
2
Mendonça et al. (2010), p. xxi.
3
Waldner and Rechsteiner (2012), para 7.
4
WTO doc. WT/DS412AB/R, WT/DS426/AB/R, Appellate Body Report, Canada – Certain
Measures Affecting the Renewable Energy Generation Sector, Canada – Measures Relating to
the Feed-In Tariff Program, 6 May 2013; WTO doc. WT/DS412/R, WT/DS426/R, Panel Report,
Canada – Certain Measures Affecting the Renewable Energy Generation Sector, Canada –
Measures Relating to the Feed-In Tariff Program, 12 December 2012.
Renewable Energy and WTO Subsidy Rules: The Feed-In Tariff Scheme of Switzerland 171
sense of the Agreement on Subsidies and Countervailing Measures (SCM Agree-

ment). The Appellate Body (AB) avoided answering this question. Nevertheless, it
gave some interesting insights into how it might examine a FIT-scheme under the
SCM Agreement.
Switzerland introduced its FIT-program in 2009.5 Although the majority of
electricity produced in Switzerland is already from renewable energy sources,
namely hydropower, Switzerland intends to continue an environmental friendly
energy policy and to phase out electricity production from nuclear energy. There-
fore, the promotion of green electricity plays an important role in Switzerland.
Against this background, Switzerland may serve as a blueprint to demonstrate the
need to reform the SCM Agreement for future situations, in which green electricity
is established in the market but governments still intend to further promote green
electricity due to legitimate policy objectives.
This paper analyses Switzerland’s FIT-scheme under WTO law and takes into
account the recent development in WTO case law. It focuses mainly on the notion
of subsidy as this marks the first step in disciplining subsidies. In doing so, the
research question is asked, whether the current WTO subsidy regime allows
Switzerland enough policy space to pursue its objective to raise its production of
green electricity by using a FIT-program. In order to answer the research question,
this contribution starts with a brief introduction to the WTO subsidy rules as well as
to the recent WTO case law on Ontario’s FIT-program (Sect. 2). Next, an intro-
duction to Switzerland’s FIT-scheme is provided including a closer look at the
support of hydropower (Sect. 3). Finally, the Swiss FIT-scheme will be analysed in
the light of the WTO subsidy regime (Sect. 4).
Despite the new decision of the Appellate Body in Canada – Feed-In Tariff
Program, which tended to favour support of green electricity, this paper concludes
that certain aspects of Switzerland’s promotion of renewable energy may still fall
within the notion of subsidy in the sense of the SCM Agreement. This raises the risk
for this State support being challenged before the WTO judiciary, which creates
legal uncertainty. Therefore, this paper argues in favour to “green” the SCM
Agreement so as to account for the rational of subsidies.6
2 Subsidies to Renewable Energy in WTO Law
2.1 Defining a Subsidy Under WTO Law
WTO law disciplines the use of subsidies in the SCM Agreement, which also
regulates countervailing measures taken by WTO Members in order to offset
negative effects of other Members’ subsidies. A subsidy exists if (1) a financial
5
Federal Administration (2008).
6
See for options Shadikhodjaev (2015), pp. 493 ff.
172 J.-F. Mayoraz
contribution, or price support, by a government or any public body (2) confers a

benefit (3) to a specific recipient.7 The latter requirement opens the door for the
subsidy disciplines under the SCM Agreement whereas the first and second require-
ments are decisive in determining whether a State measure falls within the notion of
subsidy of the SCM Agreement.
Originally, the SCM Agreement included an exemption for certain subsidies in
art 8. However, this article expired in 1999 and has not been prolonged yet.
Therefore, all State measures considered as a subsidy under the SCM Agreement
are subject to possible legal challenges today.
2.1.1 Financial Contribution
A financial contribution by a government can be made either directly, i.e. providing

funds, goods, services or forgoing income due; or indirectly, i.e. channelling
payments through a private body (art 1.1(a)(1) SCM Agreement). Alternatively,
any form of income or price support may also be considered as a subsidy (art 1.1(a)
(2) SCM Agreement).
The four possible forms of a financial contribution are enumerated exhaustively in
art 1.1(a)(1)(i)–(iv) SCM Agreement, with paragraphs (i)–(iii) being direct in nature.
As a pre-condition, art 1.1(a) SCM Agreement encompasses only financial contribu-
tions made by a government or any public body. Therefore, the first step is to identify
a government or a public body as the subsidizing entity. Thereby the critical question
lies on the interpretation of the term “public body”. As former case law suggested,8 a
public body in the sense of the SCM Agreement was considered to be “any entity
controlled by a government”.9 In recent case law, however, the Appellate Body
overturned this view and interpreted the term “public body” as “an entity that possess,
exercises or is vested with governmental authority”.10 It should be noted that a de jure
evidence for delegation of governmental authority is not readily available in each
case. Therefore, whether an entity’s operation can be considered as part of govern-
mental authority has to be examined on a case-by-case basis.
With respect to indirect financial contributions, paragraph (iv) aims primarily at
preventing circumventions of paragraphs (i)–(iii).11 It recognizes that a government
may also grant indirectly a financial contribution by making payments to a funding
7
Arts 1 and 2 SCM Agreement.
8
WTO doc. WT/DS273/R, Panel Report, Korea – Measures Affecting Trade in Commercial
Vessels, 11 April 2005, para 7.50.
9
WTO doc. WT/DS379/AB/R, Appellate Body Report, United States – Definitive Anti-Dumping
and Countervailing Duties on Certain Products from China, 25 March 2011, para 320, referring to
the Panel Report.
10
Ibid., para 317.
11
WTO doc. WT/DS296/AB/R, Appellate Body Report, United States – Countervailing Duty
Investigation on Dynamic Random Access Memory Semiconductors (DRAMS) from Korea, 20 July
2005, para 113; WTO doc. WT/DS257/AB/R, Appellate Body Report, United States – Final
mechanism or through entrusting or directing a private body. However, the diffi-

culty lies in identifying the types of government actions that constitute entrustment
or direction. The terms “entrust” and “directs” encompass not only acts of “dele-
gation” and “command”. In some circumstances, “guidance” by a government may
also be seen as direction. Nevertheless, in general it can be expected that entrust-
ment and direction of a private body involve, “some form of threat or induce-
ment”.12 Therefore, it seems unavoidable to assess on a case-by-case basis whether
a government’s action constitutes an entrustment or direction of a private body.
As an alternative to financial contribution, any form of income or price support
may also constitute a subsidy if it confers a benefit to a specific recipient. At first
sight, the phrase in art 1.1(a)(2) SCM Agreement seems as broad as to capture any
government measure that leads to raising prices within a market. However, the
panel in China – GOES rightfully narrowed its meaning as to capture only govern-
ment measures that set or target a given price and consequently excluded every
government measure that has an incidental and random effect on price.13
2.1.2 Benefit
A subsidy in the sense of the SCM Agreement requires secondly a benefit conferred
to a recipient. For a benefit to be demonstrated, the recipient has to obtain an
advantage that it could not obtain in the market place. Therefore, it has to be
examined whether the recipient is “better off” than it would have been absent the
contribution.14 The appropriate basis for this examination is to be found in the
marketplace by using a so-called private-investor test. According to this private-
investor test, a benefit can be identified “by determining whether the recipient has
received a financial contribution in terms more favourable than those available to
the recipient in the market”.15 This approach is inspired by art 14 SCM Agreement,
where for the purpose of countervailing measures prevailing market conditions
serve as basis for the calculation of the amount of a subsidy in terms of the benefit.
Note however that a comparison with the private market place is only meaning-
ful if the market itself is not distorted.16 In cases, where a market is distorted,
recourse to an alternative benchmark outside the country or a constructed
Countervailing Duty Determination with Respect to Certain Softwood Lumber from Canada,
17 February 2004, para 52.
12
13
WTO doc. WT/DS414/R, Panel Report, China – Countervailing and Anti-Dumping Duties on
Grain Oriented Flat-Rolled Electrical Steel from the United States, 16 November 2012, para 7.84.
14
WTO doc. WT/DS299/R, Panel Report, European Communities – Countervailing Measures on
Dynamic Random Access Memory Chips from Korea, 3 August 2005, para 7.176.
15
WTO doc. WT/DS70/AB/R, Appellate Body Report, Canada – Measures Affecting the Export of
Civilian Aircraft, 20 August 1999, para 157.
16
WTO doc. WT/DS316/AB/R, Appellate Body Report, European Communities and Certain
Member States – Measures Affecting Trade in Large Civil Aircraft, 1 June 2011, para 900.
174 J.-F. Mayoraz
benchmark is possible provided that calibration accounting for the prevailing

conditions in the given market is made.17 The Appellate Body recently distin-
guished between government intervention that creates new market and intervention
in an existing market when recourse to an alternative benchmark is made.18 If the
government establishes a new market, the appropriate alternative benchmark for
determining a benefit has to be found within the contours of this newly established
market, i.e. finding a competitive market with the same characteristics.
2.2 Feed-In Tariff Schemes and the Notion of Subsidy
In Canada – Feed-In Tariff Program the WTO judiciary was confronted for the first
time with the question whether a feed-in tariff program by the Canadian Province of
Ontario was a prohibited subsidy. In the Ontario feed-in tariff program a premium
price per kilowatt-hour of electricity was paid to producer using wind-power or
solar photovoltaic (PV) for their electricity production. Ontario was aiming at
diversifying its electricity supply mix and replacing its coal-fired facilities, which
consequently should also reduce greenhouse gas emissions. While the objectives of
this measure seem legitimate, the case was brought to the WTO because Japan and
the EU complained about the requirement of using Canadian equipment for the
production of renewable electricity in order to be eligible for the program.19 The
panel and Appellate Body found this local content requirement indeed to be
inconsistent with the national treatment provision under art III.4 GATT and art
2.1 Agreement on Trade-Related Investment Measures (TRIMs Agreement).
Canada argued that its measure falls within the government procurement under
art III.8 GATT. This argument was rejected because the Appellate Body noted that
the government was purchasing electricity, whereas foreign electricity-generation
equipment was allegedly being discriminated.20 However, neither the panel nor the
Appellate Body could confirm the existence of a subsidy, although they examined
this claim under the SCM Agreement extensively.21
17
18
WTO doc. WT/DS412AB/R, WT/DS426/AB/R, supra, n. 4, para 5.188.
19
Local content requirement concerns seem to be the most common issue why complainants
challenge State measure promoting renewable energy. See Asmelash (2015), p. 284, Leal-Arcas
and Filis (2014) and Meyer (2013).
20
WTO doc. WT/DS412AB/R, WT/DS426/AB/R, supra, n. 4, para 5.75 ff.
21
WTO doc. WT/DS412/R, WT/DS426/R, supra, n. 4, paras 8.6-7; WTO doc. WT/DS412AB/R,
WT/DS426/AB/R, supra, n. 4, paras 5.79, 5.84 and 6.1.
2.2.1 Involved Agencies Are Public Bodies
Under Ontario’s FIT-program, three government agencies were responsible for

making payments to suppliers for delivered electricity, transmission of electricity
and administration of the electricity market. The panel found all of them to be
public bodies within the meaning of art 1.1(a)(1) SCM Agreement, which was not
disputed by the parties.22 A de jure evidence consisting of an explicit statutory
provision under Ontario’s domestic law, which assigns and delegates governmental
authority to these agencies, was pivotal to the panel for its conclusion to qualify
these agencies as public bodies.23
2.2.2 The Government of Ontario Purchased Goods in Form

of Electricity
The panel qualified the financial contribution in this case as a purchase of goods by
the government of Ontario in the sense of art 1.1(a)(1)(iii) SCM Agreement. It
viewed that Ontario has obtained possession of electricity through certain pay-
ments.24 The Appellate Body upheld this conclusion but refined that a financial
contribution under art 1.1(a)(1) SCM Agreement may take several forms listed in
sup-paragraphs (i)–(iii) simultaneously. Two notable elements can be drawn from
the Appellate Bodies findings. First, the Appellate Body recognized electricity as a
good since it accepted that the FIT scheme constitutes a government’s purchase of
goods. Therefore, this case approves that electricity falls within the WTO regula-
tory domain on goods. Second, the Appellate Body’s refinement concerning the
possibility of a measure to fulfil several forms of financial contribution offers
complainants in their complaint the option to favour the form of financial contri-
bution, which allows imposing the severest countermeasure under the SCM
Agreement.25
2.2.3 Higher Hurdle for the Benefit Analysis in a New Market
As mentioned before, in Canada – Feed-In Tariff Program the Appellate Body

introduced a new possibility for recourse to an alternative benchmark within the
benefit analysis. It followed a two-step approach in order to analyse whether a
benefit has been conferred to producer of green energy in Ontario. First, it held that
22
WTO doc. WT/DS412/R, WT/DS426/R, supra, n. 4, paras 7.231–7.239.
23
Ibid., para 7.234.
24
Ibid., paras 7.169–7.185, 7.223–7.241.
25
See WTO doc. WT/DS412AB/R, WT/DS426/AB/R, supra, n. 4, para 5.130. The Appellate
Body acknowledged that art 14 SCM Agreement offers different methods for calculating the
amount of a subsidy depending on the type of financial contribution.
176 J.-F. Mayoraz
the determination of the relevant market is a necessary pre-condition for the benefit
analysis. Unlike the panel, which concluded that renewable and conventional
sources of energy are in the same wholesale electricity market,26 the Appellate
Body identified two separate markets: a market for conventional, and a market for
renewable energy, in particular a market for each wind- and solar PV-generated
electricity. It based its findings on the importance to take into account the supply-
side substitutability of a product when identifying the relevant market, namely cost
structure, operating costs and characteristics among generating technologies.27 In
its view, not only the demand-side substitutability matters but also the supply-side
substitutability. As a consequence, the benefit analysis should be conducted within
competitive markets for wind- and solar PV generated electricity instead of the
entire wholesale electricity market.28
After having defined the relevant market, the Appellate Body examined whether
a benefit had been bestowed to the producers. In this context, the Appellate Body
introduced a new conceptual interpretation. It distinguished between government
action that aims at creating a new market and government intervention in an
established market.29 In its view, the former does not “in and of itself”30 amount
to a subsidy. As a result, the Appellate Body set the hurdle for demonstrating a
subsidy being bestowed in a newly created market higher than in an already
established market.31 However, it could not complete the benefit analysis due to
lack of information. Nevertheless, it established some determining factors for the
benefit analysis.32
2.3 A Comment
Before the Appellate Body Report on Canada – Feed-In Tariff Program was issued,
the prevailing doctrine considered that FIT-schemes may fit into the subsidy notion
of the SCM Agreement.33 The Appellate Body introduced more flexibility within
26
WTO doc. WT/DS412/R, WT/DS426/R, supra, n. 4, para 7.322.
27
28
Ibid., para 5.178.
29
Ibid., para 5.188.
30
Ibid.
31
Ibid., para 5.190. The Appellate Body held that a benchmark price could be found by finding
some market with the same characteristics as in Ontario. This might seem to be an unlikely event
but it shows that the Appellate Body has not completely closed the door for demonstrating that a
governmental creation of a new market amounts to a subsidy.
32
33
Rubini (2011), p. 23; Jerijian (2012), p. 10; Cottier et al. (2011), p. 226; Bigdeli (2009), p. 169.
the notion of subsidy, in particular by taking a new approach towards the benefit
analysis. First, it found the absent supply-side substitutability to be decisive in this
case to argue for a distinct renewable energy market. Second, it distinguished
between government intervention establishing a new market and government
intervention in an established market. In doing so, the AB allowed more leeway
for Member States when designing their industrial policy. The newness of a market
can preserve their measures from WTO subsidies disciplines. Although the Appel-
late Body did not decide on whether Ontario’s FIT-scheme is a subsidy, its findings
allow to anticipate that in its view an FIT-program should not fall within the subsidy
notion of the SCM Agreement.
The added flexibility to the subsidy notion is seen critically in the literature. The
Appellate Body’s emphasis on the importance of supply-side factors inherits certain
risks because it gives States the opportunity to support their infant industry by
simply stating that their product is not competitive with existing products due to
different supply-side factors such as cost structures.34 Moreover, this situation
should be already regulated in art XVIII(c) GATT, which offers an explicit and
restrictive provision for this kind of promotion.35 As a result, the increasing
relevancy of supply-side substitutability may open the door for unwanted produc-
tion subsidies36 and may even challenge the WTO judiciary approach on the
concept of like products as well.37 In addition, it is argued that the distinction
between established and new market lacks a legal basis in the SCM Agreement.38
There are no indications in the SCM Agreement, which could suggest such a
distinction. Lastly, the Appellate Body gave no guidance on what it considers as
a new market and thus created a new loophole.
In sum, with the Appellate Body’s finding and the doctrine’s criticism on the
case it still remains open whether FIT-programs are considered as subsidies within
the meaning of the SCM Agreement. Nevertheless, future complainants now
dispose guidance from the Appellate Body on how a FIT-scheme may be qualified
as a subsidy. Against this background, it will be more likely that future panels will
dispose all information needed in order to decide whether a subsidy exist. There-
fore, this case offers no sustainable safe haven for green measures since under the
current WTO subsidy rules it is conceivable that a FIT-program might be consid-
ered as a subsidy, independently of its objective.39 This puts a State promotion at
risk to be challenged.
34
Cosbey and Mavroidis (2014), p. 26.
35
Article XVIII(c) states an exception for infant industries, which is limited for use by developing
countries only.
36
Pal (2014), p. 136.
37
Shadikhodjaev (2013), p. 875.
38
Cosbey and Mavroidis (2014), p. 27; Pal (2014), p 134.
39
178 J.-F. Mayoraz
3 The Feed-In Tariff Scheme of Switzerland
3.1 Electricity Market in Switzerland
A local, decentralized and federalist market structure characterizes Switzerland’s

electricity market, in which hundreds of power companies supply electricity to
consumers.40 With respect to electricity production, Switzerland is in a different
situation than most other countries. In 2014, Swiss electricity producers produced
69.6 billion kWh in total. 37.9 % was from nuclear energy sources and 5.7 % from
conventional thermal power plans. The prevailing energy source in Switzerland is
hydropower, which accounts for 56.4 % of the electricity production.41 Thus,
Switzerland’s electricity production has already a low carbon emission and a high
share of renewable sources. However, new renewable energy sources, such as solar
or wind, account for only 3.9 % of the total electricity production.42
3.2 Legal Framework for Feed-In Tariffs
The Swiss energy policy is outlined in art 89 of the Swiss Constitution. The
Confederation and Cantons shall, within the scope of their powers, ensure a
sufficient, diverse, safe, economic and environmentally sustainable energy supply
as well as an economic and efficient use of energy.43
With regard to the promotion of renewable energy, the Constitution states that the
Confederation “shall encourage the development of energy technologies, in particular
in the fields of saving energy and the renewable energy sources”.44 Article 74 (regarding
protection of the environment) and art 64 (regarding research in general) complement
the constitutional basis for the promotion of renewable energy sources.
Based on these constitutional assignments, the 1998 Energy Act45 and its
corresponding 1998 Energy Ordinance46 have been enacted on the federal level
40
The exact number of existing power companies is vague: the Association of Swiss Electricity
Companies has over 400 Members, which produce, distribute and trade 90 % of the electricity in
Switzerland. See http://www.strom.ch/de/verband/mitglieder.html (German) (accessed
31 January 2016).
41
Besides Switzerland, only few countries such as Norway and Austria dispose a high share of
hydropower too. In Norway 96 % and in Austria 66 % of electricity is produced from hydropower.
Both countries dispose no nuclear energy sources. See Swiss Federal Office for Energy (2015a),
pp. 2–3, 7.
42
Swiss Federal Office for Energy (2015b), p. 6.
43
Swiss Constitution, art 89.1.
44
Swiss Constitution, art 89.3.
45
Classified Compilation (SR) 730.0.
46
in order to implement the federal energy policy strategy. Similar to the constitu-
tional provision, the Energy Act aims at ensuring a sufficient, diversified, secure,
economic and environmental friendly energy supply.47 It provides for, amongst
others, an increased use of renewable energy sources.48 In addition, the Energy Act
lays down concrete targets regarding electricity production from renewable energy
sources, which raises the share of green electricity up to 77 % of the total electricity
production in the upcoming decades.49 The term “renewable energy” encompasses
hydropower, solar energy, geothermal energy, ambient heat, wind energy and
energy from biomass and biological waste.50
In order to fulfil these statutory objectives, the federal legislator introduced a
“Feed-In Remuneration at Cost” as the main instrument for the promotion of
renewable energy sources in 2009.51 Art 7(a) Energy Act serves as the legal basis
for this FIT-program and obliges network operators to take all electricity from
producers of renewable electricity and to compensate them with a fixed tariff. In
addition, the Energy Supply Act 200752 guarantees a non-discriminatory and
privileged access for electricity from renewable energy sources to the grid.53
The Energy Act has been subject to various upcoming reforms.54 After the
nuclear incident in Fukushima (Japan) the Federal Council decided to change the
energy supply mix in Switzerland and to phase out nuclear energy.55 The govern-
ment intends not to replace the existing nuclear power plants at the end of their
lifespan. In order to maintain security of supply, it is planned to increase energy
efficiency and to expand electricity production from hydropower as well as from
new renewable energy sources.56 This plan is labelled as the “Energy Strategy
2050” and activated a series of measures. Amongst them, the above-mentioned
feed-in tariff program plays, again, an important role for increasing the share of
renewable energy sources in the Swiss electricity production.57
In conclusion, the importance of the FIT-program for Switzerland’s energy
policy cannot be denied. Whether it is to fulfil the aims set in the Constitution or
to push the State’s energy supply mix towards a nuclear free future, the Swiss
government uses the FIT-program as its main instrument to promote the production
47
Energy Act, art 1.
48
See Energy Act, arts 1.2(c), 3.1(b) and 5.3.
49
Federal Gazette (BBl) 2004 1661, p. 1667.
50
Energy Ordinance, art 1(f); the same wording is used in art 4.1(c) of the Energy Supply Act.
51
52
53
Energy Supply Act, art 13.3(c).
54
55
Swiss Federal Office for Energy (2011).
56
See for the objectives of the new Energy Strategy 2050: Federal Gazette (BBl) 2013 7561,
pp. 7593–7594.
57
180 J.-F. Mayoraz
of electricity from renewable energy sources. Thereby, the Constitution, the Energy
Act and as a completion the Energy Supply Act serve as the legal bases.
3.3 Mechanism of the FIT-Program in Switzerland
3.3.1 Current Mechanism
The Swiss FIT-program requires network operators to feed-in and to remunerate all
electricity produced from renewable energy sources at cost.58 This guaranteed feed-
in and cost-covering remuneration is available for new power facilities. A power
facility is regarded as “new” if it is put into operation or is substantially renewed or
expanded after 1 January 2006.59 Moreover, the FIT-program promotes only
selected renewable energy sources, which are solar energy, geothermal energy,
wind energy, hydropower (up to 10 MW), biomass energy and energy from
biological waste.60 Lastly, for each technology a maximum share from the total
fund is defined.61 This is to prevent that certain technologies receive an excessive
share from the fund.
The cost-covering remuneration is calculated on the basis of the production costs
of a reference facility62 and consists of a fixed tariff per kWh paid to the eligible
producers. This fixed tariff is defined in the Energy Ordinance and exceeds the
market price.63 It is guaranteed over a fixed term64 and is financed through revenues
from sales on the market and a central fund. The central fund fills the difference
between the market price and the fixed tariff and is fed by a surcharge on the
electricity transmission price. This surcharge is limited to 1.5 cents per kWh and
thus caps the total available financial resources.65 Currently, the Federal Council set
the surcharge at 1.3 cents per kWh adding up a total annual amount of around
800mio Swiss Francs available for the FIT-program.66
Two key entities are responsible for the proper execution of the FIT-program,
which are supervised by the Swiss Federal Office of Energy (SFOE). First, the
national grid operator “Swissgrid” is in charge of collecting the above-mentioned
surcharge. For this purpose, it set up a foundation called “KEV-Stiftung”. This
58
Energy Act, art 7a.
59
Energy Act, art 7a, last sentence.
60
Energy Act, art 7a.
61
Energy Act, art 7a.4.
62
Energy Act, art 7a.2.
63
See for the current tariffs Annex 1.1–1.5 of the Energy Ordinance.
64
The guaranteed length of the support depends on the technology. See Annex 1.1–1.5 of the
Energy Ordonnance for more details.
65
Energy Act, art 15b paras 4 and 5.
66
Swiss Federal Office for Energy (2015c).
foundation is also responsible for managing the central fund, from which the
remuneration at cost is financed. Moreover, Swissgrid also handles the application
procedures for the FIT-program.67 Second, the “Balance Group for Renewable
Energy” (BGRE) passes the electricity from the promoted producers on to other
balance groups,68 which further transfer the electricity to end-consumers, and pays
the fixed-tariff to the promoted producers.69 The SFOE has appointed the company
“Energie Pool Schweiz” (EPS) to be the responsible BGRE.70 Since the other
balance groups pay only the market price,71 EPS regularly clears the difference
between the market price and the fixed tariff remuneration with Swissgrid using the
central fund.
3.3.2 Reforms Within the Framework of the Energy Strategy 2050
With the new Energy Strategy 2050 the Federal Council introduced new objectives
for the electricity production from renewable energy sources. These aims constitute
a significant increase of the current objectives, in particular with respect to other
renewable energy sources than hydropower.72
As a consequence, the promotion of renewable energy sources becomes more
important. This impacts the future design of the Swiss FIT-program: first, the cost
covering FIT shall shift to a feed-in system with an incentive for participating in the
market. This means that producers shall sell their electricity by themselves on the
market. In addition, producers receive a premium for the ecological surplus, which
constitutes the difference between a defined remuneration and the market price or
reference market price. This surplus is financed by the central fund as before. As a
result, promoted producers do not gain less, but receive an incentive to participate
in the market and to produce electricity when it is needed most.73 Second, the
surcharge shall increase to 2.3 cents per kWh in order to raise more financial
resources. Lastly, only “new” facilities shall be supported, i.e. facilities which are
put into operation after 1 January 2013. Substantially renewed or expanded facil-
ities are not supported anymore. Instead, they receive a one-time investment aid.
These proposals by the Federal Council are currently debated in the Parliament.
67
Energy Ordinance, art 3 g.
68
A balance group is an energy account. See Swissgrid (2015).
69
Energy Supply Ordinance, art 24.
70
71
The market price is defined by the Swiss Federal Office for Energy. See: Energy Ordinance, art
3bbis.
72
The total production of electricity from renewable energy (excluding hydropower) sources shall
be at 4400 GWh by 2020 and by 2035 at 14’500 GWh. With regard to hydropower, the production
shall reach at least 37’400 GWh by 2035. See: Federal Gazette (BBl) 2013 7561, p. 7594.
73
Federal Gazette (BBl) 2013 7561, p. 7625. This system is somewhat a combination of the tariff
system with incentives for participation in the conventional market and demand-oriented tariff-
differentiation as described in Mendonça et al. (2010), pp. 42–43.
182 J.-F. Mayoraz
3.4 Support of Hydropower in Particular
Hydropower is the predominant renewable energy source and continues to play its
important role in the electricity supply for Switzerland.74 However, in recent years
the profitability of hydropower has been decreasing due to over-capacities, low
prices for coal and increasing feed-in of subsidised renewable energy electricity in
Europe.75 This forced the Swiss government to decide whether it should expand the
support for the hydropower industry .
Today, only small-scaled hydropower plants with a capacity of up to 10 MW are
eligible for the cost covering FIT-program, which applies to around 1’000 facili-
ties.76 The reform of the FIT-program within the Energy Strategy 2050 proposes
several changes with regard to the promotion of hydropower. First the support for
hydropower plants with a capacity of less than 300 kW shall be excluded due to
their disproportional environmental impact.77 Second, the support of hydropower
facilities between 300 kW to 10 MW production capacity shall remain under the
new regime provided that it is a “new” facility. Third, hydropower plants that are
substantially renewed or expanded shall receive an investment contribution instead
of a feed-in remuneration as before.78 The Federal Council hesitates to expand the
State-support to larger hydropower plants. Also for the SFOE a State intervention in
favour of large hydropower plants would create further market distortion and is thus
unnecessary in its view.79 However, there is much support for the promotion of
large hydropower in the Parliament.80
4 Analysing Switzerland’s FIT-Scheme in the Light

of WTO Law
4.1 The Role of Swissgrid and EPS
The narrow interpretation of the term public body given by the Appellate Body may
allow for some more policy space for State measures because one has to establish
whether an entity possesses governmental authority, which is not a straightforward
exercise.81 However, in the Swiss FIT-scheme it seems irrelevant what role
74
75
Swiss Federal Office for Energy (2014), p. 2.
76
77
Federal Gazette (BBl) 2013 7561, p. 7625; Swiss Federal Office for Energy (2014), p. 6.
78
79
Swiss Federal Office for Energy supra, n. 75, p. 8.
80
Neue Z€urcher Zeitung (2014).
81
Shadikhodjaev (2013), pp. 869–870.
Swissgrid and EPS play since either they act as public bodies or are directed or
entrusted by the government to provide a financial contribution. Both entities are
organized as limited companies under Swiss private law. In principle, they are
independent but are assigned with key tasks regarding the execution of the
FIT-program. If these tasks are considered as exercising governmental authority,
the form of financial contribution constitutes a purchase of goods, similar to the
situation in the case Canada – Feed-In Tariff Program.82 As private bodies, it can
be argued that the government directs or entrusts these two entities to carry out the
purchase of electricity.83 The direction or entrustment lies in the statutory obliga-
tion to purchase and remunerate electricity from renewable energy sources, which
leaves no flexibility for both entities.84 Alternatively, by setting a fixed tariff, the
Swiss FIT-scheme can be seen as a form of price support.85
In sum, it is conceivable to regard the Swiss FIT-program as a financial contri-
bution or price support fulfilling the first prong of the subsidy notion under the SCM
Agreement.
4.2 Relevance of the New Benefit Analysis
The Swiss FIT-program remunerates producers with a premium tariff, which is

normally set above the market price. Prior to the Appellate Body Report in the
Canada – Feed-In Tariff Program case it was generally assumed that conventional
and renewable energy sources compete in the same wholesale electricity market
and thus a fixed premium tariff paid to renewable energy producers confers a
benefit.86 Under these assumptions, the Swiss FIT-program is likely to be consid-
ered as a subsidy as well because it ensures a profit that might not exist in a normal
market place fulfilling the second prong of the subsidy notion.
In its findings in the Canada – Feed-In Tariff Program case the AB seemed to
introduce more policy space for State measures pursuing legitimate policy objec-
tives such as climate mitigation. Its new approach to the benefit analysis impacts the
subsidy determination with regard to FIT-schemes. Therefore, the question here is,
whether Switzerland’s FIT-scheme is a subsidy in the sense of the SCM Agreement.
Following the Appellate Body’s new approach regarding the importance of
supply-side substitutability when determining the relevant market, one can con-
clude that each renewable energy source used in Switzerland to produce electricity
constitutes a separate market. As a consequence, the market benchmark in the Swiss
82
WTO doc. WT/DS412AB/R, WT/DS426/AB/R, supra, n. 4, paras 5.118–5.139.
83
Art 1.1(a)(1)(iv) SCM Agreement.
84
Hettich and Walther (2011), p. 164; Zlatanov (2009), p. 65; Pinelli (2014), p. 160.
85
Art 1.1(a)(2) SCM Agreement. See Bigdeli (2009), pp. 171–172; dissenting opinion in Howse
(2005), p. 22.
86
WTO doc. WT/DS412AB/R, WT/DS426/AB/R, supra, n. 4, para 5.169; Bigdeli (2009), p. 170.
184 J.-F. Mayoraz
electricity market has to be found within the competitive markets for hydropower,
wind-power, solar-power, etc. separately. In the next step, one has to identify
whether the Swiss FIT-program constitutes an intervention to a new market or in
an established market. However, the Appellate Body gave no guidance on what it
sees as a new market nor did it define a threshold for an established market. The
renewable energy sources excluding hydropower produce 3.4 % of the electricity in
Switzerland. Considering that within this total share each source holds a smaller
share, it might be conceivable that the FIT-program for these renewable energy
sources constitute an intervention for creating a new market. Thus, a higher
threshold for identifying a benefit would be applied as outlined above, which
impedes the determination of a subsidy and leaves Switzerland more policy space
for supporting these new renewable energy sources. Conversely, the FIT-program
seems more problematic with regard to the support of hydropower since
Switzerland’s electricity production already disposes a high share of hydropower.
Therefore, it is likely to assume that the FIT-program for hydropower constitutes an
intervention in an established market, which facilitates the determination of a subsidy
compared to the new market situation.87 Nevertheless, the Swiss government sup-
ports hydropower for the same reasons as it supports the other renewable energy
sources. This leads to the conclusion that for pursuing the same legitimate policy
objective more policy space is available with regard to State measures creating a new
market than for State measures intervening in an established market.88
In sum, considering the entire wholesale electricity market in the benefit anal-
ysis, the Swiss FIT-program is likely to be a subsidy. Under the new case law
regime, the FIT-program to new renewable energy sources might not be considered
as a subsidy whereas the support for hydropower is more likely to be a subsidy in
the sense of the SCM Agreement. However, the policy objective remains the same
in both instances, namely to expand a sustainable and environmental friendly
electricity supply.
5 Concluding Remarks
By using the Swiss FIT-program as an example, this paper has carved out the policy
spaces for State measures promoting renewable energy sources taking into account
recent developments in WTO case law, namely in the case Canada – Feed-In Tariff
Program. First, policy spaces may exist in the definition of the term public body,
which has been narrowed by the Appellate Body. However, the Swiss FIT-program
shows that using private entities for the execution of the FIT-program may be
87
As shown, Switzerland limits the FIT-program to hydropower facilities with a capacity up to
10 MW. Therefore, this conclusion underlies the assumption that electricity produced from these
facilities compete in the same market as hydropower electricity from larger hydropower stations.
88
See also Coppens (2014), p. 461.
regarded as a direction or entrustment by the government due to strict statutory

instructions. Therefore, whether these private entities are public or private bodies
seems irrelevant for identifying a financial contribution. Second, the importance of
determining the relevant market and the use of supply-side substitutability intro-
duced more policy space as well allowing governments to carve out their supported
industry from subsidy disciplines by simply stating that their industry is not
competitive due to absent supply-side substitutability. Whether such a development
is desired is questionable and criticized in the literature. Lastly, the distinction
between new and old markets seems also in favour of more policy space for State
measures supporting green energy. However, the example of Switzerland shows
that this distinction could also lead to an odd result. Switzerland’s energy policy
aims to expand its electricity production from renewable energy sources. For that, it
introduced a FIT-program. Using the Appellate Body’s distinction, this instrument
is now seen in two different ways. With regard to hydropower it is more likely to be
a subsidy than with regard to other renewable energy sources, although it is used for
the same policy objective.
To conclude, the subsidy interpretation by the Appellate Body in Canada –
Feed-In Tariff Program was necessary so as not to discourage governments from
pursuing a climate-friendly policy agenda. Nonetheless, the Swiss example shows
the need for a true exemption for green subsidies in the SCM Agreement. Switzer-
land might serve as a blueprint for future situations, in which electricity from
renewable energy sources are well established in the market but governments
wish to continue their support in order to carry on their environmental friendly
policy agenda. Under these circumstances, the WTO judicial interpretation of the
SCM Agreement reaches its limits and it is on the Member States to include the
rationale of a subsidy in the SCM Agreement.
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The Nexus Between the WTO and the ECT
in Global Energy Governance
Anna Marhold
Contents
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
2 The WTO and the Origins of the ECT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
2.1 The WTO and Energy in Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
2.2 ECT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
2.3 WTO/ECT Overlap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
3 WTO and ECT: Overlap and Changes in Membership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
3.1 WTO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
3.2 ECT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
3.3 WTO and ECT Membership: Changes and Overlap 1998–2016 . . . . . . . . . . . . . . . . . . . 194
4 Issue-Area Overlap Between the WTO and the ECT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
4.1 Trade in Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
4.2 Investments in Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
5 Procedural Overlap: Dispute Settlement in the WTO v. the ECT . . . . . . . . . . . . . . . . . . . . . . . . . 199
5.1 Settlement of Trade Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200
5.2 Settlement of Investment Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
5.3 Recap: The Nexus Between the ECT and the WTO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202
6 The WTO-ECT Relationship 20 Years Later: Unresolved Issues . . . . . . . . . . . . . . . . . . . . . . . . . 205
6.1 The Risks of ECT/WTO Tension and Overlap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205
6.2 Cooperation and Coordination to Overcome Tension? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207
7 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210
Abstract This article discusses the nexus between the ECT and the WTO in global
energy governance. The two treaty-based regimes each cover an area of the global
energy governance patchwork. Moreover, they are connected in substance. While
the former is concerned with providing a framework for the regulation of trade in
virtually all goods and services, the latter offers a specialized regime for energy
trade and investment regulation. Apart from discussing the origins of the ECT and
This is an adapted version of a journal article published by the author in the Journal of World
Investment and Trade (JWIT), see Marhold (2015).
A. Marhold (*)
Tilburg Law School, Tilburg University, Tilburg, The Netherlands
e-mail: A.Marhold@uvt.nl

DOI 10.1007/978-3-319-44645-5_11
190 A. Marhold
its relationship to the WTO, the article examines where the treaties overlap and
where they are at tension with each other. It does so in view of the changes that have
taken place over the past two decades of their existence.
1 Introduction
This article discusses the nexus between the Energy Charter Treaty (ECT) and the World
Trade Organization (WTO) in global energy governance.1 These two treaty-based
regimes each cover an area of the global energy governance patchwork. Moreover,
they are connected to each other in substance. While the latter is concerned with providing
a framework for the regulation of trade in virtually all goods and services, the former
offers a specialized regime for energy trade and investment regulation. Apart from
discussing the origins of the ECT and its relationship with the WTO, the article examines
where the treaties overlap and where they are at tension with each other. It does so in view
of the changes that have taken place over the past two decades of their existence.
2 The WTO and the Origins of the ECT
2.1 The WTO and Energy in Context
The GATT 1947 was originally set up to regulate trade in goods.2 The WTO took
on a broader set of responsibilities in 1995, adding trade in services, trade-related
investment measures and intellectual property to its portfolio. The Organization’s
objective is to promote free trade by reducing tariffs and other trade barriers and
eliminating discriminatory treatment in international trade relations.3 Simply put, it
is an organization that administers trade rules and a specialized dispute settlement
system. It additionally provides for an institutional forum for trade negotiations,
addressing various trade-related issues. Energy products have been de jure covered
by the GATT/WTO system from 1947, and energy services were added through
GATS after the establishment of the WTO. However, the regulation of energy has
been anything but a problem-free topic in the multilateral trading system and
continues to pose a plethora challenges to the WTO legal framework today.4
1
The Energy Charter Treaty (entered into force 18 April 1998) 2080 UNTS 100; the World Trade
Organization (WTO) was established on 1 January 1995. For the texts of the WTO agreements, see
https://www.wto.org/english/docs_e/legal_e/legal_e.htm.
2
General Agreement on Tariffs and Trade (GATT), Geneva, 21 November 1947, entered into force
29 July 1948, 55 UNTS 194.
3
Preamble, Marrakesh Agreement Establishing the World Trade Organization.
4
Marhold (2013).
The Nexus Between the WTO and the ECT in Global Energy Governance 191
2.2 ECT
The ECT seems to have sprouted as a separate branch of the GATT/WTO regime in
the early nineties and continues to operate as a (semi-)distinct treaty-based system
today.5 The ECT is partly an elaboration on the GATT, but specially geared towards
energy. Both the WTO and ECT frameworks contain partially overlapping elements,
objectives and membership. Conversely, both treaties have diverging functions and
mechanisms, which are not necessarily in accordance with one another.
The ECT was signed in Lisbon in 1994, just before the establishment of the
WTO. It entered into force in 1998. The ECT is a similar treaty regime to the WTO,
but in addition to regulating energy trade, it incorporates a significant investment
part and an environmental protocol.6 In essence, it was born as an alternative to
concluding an energy specific agreement within the GATT/WTO framework after
the Cold War. The trade provisions of the ECT draw largely upon the GATT, but
are better adapted to the needs of energy trade, for instance by providing extensive
definitions of energy products (Energy Materials and Products) and services (in the
form of “Economic Activity in the Energy Sector”). It also clearly incorporates gas
pipelines as a means of transport in art 7 on transit.7 The objective of the Treaty is to
provide a stable and predictable framework for trade in energy materials, products
and energy-related equipment, based on GATT/WTO rules.8
To assume that the ECT is a completely separate treaty regime from the WTO
would be a mistake. With regard to the trade provisions of the ECT, the purpose of
its establishment seems to have been to introduce GATT-type standards in the
energy sector to former communist countries.9 It was intended to promote reform
towards GATT compatibility and help with GATT/WTO accession.10 This is
visible in the way ECT trade rules are set up: the ECT incorporates WTO rules
“by reference” in art 4.11
The Energy Charter Secretariat (ECS), the administrative body overseeing the
ECT, has taken tension and overlap between the WTO and the ECT into account by
providing extensive guidelines on incorporation of WTO rules into the Treaty.12
5
The inauguration of the ECT was in 1994—right before establishment of the WTO in 1995. The
term “semi-distinct” is used here because the treaties are partly connected in substance through arts
4 and 29 ECT.
6
Investment and its dispute settlement are regulated in ECT Parts III and V, and the ECT
additionally houses a Protocol on Energy Efficiency and Related Environmental Aspects
(PEEREA).
7
See Annex EM ECT. Art 1.5 ECT incorporates “Economic Activity in the Energy Sector” and art
7.10(b) ECT explicitly groups gas pipelines as “Energy Transport Facilities”.
8
Energy Charter Secretariat (2001) and Energy Charter Secretariat (2003).
9
Frasl (1996), pp. 460–461.
10
Ibid.
11
Arts 4 and 29 ECT.
12
The GATT and several WTO agreements are incorporated into the ECT “by reference” through
art 4 ECT, but important exceptions exist.
192 A. Marhold
This so-called “coordination ex ante” was aimed at functioning as a conflict

prevention tool.13 However, gaps, conflicts and uncertainties remain.
2.3 WTO/ECT Overlap
In the substantive sense, the WTO and ECT deal with partially overlapping issue-
areas: the WTO regulates the trade of goods and services, of which energy goods
and services are a subcategory.14 The ECT, on the other hand, aims to regulate trade
and investment in energy materials and products and related services.15 With
respect to geographical delimitations, neither of the treaties is bound to a specific
topographical area, but the treaties have largely overlapping membership, which
has changed significantly since the establishment of both treaty-regimes.
Procedurally, overlap occurs with respect to dispute settlement in the WTO and
the ECT. The WTO has its own built-in dispute settlement mechanism, the Dispute
Settlement Body (DSB), to solve trade disputes between WTO Members in this
exclusive forum. The ECT provides a rather “informal” mechanism to resolve trade
disputes through diplomatic means, and additionally has an Investor-State and
State-State dispute settlement mechanism.16
3 WTO and ECT: Overlap and Changes in Membership
Neither the WTO nor the ECT is tied to a particular region per se. However,
substantial overlap in membership between the treaties does occur, because they
are connected in substance through arts 4 and 29 ECT, providing for incorporation
of GATT trade rules in the ECT. Rather than looking at geographical overlap, it is
more fruitful to scrutinize the overlap and change in membership to the WTO and
ECT. This helps us to assess what developments have taken place in the past two
decades.
13
Pauwelyn (2003), pp. 327 ff.
14
Energy products are taken up in WTO Members’ Schedules of Concessions, services are taken
up in Members’ Schedules of Specific Commitments.
15
ECT, Annex EM.
16
ECT, Annex D, and arts 26 and 27.
3.1 WTO
From its establishment in 1995, the WTO started out with 113 Members, and
61 observers. Fourteen countries were neither Members, nor observers, and con-
tinue to function outside of the multilateral trading system today. By 2016, WTO
membership has expanded drastically: with Kazakhstan’s accession to the Organi-
zation in 2015, the WTO now has 162 Members.17 Amongst them are major fossil
fuel producing, exporting and transporting countries, a large part of which has
joined the WTO only after its establishment in 1995.18 Other major players in the
energy sector are in the process of negotiating accession. Nine Members out of
13 of the Organization of Oil Exporting Countries (OPEC) are already in the
WTO.19 It is thus evident that major stakeholders in the global energy landscape
are full-fledged participants in the multilateral trade system.
3.2 ECT
The WTO’s wide-ranging membership is in stark contrast with the membership of

the ECT. It entered into force in 1998 with 40 Parties to the Treaty. At the same
time, 8 ECT signatories chose to apply the Treaty provisionally pending ratifica-
tion, while 29 countries were observers to the ECT. By 2016 the numbers have
changed, but the amount of countries that has acceded to the ECT is still far less
comprehensive than that of the WTO: merely 46 countries have ratified the ECT.
5 ECT signatories continue to apply the Treaty provisionally, and 26 countries have
observer status with the ECT. In a notorious move, Russia stepped back from the
agreement altogether in 2009, after applying it provisionally since its signature in
1994.20 Italy also withdrawn from the treaty as of 2016. The number of countries
who are neither parties nor observers is 122. Major energy producing and exporting
countries like Canada, Indonesia, the United States, Algeria, Bahrain, China,
Kuwait, Nigeria, Oman, Qatar, Saudi Arabia, United Arab Emirates and Venezuela
have observer status to the ECT only.
17
See https://www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htm (accessed 4 March 2016).
18
Major energy producing, exporting and/or transporting States who joined the WTO after 1995
are Angola (1996), China (2001), Ecuador (1996), Oman (2000), Qatar (1996), Russia (2012),
Saudi Arabia (2005), Ukraine (2008) and the United Arab Emirates (1996).
19
See http://www.opec.org/opec_web/en/about_us/25.htm (accessed 4 March 2016).
20
Investments made during the period of provisional application (1998–2009) are protected until
29 October 2029.
194 A. Marhold
3.3 WTO and ECT Membership: Changes and Overlap

1998–2016
Substantial changes have taken place in membership to the WTO and ECT alike,
from the early days of the WTO and the entry into force of the ECT, to roughly two
decades later. The biggest development admittedly is the vast number of accessions
to the WTO of a considerable amount of former WTO observers. These were
reduced from 50 in 1998 to only 22 in 2016. Prominent non-ECT countries in this
category are Russia, China, Saudi Arabia and Oman.
Overlapping membership between the two treaty-regimes became an instant
reality with the entry into force of the ECT in 1998. This de facto resulted into
two “tiers” of ECT membership: (1) simultaneous WTO Members and ECT
parties, and (2) ECT parties that have not acceded to the WTO (yet). Therefore,
there are three possible modes of “membership interaction” within the legal
framework of the ECT, namely: (a) among ECT/WTO Members, (b) between
ECT/WTO Members and non-WTO ECT Parties, and (c) among non-WTO ECT
Parties.
In 1998, 25 Members to the WTO were simultaneously parties to the ECT. By
2016, the number of simultaneous ECT/WTO Members has risen to 42. This
increase indicates that a substantial number of countries that were ECT parties
only in 1998 did indeed accede to the WTO over time. Hence, the ECT’s partial
objective to function as a stepping-stone to WTO accession seems to have been
successful, though arguably ECT membership was not the only reason that trig-
gered WTO accession. Russia, as the major Eurasian energy producing and
exporting country, proves to be a special case and the only country to effectively
“swap” (provisional) ECT membership for WTO accession, while minimising
unwanted commitments on energy along the way. It acceded to the WTO in
August 2012, after protracted negotiations of almost two decades.21
4 Issue-Area Overlap Between the WTO and the ECT
4.1 Trade in Energy
The WTO and the ECT partially overlap in issue-area as both instruments are
relevant for trade in energy products and related services. The Organizations share a
partial common objective, namely the promotion of free(er) trade.22
21
WTO doc. WT/ACC/RUS/70, WT/MIN(11)/2, Report of the Working Party on the Accession of
the Russian Federation to the World Trade Organization—Restricted, 17 November 2011.
22
Desta (2003), p. 539.
The WTO regulates trade in goods (GATT), services (GATS), intellectual

property (TRIPs) and trade-related investment measures (TRIMs), accompanied
by an “exclusive forum” dispute settlement mechanism, administered by the
DSB.23 Energy falls within the WTO’s remit, because energy products are taken
up in Members’ GATT art II schedules. Additionally, energy services are covered
in Members’ service schedules and disputes relevant for energy are being settled in
the WTO dispute settlement system. The WTO estimates that at least 18 % of intra
WTO-trade involves energy goods such as fossil fuels.24 Energy is either classified
as a good, regulated by the GATT (energy products such as crude petroleum or
natural gas) or a service, regulated by the GATS (such as the transportation of an
energy product). Sometimes, it possesses the elements of both.25
The ECT in arts 4–6 and 29 deals with trade in energy goods and related
economic activity (read: services) only, with the exception that the ECT deals
with investment in addition to trade.26 The definition of “energy” under the ECT
is very wide: it relates to trade in energy, energy products and energy related
equipment, all of which are specified under Annex EM of the ECT. The ECT
generally focuses on five broad areas:
– Protection and promotion of foreign energy investments, based on most-
favoured nations (MFN) treatment or national treatment (NT), set out in art 10.3;
– Free trade in energy materials, products and energy-related equipment, based on
WTO rules, in arts 4, 56 and 2927;
– Freedom of energy transit through pipelines and grids in art 7, based on GATT
art V on transit, but more specific28;
– Reducing the negative environmental impact of the energy cycle, set out in art
19 and the PEEREA29; and
– Dispute resolution, e.g. trade related disputes, State-to-State and/or Investor-to-
State disputes, in Part V, arts 26 to 32, and transit disputes, in art 7.
23
Governed by the rules of the WTO Dispute Settlement Understanding (DSU).
24
WTO (2010a), p. 54.
25
A case in point here is electricity: there is still no conclusive categorization of electricity in the
WTO, although “electrical energy” is registered under code 2716 of the Harmonized System
Convention (adopted 14 June 1983, entered into force 1 January 1988, 1503 UNTS 167); in EU
law, however, electricity is explicitly considered a “good” and not a “service”. In ECJ, Case
C-393/92 Almelo v Energiebedrijf IJsselmij [1994] ECR I-1477 [28] and Case C-158/94 Commis-
sion v Italy [1997] ECR I-5789 [17], the European Court of Justice has ruled that electricity,
despite its intangible character, should be treated as a “good”.
26
Konoplaynik and Waelde (2006), p. 529; Waelde (1996).
27
Art 29 ECT sets out temporary trade rules for ECT parties in the process of WTO accession.
28
See art 7.10(b) ECT, at 1: “‘Energy Transport Facilities’ consist of high-pressure gas transmis-
sion pipelines, high-voltage electricity transmission grids and lines, crude oil transmission pipe-
lines, coal slurry pipelines, oil product pipelines, and other fixed facilities specifically for handling
Energy Materials and Products”.
29
ECT PEEREA.
196 A. Marhold
The ECS intentionally based ECT trade rules on the GATT/WTO. The ECT has,
for instance, incorporated the trade rules of the GATT in its trade part by means of art
4 ECT.30 Overlap with respect to the trade provisions of both treaty-regimes therefore
occurs there where the trade provisions of the WTO (GATT) meet the energy trade
provisions of the ECT (arts 4, 5, 6, 7 and 29). To foster transparency concerning this
overlap between the GATT and the ECT, the ECS issued two extensive guides with a
referencing mechanism, in 2001 and 2003.31 There are several basic rules at the heart
of this incorporation of GATT rules “by reference” in the ECT32:
– The trade provisions of the ECT apply with and between parties to the ECT that
are not Members to the WTO only.33
– Conversely, trade in energy materials and products between ECT parties, who
are also WTO Members, are regulated by the trade provisions of the WTO.34
– Trade between ECT Members, of which at least one is not a WTO Member, is
generally governed by WTO rules incorporated to the ECT through art 29.2
(a) ECT.35
– The ECT uses a “negative” reference listing technique, incorporating all WTO
provisions, unless they are listed in Annex W(A) to the ECT.36
There are some exceptions with regard to WTO rules integrated in the ECT:
bindings on customs duties as set out in art II of the GATT are not automatically
taken over. Instead, they are replaced by a softer, “best-endeavours” commitment
discouraging parties to the ECT to increase custom duties or importation and
exportation charges of any kind.37
Art 7 ECT on transit goes further than art V GATT and explicitly incorporates
gas pipelines as a means of transport.38 It thereby creates additional obligations for
ECT Parties who are also WTO Members. This can be seen as a so-called “WTO-
30
Art 4 ECT reads “Nothing in this Treaty shall derogate, as between particular Contracting Parties
which are parties to the GATT, from the provisions of the GATT and Related Instruments as they
are applied between those Contracting Parties”.
31
Supra, n. 9.
32
ECS (2003) viii.
33
Art 29.1 ECT.
34
Art 4 ECT.
35
Art 29.2(a) ECT. The exceptions are listed partly in Annex W of the ECT Trade Amendment,
partly in art 29.2.b of the ECT and most importantly relate to the dispute settlement system of the
WTO, which cannot be used for non-WTO Members. In their case, it is replaced in Annex D by a
panel-based dispute resolution mechanism inspired by the DSU, less “heavy”.
36
Annex W(A) ECT.
37
Arts 29.3–29.5 ECT. However, export tariffs, which are highly relevant for the energy sector and
utilized for “dual energy pricing”, also remain largely unregulated in the WTO, with the excep-
tions of some recent bindings on them in selected accession protocols (e.g. Russia and China).
38
In WTO law, it is still debated whether art V GATT covers fixed infrastructures such as gas
pipelines. See on this issue Azaria (2009).
plus effect of the ECT”.39 It is also worth mentioning that negotiations on an ECT
Protocol on Transit are on-going (but stalled) since 1999.40
GATS,41 TRIPs42 and TRIMs43 are not taken over into the ECT, but have an
equivalent article in the ECT: services are covered under the overarching term of
“Economic Activity in the Energy Sector”,44 a commitment to protect intellectual
property rights is taken up in the Final Act of the International Conference45 and art
5 ECT incorporates trade related investment measures.46 It should be mentioned
that here, the conflict between the two treaties caused by simultaneously applicable
provisions is not solved. Additionally, the WTO special and differential treatment
provisions do not apply in the ECT, except for paras 1–4 of the Enabling Clause.47
Plurilaterals that are not binding on all WTO Members have not been taken over in
the ECT. In the same vein, WTO multilateral agreements, which are substantially
irrelevant for the subject matter of the ECT, such as the agreements on agriculture or
on sanitary and phytosanitary measures, do not apply either. Last but not least, pro-
tocols of accession of new Members to the WTO are not incorporated into the ECT.48
One can conclude that with regard to trade in goods provisions, the ECS has
taken into account the risks stemming from overlap and tension in substance
between the ECT and the WTO and has pre-emptively set out conflict rules to
reconcile both treaties. Conflicts not (directly) solved in the ECT concern TRIMs,
TRIPs and GATS.
4.2 Investments in Energy
Another important issue-area where conflict of rules between the WTO and the ECT
remain unsolved is where investment protection in the WTO (through GATS Mode 3)49
meets protection of energy services investments in the ECT (Part III ECT). Trade in
services is covered in the ECT by means of art 1.5, but the GATS is not incorporated in
39
Frasl (1996), p. 484.
40
See the most recent informal text of the “Transit Protocol” dated 22 October 2010, TT87 22/01/2010.
41
Annex W (A)(b) ECT.
42
Annex W (A)(c) ECT.
43
Annex W (A)(iv) ECT. See also Defilla (2003).
44
Art 1.5 ECT.
45
ECT Parties made a commitment to provide protection of intellectual property rights, laid down
in the Final Act of the International Conference and Decision by the Energy Charter Conference in
Respect of the Amendment to the Trade-Related Provisions of the Energy Charter Treaty, Joint
Declaration on Trade-Related Intellectual Property Rights.
46
Art 5 ECT “Trade-Related Investment Measures”, linked to Annex D and art 26 ECT.
47
Through Annex W (A) para 2.a ECT.
48
Agreement Establishing the World Trade Organization, art XII.1 and Annex W(A)(1) ECT.
49
GATS art 1.2(c).
198 A. Marhold
the ECT as such.50 This leads to a parallel applicability of WTO rules and ECT rules
concerning the protection of energy investments in the following manner.
The ECT protects investments in the energy sector in a direct way by granting
them NT and MFN in art 10.3 in Part III.51 “Investment in the energy sector” in the
sense of the ECT refers to any investment associated with an “Economic Activity in
the Energy Sector”, i.e. concerning the exploration, extraction, refining, production,
storage, land transport, transmission, distribution, trade, marketing, or sale of
energy materials and products covered in the ECT.52 Conversely, investment in
the WTO becomes relevant when we look at the modes of supply of services in the
GATS. As with GATT Schedules, WTO Members make sector-specific commit-
ments in their GATS Schedules of Specific Commitments, where they agree on
particular market access commitments with regard to trade in services.53 There are
horizontal commitments, which apply to all commitments in the schedules, and
sector specific commitments affecting only to the sector in question, which may
additionally only apply to one or more of the four modes of supply of the GATS.
These are (a) Mode 1, when neither the service supplier nor the service consumer
has to move; (b) Mode 2, when the consumer moves to the country where the
service is supplied; (c) Mode 3, when the service supplier establishes commercial
presence in the country where he/she supplies; (d) Mode 4, when the service
supplier is established in a different country.54
WTO Members have to grant MFN to all foreign services, and NT to GATS
commitments made in their schedules.55 It figures that investments in services,
including investments in energy services, are covered in the GATS through art I.2
under c, Mode 3, when the service supplier establishes commercial presence in the
country where he/she supplies (i.e. a foreign company setting up subsidiaries or
branches to provide services in another country).56
In principle, GATS rules apply to all energy related services.57 There are some
sectors, which are particularly relevant to energy and to which Members committed
in the services schedules, e.g. construction and related engineering services, distri-
bution services, environmental services, financial services, transport services and
other Services not included elsewhere.58 Moreover, since the start of the Doha
50
Annex W (A)(b) ECT.
51
Art 10.3 ECT “Promotion, Protection and Treatment of Investments”.
52
See definitions of respectively “Economic Activity in the Energy Sector” and “Investment” in
arts 1.5 and 1.6 ECT.
53
Mavroidis et al. (2010), pp. 802–819.
54
GATS art I.2.
55
GATS art II “General Obligations and Disciplines” and art XVII “National Treatment”.
56
Mavroidis (2013) and Molinuevo (2011).
57
Marceau (2011), p. 26.
58
Energy services identified by Members in WTO doc. TN/S/23, Report by the Chairman to the
Trade Negotiations Committee, 28 November 2005. See WTO doc. MTN.GNS/W/120, Services
Sectoral Classifications List, 10 July 1991.
Round (2001-present), 45 Members have undertaken commitments in “services

incidental to mining”,59 27 in “on-site preparation work for mining”,60 18 in
“services incidental to energy distribution”,61 and 12 “on pipeline transportation
of fuels”.62
It thus follows that investment in energy services may fall within the scope of
GATS protection on the basis of art I.2(c) Mode 3. This is the case for those WTO
Members that have made sector-specific commitments in services relevant to the
energy sector, or in energy services directly, and to which Mode 3 of supply of
services (commercial presence) applies.
The rules of conflict of the ECT have not taken this into account adequately,
presumably since the complete exclusion of the GATS from the ECT left this
scenario unforeseen. One thing should be noted in this respect, though: the ECT
does not provide for pre-establishment or market access obligations, in contrast to
GATS arts II and XVI.63 The conflict between the ECT and the GATS is therefore
likely to arise in the post-establishment phase only.64 The result is, however, that
both treaties can apply with respect to protection of investments in the energy
sector. Overlap in issue-area in this instance can continue to have an impact when it
comes to procedural provisions of the treaties: with respect to dispute resolution in
energy investments, both the procedures provided for the ECT and the WTO could
apply.
5 Procedural Overlap: Dispute Settlement in the WTO v.

the ECT
Parallel competence concerning the WTO and the ECT occurs in the area of settling
trade as well as investment disputes as well. The first has been accounted for by
ECT rules of conflict, the latter has not.65
59
See WTO doc. S/C/W/311 Energy Services—Background Note by the Secretariat, Doc,
12 January 2010, CPC [883].
60
Ibid., CPC [5115].
61
Ibid., CPC [887].
62
Ibid., p. 14.
63
See GATS arts II and XVI.
64
Dolzer and Schreuer (2008), p. 80.
65
See Table 1 below.
200 A. Marhold
5.1 Settlement of Trade Disputes
Article 3.2 of the DSU designates the dispute settlement mechanism as a central
element in the WTO providing security and predictability to the multilateral trading
system.66 Members to the WTO must settle any trade dispute among themselves,
including the disputes on energy trade, in this exclusive forum.67 Members are in
effect precluded from settling their trade disputes elsewhere. The function of this is
twofold: it provides Members with a multilateral forum for dispute settlement to the
exclusion of any other and at the same time it prevents them from having recourse
to unilateral determinations of a breach of WTO law. The functioning of the WTO
dispute settlement system is not free of criticism, but with around 475 cases settled
in the nearly 20 years of the WTO’s existence, it is clearly one of its success
stories.68 The WTO has witnessed several energy-related disputes recently, e.g. the
Canada—Renewable Energy case.69 In that case, the panel and the Appellate Body
had to resort to what some call “legal acrobatics” in order to avoid finding that a
scheme aimed at promoting a public good—the underlying feed-in tariff for
renewable energy—was in fact a subsidy.70
The ECT, on the other hand, provides mechanisms for the settlement of both
energy trade and investment disputes. It offers State-to-State,71 Investor-to-State,72
Transit,73 Energy Trade74 and Environment and Competition75 dispute settlement.
Concerning energy trade dispute settlement and overlap in competence between the
WTO and the ECT, the latter has taken into account several conflict resolution
measures.76 Following art 4 ECT, the WTO DSU applies to the resolution of energy
trade disputes between ECT parties who are simultaneously WTO Members.77
Since the DSU is not available to non-WTO Members, it is replaced by a dispute
resolution mechanism in Annex D for trade disputes between an ECT/WTO
66
Art 3.2 DSU.
67
See connection with art 4 ECT.
68
McRae (2004), p. 3.
69
WTO doc. WT/DS412AB/R, WT/DS426/AB/R, Appellate Body Report, Canada—Certain
Measures Affecting the Renewable Energy Generation Sector, Canada—Measures Relating to
the Feed-in Tariff Program, 6 May 2013; WTO doc. WT/DS412/R, WT/DS426/R, Panel Report,
Canada—Certain Measures Affecting the Renewable Energy Generation Sector, Canada—Mea-
sures Relating to the Feed-in Tariff Program, 19 December 2012.
70
71
Art 27 ECT; this article does explicitly not apply to energy trade disputes, see art 28 ECT.
72
Art 26 ECT.
73
Art 7.7 ECT.
74
ECT art 29 and Annex D.
75
ECT arts 6 and 19.
76
Frasl (1996), p. 478.
77
Art 4 ECT and Energy Charter Secretariat (2003), p. viii.
Member and a non-WTO ECT party or a dispute amongst non-WTO ECT Parties.78
This mechanism follows the WTO dispute settlement model closely, but it is more
informal in nature, less detailed and legalistic.79
Transit disputes are treated differently from the rules of conflict for “regular”
trade disputes between the ECT and WTO. Resolution of transit disputes under the
ECT is accounted for in art 7.7. It prescribes that in case of an energy transit dispute,
ECT parties will have recourse to the mechanism under art 7.7, after exhausting any
other relevant contractual remedies between them.80 The procedure for dispute
resolution itself is conciliatory in nature and largely takes place along diplomatic
channels, with the appointment of a conciliator by the Secretary General of the
ECT, who “shall seek the agreement of the parties to the dispute”.81
There is no apparent conflict between art V GATT and the procedure set out in
art 7.7 ECT, since the commitment in this article goes back to what is called the
“WTO-plus nature of the ECT”: it offers settlement of transit disputes in a way that
is not provided for by GATT art V. As a result, the rights and obligations provided
for in art 7.7 ECT go beyond WTO commitments for simultaneous WTO/ECT
Members. Article 7.8 ECT further emphasises that nothing in art 7 shall derogate
from a Party’s rights and obligations under international law including customary
international law, existing bilateral or multilateral agreements, ergo including art V
of the GATT.82 Article 7 ECT, including its dispute resolution mechanism, there-
fore seems to be an elaboration on the obligations set out in art V GATT, with the
latter setting the minimum standard.83 For energy transit disputes between all
shades of ECT membership interaction (among ECT/WTO Members, between a
ECT/WTO Member and a non-WTO ECT party and among non-WTO ECT
parties), the obligations in this article thus seem to go further than those in art V
GATT for energy transit disputes.
5.2 Settlement of Investment Disputes
With regard to the resolution of energy investment disputes in the ECT and WTO,
the parallelism stemming from issue-area overlap in this field continues to hold in
the area of dispute settlement. Article 26 ECT provides for Investor-to-State dispute
settlement, while art 27 covers State to State disputes (non-trade issues only).
78
In conjuncture with art 29.7 ECT.
79
As set out in arts 17 and 20 DSU. See also Frasl (1996), p. 479.
80
Ibid.; Frasl (1996), p. 495; Energy Charter Secretariat (2001), p. 37, and Azaria (2009).
81
Art 7.7(b) and (c) ECT.
82
See Azaria (2009), p. 589.
83
Ibid., p. 591, referring to the traveaux preparatoires of the ECT: European Energy Charter
Conference Secretariat 22.4.94/2647.
202 A. Marhold
The overlap between the energy investment dispute resolution procedures of the
WTO (GATS Mode 3) and the ECT (energy investment protection) manifests itself
in the State to State dispute resolution as set out in art 27 ECT. In other words, there
may be overlaps and conflicts between the dispute settlement mechanisms if they
are available to the same parties, i.e. States that are simultaneous ECT and WTO
Members. Where art 27 of Part V of the ECT offers a route for resolution of such
disputes for ECT Members, the DSU arguably simultaneously applies to disputes of
energy investment protection stemming from violation of GATS Mode 3 for WTO
Members. This observation theoretically opens up a route for forum shopping for
WTO/ECT Members in case of an energy investment dispute.
One provision worth mentioning with regard to ECT investment protection in
relation to other agreements, though, is art 16 ECT. The article comes closest to
being a conflict prevention/coordination tool and is aimed at the instances when one
or more contracting parties enter or have entered into other international agree-
ments, concerning the subject matter of ECT Part III or Part V. In essence, the
provision—in a somewhat cumbersome manner—prescribes that those provisions,
which are more favourable to the investor or the investment of either the ECT or the
other agreement, should prevail.
The potential overlap and/or conflict in the narrow sense of private law in this
area between the WTO and the ECT does not hold true where it concerns GATS
Mode 3 dispute resolution in the WTO (State to State) versus Investor-to-State
dispute settlement according to art 26 ECT. Here, we see the two dispute settlement
mechanisms working in parallel rather than in conflict with one another, since they
do not involve the same parties or the same applicable law, even though the disputes
may stem from the same events. In this case there is a fruitful complementarity
between the ECT and the WTO dispute resolution mechanisms, where both the
WTO (for States) and the ECT (for investors) provide a potential forum for redress
in the field of energy investment protection.
5.3 Recap: The Nexus Between the ECT and the WTO
By way of overview of this Section, Table 1 attempts to compare both treaties and
identify issue-area and procedural overlap between them. It also identifies resolu-
tion of conflict between the WTO and the ECT, where available.
Table 1 Resolution of conflict, issue-area and procedural overlap—a comparison between the WTO and the ECT
WTO ECT WTO rules in ECT: resolution of conflict
Trade in – GATT – Trade Provisions ECT GATT 1994 incorporation into ECT by reference (art 4 ECT):
energy goods – TBT (arts 4, 5, 6 and 29 ECTa) – GATT 1994 Applies:
– TRIMs – Art 5 ECT “Trade (a) Among ECT/WTO Members (art 4 ECT)
– TRIPs Related Investment (b) Between ECT/WTO Members and non-WTO ECT Parties (art 29.2(a) ECT)a
– Trade Remedy Agree- Measures” – Trade Provisions ECT (art 4 s, 5, 6 and 29 ECT) apply among non-WTO ECT
ments: Anti-Dumping, – Art 7 ECT “Transit” Parties only (art 29.1 ECT)a
Subsidies and Safe- (ECT Transit Protocol to – Art 7 ECT creates additional obligations for ECT/WTO Members (i.e. art
guards be elaboration on ECT 7 prevails over art V GATT—the so-called “WTO-plus effect of the ECT”—The
– Market Access Agree- and this Article) same would account for an ECT Transit Protocol (Draft art 3 Transit Protocol)
ments: – Transit Protocol (under Main exception to GATT incorporation by reference (Art 4 ECT):
Import Licensing, Rules negotiation—Most – Schedules of Concessions art II GATT are not incorporated into the ECT, but
of Origin, Customs Val- recent informal text ECT has “Best-endeavours” clause (arts 29.3–29.5) ECTa)
uation and Preshipment available: TT87 22/01/ WTO Agreements excluded from incorporation into ECT:
Inspection 2010) (a) Plurilaterals, not binding on all Members (Annex W ECT), e.g. Government
Not directly relevant NB The aim of the Procurement, Civil Aircraft)
for trade in energy Transit Protocol is to (b) WTO Agreements, not directly relevant for ECT (Annex W ECT),
goods: complement the ECT e.g. Agreement on Agriculture, SPS, Textiles)
– SPS while being in accor- (c) The WTO Special and Differential Treatment provisions do not apply in the
– Other WTO Agree- dance with art 7 ECT ECT, except for paras 1–4 of the Enabling Clause (through Annex W, section A,
ments: Agreement on (Draft art 3 Transit para 2(a) ECT)
Agriculture, Textiles Protocol) Conflict not solved:
– Plurilaterals, not bind- – TRIMS not incorporated in ECT (Annex W(A)(iv) ECT), but similar article in
ing on all WTO Mem- art 5 ECT “Trade Related Investment Measures”
The Nexus Between the WTO and the ECT in Global Energy Governance
bers (GSP, Government – TRIPS not incorporated in ECT (Annex W(A)(c) ECT), but commitment to
Procurement, Civil provide protection of intellectual property rights (Final Act of the International
Aircraft) Conference and Decision by the Energy Charter Conference in Respect of the
Amendment to the Trade-Related Provisions of the Energy Charter Treaty, Joint
Declaration on Trade-Related Intellectual Property Rights)
Trade in – GATS – “Economic Activity in – Art 11 ECT “Key Personnel” takes up issues treated as specific commitments
energy services the Energy Sector” (art under the GATS (the so-called “WTO-plus effect of the ECT”
203
(continued)
Table 1 (continued)
204
WTO ECT WTO rules in ECT: resolution of conflict

1.5 ECT) Conflict not solved:
– Transit Protocol (under GATS not incorporated in ECT (Annex W(A)(b), but energy services nevertheless
negotiation—Most covered in ECT as “Economic Activity in the Energy Sector”
recent informal text
available: TT87 22/01/
2010)
Resolution – DSU – Annex D “Interim – DSU Applies:
energy trade Provisions for Trade (a) Among ECT/WTO Members (Art 4 ECT)
disputes Dispute Settlement” – Annex D Applies:
– Art 7.7 ECT for Transit (a) Between ECT/WTO Members and non-WTO ECT Parties (art 29.7 ECTa)
disputes (b) Among non-WTO ECT Parties (art 29.7 ECTa)
– Art 7.7 ECT creates additional obligations for ECT/WTO Members (the
so-called “WTO-plus effect of the ECT”)
Energy invest- – GATS Mode 3 “Com- – Part III ECT “Invest- Conflict not solved:
ment mercial Presence” ment Promotion and Overlap/tension where GATS Mode 3 investment protection coincides with ECT
protection Protection” Part III (because GATS not incorporated in ECT)
Resolution – DSU for GATS Mode – Part V ECT “Dispute Conflict not solved:
energy invest- 3 disputes Settlement”: (Stems from issue-area conflict) Overlap/tension where GATS Mode 3 investment
ment disputes (a) Investor-State (art protection disputes coincide with ECT Part III, State-State disputes (art 27 ECT)
26 ECT) (post-establishment). However, see art 16 ECT “Relation to Other Agreements”
(b) State-State (art regarding Part III and V of the ECT. WTO/ECT complementarity regarding
27 ECT, non-trade mat- Investor-State disputes (Art 26 ECT)
ters only)
Environmental – Possible through Art – Art 19 ECT “Environ- – Art 19 ECT and the Environmental Protocol (PEEREA) create additional
protection XX GATT mental Aspects” obligations for ECT/WTO Members (the so-called “WTO-plus effect” of the
NB Also see WTO – Environmental Proto- ECT)
Decision on Trade and col (PEEREA)
Environment
a
Article 29 ECT sets out transitional arrangements and ceases to exist for an ECT Party when it joins the WTO. The application of art 29 ECT will end only
A. Marhold
upon universal WTO membership of all ECT Parties

6 The WTO-ECT Relationship 20 Years Later: Unresolved

Issues
While the WTO was set-up from the standpoint of creating an optimal long-term
governance model for international trade regulation, the ECT seems to have been
brought into life to deal with problems as they arose after the fall of the Iron
Curtain. It was these unpredicted circumstances that led to the establishment of the
ECT and which simultaneously caused tension and overlap between the two
treaties.84
One element that stands out is the fading relevance of the ECT provisions on
energy trade. Above we discussed how the trade provisions of the ECT are only
applicable between non-WTO Members who are Party to the ECT. Because of the
large number of accessions to the WTO, this means that these trade rules are only
applicable between a handful of ECT parties by 2016 (as opposed to 1998):
Afghanistan, Azerbaijan, Bosnia and Herzegovina, Uzbekistan and Turkmeni-
stan.85 With the exception of Turkmenistan, all these countries are WTO observers
and currently in the process of acceding to the WTO. Between all other ECT parties
who already are WTO Members, and even between these ECT/WTO Members and
non-WTO ECT parties, GATT rules apply, with the abovementioned exceptions.
The fundamental question that arises from this is what will happen to the trade
provisions of the ECT once all WTO observers who are ECT Parties have acceded
to the Organization? Will they become obsolete, with the exception of the “WTO-
plus” style provisions such as art 7 on transit (especially relevant for natural gas)?
Will the other trade provisions of the ECT still have a legitimate purpose? This
remains to be seen.
6.1 The Risks of ECT/WTO Tension and Overlap
The main risk of overlap between the WTO and the ECT is evidently one of parallel
applicability in issue-area and procedure with no clear hierarchy. While introducing
ECT rules of conflict from the start has averted tension between the main trade
provisions between WTO and the ECT, certain conflicts remain unresolved even
two decades later. This is a problem, because it results in an inefficient system of
energy governance. This is particularly harmful when considering the need for a
well-functioning framework that reflects modern energy and sustainable develop-
ment needs.
A case in point here is the applicability of TRIMs, TRIPs and GATS agreements
of the WTO with respect to trade in energy in parallel with their corresponding
84
Meyer (2012), p. 390.
85
Left out are the ECT countries who apply the ECT provisionally, or have applied it provisionally
in the past: Russia, Belarus, Australia, Iceland and Norway.
206 A. Marhold
provisions in the ECT, but the tension here has not been solved.86 There is no “real”
normative conflict between these norms in that they are not contradictory in nature
and both the WTO and the ECT aim to transmit a similar message: to provide rules
on trade-related investment measures, intellectual property and trade in services.
But the rules on TRIMs, TRIPs and GATS of the WTO and the rules of the same
notion in the ECT are not in the least identical and might result in significantly
diverging results if applied in practice.87 Instead of an inherent normative conflict,
the problem here is that both the WTO and ECT are applicable in parallel. Which of
the norms prevails? It appears there is no straightforward answer in this case. The
rules of the ECT have not provided for any explicit conflict clauses regarding
TRIMs, TRIPs and the GATS and both norms are deemed to be “equal”.
Another WTO/ECT overlap, concerning both issue-area and procedure, stems
from the unresolved parallel applicability of the WTO and the ECT with regard to
the protection and dispute settlement of energy investments. This overlap is not an
exclusive problem of the WTO and the ECT, but part of a greater discourse on the
gaps and overlaps between trade and investment law in general. While the issue-
area overlap with respect to GATS Mode 3 investment protection and Part III ECT
is subject to the same questions as those with regard to TRIMs, TRIPs and the
GATS above, the procedural overlap in this particular instance faces a practical
issue for countries who are simultaneous WTO/ECT Members. Arguably, invest-
ments of one WTO Member in the energy sector are protected by GATS rules under
GATS Mode 3 in the area of another WTO Member. But, investments of an ECT
party or an investor of an ECT party in the energy sector are additionally protected
through the rules set out in Part III of the ECT.88 Dispute settlement for States (not
investors) who are WTO/ECT Members would therefore appear to be possible
under the DSU as well as under art 27 of Part V of the ECT.89 If both the WTO and
the ECT have competence in resolving disputes concerning energy investment
disputes, which dispute settlement forum has precedence? Here, there are two
possible lines of argument, one making the case for prevalence of dispute settle-
ment in the WTO over the ECT, and the other vice versa. Nonetheless, neither of
these scenarios provides conclusive legal answers to the question which treaty-
regime should have priority.
With respect to the WTO, one could claim that a dispute in the energy sector,
stemming from a violation of the GATS in connection with Mode 3 (commercial
presence) should be litigated first and foremost between WTO Members before a
WTO panel. A strong argument in favour is that the WTO offers an exclusive forum
for dispute resolution for its Members and they are precluded from going elsewhere.
86
See Table 1.
87
It goes without saying that rules on TRIMs, TRIPs and GATS within the WTO are much more
elaborate than the rules provided on these topics in the ECT.
88
Part III ECT.
89
Note, however, that in the case of art 26 of the ECT, the investor would be the litigating party,
while under the DSU it would be a State, namely a WTO Member.
Furthermore, GATS Mode 3 is evidently a part of the agreements of the WTO

(namely the GATS), and consequently falls within the jurisdiction of WTO
panels.90 That being said, GATS Mode 3 has only been one the table in one
WTO dispute so far, namely in China—Certain Measures Affecting Electronic
Payment Services, a dispute which moreover did not concern energy investment
protection.91
Conversely, there is a case to be made that settling State-to-State energy
investment disputes through art 27 ECT has precedence over the WTO. The ECT
offers a specialised regime for the settlement of energy investment disputes. The
view that a specialised regime should prevail in this case could coincide with the
rules of conflict resolution. What is more, the ECT has been used very frequently
for such disputes, as opposed to the WTO.92 It must however be said that contrary to
the WTO, there is nothing in the wording of the ECT that prescribes exclusive
settlement of energy investment disputes under the ECT.93
Another possible solution in such circumstances is to resort to the text of art
16 ECT, and decide which provision of what agreement (WTO or ECT) is more
favourable to the case at hand. If nothing else, this fact certainly puts the perceived
“exclusivity” of the WTO dispute settlement system into question, as a parallel
route of settlement for energy investment disputes is available through the ECT.
6.2 Cooperation and Coordination to Overcome Tension?
From the above it is obvious that parallel applicability causes some tension between
the WTO and ECT. But how can these institutions best manage the unsolved conflicts
stemming from overlap in substance and procedure? This seems difficult to predict
and largely depends on the course both treaty-regimes aim to take in the future.
In absence of clear rules prescribing how to manage the risks of fragmentation
concerning the WTO and ECT, one can look at the fairly straightforward sugges-
tions made in analogy in the somewhat related field of international environmental
law.94 Wolfrum and Matz propose an approach where closer cooperation and
90
Pauwelyn (2003), p. 443 and art 1.1 DSU.
91
WTO doc. WT/DS413/R, Panel Report, China—Certain Measures Affecting Electronic Pay-
ment Services, 16 July 2012.
92
In contrast, see the extensive list of dispute settlement cases litigated under the ECT, “Investor-
State Dispute Settlement Cases” on http://www.energycharter.org.
93
In fact, in case parties to a dispute failed to settle it amicable pursuant to art 26.1 ECT, art 26.2
ECT gives the investor three options for submitting the dispute for resolution: “(a) to the courts or
administrative tribunals of the Contracting Party to the dispute; (b) in accordance with any
applicable, previously agreed dispute settlement procedure; or (c) in accordance with the follow-
ing paragraphs of this Article” (the latter referring to the ad hoc dispute settlement procedure
provided for in the ECT).
94
Pauwelyn (2006), [25], citing Wolfrum and Matz (2003), pp. 159–163.
208 A. Marhold
coordination between overlapping regimes and institutions can contribute to over-

coming tension.95 What is meant here is a broad concept of both terms, and it
implies voluntary and coordinated action between stakeholders of both institu-
tions.96 To make coordination and cooperation successful, it seems that both
institutions have to have a common objective in mind. With regard to the WTO
and the ECT this could be a (more) optimal regime to regulate economic activity in
the energy sector. But fruitful cooperation does not only concern active involve-
ment of institutions, for there are two crucial aspects: (1) interaction of States in the
work of international institutions, and, (2) cooperation between different institu-
tions.97 This should not be in the form of a one-time event, but has to be part of a
continuing process.98 In part, this has been attempted in the early 2000s, with the
ECS providing rules of coordination for WTO and the ECT. But this alone is not
enough, because gaps and overlaps continue to exist. To add to this, conflict
resolution between the WTO and the ECT based on the ECS guides as it stands
now seems quite complex and perhaps unnecessarily so.99 Perhaps it is not unthink-
able that coordination between the two treaty-regimes could happen in a simpler
manner in the future.
The WTO and ECT have made a renewed careful step in the direction of
increased cooperation and coordination by organising a common conference at
the WTO Headquarter in Geneva in 2013, focusing on legal problems concerning
energy in the WTO, the ECT and the interaction of these legal instruments.100 This
is just the beginning of what predictably will be a long journey if both institutions
aspire to take trade and regulation of the energy sector seriously.
A more interesting development in this respect is the political declaration on
global cooperation in the field of energy, the 2015 International Energy Charter,
negotiated under the auspices of the ECS in The Hague.101 While this declaration is
a political declaration and a soft law instrument, it is a positive sign that ECT
Members, signatories as well as non-signatories gathered around the table to
discuss global energy challenges ahead. Its purpose was to produce an updated
document to the founding document of the ECT, the European Energy Charter,
concluded in 1991.102 The concept of the International Energy Charter “aims at
95
Wolfrum and Matz (2003), pp. 159–163.
96
Ibid., p. 161.
97
Ibid.
98
Ibid., p. 159.
99
Energy Charter Secretariat (2001, 2003).
100
WTO, WTO News, Lamy Calls for Dialogue on Trade in Energy in WTO, 29 April 2013, http://
wto.org/english/news_e/sppl_e/sppl279_e.htm (accessed 4 March 2016).
101
International Energy Charter, Agreed Text for Adoption in The Hague at the Ministerial
Conference on the IEC on 20 May 2015, http://www.energycharter.org/fileadmin/
DocumentsMedia/Legal/IEC_EN.pdf (accessed 31 May 2016).
102
The 1991 Energy Charter, also known as the European Energy Charter, was the founding
document for the Energy Charter Treaty and provides the political foundation for the Charter
process.
enhancing international cooperation in order to meet common challenges related to

energy at national, regional and international levels, including the evolution of
global energy architecture”.103 The document hints to more cooperation and coor-
dination between multilateral agreements in the field of energy. Its signatories have
agreed to foster synergies among energy-related multilateral fora and stated the
wish to take full advantage of the expertise of existing international organisations in
the energy field.104 More importantly, for cooperation between the ECT and WTO,
the signatories to the 2015 Charter aim to ensure the development of trade in energy
is consistent “. . . with major multilateral agreements such as the WTO Agreement
and its related instruments . . .”.105 These goals should be achieved by means of, for
instance, guaranteeing an open and competitive market for energy products, mate-
rials, equipment and services, access to energy resources and access to national,
regional and international markets.106
7 Conclusions
This contribution examined the nexus between two major treaty-based systems
relevant for governance in the energy sector, the WTO and the ECT. While the
WTO, established in 1995 governs global trade in general, the ECT which came
into force in 1998, offers a specialized regime for the regulation of the energy
sector. Both treaties intersect and overlap in several places. The goal of this article
was to scrutinize the origins of the resulting overlap between them and to examine
where tension and parallel applicability occurs. Parts that are prone to the risks of
fragmentation are the parallel applicability of the WTO and the ECT in the field of
TRIMs, TRIPs and GATS. The tension between energy investment protection and
State-to-State dispute resolution in the ECT vis-a-vis the protection offered to such
investments in Mode 3 of the GATS present an additional challenge. One straight-
forward way to prevent and overcome conflict in these areas of the WTO and the
ECT is to foster increased cooperation and coordination between institutions, as
proposed by Wolfrum and Matz.107 With an eye on future energy governance, both
treaty regimes would arguably highly benefit from increased cooperation, coordi-
nation, and perhaps even integration. This would be particularly useful considering
the ambitions of the ECT—in view of the 2015 International Energy Charter—to
function as a hub in international energy regulation, whether with or without
involvement of the WTO. Or, alternatively, it would be a helpful exercise for the
WTO in tackling energy issues more proactively.
103
See Preamble to the text of the 2015 Charter.
104
Ibid.
105
International Energy Charter (2015) Title I—Objectives [1].
106
Ibid.
107
Wolfrum and Matz (2003).
210 A. Marhold
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“Ain’t No Sunshine”: Photovoltaic Energy
Policy in Europe at the Crossroads Between
EU Law and Energy Charter Treaty
Obligations
Francesco Montanaro
Contents
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212
2 The Legal and Economic Background of the Disputes: The Liberalisation of the Energy
Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213
3 PV Energy Support Schemes and EU Law Constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214
4 The Unpleasant Consequences of Renewable Energy Policy Reforms . . . . . . . . . . . . . . . . . . . 217
5 Possible Grounds for Investors’ Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218
6 Between Scylla and Charybdis: EU Member States Obligations Under EU Law
and the ECT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221
6.1 The Public International Law-Centred Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221
6.2 The ECT-Centred Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222
6.3 The Hybrid Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223
7 Beyond the Hermeneutic Solutions to the Conflict: Some Modest Proposals . . . . . . . . . . . . 224
7.1 Long-Term Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224
7.2 Short-Term Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225
8 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228
Abstract After the EU-driven liberalisation of the electricity market in Europe,

EU Member States put in place a variety of measures to develop photovoltaic
(PV) energy sources. These policies, however, soon proved to be unsustainably
expensive, particularly in a moment in which the condition of EU Member States’
public finances is generally problematic. In order to fulfil the tight EU fiscal
requirements, many EU Member States withdrew or substantially curtailed support
for renewable energies. In response to these policy changes, a group of solar power
investors initiated several arbitral proceedings against Spain, Italy, and Czech
Republic under the Energy Charter Treaty (ECT). This wave of claims has once
I wish to thank Prof. Yves Nouvel, Prof. Laura Ammannati and Dr. Mara Valenti for their
insightful comments. All errors are mine alone.
F. Montanaro (*)
Panthéon-Assas University, Paris, France
e-mail: francesco.montanaro@phd.unibocconi.it

DOI 10.1007/978-3-319-44645-5_12
212 F. Montanaro
again brought to the fore the vexed question of compatibility between ECT and EU
obligations in intra-EU cases. Given the variety of possible interpretative
approaches and the lack of binding precedent doctrine in international investment
arbitration, this paper maintains that solving this conflict through hermeneutic
means is not entirely satisfactory. Therefore, it suggests a two-step strategy to
accommodate it and neutralise its detrimental effects.
1 Introduction
Over the past few years, EU Member States have withdrawn or substantially
reduced the support to photovoltaic (PV) energy production. While these policy
changes seem to be required or, at least, encouraged by EU law, they could also
trigger Member States international responsibility under the Energy Charter Treaty
(ECT). By invoking the violation of the latter, several European solar power
investors have sued Spain, Italy, and the Czech Republic before international
arbitral tribunals. This new strip of cases revives the vexed question concerning
the compatibility of EU with ECT obligations in intra-EU cases. Caught between
the hammer and the anvil, EU Member States find themselves in an extremely
uncomfortable “lose-lose situation”. Two approaches may be envisaged to deal
with this conflict between international obligations. On the one hand, arbitral
tribunals may accommodate it on a case-by-case basis through interpretative
means. On the other hand, the States subject to these diverging obligations may
seek a conclusive solution through political means. To identify the most suitable
solution, this article proceeds as follows.
First, it outlines the legal and economic context in which EU Member States
enacted policies promoting photovoltaic and renewable energies. Notably, this
section briefly illustrates how the EU seeks to reconcile a variety of objectives,
such as electricity market liberalisation, environment protection, and sustainability
of public finances. With this in mind, it enquires how EU law may come into
conflict with the ECT. Second, it shows that solving such a conflict case-by-case
through hermeneutic means is largely unsatisfactory owing to the lack of binding
precedent and the variety of possible interpretative solutions. In conclusion, it puts
forward a two-step strategy that could not only resolve the conflict in the long-term,
but also immediately neutralise the unfair and undesirable consequences thereof.
On the one hand, it argues that only an amendment of the ECT would avoid future
conflicts with EU law. On the other hand, it suggests that the rules governing the EU
excessive deficit procedure should be interpreted in a way that can attenuate the
financial effects of the violation of the ECT.
“Ain’t No Sunshine”: Photovoltaic Energy Policy in Europe. . . 213
2 The Legal and Economic Background of the Disputes:

The Liberalisation of the Energy Market
At the end of the nineties, Member States set in motion a process leading to a
gradual liberalisation of the energy market which was marked until then by high
concentration and large State involvement. This process occurred under the impulse
of the three EU “energy packages”.
The first package comprised two “framework” directives on electricity and gas.1
These directives followed a twin-track approach that not only required Member
States to separate the natural monopolistic functions of the Transmission System
Operator (TSO) from generation and distribution, but also entrusted the incumbents
in the electricity market with public service obligations.2
The second package introduced the concept of functional unbundling, according
to which TSOs should set up a separate and independent organisation and decision-
making process to carry out the transmission functions.3 Furthermore, Member
States had to create independent national regulatory authorities (NRAs) to regulate
a wide range of issues, such as tariffs and conditions for access to transmission
networks, allocation of transmission capacity and congestion management.
The third package took further steps towards the creation of an European
electricity market by providing (1) the structural unbundling of the TSOs, (2) pro-
cedural and substantial rules geared to the solution of cross-border issues, and
(3) new and more far-reaching powers for the NRAs.4
1
Directive 96/92/EC of the European Parliament and of the Council of 19 December 1996
concerning common rules for the internal market in electricity, OJ 1997 L027/20; Directive
98/30/EC of the European Parliament and of the Council of 22 June 1998 concerning common
rules for the internal market in natural gas, OJ 1997 L204/1.
2
Hancher and Larouche (2011), p. 753.
3
Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning
common rules for the internal market in electricity and repealing Directive 96/92/EC, OJ 2003
L176/37; Directive 2003/55/EC of the European Parliament and of the Council of 26 June 2003
concerning common rules for the internal market in natural gas and repealing Directive 98/30/EC,
OJ 2003 L176/57.
4
Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning
common rules for the internal market in electricity and repealing Directive 2003/54/EC, OJ L211/
55; Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009
concerning common rules for the internal market in natural gas and repealing Directive 2003/
55/EC, OJ L211/94.
214 F. Montanaro
3 PV Energy Support Schemes and EU Law Constraints
While pursuing stronger market integration and competitiveness of the energy

market, the EU also sought to encourage the exploitation of renewable energies.
In the framework of the “Climate and Energy Package”, the Renewable Energy
Directive sets ambitious objectives in terms of electricity production from renew-
able resources.5 Since market and regulatory failures would generally impede a
sufficient production of electricity from renewable resources, this directive also
allowed for the introduction of support schemes.6
EU Member States adopted a variety of measures to shore up renewables,
namely (1) price support schemes, such as feed-in-tariffs (FITs) and (2) green
certificates, (3) tax incentives and (4) subsidies for PV plants projects.7 Since all
these measures imply a deployment of public resources or a transfer of resources to
private undertakings, they can come into conflict with EU State aid rules and with
EU fiscal discipline.
In terms of the former, Article 107.3 of the TFEU stipulates the conditions under
which State aids may be compatible with the internal market. In particular, Article
107.3(c) provides that State aid can be granted
to facilitate the development of certain economic activities or of certain economic areas,
where such aid does not adversely affect trading conditions to an extent contrary to the
common interest.
In the framework of the State aid modernisation, the Commission recently issued
the “Guidelines on State aid for environmental protection and energy”, which
amend the rules governing the Commission assessment of State aid granted to
renewable energy producers under Article 107.3.8 For reasons of space, this paper
cannot embark on a comprehensive analysis of the new guidelines. However, it is
worth noting that they seek to better integrate three seemingly diverging interests
such as environmental protection, energy security, and safeguard of effective
5
Directive 2009/28/EC of the European Parliament and of the council of 23 April 2009 on the
promotion of the use of energy from renewable sources and amending and subsequently repealing
Directives 2001/77/EC and 2003/30/EC, OJ 2009 L140/16.
6
Article 3.3(a), Directive (EC) 2009/28. European Commission, Guidance for the design of
renewables support schemes, SWD (2013) 439 final, 5 November 2013, p. 3. See also European
Commission, Renewable energy progress report, COM (2013) 175, 27 March 2013, p. 7; European
Commission, Renewable Energy: Progressing towards the 2020 target, COM (2011) 31, 31 January
2011. Subsidies to fossil fuels certainly represent a major regulatory failure. See generally IMF
(2013), pp. 19–20.
7
See Couture and Gagnon (2010), pp. 955–961; Sarasa-Maestro et al. (2013), pp. 317–318.
8
European Commission, Guidelines on State aid for environmental protection and energy
2014–2020, 2014/C 200/01. See also European Commission, Communication on EU State Aid
Modernisation, COM (2012) 209 final, 8 May 2012. The previous version of the guidelines was
issued in 2008. See European Commission, Community Guidelines on State Aid for Environmen-
tal Protection, 2008/C 82/01.
competition. To this end, they introduce new rules concerning State aid for renew-
able energy that urge Member States to transit to more market friendly measures in
support of renewable energy.9 More specifically, they provide, amongst others, that
the (1) price of green certificates systems should be established by demand and
supply in the market, (2) all aids should be granted through a competitive bidding
process from 2017, and (3) operating aid should take the form of a premium in
addition to the market price.10
Similarly, EU fiscal discipline may collide with national PV energy policies,
because the Member States directly or indirectly bear the costs of production of PV
energy. Direct support generally takes the form of tax breaks or tax incentives.
Indirect support, instead, occurs in case of accumulation of large tariff deficits,
which can arise when regulated tariffs do not cover the cost borne by energy
companies to produce PV energy.11 Although consumers normally bear this deficit,
the accumulation of large tariff deficits may ultimately require State intervention.
For instance, States may earmark their revenues to repay such tariff deficits or
guarantee the securities representing consumers’ debt.12 The sovereign debt crisis
and the strict EU fiscal discipline substantially reduced the room for such interven-
tions.13 In fact, it is no coincidence that all the Member States sued by PV investors
experienced a parallel rise in government debt and in the costs associated with the
support for renewable energies.14 Spain’s public debt/GDP ratio increased from
60.1 to 92 % between 2010 and 2014 and is expected to reach 102.1 % by 2016.15
Likewise, Italy’s government debt/GDP ratio over the same period equalled
127.9 % and will further increase in the next 4 years.16 The government debt/
GDP ratio of the Czech Republic, the only non-Euro country involved in these
arbitral proceedings, rocketed by 17 % in the period 2008–2013.17
EU fiscal discipline is a complex combination of obligations stemming from
(primary and secondary) EU law as well as from the Treaty on Stability, Coordi-
nation and Governance in the Economic and Monetary Union (TSCG). The TFEU
sets out the framework for the coordination of Member States’ economic policies
9
Szyszczak (2014), p. 618. See also Almunia (2014).
10
European Commission, Guidelines supra, n. 8, pp. 124–135.
11
Johannesson et al. (2014), p. 19.
12
Ibid., pp. 48–49. See also Creutzig et al. (2014), p. 1022. See also Robinson (2013), p. 3.
13
European Commission, Renewable Energy supra, n. 6, p. 8.
14
See Johannesson et al. (2014), pp. 23–24 and 39.
15
European Commission, Country Report Spain 2015, SWD (2015) 28 final, 26 February
2015, p. 8.
16
European Commission, Country Report Italy 2015, SWD (2015) 31 final, 26 February
2015, p. 10.
17
European Commission, Country Report Czech Republic 2015, SWD (2015) 23 final, 26 February
2015, p. 8.
216 F. Montanaro
(preventive arm), for the excessive debt procedure (corrective arm) and forbids the
Union from assuming liability for Member States’ public debt (no-bail out
clause).18 In 1997, two regulations fleshed out these rather scant treaty rules.19
However, due to their excessive rigidity, they were later modified in 2005.20 After
the outbreak of the sovereign debt crisis, they were further amended and
complemented in order to streamline the excessive deficit procedure and to enhance
surveillance and macroeconomic coordination.21 EU fiscal discipline applies in its
entirety to Member States that adopted the Euro. However, non-Euro States are
nonetheless subject to the regulations on the excessive deficit procedure and the
surveillance of budgetary positions.22
Against this background, EU policies impact on Member States’ renewable
energy policies can be regarded in two contrasting ways. On the one side, the
18
See Articles 121, 125 and 126 TFEU; Article 1 of the Protocol No. 12 of the TFEU sets the
criteria for assessing Member States debt and deficit.
19
Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of
budgetary positions and the surveillance and coordination of economic policies, OJ 1997 L209/1;
Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implemen-
tation of the excessive deficit procedure, OJ L209/6. See Morris et al. (2006).
20
Council Regulation (EC) No 1056/2005 of 27 June 2005 amending Regulation (EC) No 1467/97
on speeding up and clarifying the implementation of the excessive deficit procedure, OJ L174/5.
21
These measures are referred to as the “Six Pack” and the “Two Pack”. The former comprises
Regulation (EU) 1175/2011 of the European Parliament and of the Council of 16 November 2011
amending Council Regulation (EC) 1466/97 on the strengthening of the surveillance of budgetary
positions and the surveillance and coordination of economic policies, OJ L306/12; Council
Regulation (EU) 1177/2011 of 8 November 2011 amending Regulation (EC) 1467/97 on speeding
up and clarifying the implementation of the excessive deficit procedure, OJ L306/33; Regulation
(EU) 1173/2011 of the European Parliament and of the Council of 16 November 2011 on the
effective enforcement of budgetary surveillance in the euro area, OJ L306/1; Council Directive
2011/85/EU of 8 November 2011 on requirements for budgetary frameworks of the member
States, OJ L306/41; Regulation (EU) 1176/2011 of the European Parliament and of the Council of
16 November 2011 on the prevention and correction of macroeconomic imbalances, OJ L306/25;
Regulation (EU) 1174/2011 of the European Parliament and of the Council of 16 November 2011
on enforcement measures to correct excessive macroeconomic imbalances in the euro area, OJ
L306/8. The “Two Pack” includes Regulation (EU) 472/2013 of the European Parliament and of
the Council of 21 May 2013 on the strengthening of economic and budgetary surveillance of
member States in the euro area experiencing or threatened with serious difficulties with respect to
their financial stability, OJ L140/1; Regulation (EU) 473/2013 of the European Parliament and of
the Council of 21 May 2013 on common provisions for monitoring and assessing draft budgetary
plans and ensuring the correction of excessive deficit of the member States in the euro area, OJ
L140/11. On 2 March 2012, 25 EU member States concluded the Treaty on Stability, Coordination
and Governance in the Economic and Monetary Union.
22
Notably, they are subject to regulations 1466/97 and 1467/97 and their amendments. Some
non-Euro countries, such as Sweden, Denmark and Poland, are parties to the TSCG.
progressive liberalisation of the energy market and the ambitious objectives of the
climate and energy policy encourage Member States’ support to renewable ener-
gies. On the other side, EU State aid and fiscal policy significantly reduce the
margins for State intervention. Yet, it seems that the second tendency has prevailed
in recent times, thereby nudging the vast majority of EU Member States towards
more market-friendly and cost-effective renewable energy policies.23
4 The Unpleasant Consequences of Renewable Energy

Policy Reforms
Several EU Member States and, notably, Spain, Italy, and the Czech Republic, have
recently started to reform their PV energy policies. Spain enacted a number of
measures aimed at reining in tariff deficit and reforming its PV energy policy
between 2008 and 2013. After having reduced the FITs in 2008 and 2010,24 it
also curtailed the amount of production hours covered by the FIT for all the PV
installations put in place after 2007 thereby retroactively cutting tariffs.25 In
addition to this, Spain (1) suspended the FIT for PV systems installed on and
after 1 January 2012, (2) levied a 7 % tax on income from electricity production
and (3) retroactively modified the index adopted to calculate the amount of the
FIT.26 Similarly, the Czech Republic substantially reduced its support to PV energy
by introducing a tax that applied to all PV installations built after 2009 and
discontinuing the FIT scheme.27 Italy also enacted a number of measures to curb
tariff deficit. In particular, it substantially reduced the support for photovoltaic
energy and imposed a special tax on firms operating in the energy and oil industry.28
Unsurprisingly, these measures elicited reactions from PV investors. Numerous
23
See EPIA (2013); OECD (2014a), p. 19; OECD (2015), p. 26; OECD (2014b), p. 15. See also
Johnson (2014) and Wynn (2014).
24
Royal Decree 1578/2008 [2008] BOE 234; Royal Decree 1565/2010 [2010] BOE 283.
25
Royal Decree 14/2010 [2010] BOE 312.
26
Royal Law-Decree 1/2012, [2012] BOE 24; Ley 15/2012, [2012] BOE 312. Royal Law-Decree
9/2013 [2013] BOE 167.
27
EPIA (2013), p. 10.
28
Ministerial Decree of 5 July 2012 [2012] GU No. 159; Decree-law No. 69 of 21 June 2013
[2013] GU No. 144; Law No. 98 of 9 August 2013 [2013] GU No. 194.
218 F. Montanaro
arbitral proceedings have been initiated against Spain,29 the Czech Republic,30 and
Italy31 since 2011.
5 Possible Grounds for Investors’ Claims
With this factual background in mind, let us now attempt to identify the ECT
dispositions that could constitute grounds for the investors’ claims.
In the circumstances at hand, foreign investors are likely to invoke the fair and
equitable treatment (FET) standard under Article 10.1 of the ECT. This standard
comprises the following elements: (1) duty of transparency, (2) protection of
29
AES Solar v. Spain, UNCITRAL Rules of Arbitration; Antin Infrastructure v. Spain, ICSID Case
No. ARB/13/31; RREEF Infrastructure v. Spain, ICSID Case No. ARB/13/30; Charanne v. Spain,
SCC Rules of Arbitration, SCC Case; CSP Equity Investment v. Spain, SCC Rules of Arbitration,
PCA Case; Eiser Infrastructure Limited v. Spain, ICSID Case No. ARB/13/36; Isolux Infrastruc-
ture Netherlands v. Spain, SCC Rules of Arbitration, SCC Case RENERGY v. Spain, ICSID, Case
No. ARB/14/18; RWE Innogy v. Spain, ICSID, Case No. ARB/14/34; NextEra Energy v. Spain,
ICSID Case No. ARB/14/11; InfraRed v. Spain, ICSID Case No. ARB/14/12; Masdar Solar &
Wind v. Spain, ICSID Case No. ARB/14/1; Stadtwerke M€ unchen v. Spain, ICSID Case
No. ARB/15/1; STEAG v. Spain, ICSID Case No. ARB/15/4; Landesbank Baden-W€ urttemberg
v. Spain, ICSID Case No. ARB/15/45; Watkins Holdings v. Spain, ICSID Case No. ARB/15/44;
Hydro Energy v. Spain, ICSID Case No. ARB/15/42; SolEs Badajoz v. Spain, ICSID Case
No. ARB/15/38; OperaFund Eco-Invest v. Spain, ICSID Case No. ARB/15/36; Cavalum
v. Spain, ICSID Case No. ARB/15/34; JGC Corporation v. Spain, ICSID Case No. ARB/15/27;
KS Invest v. Spain, ICSID Case No. ARB/15/25; Mathias Kruck v. Spain, ICSID Case
No. ARB/15/23; Cube Infrastructure Fund v. Spain, ICSID Case No. ARB/15/20; BayWa
r.e. v. Spain, ICSID Case No. ARB/15/16; 9REN Holding v. Spain, ICSID Case No. ARB/15/
15; Alten Renewable Energy Developments BV v. Spain, SCC; E.ON SE, E.ON Finanzanlagen
GmbH and E.ON Iberia Holding GmbH v. Spain, ICSID Case No. ARB/15/35; Eurus Energy
Holdings Corporation and Eurus Energy Europe B.V. v. Spain, ICSID Case No. ARB/16/4; Sun-
Flower Olmeda GmbH & Co KG and others v. Spain, ICSID Case No. ARB/16/17; Infracapital F1
S.
a r.l. and Infracapital Solar B.V. v. Spain, ICSID Case No. ARB/16/18; Sevilla Beheer B.V. and
others v. Spain, ICSID Case No. ARB/16/27.
30
Voltaic Network v. Czech Republic, UNCITRAL Rules of Arbitration; I.C.W. Europe Invest-
ments v. Czech Republic, UNCITRAL Ad Hoc; Photovoltaik Knopf Betriebs v. Czech Republic,
UNCITRAL Rules of Arbitration; Antaris Solar v. Czech Republic, UNCITRAL Rules of Arbi-
tration, PCA Case; Natland Investment Group v. Czech Republic, UNCITRAL Rules of Arbitra-
tion; J€urgen Wirtgen v. Czech Republic, UNCITRAL Rules of Arbitration; WA Investments-
Europa Nova Limited v. Czech Republic, UNCITRAL; ICW Europe Investments Limited
v. Czech Republic, UNCITRAL.
31
Blusun v. Italy, ICSID Case No. ARB/14/3; Silver Ridge Power v. Italy, ICSID Case
No. ARB/15/37; Greentech Energy v. Italy, SCC Rules of Arbitration, SCC Case; Belenergia
v. Italy, ICSID Case No. ARB/15/40; Silver Ridge Power v. Italy, ICSID Case No. ARB/15/
37; ESPF Beteiligungs GmbH, ESPF Nr. 2 Austria Beteiligungs GmbH, and InfraClass Energie
5 GmbH & Co. KG v. Italy, ICSID Case No. ARB/16/5; Eskosol S.p.A. in liquidazione v. Italy,
ICSID Case No. ARB/15/50. It is worth noting that Italy notified its withdrawal from the ECT on
31 December 2014. However, it will be subject to the ECT for the next 20 years by virtue of Article
47.3 of the ECT. See De Luca (2015), pp. 9–11.
investors’ legitimate expectations, (3) due process, and (4) freedom from coercion
and harassment.32 The legitimate expectations doctrine is likely to play a crucial
role in the cases under consideration. Under this doctrine, host States must maintain
commitments undertaken vis- a-vis foreign investors.33 Arbitral case law found that
host State’s commitments may stem from (1) representations and assurances,34
(2) contract or licenses35 and, in some circumstances, from (3) laws and regula-
tions.36 Having outlined the possible sources of commitment, it is worth dwelling
on the last category and, in particular, on whether a change in the regulatory
framework existing at the time of the investment may result in the violation of
the investor’s legitimate expectations. Arbitral practice provides mixed guidance in
this respect. Some arbitral tribunals found that the protection of investors’ expec-
tations could justify an almost blanket limitation to the host State’s right to
regulate.37 Some others, instead, took a more deferent stance by affirming that
modifications to the regulatory framework do not violate legitimate expectations as
long as they are reasonable and proportionate.38 Recent ECT practice seems to
uphold the latter approach. In Electrabel, the Tribunal assessed whether the with-
drawal of a regulated price regime for production, transmission, and supply of
electric energy violated the investor’s legitimate expectations. In this regard, it
found that:
While the investor is promised protection against unfair changes, it is well established that
the host State is entitled to maintain a reasonable degree of regulatory flexibility to respond
to changing circumstances in the public interest. Consequently, the requirement of fairness
must not be understood as the immutability of the legal framework, but as implying that
subsequent changes should be made fairly, consistently and predictably . . . Fairness and
consistency must be assessed against the background of information that the investor knew
and should reasonably have known at the time of the investment and of the conduct of the
host State.39
What is more, the Tribunal held that, in the context of a progressive transition to
a liberalised energy market, the abolition of a regulated price regime does not
32
Leben (2015), pp. 322–342; Schreuer (2005a), pp. 373–384.
33
Valenti (2014), pp. 39–45; Snodgrass (2006), p. 36.
34
Total v. Argentina, ICSID Case No. ARB/04/01, Decision on Liability, 27 December 2010, para
119; Gami Investments v. Mexico, UNCITRAL, Final Award, 15 November 2004, para 93;
Feldman v. Mexico, ICSID Case No. ARB(AF)/99/1, Award on Merits, 16 December 2002, para
128.
35
SGS v. Paraguay, ICSID Case No. ARB/07/29, Award, 10 February 2012, para 134. See also
Noble Ventures v. Romania, ICSID Case No. ARB/01/11, Award, 12 October 2005, para 182.
36
Bayindir v. Pakistan, ICSID Case No ARB/03/29, Award, 27 August 2009, para 240; Occidental
v. Ecuador, LCIA Case No UN3467, Award, 1 July 2004, para 191; Saluka v. Czech Republic,
UNCITRAL, Partial Award, 17 March 2006, para 307.
37
CMS v. Argentina, Case No. ARB/01/8, Award, 12 May 2005, para 277; TECMED v. Mexico,
ICSID Case No. ARB(AF)/00/2, Award, 29 May 2003, para 154.
38
Total, supra, n. 34, paras 122–123.
39
Electrabel v. Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, 30 November
2012, paras 7.77–7.78.
220 F. Montanaro
frustrate investors’ legitimate expectations.40 On the contrary, investors should

expect these kinds of changes to the regulatory framework in such circumstances.
That being said, it cannot be excluded that future arbitral tribunals might choose to
distance themselves from this interpretation of legitimate expectations under Arti-
cle 10 of the ECT. Whether the above measures are consistent with the FET
standard depends on which of these views the arbitral tribunals will take. Should
they choose the former, they would in all likelihood find a violation of the FET
standard. However, assuming that they would adopt the latter, some of the retro-
active measures enacted by the EU Member States could be nonetheless inconsis-
tent therewith.41
Besides being a crucial part of the fair and equitable treatment standard, the
legitimate expectations doctrine can also be invoked in relation to violations of the
prohibition against illegal expropriation.42 Under Article 13 of the ECT, in order to
be considered lawful, an expropriation should (1) pursue a public interest objective,
(2) be non-discriminatory as well as (3) consistent with the due process of law, and
(4) be followed by a prompt, adequate and effective compensation. As is well-
known, expropriation may be direct and indirect. The former occurs through State
action, namely a State takes foreign property.43 Whereas the latter is the result of
regulatory measures that destroy or significantly reduce the value of the invest-
ment.44 However, the distinction between measures amounting to expropriation and
regulatory measures can be quite blurry. Thus, legal scholarship and arbitral
practice have adopted a number of criteria to better identify indirect expropriations
with legitimate expectations being one of them.45 Arbitral practice has
often interpreted quite restrictively the legitimate expectations doctrine. In partic-
ular, it has been found that the legislative framework existing at the time of the
investment does not per se give rise to legitimate expectations unless the host State
expressly assures that it will remain unchanged.46
Be that as it may, it cannot be excluded that some of the arbitral tribunals may
consider the amendments to renewable energy policies as a violation to investors’
legitimate expectations that could result in an indirect expropriation.
40
Ibid., para 7.140.
41
Total, supra, n. 34, para 129. See also Kläger (2011), p. 224. However, it should be noted that, in
Charanne, the arbitral tribunal interpreted the legitimate expectations doctrine in a restrictive
manner. See De Luca (2016), pp. 273–275.
42
Thunderbird v. Mexico, UNCITRAL, Separate Opinion, 1 December 2005.
43
Salacuse (2015), pp. 322–324.
44
Schreuer (2005b), pp. 28–29; Carreau and Juillard (2013), pp. 549–551; Dolzer (2002), p. 79.
45
See Carreau and Juillard (2013), pp. 570–573; Nouvel (2002), p. 89; De Luca (2014), pp. 62–65;
Higgins (1982), pp. 276–277; OECD (2004), pp. 19–20.
46
Parkerings v. Lithuania, ICSID Case No. ARB/05/8, Award, 11 September 2007, para 334.
6 Between Scylla and Charybdis: EU Member States

Obligations Under EU Law and the ECT
The recent wave of intra-EU investors’ claims brought to the fore the possible
conflict between EU law and the ECT. This conflict does not take the form of a mere
logical incompatibility between two norms, but that of a policy conflict, that is to
say a contrast between the objectives pursued by the two systems.47 At first glance,
this may appear somewhat outlandish and unexpected. For one thing, both TFEU
provisions on free movement of capital, freedom of establishment and free provi-
sion of services and the substantive standards under Chapter III of the ECT pursue
economic integration by protecting cross-border investments.48 However, a closer
look reveals that the EU and the ECT underlie a different idea of economic
integration.49 Though investment protection is certainly one of the fundamental
objectives of the EU Single Market, it is balanced with a variety of equally
important policies.50 The ECT is a much simpler instrument of international
economic integration, which by its very nature puts more emphasis on investor
protection.51 Thus, it is not surprising that the two systems may differently interact
with the same domestic measure and come into conflict. Confronted with this issue,
arbitral tribunals may in principle apply different interpretative approaches, namely
(1) the public international law-centred approach, (2) the ECT-centred approach, or
(3) the hybrid approach.
6.1 The Public International Law-Centred Approach
According to the first perspective, the conflict between ECT and EU law must be
regarded as a conflict between two international treaties. Therefore, it can be solved
through the interpretative tools contained in Articles 54, 59 and 30 of Vienna
Convention on the Law of Treaties (VCLT). Article 54(b) stipulates that a treaty
may be terminated or suspended when the parties, after consultation, agree to do
so.52 This provision must be read in conjunction with Article 59 of the VCLT,
whereby new agreements concluded between the same parties on the same subject
47
UN doc. A/CN.4/L.682, Fragmentation of International Law: Difficulties Arising from the
Diversification and Expansion of International Law. Report of the Study Group of the International
Law Commission Finalized by Martti Koskenniemi, 16 April 2006, paras 21–26.
48
See Poulain (2007), pp. 812–814; Dutheil de la Rochère (2011), pp. 37–38.
49
Ibid.
50
Kleinheisterkamp (2012), p. 97; Reinisch (2012), p. 169.
51
It should be admitted that the ECT, as opposed to BITs, pursues, to a certain extent, interests
other than investment protection. See Schill (2014), pp. 273–280.
52
This provision is a reflection of the pacta sunt servanda principle enshrined in Article 26 of the
VCLT. Chapaux (2006), p. 1927.
222 F. Montanaro
can displace old agreements provided that they are intended to do so or are in any
case incompatible.53 Article 30 of the VCLT stipulates that the same rule governs
conflicts between individual treaty dispositions.54 Applied to the cases under
consideration, these principles could generate unreasonable outcomes. ECT obli-
gations would prevail over EU law vis-a-vis Spain and Italy, as they entered into the
Energy Charter Treaty after having joined the EU. But they would not do so in
relation to the Czech Republic, as it became a EU Member being already party to
the ECT. Furthermore, it should be noted that several arbitral tribunals found that
such principles do not apply to the conflict between EU law and intra-EU BITs, as
BITs and EU law do not cover the same subject matter and are not incompatible
with each other.55 Arguably, the tribunals dealing with PV investors’ claims might
deploy these arguments to reject this approach.
6.2 The ECT-Centred Approach
This approach presupposes the completeness and the self-sufficiency of the ECT
legal system. Put differently, the ECT would contain the rules to solve the conflict
between itself and other international treaties. Under Article 26.6 ECT, investment
disputes should be decided in accordance with the rules set out therein as well as the
applicable rules and principles of international law. Thus, EU law is not applicable
to ECT investment disputes.56 Viewed from this angle, the conflict between the two
systems does not even arise. When adjudging intra-EU investor-State disputes, EU
law is only a fact to be taken into consideration unless Article 16 of the ECT
applies.57 This disposition stipulates that Parts III (Investment Protection) and V
(Dispute Settlement) of the ECT may be derogated by another international treaty
so long as the latter provides a more favourable treatment. However, given the
relatively limited protection granted by EU law to investors, it is unlikely that this
provision would ever apply.58
53
Dubuisson (2006), p. 2094.
54
It has been observed that this distinction may be somewhat artificial. See Dubuisson (2006),
pp. 2118–2119.
55
See Eastern Sugar v. Czech Republic, SCC Case 088/2004, Partial Award, 27 March 2007, paras
160–169; Binder v. Czech Republic, UNCITRAL, Award on Jurisdiction, 6 June 2007 (not public);
Eureko v. Slovak Republic, UNCITRAL Rules of Arbitration, PCA Case No. 2008-13, Award on
Jurisdiction, Arbitrability and Suspension, 26 October 2010, paras 231–267. See also Reinisch
(2012), pp. 165–174; Cf. Poulain (2007), pp. 812–816.
56
See AES v. Hungary, ICSID Case No. ARB/07/22, Opinion Expert, 30 October 2008, para 21.
Giardina (2011), pp. 150–156.
57
AES v. Hungary, ICSID Case No. ARB/07/22, Award, 23 September 2010, para 7.6.12.
58
Happ and Bischoff (2011), p. 162.
6.3 The Hybrid Approach
The hybrid approach seeks to reconcile EU law and the ECT as far as possible.
Though neither the ECT nor the EU treaties require doing so, this approach would
be the most suitable in light of the links between the two systems. As explained
above, both the ECT and the EU promote, albeit in different ways, economic
integration and free competition.59 In addition, the ECT has always been considered
by the EC/EU as an instrument to pursue its foreign and energy policies.60 Follow-
ing this approach, an arbitral tribunal recently concluded that, if a conflict between
EU law and the ECT arises, such treaties should be construed in such a way as to
avoid incompatibility.61 What is more, it held that the assessment of the compat-
ibility of a State measure vis- a-vis the ECT must take into account whether it was
enacted to fulfil EU law obligations.62 Put another way, EU law operates as a screen
placed between the domestic measure and the ECT.63 It follows that the ECT
should not represent an instrument to circumvent EU law obligations.64 Mindful
of the fact that this harmonious interpretation might not solve the problem, the
Tribunal added that EU law must prevail over the ECT in case of persisting
contrast.65 Notably, by virtue of a broad interpretation of Article 351 of the
TFEU, the Tribunal found that EU law overrides all treaties concluded between
Member States, including the ECT.66 In doing so, the Tribunal arguably sought to
ensure consistency between the two systems while preserving a certain degree of
autonomy for the ECT.67 Although this approach may look suitable, it only reflects
the position of an arbitral tribunal that is not binding on other tribunals.68 Therefore,
the tribunals called on to decide on the cases concerning PV energy reforms are not
bound to adopt it.
59
Weiler and Wälde (2003), p. 35.
60
Behrens and Egenhofer (2008), p. 241.
61
Electrabel, supra, n. 39, para 4.167.
62
Ibid., para 4.169.
63
Laazouzi (2013), p. 492.
64
Ibid.
65
66
Ibid.
67
Laazouzi (2013), p. 492.
68
Sacerdoti (2010), pp. 240–246; Kauffman-Kohler (2007), pp. 368–369.
224 F. Montanaro
7 Beyond the Hermeneutic Solutions to the Conflict: Some

Modest Proposals
The above analysis demonstrates that, due to the lack of the binding precedent
doctrine and the great heterogeneity of approaches adopted by arbitral case law, the
conflict between ECT and EU law obligations cannot be satisfactorily resolved
through interpretative means. It is thus necessary to envisage an alternative
approach. To this end, this article suggests a twofold strategy to overcome the
persisting conflict between EU and the ECT in intra-EU cases.69
7.1 Long-Term Strategy
The enduring conflict between the ECT and EU law is due to the overlap between
the two systems in intra-EU cases. This could be avoided if EU Member States
would disconnect themselves from the ECT vis- a-vis cases falling within the scope
of application of EU law.70 In this respect, it is possible to envision two alternative
courses of action. First of all, they might agree not to apply ECT substantial and
procedural rules to intra-EU energy investment disputes. As a result, these disputes
would be exclusively subject to EU law. Such an international agreement would be
subject to the rules set out in the VCLT. In particular, Article 41 of the VCLT
stipulates that the parties to a multilateral agreement may agree to modify it as
between themselves on the condition that it is permitted or at least not prohibited by
the multilateral agreement itself. In the latter case, such agreements should not
impair the enjoyment of other parties’ rights and be inconsistent with its object or
purpose. As such an agreement would not impede the application of ECT invest-
ment and dispute settlement provisions to non intra-EU investment claims, the first
condition would probably be met. However, whether such an agreement between
EU Member States would satisfy the second condition is doubtful. Notably, one
could argue that an investor-State dispute settlement mechanism is key to achieving
the investment liberalisation objective enshrined in the ECT preamble. In addition,
an agreement between EU Member States with such a far-reaching scope would not
be the most appropriate and politically viable option to solve the conflict. Other
ECT contracting States could raise objections or enter into similar agreements that
would eventually undermine the ECT. Thus, it is submitted that a renegotiation of
the ECT involving all its contracting States would be the best long-term option,
even though the road leading to such an agreement would be long and fraught with
difficulties. In the meantime, it is worth asking whether Member States ineluctably
bear the heavy financial burden caused by this conflict or whether the Union should
69
Needless to say, this strategy can be applied mutatis mutandis also to intra-EU BITs. See Mariani
(2014), pp. 280–284.
70
Kleinheisterkamp (2012), pp. 104–105; Dutheil de la Rochère (2011), p. 44.
intervene to alleviate their position. The more the number of intra-EU ECT-based
arbitral proceedings grows, the greater the need for a prompt and fair solution.
7.2 Short-Term Strategy
The EU legal system contains the instruments to address this problem. Regulation
912/2014 sets out the rules for apportioning the financial responsibility ensuing
from investor-State dispute settlement tribunals established by treaties to which the
Union is party.71 In particular, Article 3 of the Regulation stipulates that the
financial responsibility must be attributed according to the principle of the “origin
of the treatment”.72 That is to say that the Member States and the Union respec-
tively bear the financial responsibility ensuing from their actions. More impor-
tantly, the Union will be also financially responsible for Member States’ conducts
that are “required by EU law”. Admittedly, the rather vague language of this last
criterion might create a great deal of uncertainty.73 It is somewhat unclear what
“required by EU law” means. Does it exclusively refer to the obligations consisting
in the implementation of EU legislation through domestic measures? Does it refer
to a wider range of obligations? For instance, one could wonder whether the
financial responsibility of the EU could be invoked with respect to Member States
measures adopted under the impulse of EU fiscal policy. This interpretative ques-
tion can be solved by construing Article 3 in light of the objective of the regulation,
namely a fair apportionment of financial responsibility between the Union and the
Member States. In particular, recital No. 5 of the Regulation reads as follows:
It would as a consequence be inequitable if awards and the costs of arbitration were to be
paid from the budget of the Union where the treatment was afforded by a Member State,
unless the treatment in question is required by Union law.74
By the same token, it can be argued that it would be unfair if the financial
responsibility of the EU would arise only when a Member State violates investors’
rights by transposing and implementing EU legislation. In addition, a restrictive
interpretation of this disposition would be at odds with the fundamental principles
of loyal cooperation and good faith enshrined in the EU legal order.75
71
Regulation (EU) No 912/2014 of the European Parliament and of the Council of 23 July 2014
establishing a framework for managing financial responsibility linked to investor-to-State dispute
settlement tribunals established by international agreements to which the European Union is party,
OJ L257/121.
72
European Commission, Explanatory Memorandum—Proposal for a Regulation establishing a
framework for managing financial responsibility linked to Investor-State dispute settlement tri-
bunals established by international agreements to which the European Union is a party, COM
(2012) 335, 21 June 2012, p. 9.
73
Tietje et al. (2013), pp. 20–21.
74
Recital No. 5 of the Regulation 912/2014, supra, n. 71.
75
See Klamert (2014), p. 63; Gormley (2008), p. 304.
226 F. Montanaro
Consequently, financial responsibility of the EU should also arise when Member

States adopt measures to fulfil all kind of obligations stemming from EU law.
However, this interpretation of the apportionment criteria contained in the Regula-
tion 912/2014 would be of little help in the cases under consideration. In fact, this
Regulation applies to arbitral proceedings initiated on or after 17 September 2014
and concerning treatments occurred after that date.76 As a result, Member States are
still exposed to financial responsibility for the claims brought in relation to the
amendments to their renewable energy policies. Although there is no clear infor-
mation on the amount of these claims, investment claims, particularly in the energy
sector, can amount to hundreds of millions or even billions of dollars.77 In the cases
under consideration, the impact on host States budget might be even larger as
several parallel arbitral proceedings were initiated. Thus, the already deteriorating
situation of public finances of the respondent States might be further aggravated by
this new financial burden. In brief, the financial consequences of this wave of
arbitral proceedings might—at least partially—outweigh the beneficial effects on
national budgets produced by the reforms of renewable energy policies, thereby
compromising the compliance with EU fiscal discipline. The principles of fairness,
good faith and loyal cooperation, immanent in the Regulation 912/2014 and in the
EU legal order, should induce EU institutions to address this paradoxical situa-
tion.78 All sums of money paid by Member States in the above cases, either
awarded by arbitral tribunals or agreed upon as part of a settlement, should be
rendered irrelevant for the purposes of the excessive deficit procedure, as they are
de facto required by EU law. To this end, EU fiscal rules should be construed to
neutralise the effects of the financial responsibility stemming from the violation of
the ECT.79 This would be possible at two different stages of the procedure.
First, the financial burden stemming from ECT violations might come into play
when the Commission issues a report pursuant to Article 126.3 of the TFEU. In
such a report, the Commission must weigh up the factors contained in the said
provision as well as in Article 2.3 of the Regulation on the excessive deficit
procedure.80 Of particular relevance for our purposes are the expenses aimed at
achieving the “objectives of the Union”. There is little doubt that Member States
pursue the objectives of the Union by enacting measures required or prompted by
76
Article 24 of the Regulation 912/2014, supra, n. 71.
77
For instance, the claims brought against Germany in reaction to its decision to discontinue the
Nuclear Energy Programme amount to USD 1 billion. See generally Bernasconi-Osterwalder and
Hoffmann (2012). See also Anatolie Stati v. Kazakhstan, SCC, Award, 19 December 2013 (USD
497.68 million); EDF International v. Argentina, ICSID Case No. ARB/03/23, Award, 11 June
2012 (USD 136.13 million).
78
See Klamert (2014), pp. 41–46.
79
It is worth noting that Member States pleaded for a flexible application of EU budgetary rules in
order to absorb the costs associated with the migrant crisis. See Valero, EU drags on Stability and
Growth Pact reform, Euractiv (2015), http://www.euractiv.com/sections/euro-finance/eu-drags-
revised-stability-and-growth-pact-318395 (accessed December 2015).
80
Regulation 1467/1997, supra, n. 19.
EU law, even though they are inconsistent with the ECT. Therefore, the Commis-
sion should take into account the financial responsibility stemming from the
aforementioned arbitrations when preparing the report under Article 126.3 of
the TFEU.
Second, the financial responsibility ensuing from violations of the ECT may be
relevant when assessing compliance with the deficit and debt thresholds. According
to Article 2.4 of the Regulation on the excessive deficit procedure, the Commission
and the Council shall carry out these assessments by taking all the relevant factors
into consideration. However, if the debt/GDP ratio exceeds the 60 % threshold, they
can only consider the factors that do not bring about an excessive and permanent
divergence from the reference values when assessing compliance with the deficit
threshold. Applied to the cases under consideration, this disposition would lead the
Commission and the Council to consider Member States financial responsibility as
a crucial mitigating factor. In so doing, they would not only relieve Member States
of the burdensome consequences ensuing from possible excessive deficit proce-
dures, but also implicitly recognize the responsibility of the Union for these
violations.
8 Conclusions
The recent wave of challenges brought by European investors against EU Member

States PV energy policies uncloaked new possible conflicts between the ECT and
EU law.
This article has shown that this conflict cannot be satisfactorily accommodated
through hermeneutic means due to the variety of approaches adopted in arbitral
practice and the lack of the binding precedent doctrine in international investment
arbitration. This is because a political solution should therefore be preferred. EU
Member States should renegotiate the ECT in order to disconnect themselves from
this treaty with respect to intra-EU cases. Since this renegotiation is likely to be a
long and complicated process, the EU should, in the meantime, undertake financial
responsibility stemming from Member States’ measures adopted to comply with
EU law. Despite the lack of clarity of some of its provisions, the Regulation
912/2014 represents an important step forward in this respect. The origin of
treatment criterion, if properly interpreted, may ensure a fair allocation of financial
responsibility between Member States and the Union.
However, this regulation does not cover the recent cases that arose out of PV
energy policy reforms in the EU. The financial responsibility ensuing from the
arbitrations and the settlements that do not fall within the scope ratione temporis of
the Regulation might even worsen the problematic situation of the public finances
of the respondent States. Thus, this article has suggested that the rules governing the
excessive deficit procedure should be interpreted in order to neutralise the effects of
such a financial responsibility on Member States’ budgetary positions.
228 F. Montanaro
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Part IV
Investment and Finance
The Final Volcker Rule and Its Impact
Across the Atlantic: The Shaping
of Extraterritoriality in a World of Dynamic
Structural Banking Reforms
Elisabetta Cervone
Contents
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234
2 Transatlantic Structural Reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
2.1 Basic Rationale of Structural Reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
2.2 Regulatory Disparities: Volcker Rule v. European Commission Proposal . . . . . . . . . 237
2.3 The Final Volcker Rule and Its Application to Foreign Banks . . . . . . . . . . . . . . . . . . . . . 240
3 “Localization”, Extraterritoriality and the Aim for Effective Global Standards
and Coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242
3.1 Economic History and the Unavoidability of “Localization” . . . . . . . . . . . . . . . . . . . . . . . 242
3.2 The Danger of “Unilateral Extraterritoriality” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243
3.3 Toward Equivalence and Mutual Recognition (or Substituted Compliance)
in Developing Global Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246
4 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250
Abstract The Volcker Rule could potentially apply to the global structure of a
foreign bank with US branches or any business of foreign banks with US
counterparties. Concerns of an adverse extraterritorial impact—while mitigated in
the implementing regulations—still matter. This Chapter, in considering the differ-
ent approaches adopted by the United States and the European Union toward
extraterritoriality, emphasizes the fact that, even when there is no global standard,
mutual recognition based on equivalence would be a slow, complex process toward
harmonization, but it might work. The purpose of this Chapter is to explore the
prospects of harmonization and the development of global standards via extra-
territoriality in banking structural measures, providing a view on the role national
regulations as potential source of international financial law.
E. Cervone (*)
University of Milan, Milan, Italy
World Bank, Finance and Markets Global Practice, DC, USA
e-mail: elisabetta.cervone@unimi.it

DOI 10.1007/978-3-319-44645-5_13
234 E. Cervone
1 Introduction
Extraterritoriality has become a hot topic in banking structural reforms, especially

with the intensification of regulation in both sides of the Atlantic.
In the years since the crisis, we are confronted with the adoption, or planned
adoption, of structural banking measures in several jurisdictions to impose restric-
tions on the scope of banking activity, limiting and overseeing proprietary trading.
These initiatives include the so-called “Volcker rule”1 and its implementing mea-
sures (hereinafter “Final Rule”)2 in the United States, the Banking Reform Act
(implementing the “Vickers report”)3 in the United Kingdom and the European
Commission Proposal on banking structural reform (hereinafter “European Com-
mission Proposal”)4 based on recommendations from the Liikanen report.5
There have not been similar initiatives at the international level. In 2008, the
Group of Twenty (G20) met in Washington, D.C., and committed to reform the
global financial system.6 Since then, the G20 has, among other things, implemented
new liquidity and capital adequacy requirements for banks, taken steps toward
regulating over-the-counter derivative markets and made recommendations for
regulating the shadow banking industry.7 However, markedly absent from the
G20 agenda is a regulation of proprietary trading.
This Chapter focuses on the reforms in the United States, United Kingdom and
the European Union because thy will create most concerns in terms of their impact
on systemic stability in other countries. The Volcker rule’s implementing measures
went into effect in April 2014, ring-fencing in the United Kingdom will come into
1
“Volcker Rule” is the colloquial name for Section 619 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. 111-203 (21 July 2010), which is codified as Section 13 of the
Bank Holding Company Act of 1956, 12 U.S.C. §1851 (BHC Act).
2
OCC, Federal Reserve, FDIC, and SEC, Prohibitions and Restrictions on Proprietary Trading and
Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds, 79 Fed. Reg.
5536 (10 December 2013).
3
The reform in UK was passed in December 2013, implementing the key recommendations of the
2011 report by the Independent Commission on Banking (the “Vickers” report).
4
European Commission, Proposal from the Commission for a Regulation of the European Parlia-
ment and of the Council on structural measures improving the resilience of EU credit institutions,
COM (2014) 43. The proposal was first transmitted to the Council on 29 January 2014. It has been
hotly debated both in the ECON Committee and the Council and is facing a great deal of criticism.
On June 19th 2015 the ECOFIN Council agreed its negotiating stance.
5
The High-Level Expert Group, chaired by Erik Liikanen, Governor of the Bank of Finland, was
mandated by Commissioner Barnier to assess the need for structural reform of the EU banking
sector. The so called “Liikanen report” was presented in October 2012. European Commission,
Commission Staff Working Document Impact Assessment Annexes 1–4. Brussels, 29.1.2014,
SWD (2014) 30. www.cdep.ro/afaceri_europene/CE/2014/SWD_2014_30_EN_
DOCUMENTDETRAVAIL_f.pdf. Accessed 18 Jan 2016.
6
See letter from Mark Carney, Chairman of the Financial Stability Board, to the G20 Leaders,
Carney (2013), p. 1.
7
G20 (2013).
The Final Volcker Rule and Its Impact Across the Atlantic: The Shaping of. . . 235
force in 2019 and the EU rules are still subject to negotiations, after being rejected
in May 2015 by the European Parliament.8
In dealing with “global banks”, extraterritoriality issues arise. The Volcker Rule
could potentially apply to the global structure of a foreign bank with US branches or
any business of foreign banks with US counterparties. Numerous provisions regu-
late foreign banks’ operations both inside and outside the United States, giving the
US regulators the right to intervene in foreign banks’ business. The exemptions
granted for business that has clearly been transacted outside the United States are
subject to a few conditions which in practice turn out to be restrictive. On the EU
side, although the EU Proposal is intended to be applied to non-EU banks’
branches, it gives the Commission the option of recognizing a non-EU country’s
legal system as equivalent.
These reforms differ in scope and strictness. There is the possibility that not
adopting uniform approaches would affect efficiency and competitiveness of finan-
cial institutions and may even create new opportunities for regulatory arbitrage.
Almost all participants, home and host, advanced and emerging markets, acknowl-
edged the potential for significant cross-border spillover and expressed concern
regarding the cost implications of multiple national rules imposed on internation-
ally active banks.
It is, however, questioned the need for global standards to avoid regulatory
fragmentation. There is also scepticism about the slow pace of international soft
law and in international regulators’ ability to have the right incentives to control
systemic risk. In addition, territoriality, especially in banking structural reforms,
often matters. Some diversification in national approaches is inevitable, reflecting
existing differences in banks’ business models, size and concentration of banking
system, level of development of financial markets and prevalence of non-bank
financial intermediaries. A decision to apply a domestic framework
8
The proposal was first transmitted to the Council on 29 January 2014. The proposal has been hotly
debated both in the ECON Committee and the Council and is facing a great deal of criticism. The
ECON Committee published a draft report on the Commission’s proposal: the H€ okmark report on
Bank Structural Reform. The European Parliament’s rapporteur on bank structure reform, Gunnar
H€ okmark, in his draft report, proposed a number of significant amendments, including changes
that would weaken the objectives, scope, definitions, mechanism and sanctions in the Commis-
sion’s original proposal. The justification provided is that universal banks play an important role in
financing commercial investments and that the drivers are residual systemic risks (i.e. risks that
may remain even after the application of existing frameworks such as capital requirements or
resolution planning). However, the vote in Committee which took place 26 May 2015 resulted in
the ECON Committee rejecting the report by one vote: 30-29 with one abstention. The decision on
future progress will be left to the ECON coordinators, which usually meet with the ECON Chair
during every Strasbourg week to decide on the major procedural steps for the Committee. There
remains the necessary political intention to make progress on bank structural reform, so the idea
that this file will be withdrawn by the Commission is somewhat exaggerated. On June 2015 the
ECOFIN Council agreed its negotiating stance. On the basis of this mandate, the incoming
Luxembourg presidency will start negotiations with the European Parliament as soon as the latter
has adopted its position. Better Regulation (2016).
236 E. Cervone
extraterritorially may depend on whether this is necessary to achieve the (largely

domestic) goal of the regulation.
The purpose of this Chapter is to explore the prospects of harmonization and the
development of global standards via extraterritoriality in banking structural mea-
sures, proposing a view on the role of national regulations as potential source of
international financial law. Although scholars have long recognized the extraterri-
torial effects of various financial rules, extraterritoriality is generally examined in
the context of the conflicts of law literature.9 This Chapter intends, instead, to
explore the possibilities of extraterritoriality as a regulatory strategy, specifically
looking at equivalence clauses used to export the national regulatory model.
While the strict extraterritoriality of the Volcker Rule has been reduced in the
Final Rule implementing it, too much rigidity still exists. While the Final Rule does
offer some concessions to non-US banking organizations (so called “Foreign Bank
Organizations” or FBOs), at the same time, it introduces them into a US-centric
compliance and reporting regime that will inevitably conflict with home country
customs and requirements. This rigid approach to regulation may hinder future
crisis management.
2 Transatlantic Structural Reforms
2.1 Basic Rationale of Structural Reforms
Restrictions on banks’ business lines have been relaxed since the 1970s, in parallel
with the deregulation of financial markets. There was a broad consensus that
universal banks can provide the largest economic benefits in a rapidly growing
global economy.10 Diversification of business lines, innovations in risk manage-
ment, market-based pricing of risks and market discipline were seen as effective
safeguards against financial risks associated with the rapid expansion of large
universal banks.11
After the financial crisis of 2007, economic costs and benefits of the involvement
of universal banks in proprietary trading and other securities markets activities have
been reassessed. Many large universal banks shifted too many resources to trading
books, supported by cheap funding.12 The complexity of many banks weakened
market discipline, while their interdependence increased systemic risk, contributing
to contagion within and across firms. Though the crisis has shown the need to
strengthen market-based pricing of risk and market discipline, the heavy burden of
9
On the diverse approaches used by US courts, see, for example, Buxbaum (2001), pp. 225–226;
McConnaughay (1999), p. 262; Symeonides (2001), p. 1; Trautman (1961), p. 617.
10
Gambacorta and Van Rixtel (2013), p. 1.
11
Ibid.
12
Ibid.
bank losses imposed on taxpayers has raised questions about the separation of
certain banking activities.
A number of jurisdictions have then taken initiatives to address the above con-
cerns. In the last years some EU Member States have engaged in reforms (including
Germany, France, the United Kingdom and Belgium).13 The United States has
adopted the Volcker Rule.
The basic rationale for these reforms is to insulate certain types of financial
activities, regarded as especially important for the real economy or significant on
consumer/depositor protection grounds, from the risks that emanate from poten-
tially riskier, but less important activities. These initiatives are designed to reduce
these risks in several ways. First, and most directly, they can shield the institutions
carrying out the protected activities from losses incurred elsewhere. Second, they
can prevent any subsidies that support the protected activities (e.g. central bank
lending facilities and deposit guarantee schemes) from lowering the cost of risk-
taking and encouraging moral hazard in other business lines. Third, they can reduce
the complexity and possibly size of banking organizations, making them easier to
manage, more transparent to outside stakeholders and easier to resolve; this in turn
could improve risk management, contain moral hazard and strengthen market
discipline. Fourth, they can prevent the aggressive risk culture of the riskier
activities from infecting that of more traditional banking business, thus reducing
the scope for conflicts of interest. In addition, smaller institutions would reduce the
risk of regulatory capture.
The common element of all the regulatory initiatives is to restrict universal
banking by drawing a line somewhere between “commercial” and “investment”
banking businesses. The proposed changes do not go as far as the previous strict
separation of commercial from investment banking that existed in some jurisdic-
tions, such as the United States.14 Restrictions on universal banking would be new,
however, for many countries, notably a number of continental European ones.
2.2 Regulatory Disparities: Volcker Rule v. European

Commission Proposal
Beyond their basic similarities, structural reform initiatives differ in scope and
strictness.15
The Dodd-Frank Act was enacted on 21 July 2010.16 Section 619 of the Act
added a new Section 13 (the “Volcker Rule”) to the BHC Act. The Volcker Rule
13
On the economic underpinnings of the reforms, Vickers (2012) and Lehmann (2014).
14
15
Ibid., pp. 8 ff.
16
Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat.
1376 (2010).
238 E. Cervone
consists of two parts: one prohibits any bank17 from engaging in proprietary
trading, the other prohibits any bank from acquiring or retaining an ownership
interest in, sponsoring, or having certain relationships with a hedge fund or private
equity fund (so called “covered funds rule”), subject to certain exemptions.18
In December 2013, five financial regulatory agencies19 adopted the long-awaited
Final Rule, which implements the Volcker Rule. The Final Rule prohibits any bank
from engaging in proprietary trading20; requires firms with significant trading
operations to report to the relevant Agency a number of quantitative measurements
that are designed to assist the Agencies and banks in identifying prohibited propri-
etary trading that might occur in the context of exempt activities21; prohibits any
bank from acquiring or retaining an ownership interest in, or having certain
relationships with, a hedge fund or private equity fund (“covered fund”), subject
to some exemptions22; requires banks to establish an internal compliance program
designed to help ensure and monitor compliance with the prohibitions and restric-
tions of the statute and the Final Rule.
By including virtually all dealing positions, the Volcker rule definition of
“proprietary trading” is extremely broad. However, this prohibition is subject to
exemptions for underwriting,23 market-making activities,24 risk-mitigating
17
The term “banking entities” includes FDIC-insured depository institutions, US bank holding
companies, non-US banks with a US branch or agency, and any affiliates of the foregoing around
the globe, whether or not they are organized or located in the United States.
18
On the covered funds rule, on the choice by the legislator and regulators to use Investment
Company Act definitions to set the scope of the rule and on the critical implications of this choice,
Gerding (2015).
19
The Board of Governors of the Federal Reserve System, the Office of the Comptroller of the
Currency (OCC), Federal Deposit Insurance Corporation (FDIC), the Commodity Futures Trading
Commission (CFTC) and the Securities and Exchange Commission (SEC) (collectively, the
“Agencies”). On the Volcker Rule’s complex regulatory framework involving five government
agencies, which was undoubtedly a factor in delaying the Rule’s time to adoption, Baker (2015),
p. 433. On the implementation of the Volcker Rule as a singular test for reconciling the comple-
mentary approaches of US financial regulators, Dombalagian (2015).
20
Under the statute, “proprietary trading” involves acquiring or taking positions as principal in any
security, derivative, option or contract for sale of a commodity for future delivery for the purposes
of selling the security or position in the near term or otherwise with the intent to resell to profit
from short-term price movements.
21
The reporting requirements would be phased in based on the type and size of the firm’s trading
activities.
22
Exemptions are for investments made in connection with organizing and offering a covered
fund, making and retaining de minimis investments in a covered fund, activities of FBOs solely
outside the United States and certain other activities.
23
This exemption would require that a bank acts as an underwriter for a distribution of securities
(including both public and private offerings) and that the trading desk’s underwriting position be
related to that distribution.
24
Under this exemption, a trading desk would be required to routinely stand ready to purchase and
sell one or more types of financial instruments. A market-making desk may hedge the risks of its
market-making activity under this exemption.
hedging,25 activities of FBOs solely outside the United States and certain other
activities. The Final Rule makes other exemptions26 and clarifies which activities
are not considered proprietary trading,27 provided certain requirements are met.
Similar to the Volcker Rule, the Final Rule limits these exemptions if they involve a
material conflict of interest, a material exposure to high-risk assets or trading
strategies or a threat to the safety and soundness of the bank or to financial stability
in the United States.
Because of the reach of the term “banking entity”, all of a covered banking
organization’s operations around the world may be subject to the Volcker Rule’s
restrictions, even if the organization, or the activities in question, has limited
connection with the United States. However, the Final Rule does offer some
concessions to non-US banking organizations (hereinafter “FBOs”). These conces-
sions and the extraterritorial effects of the Final Rule will be analysed in the next
session of this Chapter.
Compared to the Final Rule, the EU Proposal differs in scope and strictness.
In 2014 the European Commission, following the Liikanen Report, proposed a
set of structural reforms prohibiting certain large EU banks from operating
standalone proprietary trading desks. The EU Proposal introduces the concept of
“core credit entity” and requires trading activity or the holding of shares in a hedge
fund to be located outside this core entity. The two entities can reside within one
group, but the core credit entity would not be permitted to hold equity in the trading
entity.
The EU Proposal is somewhat broader in scope than the Volcker Rule: it seeks to
carve out both proprietary trading and market-making, without drawing a distinc-
tion between the two.28 It is also less strict: it allows these activities to coexist with
other banking business within the same group as long as these are carried out in
separate subsidiaries.
The EU Proposal is narrow in its content. First, the Proposal prohibits only large
banks and banking groups from carrying out proprietary trading and certain related
activities. Second, in view of the challenges derived from the difficult distinction
between proprietary trading and other similar trading activities, market making in
particular, a narrow definition of activities subject to the prohibition is provided.
Third, the EU Proposal allows national authorities broad ability to grant exceptions.
Finally, most importantly for extraterritoriality effects, the European Commission
25
This exemption applies to hedging activity that is designed to reduce specific, identifiable risks
of individual or aggregated positions of the bank.
26
For example, it is allowed trading on behalf of a customer in a fiduciary capacity or in riskless
principal trades and activities of an insurance company for its general or separate account.
27
Such activities include trading solely as an agent, broker, or custodian; through a deferred
compensation or similar plan; to satisfy a debt previously contracted; under certain repurchase
and securities lending agreements; for liquidity management in accordance with a documented
liquidity plan; in connection with certain clearing activities; or to satisfy certain existing legal
obligations.
28
240 E. Cervone
can approve an exemption for banks in a jurisdiction where an equivalent regime is

in place since January 2014 (including foreign branches and subsidiaries).
The Volcker Rule appears to differ from the EU Proposal in a number of
significant respects.
Compared with the European Commission Proposal, the Final Rule seems to be
narrow in scope, but it is quite strict in general. The Final Rule applies a broader
definition with respect to European Union rules of prohibited trading: it forbids the
coexistence of such trading activities and other banking activities in different
subsidiaries within the same group; it similarly prevents investments in, and
sponsorship of, entities that could expose institutions to equivalent risks, such as
hedge funds and private equity funds. Also, the current legislation in the United
States does constrain the activities of depository institutions. For example, it
restricts banks’ dealings with affiliates, which can be seen as a degree of ring-
fencing.29
2.3 The Final Volcker Rule and Its Application to Foreign

Banks
According to the Volcker Rule, any non-US bank that operates a branch or agency
office in the United States, or that controls a US subsidiary bank, and the parent of
each such entity, is subject to the Final Rule’s restrictions.
Likely, fears of an adverse extraterritorial impact of the rule have been eased
when financial regulators jointly issued the Final Rule. The case for the extraterri-
torial application of the Volcker Rule to FBOs seems limited, when compared to the
Proposed Rule.
First, to limit the broad extraterritorial scope of the proprietary trading pro-
visions, the Final Rule permits FBOs to engage in otherwise prohibited proprietary
trading under the a “solely outside of the United States” trading exemption
(so-called SOTUS exemption). The proposal would have prohibited proprietary
trading where the transaction in question was entered into outside of the United
States by a FBO if the trade “touched” the United States in any of a number of ways,
including if it cleared through a US exchange. The Final Rule, instead, is less
restrictive in interpreting the SOTUS exemption. It adopts a risk-based, rather than
transaction-based, approach to the SOTUS standard and generally does not apply to
activity that does not involve decisions made, or risk booked, in the United States.30
Foreign transactions conducted by FBOs may be exempted from the restriction if no
29
12 CFR 223—Transactions between Member Banks and Their Affiliates (Regulation W),
implementing Sections 23A and 23B of the Federal Reserve Act of 1933. Such sections have
been substantially widened and strengthened by section 608 of the Dodd-Frank. See Vickers
(2012), p. 16.
30
Preamble, p. 5541.
financing for the transactions is provided by US affiliate and the purchase is not
conducted through any US entity. In addition, transactions could be exempted if
FBOs use exchanges based in the United States, central counterparties or
unaffiliated market intermediaries: clearing a trade through a US exchange or
swap execution facility on an anonymous basis does not impact SOTUS status
under the Final Rule. This risk-based approach is consistent with the SOTUS
exemption for proprietary trading in the statute, which focuses on trading as
principal where the purpose is to benefit from short-term price movements.
Second, the Final Rule differs from the Proposed Rule on trading sovereign debt.
Foreign authorities and banks were concerned about the adverse impact of the
Proposed Rule on the liquidity of sovereign debt markets. The Final Rule appears to
have mitigated these concerns: foreign sovereign bonds are now exempted from the
ban on trading by FBOs (within reasonable limits). Trading is permitted by the US
operations of a FBO (other than an insured depository institution) in obligations of
the home authority of the FBO31; in addition, the Final Rule provides an exemption
which would permit foreign subsidiaries (or foreign securities broker-dealer) of US
banks trading in obligations of the host country of the foreign subsidiaries
(or foreign broker-dealer).32
Third, the Final Rule permits a FBO to acquire or retain any ownership interest
in, or act as sponsor to, a covered fund so long as the activity is conducted “solely
outside of the United States” and no ownership interest in the covered fund is
offered for sale or sold to a resident of the United States.
Fourth, the Final Rule differs from the Proposed Rule on foreign public funds.
Closely related to the foreign fund exemption is the definition of foreign public
funds in the Final Rule. The Proposed Rule did not define as covered funds US
mutual funds and similar retail investment structures, but captured highly similar
non-US structures (such as non-US mutual funds). While some commenters
suggested that FBOs could organize and invest in those structures pursuant to the
foreign fund exemption, the Final Rule definitively clarifies that such structures are
not covered funds and are then entirely outside the scope of the Final Rule.33
31
This exemption promotes safety and soundness and financial stability by allowing the US
non-insured depository institution operations of FBO to facilitate the depth and liquidity of
sovereign debt of the home country of the FBO.
32
This exemption similarly promotes safety and soundness and financial stability by allowing US
banks to own and operate banks and securities broker-dealers overseas that are permitted to
facilitate liquidity in the sovereign debt of the host country of the foreign entity.
33
Milbank (2013), p. 8.
242 E. Cervone
3 “Localization”, Extraterritoriality and the Aim

for Effective Global Standards and Coordination
3.1 Economic History and the Unavoidability

of “Localization”
In view of the proliferation of reform initiatives in this context, and with a view to
prevent overlapping or incompatible measures affecting internationally active
banks, the G20 leaders in Saint Petersburg called on the Financial Stability Board
to assess cross-border consistencies and global financial stability implications of
structural banking reforms.34
However, there is scepticism about creating a system that is regulated by a single
rule. It would create a system that is vulnerable to a single set of risks.35 There is
also scepticism about the slow pace of international soft law and international
regulators’ ability to have the right incentives to control systemic risk.
The importance of preserving national regulatory regimes has been highlighted
by the G20 St Petersburg Summit.36
Local regulatory reforms are influenced by the different shapes of national banking
systems, which largely reflect economic history and the different roles banks have
played in financing economic development. Banking systems have developed differ-
ently in Anglo-Saxon countries compared to continental Europe. Whereas nearly all
attention as regards structural reform has focused on the Volcker Rule, that rule builds
on a long history in the United States of bank structural regulation.37 A discussion of
the Volcker rule should be placed in that broader context.38
Restriction and isolation of the core banking activities within broader financial
groups constitute one of the three pillars on which structural regulation in the
United States is built. The other two pillars are the separation of banking from
commerce39 and limits on the institutional concentration of the banking and
financial sector.40
34
G20 Leaders (2013).
35
Whitehead called it “destructive coordination”. Whitehead (2011), p. 323.
36
The G20 Leaders agreed that “jurisdictions and regulators should be able to defer to each other
when it is justified by the quality of their respective regulatory and enforcement regimes, based on
similar outcomes, in a non-discriminatory way, paying due respect to home country regulation
regimes”. G20 Leaders (2013).
37
European Commission, COM (2014) 43, supra, n. 4, p. 6.
38
Ibid., p. 7 and Brown (2014), pp. 1038 ff.
39
In the United States, a company that controls a bank holding company cannot engage in activities
of a commercial nature, be it directly or indirectly through a subsidiary.
40
Market concentration in the United States has historically been limited by e.g. geographic
restrictions that limited the ability of banks to establish or buy branches in other States. The
1994 Riegle-Neal Act liberalized these interstate branching limits. European Commission, COM
(2014) 43, supra, n. 4.
In continental Europe, industrialization occurred later and substantial amounts

of capital were needed to catch up with the industrial forerunners. Given that capital
markets were less developed, banks became the main source of financing to the
large corporates who required a universal set of services.41
The universal banking model, which has therefore long historical roots in the
European Union, prior to the start of the financial crisis, had accordingly gained
prominence internationally.42
3.2 The Danger of “Unilateral Extraterritoriality”
This “localization”, and differences in local regulatory reforms that depend on it,
could be a serious threat to banks. Such reforms, even when well designed, may
make the system as a whole more, instead of less, risky. There could be a tendency
to negotiate specific one-off exceptions. Migration and fragmentation are con-
stantly issues for the private sector, with pressures on their regulators to favour
their own jurisdiction.
While the rationale behind the extraterritorial effects of the Volcker Rule is that
these activities involve a high degree of risk and would pose systemic risk to the US
financial system, when the United States regulates a US entity’s conduct, wherever
that conduct takes place and whether conducted by the US-based parent or its
non-US affiliates, it regulates conduct outside the United States in a manner that
may be inconsistent with the rules applicable in the jurisdiction in which the
conduct takes place.
The Final Rule has a more “open” regulatory philosophy, which would encour-
age competition and enhance liquidity43 and transparency44 in the markets. How-
ever, the approach adopted is still too restrictive and, cutting off US financial
markets from foreign capital, it would result in the financial markets moving
offshore.
41
For further details, European Commission, COM (2014) 43, supra, n. 4.
42
For details about the historical evolution of national banking systems, see Casserley et al. (2010),
pp. 15–23; Morrison (2010); De Young (2010); Goddard et al. (2010); Goodhart (2013).
43
Allowing FBOs to access to US exchanges and clearing facilities prevents the potential adverse
impacts from possible reductions in competitiveness of or liquidity available on these regulated
exchanges and facilities, which could also harm other US market participants who trade on these
exchanges and facilities. This approach is also consistent with and reinforces the goals of the
central clearing framework of Title VIII of the Dodd-Frank Act. See Federal Reserve Staff
(2013), p. 16.
44
Prohibiting FBOs from trading on US exchanges and clearing facilities would likely reduce
transparency for trading in financial instruments in the United States. At the same time, to the
extent US intermediaries that might be counterparty to FBOs as participants in the exchange or
central counterparty are US banks subject to section 13 of the BHC Act, those US banks would
remain subject to all the restrictions of the Final Rule. Consequently, the exemption would not
introduce new risks to the US financial system. See Federal Reserve Staff (2013), p. 16.
244 E. Cervone
The Final Rule, in fact, permits an FBO to rely on the exemption (without having
to show that the trade falls into another compliance-laden exemption, such as
market-making, etc.) only if: the FBO acts as principal in the purchase or sale
outside the United States; the personnel of the bank (or its affiliates) that arrange,
negotiate, execute or decide to undertake the trade are not located in the United
States; the bank that makes the decision to purchase or sell is not located in the
United States; no financing for the bank’s purchase or sale is provided by a US
affiliate of the FBO; and the purchase or sale is not conducted with or through any
“US entity”, which includes any entity (including a branch of a foreign bank) that is
located or organized in the United States, or is controlled by or acting on behalf of
another US entity (with some exceptions).
The above assertion of unilateral extraterritoriality would enhance the concern
that the US approach ignored national sovereignty and represented a return to prior
tradition of US imperialism.45
First, the definition of US entity is broad, reaching both the US-based broker-
dealer affiliates of FBOs and any affiliate of any US banking organization or broker-
dealer. Thus, any trade intermediated or facing those entities would not qualify for
SOTUS.
Second, it does not appear that the SOTUS exemption for trading with US
entities through market intermediaries is broad enough to allow access to the US
market without use of the other exemptions. The exemption requires the transaction
to be cleared, but there will remain a wide variety of transactions, especially in the
OTC derivatives field, that will remain bilateral. If trading desks of FBOs outside
the United States must use the exemptions for market-making, underwriting or
hedging to trade in uncleared instruments with counterparties inside the United
States, they apparently will be forced to implement the detailed US-specific
Volcker compliance regime in their home (and other host) countries. Their only
alternative will be to access the liquidity of the US markets through the non-US
offices of United States banks.
Third, the availability of the SOTUS exemption continues to depend on the
physical location of FBO’s personnel involved in a trade. If an FBO’s personnel
located in the United States “arrange, negotiate or execute” a trade, SOTUS is
unavailable for that trade. This location-based restriction means that US-based
personnel cannot solicit, sell or arrange trades—no matter how little involvement
such people otherwise had with the trade—without triggering the more onerous
compliance obligations of the Final Rule.46 This focus on personnel location pre-
sents an obstacle for FBOs that wish to manage part of their business in the United
45
On the inadequacy of the SOTUS exemption to take into account the existing framework for
trading activities under US law and market structure, Massari (2015), which analyses its appli-
cation to two types of securities transactions—trades on US securities exchanges and internalized
trades—conducted by a hypothetical bank.
46
Though such personnel could engage in back-office functions such as trade clearing or settle-
ment, without being seen to be arranging, negotiating or executing a trade. Preamble, p. 5655,
fn 1521.
States while booking trades outside. Although the stated purpose of this provision is
to keep the risk of non-US proprietary trades outside of the United States, it is hard
to see how having US personnel perform some (or any) function as part of a trade
increases any risk in the United States. This provision appears to contradict a
statement in the Preamble, relating to non-US trading activities of US banks, that
“[t]he risks of proprietary trading would continue to be borne by the US bank
whether the activity is conducted . . . through units physically located inside or
outside of the United States”.47 That statement recognizes that risk lies where trades
are booked, rather than where some personnel sit. Consequently, the Final Rule will
require FBOs to use one of the other exemptions from the proprietary trading ban if
any personnel or entities based in the United States are modestly involved in the
transaction.
Fourth, the Final Rule adds a requirement, to be satisfied in order to be qualified
for a SOTUS exemption, that the trade not be financed “directly or indirectly” by
the US branch or agency of an FBO. It is difficult to justify this provision: the
Preamble merely states that it is not intended to restrict the ability of US branches
and agencies of FBOs to provide funding to their foreign head offices.48
Finally, notwithstanding the Agencies adopted many of the comments submitted
by FBOs on the Proposed Rule, the Final Rule still creates significant compliance
and reporting burdens for FBOs, in the absence of any interpretative guidance from
the Agencies and with very little deference to the equivalence of home country
legislation. FBOs with substantial trading operations in the United States will have
to submit to the relevant Agency periodic reports on the proprietary trading
activities that each trading desk conducts under available exemptions. These reports
are intended to assist the Agencies in determining whether the bank is complying
with the proprietary trading provisions of the Final Rule.49 Notably, the Final Rule
requires this data on a trading desk basis, which is defined in part as the “smallest
discrete unit of organization” of an FBO that trades a financial product. So, even if
an FBO currently collects any of this data on a consolidated basis, it may still face
considerable systems challenges to reorganize the data on a trading desk basis.50
The Volker rule’s restrictions could raise concerns on an intrusive application of
US rules extraterritorially. Extraterritoriality needs to be selective. It should be
limited to instances where there are genuine jurisdiction-specific issues to be
addressed. On the US side, there was the fear that absent extraterritoriality cover-
age, major financial institutions could park their higher risk operations outside the
United States and thus escape one of the main goals of the Dodd-Frank Act:
financial stability.
However, here the Dodd-Frank Act may reach too far. The case for the extra-
territorial application of the Volcker Rule to foreign banks is limited: it should
47
Preamble, p. 5656.
48
Ibid., p. 5655, fn 1522.
49
Milbank (2013), p. 9.
50
Ibid.
246 E. Cervone
extend only to the offshore activities of US banks (and their subsidiaries and
affiliates) and possibly to foreign banks with a major presence in the United States.
Only to the extent that the counterparty’s failure can endanger a US institution does
a basis exist (even under the statutory language of the Dodd-Frank Act) for the
United States to bar the foreign entity from proprietary trading. Even if the foreign
bank’s trading activities were planned and orchestrated in the United States, they do
not seem likely to threaten the safety and soundness of the US financial markets.
3.3 Toward Equivalence and Mutual Recognition

(or Substituted Compliance) in Developing Global
Standards
Being major financial jurisdictions, the United States and the European Union have
the right incentives to curb systemic risk. They are exposed to it. Their assertion of
extraterritorial jurisdiction is necessary to create a governance structure under
which highly mobile financial institutions cannot flee to less regulated venues.
However, authorities with such high-quality regulatory regimes should more fre-
quently rely—rather than on the “unilateral extraterritoriality” approach adopted by
the United States in the Volcker Rule—on mutual recognition arrangements with
one another and on bilateral negotiations among them and with other major
financial centres. The “unilateral extraterritoriality” approach differs consistently
with the EU approach to the regulation of foreign banks in banking structural
reforms.
The European Union adopts a mutual recognition approach based on equi-
valence decisions. The EU Proposal does have extraterritorial effects. It will
apply to EU credit institutions and their EU parents, their subsidiaries and branches,
including in third countries. It will also apply to branches and subsidiaries in the
European Union of banks established in third countries. Such a broad territorial
scope is justified to ensure a level playing field and avoid the transfer of activities
outside the Union to circumvent these requirements. However, differing from the
Volcker Rule, the EU Proposal has no unilateral extraterritorial effects. Foreign
subsidiaries of EU banks and EU branches of foreign banks could be exempted if
they are subject to measures that in the opinion of the Commission are deemed to
have equivalent effect to those in the Regulation.51 Article 4.2 foresees another
potential exemption: supervisors have been granted the power to exempt from
separation foreign subsidiaries of groups with an EU parent if those are autonomous
(with autonomous geographic decentralized structure pursuing a so called “Multi-
ple Point of Entry” resolution strategy) and if the impact of their failure would have
limited effects on the group as a whole. By applying the separation requirement
throughout the global corporate group irrespective of geographic location, the
51
European Commission, SWD (2014) 30, supra, n. 5, arts 4 and 27.
potential for banks circumventing separation by locating particular activities out-

side the European Union is eliminated.
An alternative route to mutual recognition is through the concept of “substituted
compliance”, which has been introduced and advocated by prominent doctrine52 in
the United States and applied for the first time explicitly in the Commodity Futures
Trading Commission (CFTC) interpretive guidance on cross-border application of
some swap provisions.53 According to the “substitute compliance” approach, a
foreign entity may comply as to certain entity level requirements with its home
country rules provided those are comparably robust. Mutual recognition and sub-
stituted compliance agreements allow market participants from one jurisdiction to
operate in another as long as they comply with their (essentially equivalent) home
country rules. In principle, US financial regulators could have potentially pursued a
“substituted compliance” or mutual recognition approach, with respect to the
Volcker Rule, but they did not.
By supplementing the broad territorial coverage with a third country equivalence
regime, the possible extraterritorial concerns of third country jurisdictions are
mitigated. In requiring foreign banks to separate their operations in the European
Union, a level playing field in the internal market is also ensured and thereby the
risk of unfair competition is minimized.
The EU Proposal does not envisage each party making binding declarations of
the equivalence of the other’s entire regulatory and supervisory framework, but
rather carrying out a detailed assessment of the consistency of the implementation
of each standard.54 To ensure compliance, formal adoption of legal requirements
has to be complemented with an assessment of supervisory and enforcement tools
in the country.55 The growth of domestic and regional macro-prudential super-
visory authorities such as the Federal Stability Oversight Council in the
United States and the European Systemic Risk Board in the European Union should
be able to reinforce supervision and enforcement of banks operating cross-border.
This approach allows the parties to respect each other’s regulatory models and
legal traditions, without need of changing the existing legislation and without
slowing down the current regulatory process. Incidentally, cross-border comparison
will also provide an opportunity for domestic self-assessment.56 At the same time,
this approach can ensure, if certain conditions are met, that different rules can work
together, provided that they are made consistent.57 Instead, subjecting the global
banking industry to a single set of global rules would greatly increase convergence
52
Tafara and Peterson (2007), p. 32. Greene and Pothia (2012), p. 310; Greene and Pothia
(2013), p. 338.
53
CFTC (2013).
54
Preamble of the EU Proposal, p. 19.
55
Jackson (2015), p. 185.
56
Ibid., p. 195.
57
Gallagher (2015).
248 E. Cervone
in the banks behaviour, which may result in the development of a system vulnerable
to the same risks.
In recent regulatory reforms dealing with international actors, such as credit
rating agencies,58 the European Union has taken care that mutual recognition is not
perceived to depend upon the direct equivalence, clause by clause, of the foreign
regulations to be recognized; rather it has been judged in terms of consistency of
goals and comparability of outcomes. Requiring highly literal, provision-by-provi-
sion “equivalence” determinations can paradoxically increase rather than decrease
extraterritorial effects, and, at worst, lead to extraterritorial conflicts among
jurisdictions.
This approach realizes that a strict equivalence regime would be difficult to
achieve today, when all countries are tasked with upgrading their financial systems.
Mutual recognition and substituted compliance were developed in an environment
in which countries would incentivize each other to raise standards by offering
foreigners easier access to domestic markets once regulations in their home coun-
tries were equivalent to their own. In a world of dynamic market reform, instead,
mutual recognition and substituted compliance programs should become more
robust, and provide procedural mechanisms for coordinating rule-making and
administrative processes in an ongoing, collaborative process.
It is impossible for one jurisdiction to recognize another’s regulatory regime as
equivalent if the latter has not yet taken any commensurate action. However, we
should not expect that, absent extraterritorial regulation by the United States, EU
banks will be unregulated. All countries, and private actors within them, have
incentives to cooperate to a certain extent, in order to minimize the possibility of
another financial crisis. There is a “consonance of interests”59 to “expand gains
from cooperation”,60 based on the interconnectedness of domestic economies. If all
States agree at least to not go beyond a minimum level of shared expectations, they
would tend to prevent a regulatory “race to the bottom”. Their continuous work
together will help to develop the blueprint for the international architecture of banks
cross-border activity.
To the extent that regulators have considerable discretion in appraising func-
tional equivalence, then it seems relevant that the European Union has developed a
functionally similar (while far from strictly equivalent) structural protection that
parallels the Volcker Rule: the “ring-fencing” safeguard limits which entities within
banks may engage in proprietary trading.
On the one hand, both the US and the EU jurisdictions appear to be adopting
different standards and approaches with regard to the regulation of FBOs. The UK
Regulation and the European Commission Proposal, respectively, would “ring-
fence” proprietary trading and market-making outside of the retail bank, but not
58
On extraterritoriality issues and legal assessments based on equivalence in the credit rating
industry, Cervone (2015).
59
Brummer (2010), p. 634.
60
Raustiala (2002), p. 2.
exclude them from the banking organization as a whole. We therefore still face a
situation in which US rules prohibit banks from conducting particular activities
while UK and EU rules would instead ring-fence particular activities from the
banking group.
On the other hand, however, at least they both aim to same goal of reducing
systemic risk. Financial stability is a global public good61 that provides a rationale
for a more aggressive approach to extraterritorial financial regulation. From this
perspective, the United States may be justified in prohibiting the affiliates and
subsidiaries of US banks from engaging in proprietary trading abroad, but it has
much far less justification in seeking to preclude FBOs from doing so. At most, it
can assert that proprietary trading within the United States endangers its interests.
Thus, a more limited reach of the Volcker Rule with respect to FBOs should be
endorsed.
4 Conclusions
This Chapter has investigated the practical complexities and inefficiencies arising
from the extraterritorial reach of the Volcker Rule. Such “unilateral extraterritori-
ality” leads to regulatory fragmentation. In addition to the costs imposed on banks
and the loss of efficiency in the market, it impinges on the sovereignty of jurisdic-
tions different from the United States and may conflict with their own regulatory
regimes and policy goals.
This Chapter has then analysed the extraterritorial regime based on “enlightened
equivalence”—as opposed to “unilateral extraterritoriality”—which has been
applied in the EU banking structural reforms. In terms of curving systemic risk—
which is the principal purpose of both the Volker Rule and the EU Proposal—the
two sets of legislation are functional equivalent. While those specific regulations
may differ, both the US and the EU regulators can have confidence in one another’s
regimes to achieve broadly comparable outcomes. If global standards existed,
mutual recognition among those regulators would have greatly increased regulatory
effectiveness and efficiency, especially given the increase of complexity of regu-
lations affecting cross-border transactions and firms. Where a common, cross-
jurisdiction issue is identified but there is no global standard—as in current struc-
tural reforms—it is equally important that policymakers work toward mutual
recognition of local standards.
The ability of one jurisdiction either to determine equivalence or to enter into
mutual recognition arrangements with third countries will have a material impact
on the ability of cross-border financial services activity to flourish in the post-
financial crisis era. Once the ground rules are set by those jurisdictions with the
right incentives—which should be proactive in opening a dialogue to define what
61
Trachtman (2010), p. 721.
250 E. Cervone
should constitute “sufficient” functional equivalence—they should then approach

other countries to follow their standards, rather than await a global consensus and
harmonization.
The “enlightened” equivalence regime, as envisioned in this Chapter, would lead
to more (not less) financial stability in banking structural reforms. It would close
loopholes, avoid regulatory arbitrage, stop efforts to force the European Union and
the United States into a competitive downgrading of regulation, establish better
mechanisms for supervisory cooperation and swift reaction to market develop-
ments, provide more predictable, consistent and stable regulatory approaches.
Ultimately, this assertion of “enlightened” extraterritorial authority may be an
interim stage in the longer-term development of adequate international “soft law”
standards. Mutual recognition of equivalent standards process is slow, complex, but
it might work, also in a new area such as the one of banking structural reforms.
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More Than a Friend? The European
Commission’s Amicus Curiae Participation
in Investor-State Arbitration
Olga Gerlich
Contents
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254
2 Amicus Curiae and Third Party Intervention: Two Forms of Third Party
Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255
2.1 Amicus Curiae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256
2.2 Intervention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258
2.3 Two Forms of Third Party Participation: The Case of the WTO . . . . . . . . . . . . . . . . . . . 260
2.4 Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262
3 The European Commission as Amicus Curiae in Investor-State Arbitration . . . . . . . . . . . . . 262
3.1 The Commission’s Amicus Curiae Participation in Investor-State Arbitrations . . . 262
3.2 More Than a Friend? Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264
4 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268
Abstract The European Commission sought participation as amicus curiae in a

number of recent Investor-State arbitrations. The European Commission’s amicus
participation differs substantially from the participation of the traditional amici
curiae in investment arbitration, in particular due to the European Union’s direct
interest in the result of the proceedings. This Chapter examines the differences
between amicus curiae participation and intervention through an analysis of the
European Commission’s amicus participation in four investment arbitrations:
Eureko v. Slovakia, EURAM v. Slovakia, Electrabel v. Hungary, AES v. Hungary,
and Micula v. Romania. The author of this Chapter argues that the European
Commission’s amicus curiae participation closely resembles another form of
third party participation, namely intervention, and may mark a development in
third party participation in international investment arbitration.
O. Gerlich (*)
Warsaw Bar Association, Warsaw, Poland
e-mail: gerlich.olga@gmail.com

DOI 10.1007/978-3-319-44645-5_14
254 O. Gerlich
1 Introduction
Amicus curiae participation in international investment arbitration has undergone a

substantial development over the last years. In the ground-breaking Methanex
case,1 a North American Free Trade Agreement (NAFTA) tribunal for the first
time accepted an amicus curiae submission in Investor-State arbitration proceed-
ings deriving its power to do so from its general discretion to “conduct the
arbitration in such manner as it considers appropriate”.2 Since then we have
observed a progressive opening of investment arbitration proceedings to third
party participants. International investment arbitration rules have formalised and
established criteria for amicus participation.3 Among the actors appearing as amici
in arbitration proceedings, the European Commission is a particularly
distinctive one.
The European Commission has submitted a number of amicus curiae briefs in
the past4 as well as in the ongoing international investment arbitrations.5 The
Commission’s participation in the proceedings differs substantially from the
1
Methanex v. the United States, (NAFTA) UNCITRAL, Decision of the Tribunal on Petitions from
Third Persons to Intervene as Amici Curiae, 15 January 2001.
2
Art 15(1) of 1976 UNCITRAL Arbitration Rules, now art 17(1) of the UNCITRAL Arbitration
Rules (as revised in 2010).
3
NAFTA Free Trade Commission, Statement of the Free Trade Commission on Non-disputing
Party Participation (7 October 2003) 44 ILM 796; Rule 37(2) of the ICSID Arbitration Rules
(2006); UN doc. A/RES/68/109 UNCITRAL Rules on Transparency in Treaty-based Investor-
State Arbitration, 16 December 2013, (UNCITRAL Transparency Rules); UN doc. A/RES/69/116,
United Nations Convention on Transparency in Treaty-based Investor-State Arbitration (adopted
on 10 December 2014, not yet in force) (UN Transparency Convention).
4
Achmea B.V. v. Slovakia, UNCITRAL, PCA Case No. 2008-13 (formerly Eureko
B.V. v. Slovakia), Award, 7 December 2012; AES Summit Generation Limited and AES-Tisza
Er€om€u Kft v. Hungary, ICSID Case No. ARB/07/22, Award, 23 September 2010; Electrabel
S.A. v. Republic of Hungary, ICSID Case No. ARB/07/19, Award, 25 November 2015; Ioan
Micula, Viorel Micula, S.C. European Food S.A, S.C. Starmill S.R.L. and S.C. Multipack
S.R.L. v. Romania, ICSID Case No. ARB/05/20, Award, 11 December 2013; European American
Investment Bank AG v. Slovakia, UNCITRAL, PCA Case No. 2010-17, First and Second Award on
Jurisdiction, 22 October 2012, 4 June 2014; U.S. Steel Global Holdings I B.V. v. Slovakia,
UNCITRAL, PCA Case No. 2013-6, discontinued, 16 June 2014; EDF International
S.A. v. Hungary, UNCITRAL, Award, 4 December 2014.
5
According to the Investment Arbitration Reporter, the Commission sought to participate in five
arbitration proceedings initiated by renewable energy investor against the Czech Republic: Antaris
and others v. the Czech Republic, UNCITRAL administered by the PCA (registered 8 May 2013);
Natland Investment Group and others v. the Czech Republic, UNCITRAL ad hoc (registered
8 May 2013); I.C.W. Europe Investments Ltd v. the Czech Republic, UNCITRAL ad hoc (regis-
tered 8 May 2013); Voltaic Network GmbH v. the Czech Republic, UNCITRAL ad hoc (registered
8 May 2013); Photovoltaik Knopf Betriebs-GmbH v. the Czech Republic, UNCITRAL ad hoc
(registered 8 May 2013); WA Investments-Europa Nova Limited v. the Czech Republic,
UNCITRAL ad hoc (registered 8 May 2013); see Peterson (2014a). According to the same source,
the Commission is likely to have participated as amicus curiae in investment arbitrations against
Spain involving solar power investments. See Peterson (2014b).
More Than a Friend? The European Commission’s Amicus Curiae. . . 255
participation of the usual amici, in particular in terms of the European Union’s

(EU) direct interest in the outcome of the proceedings. Furthermore, in contrast to
cases where public interest groups appeared as amici curiae, the Commission’s
position has an actual impact on the tribunals’ reasoning in that the arguments
raised by the Commission tend to be carefully analysed by the tribunals.6 In fact, it
can be argued that the European Commission’s amicus participation comes close to
another form of third party participation, namely, intervention. Intervention is not
available under the arbitration rules applicable in investment arbitration.7 The
Commission’s resourceful use of the amicus curiae mechanism may mark a new
stage of the development of third party participation in investment arbitration as it
shows that the amicus curiae mechanism may be used in an intervener-like manner.
The present Chapter seeks to explore the European Commission’s use of amicus
curiae mechanism in Investor-State arbitration and compare it to intervention in
other types of international adjudication. The article is divided into two sections.
The first section will introduce the concept of third party participation and its two
forms: amicus curiae and intervention. The second section will present an overview
of the European Commission’s amicus participation in international investment
arbitration and analyse its distinct features. It will focus on the concluded cases
in which materials concerning the Commission’s participation have been released
(Eureko v. Slovakia, EURAM v. Slovakia, Electrabel v. Hungary, AES v. Hungary,
and Micula v. Romania).
2 Amicus Curiae and Third Party Intervention: Two Forms

of Third Party Participation
The notion of third party participation denotes participation in the proceedings of a

party who is neither a claimant nor a respondent. The reasons for allowing third
party participation relate to the recognition of the fact that, although the decision is
binding only between the parties to the dispute, the outcome of the proceedings can
influence the position of third parties. The involvement of these parties in the
disputes can mitigate the risk of repetitive proceedings and making contradictory
determinations based on similar facts. Including third parties in the proceedings
6
On the impact of the submissions of other amici curiae on the decisions of the investment
arbitration tribunals, see Ishikawa (2010), pp. 406–409.
7
With the exception of the 1899 and 1907 Conventions for the Pacific Settlement of International
Disputes which provided that in arbitrations involving the “interpretation of a Convention to which
Powers other than those in dispute are parties”, those powers had a right to intervene in the dispute.
Article 56 of the Convention for the Pacific Settlement of International Disputes (adopted 29 July
1899, entered into force 4 September 1900) 32 Stat. 1779; art 84 of the Convention for the Pacific
Settlement of International Disputes (adopted 18 October 1907, entered into force 26 January
1910) 36 Stat. 2199. The right of intervention under these conventions has never been invoked. See
Baetens (2013), p. 336.
256 O. Gerlich
also allows to avoid a situation where the adjudicator determines their rights as a
possible preliminary issue in a dispute that they are not parties to. The concentration
of participants is particularly significant if the decision is likely to be treated as a de
facto precedent by other adjudicators. With regard to third party participation in
international investment arbitration the notions of amicus curiae and third party
intervention are sometimes used interchangeably.8 However, in some domestic and
international jurisdictions these two terms refer to distinct procedural mechanisms.
This section will demonstrate that both forms of participation differ in their
function and scope of application.
2.1 Amicus Curiae
The term amicus curiae (Latin for “friend of the court”) is used to describe a third
party who has an interest in the subject matter of a dispute and has been allowed by
the adjudicators, at their discretion, to participate in the proceedings. Amicus
participation is justified on the basis that the third party is in a position to provide
the court or tribunal with an additional perspective or expertise regarding the
dispute. Amici curiae are commonly heard in the common law jurisdictions.9 The
English amicus curiae is an independent lawyer, advocating no position in the
dispute, who is appointed by the court to address an issue of law on which it lacks
assistance.10 The role of such amicus resembles a court-appointed expert.11 How-
ever, in the United States, the role of amicus curiae has shifted to become a form of
advocacy for a third party interest on part of certain public interest group.12 Amici
curiae in the second meaning have appeared before some of the international
adjudicatory bodies. While the International Court of Justice (ICJ) does not allow
amici to participate in the proceedings, their participation is widely accepted in
judicial and quasi-judicial bodies such as the European Court of Human Rights and
the World Trade Organization (WTO).13 Amici curiae who most frequently seek
participation in international dispute settlement proceedings are NGOs, industry
associations, academic institutions and private individuals. The forms of participa-
tion of amici curiae in these proceedings vary between different fora. They can
include requests to make written and oral submissions, to obtain access to case
materials, as well as to attend hearings.14
8
See, e.g. Levine (2011), p. 201.
9
Mourre (2006), p. 257.
10
Blackaby and Richard (2010), p. 257.
11
Ibid.
12
Ibid. See also Steger (2002), p. 420.
13
For an overview of amicus curiae participation before international courts and tribunals see
Bartholomeusz (2005).
14
Ibid.
Initially, arbitration rules applicable in Investor-State arbitration did not provide

for a possibility of amicus curiae participation in the arbitration proceedings. This
is connected with the fact that arbitration rules applicable in Investor-State arbitra-
tion are primarily designed for commercial arbitration which is a mechanism for
settling purely private disputes. One of the hallmarks of this type of arbitration is its
confidentiality.15 The controversy lies in the fact that, unlike most commercial
arbitrations, investment arbitrations often concern implementation of governmental
policies promoting important public interest objectives.16 Some commentators
suggested that amicus curiae participation and increased transparency could rem-
edy the problems of the frequently assumed deficits of legitimacy and accountabil-
ity in international investment arbitration.17 As a response, in recent years a gradual
“opening of the doors” of arbitral tribunals to third party participants can be
observed. Due to the lack of specific arbitration rules allowing for their participa-
tion, the first appearances of amici curiae in arbitration proceedings were based on
general discretion of arbitral tribunals.18 These developments were followed by the
formalisation of the rules on amicus participation via the NAFTA Free Trade
Commission Statement,19 the amendment to the ICSID Arbitration Rules in
2006,20 the inclusion of the provisions on amicus participation in international
investment agreements,21 and most recently, in the adoption of the UNCITRAL
Rules22 and the Convention on transparency.23
On the basis of the current regulations on amicus participation under the
arbitration rules, the following general admission criteria for amici curiae can be
distinguished:
15
Levine (2011), p. 204.
16
Ibid., p. 200.
17
See, e.g.: VanDuzer (2007); Zachariasiewicz (2012). Generally, on legitimacy deficit in
Investor-State arbitration Franck (2005).
18
In Methanex the Tribunal based its ability to accept amicus submission on its competence to
“conduct the arbitration in such manner as it considers appropriate, provided that the parties are
treated with equality and that at any stage of the proceedings each party is given a full opportunity
of presenting his case” under art 15.1 of the UNCITRAL Arbitration Rules, supra, n. 1. Likewise,
in Suez v. Argentina, the first ICSID case where an amicus brief was accepted, the Tribunal derived
its power from ICSID Arbitration Rule 44 which provides that “. . . [i]f any question of procedure
arises which is not covered by this Section or the Arbitration Rules or any rules agreed by the
parties, the Tribunal shall decide the question”. Suez, Sociedad General de Aguas de Barcelona,
S.A. and Vivendi Universal, S.A. v. the Argentine Republic, ICSID Case No. ARB/03/19, Order in
Response to a Petition for Participation as Amicus Curiae, 19 May 2005, paras 10–16.
19
Supra, n. 3.
20
Ibid.
21
See, e.g. art 39 of the Canadian 2004 Model Foreign Investment Promotion and Protection
Agreement (2004) http://italaw.com/documents/Canadian2004-FIPA-model-en.pdf (accessed
29 January 2016); art 29 of the US Model Bilateral Investment Treaty (2012) http://www.italaw.
com/sites/default/files/archive/ita1028.pdf (accessed 29 January 2016).
22
Supra, n. 3.
23
Ibid.
258 O. Gerlich
– the submission must assist the tribunal in its determination of factual or legal
issues by bringing a perspective, particular knowledge or insight that is different
from that of the disputing parties;
– the submission must address a matter within the scope of the dispute;
– the amicus has a significant interest in the proceeding.24
Amici curiae in Investor-State arbitrations often request to file written submis-
sions, to obtain access to case materials and to be heard at (or, at least, attend)
hearings.25 However, in Investor-State arbitration the participation of amici is often
limited to written submissions.26 The extent of amici’s rights in investment arbi-
trations depends not only on the scope of rights granted to amici in the applicable
arbitration rules. Some procedural rights of the amici, like attending the hearings,
are dependent on the discretionary decisions of the parties to a dispute.27
2.2 Intervention
Intervention signifies a third-party participation in the proceedings due to the third

party’s direct interest in the underlying legal issue and upon the initiative of the
third party.28 Generally, intervention in international dispute settlement is limited to
States.29 Two types of intervention can be distinguished in the instruments pre-
scribing jurisdiction of international courts and tribunals: (1) intervention where a
third party considers that it has an interest which may be affected by the decision
and (2) intervention where the interpretation of a treaty to which one or more third
States also are party is in question. These two types of intervention are clearly
24
Art 37.2 of the ICSID Arbitration Rules, supra, n. 3; art 4 of the UNCITRAL Transparency
Rules, supra, n. 3; paragraph 6 of Statement of the NAFTA Free Trade Commission on
non-disputing party participation, supra, n. 3.
25
Bastin (2014), p. 133.
26
Ibid., pp. 140–141, 142–143.
27
E.g. in accordance with Rule 32(2) of the ICSID Arbitration Rules, unless the parties to the
dispute agree otherwise the hearings are held in camera.
28
Zimmermann (2006), para 1.
29
See arts 62 and 63 of the Statute of the International Court of Justice (adopted 26 June 1945,
entered into force 24 October 1945) 1 UNTS 993; art 36.1 of the European Convention for the
Protection of Human Rights and Fundamental Freedoms (4 November 1950, entered into force
3 September 1953) ETS 5, UNTS 221; art 10 of the Dispute Settlement Agreement Understanding
(15 April 1994, entered into force 1 January 1995) 1869 UNTS 401, 33 ILM 1226. Art 42.3 of the
ICJ Rules of Court which allows an intervention by a public international organisation and the
appearances of the European Communities in WTO dispute settlement proceedings (the European
Communities are a WTO Member) should be noted as an exception to this general rule.
distinguished in arts 62 and 63 of the ICJ Statute and are sometimes referred to as
“discretionary intervention” with regard to the first type and “intervention as of
right” with regard to the second.30
The type of interest qualifying a third party participant to pursue the first type of
intervention varies depending on a particular forum. Article 62 of the ICJ Statute
requires an intervener to demonstrate a legal interest in the dispute which may be
affected by the decision in the case.31 Under art 10 of the Dispute Settlement
Understanding (DSU) manifesting a substantive factual interest in the matter before
a panel suffices for a WTO Member to participate in the proceedings as a third
party.32 Intervention under art 36.1 of the European Convention on Human Rights
(ECHR) gives a third party a right to intervene in the proceedings only to a home
State of an applicant; under art 36.2 other contracting parties to the ECHR may
intervene upon discretion of the President of the Court if such intervention is in the
interest of the proper administration of justice.33 The second type of intervention
implicitly recognises the interest of a non-disputing third party in a bilateral dispute
through the interpretation of its treaty commitments.
The intervention of a non-disputing party to investment arbitration based on its
direct interest in the dispute is absent from the rules applicable in investment
arbitrations. However, the rules for the second form of intervention can be found
in some international investment agreements, for example in art 1128 of the
NAFTA.34 Pursuant to this provision, on written notice to the disputing parties, a
non-disputing NAFTA party may make submissions to a tribunal on a question of
interpretation of the Agreement.
Once allowed to participate, an intervener can participate in the proceedings
only with regard to the subject matter of the intervention. Unless explicitly provided
otherwise, the decision delivered in the proceedings in which a non-disputing party
has intervened does not have a res judicata effect on the third party.35 By being
allowed to intervene a State does not acquire the status and privileges of a party to
the dispute. Therefore, for example, third parties are not entitled to nominate an ad
hoc judge in the ICJ or to object to the composition of a panel in the WTO. They
enjoy a limited range of procedural rights aimed at communicating their interest in
30
Chinkin (1986), p. 496.
31
Supra, n. 29.
32
Arend (2006), p. 376.
33
Supra, n. 29.
34
See also art 5 of the UNCITRAL Transparency Rules, supra, n. 3.
35
See art 62.2 of the ICJ Statute, supra, n. 29.
260 O. Gerlich
the matter to the adjudicator. In accordance with arts 85 and 86 of the ICJ Rules of
Court,36 a third party whose submission to intervene was accepted is supplied with
copies of parties’ pleadings and documents annexed to them. It is also allowed to
make written and oral statements on the subject-matter of the intervention. The
scope of rights of an intervener under art 36 of the ECHR includes a right to submit
written comments and to take part in hearings.
2.3 Two Forms of Third Party Participation: The Case

of the WTO
The amicus curiae participation and intervention are easily distinguishable in the
WTO dispute settlement procedure. Moreover, the WTO dispute settlement is a
forum where both forms of participation are frequently used. Therefore, the practice
of the panels and Appellate Body (AB) provides a useful illustration of the
diverging natures of amicus curiae participation and intervention.
The DSU does not contain a specific provision dealing with amicus curiae
participation in the proceedings. The AB derived its competence to accept amicus
briefs from the comprehensive nature of a panel’s “right to seek information and
technical advice from any individual or body which it deems appropriate” under art
13.1 of the DSU.37 The competence of the panels to accept amicus submissions
relates to their duty to make an objective assessment of the matter in dispute.38
Amicus curiae submissions in the WTO are an instrument that serves to assist the
panels and the AB in gathering the necessary information and expertise, not a
devise protecting the interests of private parties appearing as amici. NGOs and
private individuals do not have rights of participation in dispute settlement pro-
ceedings; therefore they have no right to be heard by the panel.39 It is within the
panel’s discretionary authority either to accept and consider or to reject amicus
submissions.40 Thereby, a panel has no obligation to take into account amicus
curiae submissions.
Article 10.2 of the DSU explicitly allows for intervention by third parties in the
WTO proceedings:
Any Member having a substantial interest in a matter before a panel and having notified its
interest to the DSB (Dispute Settlement Body) . . . shall have an opportunity to be heard by
36
International Court of Justice, Rules of the Court (adopted 14 April 1978, entered into force
1 July 1978) (1978) 17 ILM 1286.
37
WTO doc. WT/DS58/AB/R, Appellate Body Report, US – Import Prohibition of Certain Shrimp
and Shrimp Products, 12 October 1998, paras 102–110.
38
Steger (2002), p. 421.
39
WTO doc. WT/DS58/AB/R, supra, n. 37, paras 40–41.
40
Ibid., para 108.
the panel and to make written submissions to the panel. These submissions shall also be
given to the parties to the dispute and shall be reflected in the panel report.
The possibility of intervention is restricted to the WTO Members only. The

substantial interest in terms of art 10.2 which allows a third party to intervene is not
to be understood as a legal interest, but as any factual interest in the matter at
issue.41 The scope of rights granted to third parties under art 10 and Appendix 3 of
the DSU encompasses the right to make third party submissions, to present their
views during a session of the first substantive meeting of the panel set aside for that
purpose, and to receive parties’ submissions to the first panel meeting.42 Third
parties who have notified their interest in the panel proceedings may make sub-
missions to, and have an opportunity to be heard by the AB at the appellate review
of the panel report.43 Article 10 of the DSU makes clear that third parties do not
become disputing parties. Third parties cannot make claims before a panel44 and
they cannot appeal a panel report.45 If a third party considers that a measure which
is subject to an ongoing panel proceedings impairs its rights under the WTO
covered agreements, it may take recourse to normal dispute settlement procedures
and become a party to the proceedings.46
The example of the WTO dispute settlement mechanism shows that amicus
curiae participation and intervention differ in their function. Amicus curiae partic-
ipation is justified on the basis of the adjudicator’s duty to seek information in order
to ensure an objective assessment of the matter.47 The function of intervention is to
ensure that the interests of the WTO Members who are not parties to the pro-
ceedings are taken into consideration. Permitting an amicus curiae to file a sub-
mission lies within the discretionary power of the adjudicator. Unlike third parties,
amici curiae do not become participants in the dispute. Thus, unlike third parties,
they do not have a right to be heard by the panel.48 Even if the panel allows for
amicus briefs, it is under no obligation to take them into consideration, while art
10.2 of the DSU provides that third party submissions “shall be reflected in the
panel report”. The more limited scope of amici’s procedural rights as compared to
third parties follows their non-participant status in the dispute.
41
Arend (2006), p. 376.
42
Art 10.2 and Appendix 3, para 6 of the DSU.
43
Art 17.4 of the DSU.
44
Arend (2006), p. 374.
45
46
47
Steger (2002), p. 420, see art 11 of the DSU.
48
WTO doc. WT/DS138/AB/R, Appellate Body Report, US – Imposition of Countervailing Duties
on Certain Hot-Rolled Lead and Bismuth Carbon Steel Products Originating in the United
Kingdom, 10 May 2000, para 41.
262 O. Gerlich
2.4 Assessment
The first and main difference between the position of an amicus curiae and an
intervener is the rationale justifying their participation in the proceedings—an
amicus curiae has no protected legal interest which would entitle him to take
position as to the underlying legal issue in the dispute.49 Amici curiae cannot be
considered interveners as they do not vindicate their own rights.50 Their participa-
tion in the proceedings is justified by their ability to assist the adjudicator in making
factual and legal determinations in the case. This leads to the second difference,
which is that the participation of amici curiae is always left to the discretion of the
adjudicator. Only the adjudicator can determine whether the participation of a
particular amicus would assist it in making its decision. Conversely, at least at
some instances, the participation of an intervener in the proceedings constitutes a
right of the non-disputing party whose rights might be affected by the decision in
the dispute. Thirdly, because of their indirect interest in the dispute, the extent of the
procedural rights granted to interveners is wider than that granted to amici curiae.
The instrument of amicus curiae is known to Investor-State arbitration. It has
developed dynamically over the past years. The rules applicable in investment
arbitration did not envisage a possibility of intervention of a non-disputing party
based on its direct interest in the dispute which would be equivalent to the
intervention under art 62 of the ICJ Statute. However, there are provisions granting
a right of intervention based on construction of an investment agreement to which
an intervener is a party, such as art 1128 of the NAFTA.
3 The European Commission as Amicus Curiae in Investor-

State Arbitration
3.1 The Commission’s Amicus Curiae Participation

in Investor-State Arbitrations
The European Commission filed amicus submissions in past as well as in ongoing

Investor-State arbitrations. The cases involving the Commission’s participation can
be divided into two groups: the cases arbitrated under intra-EU bilateral investment
agreements and the cases decided under the Energy Charter Treaty.51 Within the
first group, Eureko and EURAM arose from the Slovak government’s regulatory
restrictions imposed on the health insurance market that previously underwent a
49
Zimmermann (2006), para 1.
50
Francioni (2009), p. 741.
51
Energy Charter Treaty (adopted 17 December 1994, entered into force 16 April 1998) 20 UNTS
95.
substantial liberalisation.52 In Micula the claimants contested the withdrawal and

amendment of certain regional investment incentives by the Romanian government
as part of harmonisation with the EU legal order.53 With regard to the second group,
the arbitrations initiated by Electrabel and AES against Hungary concerned termi-
nation of long-term power purchase agreements by Hungarian authorities in the
power generation sector.54 This termination was a result of the European Commis-
sion’s finding that these generous deals operated as a form of State aid, contraven-
ing EU competition law.
The tribunals in these arbitrations had to deal with the issue of an overlap
between EU law and international investment treaties. The European Commission
made observations on jurisdiction, applicable law, and enforceability of the awards.
The European Commission’s commented on the implications of accepting EU
law as part of the applicable law in the disputes. The Commission claimed that in
accordance with the principle of supremacy of EU law, EU law takes precedence
over any other inconsistent norm of an international agreement to which an EU
Member State is a party.55 Because of the supremacy of the EU legal order over
other international law obligations of the EU Member States, the principle of pacta
sunt servanda does not apply to BITs concluded between the EU Member States.56
With regard to the jurisdiction, the courts of the EU are the only courts which can
decide a dispute involving questions concerning the application of EU law. Under
art 344 of the Treaty on the Functioning of the EU, the EU Member States are
forbidden to subject disputes involving the questions of EU law to any other method
of dispute settlement than the proceedings before the Court of Justice of the EU.57
Furthermore, allowing an EU investor to bring claims against an EU Member State
could lead to a discrimination between investors from different Member States
which is prohibited under EU law as some investors are covered by BITs and
granted the opportunity to resort to investment arbitration while others are not.58
The Commission warned that the arbitrations where the investor’s claims arose in
52
Achmea B.V. v. Slovakia, Award on Jurisdiction (formerly Eureko B.V. v. the Slovak Republic),
UNCITRAL, PCA Case No. 2008-13, Award on Jurisdiction, Arbitrality and Suspension,
26 October 2010; European American Investment Bank AG v. Slovakia, UNCITRAL, PCA Case
No. 2010-17, Award on Jurisdiction, 22 October 2012.
53
Ioan Micula, Viorel Micula, S.C. European Food S.A, S.C. Starmill S.R.L. and S.C. Multipack
S.R.L. v. Romania, ICSID Case No. ARB/05/20, Award, 11 December 2013.
54
Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable
Law and Liability, 20 November 2012; AES Summit Generation Limited and AES-Tisza Er€ om€u Kft
v. Hungary, ICSID Case No. ARB/07/22, Award, 23 September 2010.
55
Eureco, supra, n. 52, para 180; Electrabel, supra, n. 54, para 4.109, EURAM, supra, n. 54, para
118.
56
Eureco, supra, n. 52, para 180, EURAM, supra, n. 54, para 118.
57
Ibid., para 178; Electrabel, supra, n. 54, para 5.20; Eureco, supra, n. 52, para 178.
58
Eureco, supra, n. 52, para 183.
264 O. Gerlich
connection with the adjustments of domestic legislation to EU law could result in

unenforceable awards.59 If a tribunal was to make a decision that would conflict
with the obligations of a Member State arising from EU law, the award could not be
implemented on the grounds of public policy which includes the principle of
supremacy of EU law.60
3.2 More Than a Friend? Assessment
In the examined cases the European Commission represented the EU’s interest. The
Commission presented itself as a guardian of the exclusive jurisdiction of the Court of
Justice of the EU on adjudging disputes involving questions of EU law and supremacy
of the EU’s legal order over other international obligations of the Member States.
Indeed, the Commission’s function accorded to it by the EU treaties is to promote the
general interest of the EU and oversee the application of EU law.61 Although the
Commission referred to several other general objectives in its submissions, such as
preventing the fragmentation of international law and forum shopping,62 they seem
only ancillary in the light of the primary goal of protection of the EU legal order.
The role of the Commission as amicus curiae is far from the definition of amicus
as “a form of advocacy for a third party interest on part of certain public interest
groups” cited above.63 The European Commission’s direct interest in the outcome
of the proceedings differentiates it from the traditional amici who are public interest
groups. The requirement of a “significant interest in the proceedings”, being a
prerequisite for participation as amicus curiae, can be interpreted to allow partic-
ipation of amici curiae representing a broad public interest as well as those whose
rights would be directly affected by the arbitral decision. The nature of involvement
of the latter category of amici resembles that of intervention before international
judicial bodies.
The example of the European Commission shows that where the procedural
rules do not allow for a proper intervention, the amicus curiae mechanism can be
used in an intervention-like manner. A precedent for such use of the amicus
instrument was established in WTO EC – Sardines case.64 In this case a WTO
Member, Morocco, filed an amicus curiae brief to the AB. Morocco could not
participate in the AB proceedings as it did not notify its interest as a third party in
59
Electrabel, supra, n. 54, paras 4.110 and 5.16; Micula, supra, n. 53, paras 334–336, EURAM,
para 116.
60
Ibid.
61
Art 17(1) of the Treaty on Functioning of the European Union.
62
Eureco, supra, n. 52, para 85.
63
See supra, para 2.1 of this Chapter.
64
WTO doc. WT/DS231/AB/R, Appellate Body Report, EC – Trade Description of Sardines,
26 September 2002, para 164.
the earlier proceedings before the panel.65 The AB found itself competent to accept
such amicus submission. However, the AB also stated that it is under no obligation
to treat a WTO Member who acts as amicus in a more favourable manner than any
other amicus curiae.66 It emphasised that it was Morocco’s choice to act not as a
third party, but as an amicus curiae and this entails the restriction of its rights in the
proceedings.67 The AB found that it is under no obligation to consider such amicus
submission.68
The European Commission’s amicus participation in the investment arbitration
is not only a substitute for a possibility of a proper intervention, but also a substitute
for achieving its immediate goal within the EU. The European Commission’s
involvement in the investment arbitrations follows its inability to achieve the
termination of all intra-EU BITs by the EU Member States.69 Effectively, a similar
result could be accomplished if the investment arbitration tribunals would deter-
mine a general lack of jurisdiction in the intra-EU BIT disputes because of the
issues of EU law involved in the disputes.
The European Commission is not the only amicus that seeks to promote its own
immediate interest in investment arbitration. A direct interest in the outcome of
arbitration was the rationale for participation of indigenous groups as amici curiae
in several Investor-State arbitrations. In Glamis Gold the Quechan Indian tribe filed
an amicus brief with the tribunal.70 The tribe opposed the investor’s project because
it would destroy the “Trail of Dreams”, being part of a network of tribal ceremonial
paths and sacred sites, in consequence preventing the tribe from practicing its
cultural and religious traditions. In the more recent Bernhard von Pezold case,
four indigenous communities, the Chikukwa, Ngorima, Chinyai, and Nyaruwa
peoples, sought participation in proceedings against Zimbabwe.71 These cases
raised a discussion as to whether intervention would not be a more suitable
instrument of participation than amicus curiae, to protect the immediate interest
of indigenous peoples in investment arbitrations.72
However, the European Commission’s participation differs from other amici
curiae representing their direct interests. Unlike the indigenous groups, the EU is an
actor in the field of international investment law. The Lisbon Treaty which entered
into force in December 2009 granted the EU the exclusive competence in the field
65
See art 17 of the DSU.
66
WTO Doc. WT/DS231/AB/R, supra, n. 64, para 164.
67
Ibid., para 166.
68
Ibid., paras 167, 170.
69
See Eureko, supra, n. 52, para 82.
70
Methanex, supra, n. 1.
71
Border Timbers Limited, Border Timbers International (Private) Limited, and Hangani Devel-
opment Co. (Private) Limited v. Zimbabwe, ICSID Case No. ARB/10/25, Procedural Order No
2, 26 June 2012.
72
See Triantafilou (2009); Wieland (2011).
266 O. Gerlich
of foreign direct investment.73 The European Commission is now responsible for

negotiating and concluding investment treaties to which the EU is a party.74 In
accordance with the recently adopted regulation, the Commission will also repre-
sent the Member States in the arbitration proceedings resulting from breaches of
these agreements.75 The involvement of the EU as an actor in the field of interna-
tional investment law is evident in the example of Energy Charter Treaty. As duly
noted by the tribunal in Electrabel, the EU is not only a party to the Energy Charter
Treaty, but it was also its main architect. Despite of its broad investment compe-
tence, the EU will struggle against the institutional structure of international
investment arbitration system which is not suited for the participation of a supra-
national organisation. For instance, the proceedings under the ICSID Convention
are open only to States.76
Amici’s assistance in an Investor-State arbitration is only as effective as the
tribunal’s willingness to take their position into account. The submissions of public
interest groups, the traditional amici, usually do not find broader reflection in the
awards made. This is different in the case of the Commission’s submissions. The
tribunals extensively cite and analyse the submissions of the Commission in their
awards.77 There is no doubt about the Commission’s superior expertise on the
matters concerning the application of EU law. However, the Commission’s impact
on the tribunals’ reasoning might also be reinforced by the recognition of the EU’s
stake in the arbitration. As stated by the tribunal in Electrabel:
it is unfortunate that the European Commission could not play a more active role as a
non-disputing party in this arbitration, given that . . . the European Union is a Contracting
Party to the ECT in which it played from the outset a leading role; and, moreover, that the
European Commission’s perspective on this case is not the same as the Respondent’s and
still less that of the Claimant. In short, the European Commission has much more than “a
significant interest” in these arbitration proceedings.78
73
Art 207 of the Treaty on Functioning of the European Union.
74
Ibid.
75
Regulation (EU) No 912/2014 of the European Parliament and of the Council of 23 July 2014
establishing a framework for managing financial responsibility linked to Investor-to-State dispute
settlement tribunals established by international agreements to which the European Union is party,
OJ L 257/121.
76
Convention on the Settlement of Investment Disputes Between States and Nationals of other
States (adopted 18 March 1965, entered into force 14 October 1966) 575 UNTS 159, art 67.
However, the EU textual proposal for the investment chapter of the Transatlantic Trade and
Investment Partnership envisages arbitration in accordance with the ICSID Convention. See art
6.2 of the EU textual proposal for the Transatlantic Trade and Investment Partnership, Chapter II
Investment, 12 November 2015 http://trade.ec.europa.eu/doclib/docs/2015/november/tradoc_
153955.pdf (accessed 19 April 2016).
77
Electrabel, supra, n. 54, paras 4.89–4.110, 5.8–5.20; Eureko, supra, n. 55, paras 175–196;
EURAM, supra, n. 52, paras 116–120. However, the arguments raised by the European Commis-
sion were not analysed in a similar manner by the tribunal in AES v. Hungary arbitration. It only
indicated that: “[t]he Tribunal also acknowledges the efforts made by the European Commission to
explain its own position to the Tribunal and has duly considered the points developed in its amicus
curiae brief in its deliberations”. AES, supra, n. 54, para 8.2.
78
The Commission’s singular position does not cause it to be granted a wider

spectrum of rights than the usual amici. For instance, the tribunal in AES denied the
Commission’s request to receive copies of the parties’ written submissions as the
parties to the dispute had not reached an agreement on this issue.79
4 Conclusions
Technically, the European Commission is not an intervener in Investor-State

arbitrations, but neither is it a typical amicus curiae. The European Commission’s
participation combines the rationale used for intervention in other types of inter-
national adjudication with the extent of rights available to amici curiae in invest-
ment arbitration. It also has a more significant impact on the tribunals’ awards that
any other amicus in investment arbitrations. The atypical nature of the Commis-
sion’s amicus participation relates to the singular position of the EU on the
international plane.
The European Commission’s involvement marks a new development in the use
of amicus curiae instrument in Investor-State arbitration. The European Commis-
sion’s resourceful use of amicus participation which supplements a procedure for
intervention that is absent in Investor-State arbitration also provides an illustration
of the dynamics in this not yet mature legal field. From the outset, amicus curiae has
served as an instrument remedying the deficiencies of the institutional design of
international investment arbitration. The European Commission amicus participa-
tion demonstrated its ability to adjust to the changing reality of international
investment arbitration and to address the evolving needs of its actors. The analysed
cases could constitute a new stage in the development of third party participation in
Investor-State arbitration.
The Commission’s amicus participation should also open a discussion on
whether there is room for intervention as a more advanced form of third party
participation in Investor-State arbitration. This article identified that one form of
intervention is present in Investor-State arbitration. It allows a non-disputing party
who is a party to the investment agreement in question to present its views on the
interpretation of the agreement. It should be considered whether the rules applica-
ble in Investor-State arbitration should include a second type of intervention—
introducing a special category of third party participants who have a direct stake in
the disputes. The immediate interest of these interveners in the dispute would be
recognised by the tribunals by according them a wider range of procedural rights
than those usually granted to amici curiae.
The need for a more advanced form of third party participation in investment
arbitration was addressed by the EU in its textual proposal for the Transatlantic
Trade and Investment Partnership Agreement.80 Intervention is one of the forms of
79
AES, supra, n. 54, para 3.22.
80
Supra, n. 76.
268 O. Gerlich
third party participation envisaged in the proposal, along with the non-disputing
party81 and amicus curiae participation.82 Article 23 of the proposal allows for
intervention of “any natural or legal person which can establish a direct and present
interest in the result of the dispute (intervener)”. Article 23(3) and (4) of the
proposal specify the extent of procedural rights granted to interveners. An inter-
vener has a right to receive a copy of every procedural document served on the
disputing parties, submit a statement of intervention, attend hearings, make an oral
statement, as well as to intervene before an Appeal Tribunal in case that an appeal
was filed.
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Chinkin CM (1986) Third party intervention before the international court of justice. Am J Int’l L
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Ibid., art 22.
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amici-curiae-in-investment-arbitration/. Accessed 29 Jan 2016
VanDuzer JA (2007) Enhancing the procedural legitimacy of investor-state arbitration through
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& D 3:334–366
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the transparency of investment dispute resolution? JIA 29(2):205–224
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Wolfrum R (ed) Max planck encyclopedia of public international law. Online Edition, Oxford
University Press, New York
Sovereign Wealth Funds as Socially
Responsible Investors
Xenia Karametaxas
Contents
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272
2 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
2.1 Facts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
2.2 Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274
2.3 SWF Activities and the Role of Governments in the Private Economy . . . . . . . . . . . . 275
3 SWF and Socially Responsible Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275
3.1 The Financial Mandate of SWFs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275
3.2 The Ethical Mandate of SWFs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276
4 SWFs Responsibility Under Private International Normative Frameworks . . . . . . . . . . . . . . 279
4.1 UN Principles for Responsible Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280
4.2 UN Guiding Principles on Business and Human Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280
4.3 UN Global Compact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281
4.4 Santiago Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282
5 Assessment of the Current Normative Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283
6 SWFs as Promoters for SRI Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284
7 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287
Abstract Sovereign Wealth Funds (SWFs) are public investment vehicles, owned
and managed directly or indirectly by governments and set up to achieve a variety
of macroeconomic purposes. As institutional investors, SWFs have the fiduciary
duty to act in the best long-term interest of their beneficiaries. In this context,
socially responsible investment may enable a SWF to increase its financial profit-
ability. However, the fiduciary duties of SWFs towards their beneficiaries go
beyond the economic maximization of returns on their investments. In the after-
math of the financial crisis, SWFs have established themselves as important finan-
cial markets participants. This paper will, first, address the existing international
regulatory frameworks that govern the responsibility and accountability of SWFs,
and, second, discuss ways to improve those frameworks in order to enable SWFs to
X. Karametaxas (*)
University of Geneva, Geneva, Switzerland
e-mail: x.karametaxas@gmail.com

DOI 10.1007/978-3-319-44645-5_15
272 X. Karametaxas
become sustainable investors. The focus of the paper is on evaluating the leverage
of SWFs in the global economy, as well as their potential to promote corporate
social responsibility and, therefore, to lead the financial sector towards greater
sustainability.
1 Introduction
Sovereign Wealth Funds (SWFs) are government-owned investment entities

acquiring and managing assets in order to achieve a variety of macroeconomic
purposes. They are typically either supported by commodity earnings such as a
country’s natural resources sectors or based on non-commodity financing such as
general taxation revenues and foreign currency exchange reserves.1 Although the
first SWF was already established in 1953,2 SWFs are fairly a new phenomenon.
Over the last decade, SWFs have established as a new category of institutional
investors. The remarkable growth in SWFs’ financial assets has made them appear
as powerful actors on financial markets and in the global economy.3
Their features make them ideal candidates for leading the financial sector
towards sustainability.4 However, and despite the recognized importance of
SWFs for the global economy, only little attention has been paid so far to the
ethical footprint of SWFs’ investments. Instead, policymakers and most scholars
have focused on the question whether or not the foreign investments made by SWFs
should be subject to specific measures in recipient countries.5
The objective of this Chapter is to assess SWFs’ responsibilities in terms of
socially responsible investments (SRI). The Chapter is organized as follows: Sect. 2
puts SWFs into their economic and legal context and seeks a definition of the term
“sovereign wealth fund”. Section 3 explores the causes of SWFs’ responsibility.
Section 4 addresses the efficiency of existing normative frameworks and inquires to
which extent SWFs may appear as standard-setters for responsible investment
(RI) practices.
1
Sarkar (2010), p. 623.
2
The first SWF was the Kuwait Investment Corporation, which was established in 1953; see Van
der Zee (2012), p. 141; Hahn (2012), p. 103.
3
The OECD estimates the total of SWF assets around US $2.6 trillion, see Blundell-Wignall
et al. (2008), p. 121.
4
Richardson (2013), p. 227.
5
Yet, there are some exceptions, see Keenan and Ochoa (2009), p. 1151; Cummine (2014),
pp. 163–177; Ghahramani (2015), pp. 321–332; Munari (2015), pp. 333–370.
Sovereign Wealth Funds as Socially Responsible Investors 273
2 Background
2.1 Facts
A glance at the data from the Sovereign Wealth Fund Institute (SWFI) shows to
what extent SWFs have established themselves as key players on the international
financial markets: by the end of 2015, SWFs held over 7 trillion US $ assets under
management.6 Moreover, their growth is closely related to global macroeconomic
instability, which explains why over forty SWFs have been created during the last
decade.7 In the aftermath of the 2007–2009 financial crisis, SWFs were welcomed
investors throughout Europe and the United States, given their ability to provide
significant cash injections to frail financial institutions in such challenging eco-
nomic times.8 For instance, through a substantial capital infusion of US $11.4
billion by the Singapore Investment Corporation, subprime crisis-ridden UBS
could avoid bankruptcy.9 Another well-known investment in an ailing financial
institution during the financial crisis was made by Abu Dhabi’s SWF (the Abu
Dhabi Investment Authority) that acquired US $ 7.5 billion in convertible securities
of Citigroup.
Despite, or perhaps because of, this crucial role in the wake of the financial
crisis, the activities of SWFs have led to uncertainty and concerns in recipient
States, provoking some of them to undertake defensive measures.10 Almost all
Western States have expressed the need to protect key strategic sectors such as the
army industry, energy and natural resources, infrastructure and the financial sector.
Indeed, in the eyes of recipient countries SWFs’ investments bring the risk of being
used as political or strategic tools rather than traditional investment vehicles.11
6
See the SWF ranking, available at http://www.swfinstitute.org/sovereign-wealth-fund-rankings
7
See http://www.swfinstitute.org/sovereign-wealth-fund-rankings/ (accessed 18 January 2016);
Senn (2009), p. 4.
8
See O’Brien (2008), p. 1233; Hahn (2012), p. 84; Senn (2009), p. 4.
9
The GIC subscribed to a mandatory convertible bond of US $ 11.5 billion issued by UBS, created
by conditional capital that has been approved by the UBS shareholders on an Extraordinary
General Meeting on February 2008. According to the terms of the agreement and subject to the
approval of UBS shareholders, the GIC will become a significant shareholder in UBS when the
notes are converted into ordinary shares. See Senn (2010), p. 154.
10
See O’Brien (2008), p. 1233; Backer (2010), p. 11.
11
O’Brien (2008), p. 1242; Rose (2008), p. 101.
274 X. Karametaxas
2.2 Definition
SWFs are not a homogenous set of institutions, which explains the wide range of
definitions that can be found in the legal and economic literature, as well as in the
practice of international organizations.12 Yet there seems to be a consensus that
SWFs are State-owned investment vehicles that are established and controlled by a
sovereign political entity. The difficulty of defining SWFs lies in the ambiguity of
SWFs as investment vehicles themselves: as public institutions, SWFs are formally
sovereign; nevertheless they are supposed to behave like private investors.13 Addi-
tionally, as they differ in size, funding sources, policy objectives and governance
structure, the challenge of finding a global definition of SWFs lies in the heteroge-
neity of SWFs as an investor group.14
In the Santiago Principles, the International Monetary Fund (IMF) together with
the International Working Group of Sovereign Wealth Funds (IWG-SWF) charac-
terized SWFs as
special-purpose investment funds or arrangements that are owned by the general govern-
ment. Created by the general government for macroeconomic purposes, SWFs hold,
manage, or administer assets to achieve financial objectives, and employ a set of investment
strategies which include investing in foreign financial assets. The SWFs are commonly
established out of balance of payments surpluses, official foreign currency operations, the
proceeds of privatizations, fiscal surpluses, and/or receipts resulting from commodity
exports.15
The Organization for Economic Cooperation and Development (OECD) has not
defined SWFs clearly either, but has instead stated that SWFs are
government investment vehicles funded by foreign exchange assets that manage those
assets separately from official reserves. Some are funded directly through commodity
exports with an explicit decision to transfer wealth to future generations, while others
result from trying to make the best from official reserve accumulation.16
Although the definition of the Santiago Principles is the most common one, it is
not entirely satisfactory for the context of this paper, since it excludes funds
operating primarily on domestic markets. In fact, according to recent analysis
there are several State funds that invest foremost in domestic enterprises or activ-
ities.17 Excluding them would mean not considering an important part of State-
owned funds. The Santiago Principles leave out funds investing on domestic
12
Rose (2008), p. 107; Bassan (2011), p. 31; Van der Zee (2012), p. 142; International Working
Group of Sovereign Wealth Funds, Sovereign Wealth Funds Generally Accepted Principles and
Practices—Santiago Principles, October 2008, http://imf.org/external/np/pp/eng/2008/022908.pdf
13
Backer (2010), p. 117; Richardson (2013), p. 228.
14
Bassan (2011), p. 31; Castelli and Scacciavillani (2015), p. 10.
15
Santiago Principles (2008), supra, n. 12, p. 3.
16
OECD (2007), p. 42.
17
Balding (2008); Bassan (2011), p. 29.
markets because of their functional rationale, which means that the objective of the
Santiago Principles is to assure recipient countries that investments made by SWFs
are not based on decisions that are politically or strategically motivated. However,
when it comes to SWFs’ responsibility, funds investing in domestic assets must also
be reviewed, since they are also likely to cause environmental damages and human
rights violations through their investments.18 Hence, in this paper, I define SWFs as
investment vehicles that are (a) established and owned solely by the general
government; (b) whose investment strategies include the acquisition of foreign
and domestic financial assets and that are (c) established out of balance of payments
surpluses, official foreign currency operations, the proceeds of privatizations, fiscal
surpluses, and/or receipts resulting from commodity exports.19
2.3 SWF Activities and the Role of Governments

in the Private Economy
The heavy reliance by developed-country governments on capital injections from

investment vehicles of foreign, emerging market governments, have redefined the
role of governments in the global economy. The post-Second World War era, a time
characterized by a transfer of power from governments to the private sector, left the
governments only a limited regulatory role. In recent decades, however, the growth
of budget surpluses due to large foreign exchange reserves, as well as the com-
modities boom of the early 2000, led to the establishment of SWFs. This new form
of State engagement in the global economy puts into question the strict traditional
view that States regulate the market and private actors participate in it.20
3 SWF and Socially Responsible Investment
3.1 The Financial Mandate of SWFs
By being institutional investors, SWFs have the fiduciary duty to act in the best
long-term interests of their beneficiaries.21 Yet, contrary to other institutional
investors (i.e. pension funds, investment funds, insurances), the concept of ultimate
beneficiaries in the context of SWFs is somewhat abstract. Since SWFs are man-
aged according to the objectives of the sovereign, the ultimate beneficiary is not a
specific individual but rather the government itself, the State, the current or future
18
Van der Zee (2012), p. 142.
19
Ibid.
20
Burgstaller (2011), p. 166; Backer (2010), p. 11.
21
Anabtawi and Stout (2007–2008), p. 1307.
276 X. Karametaxas
generations and the taxpayer in general.22 From that perspective, SWFs manage
assets on behalf of the State to meet its citizens’ future economic needs, and
therefore have the fiduciary duty to invest these assets in their best economic
interest.23 To achieve this overarching goal, SWFs, as any other investors, can
exert pressure on the boards of investee companies by submitting proposals for
higher dividends, lower executive pay or the removal of failing corporate units.24
Socially responsible investment might enable an investment fund to increase its
financial profitability. In the long term it is more profitable to allocate resources on
ventures with a certain ethical footprint, given that they do not impact negatively
upon social, environmental and human rights factors. Companies that are involved
in human rights violations or severe environmental damages may face litigation
from employees, the community or other stakeholders. They might also get nega-
tive press coverage or become the target of non-governmental organizations
(NGOs). All this has negative economic consequences such as lower share prices,
high litigation costs, damaged corporate reputation, limited market access and a
reduced chance to recruit the best employees.25 Conversely, investing in companies
with a positive ethical footprint may result in better economic returns for SWFs.
Some authors even deduce broader social benefits from corporate responsibility
such as an improved trust between the business and the community and social
stability.26
3.2 The Ethical Mandate of SWFs
By being State actors, SWFs have not only a financial, but also an ethical mandate
towards their beneficial owners that incentivize them to voice their concerns over
the companies’ ethical conduct. It should, however, be mentioned in this context
that the ethical and financial motivations of SWFs may overlap, given that an
unethical corporate behavior may jeopardize the financial interests of an SWF. As
shareholders, SWFs have an interest to ensure that the managements of their
investee corporations do not engage in practices that are likely to influence firm
reputation negatively and, subsequently, the firm’s profits and share prices.27
As pointed out by Richardson, even though SWFs do not formally become
parties to international law treaties in the same way as States do and notwithstand-
ing that such treaties do not impose obligations directly on corporations or inves-
tors, SWFs can use international treaties “as a moral compass for their RI
22
Monk (2009), p. 456; see also Collier (2011), p. 111.
23
24
Ghahramani (2015), p. 322.
25
Sullivan and Hachez (2012), p. 221; Wen (2013), pp. 178 ff.
26
See Sullivan and Hachez (2012), p. 221.
27
practices”.28 In addition, since SWFs are fully funded with State’s resources, SWFs
must be regarded as State organs, which distinguishes them from other investment
funds. They are acting as extended arms of the States, which in turn have obligated
themselves to a series of binding international law principles. Without going into
further detail, the purposes of SWFs combined with their feature as State-owned
investment vehicles qualifies them as State organs.29 Therefore, the home State of a
SWF can be held responsible for breaches of international law obligations.30 In any
event, as Demeyere correctly noted, it is ultimately and in practical terms up to the
State to ensure that its organs comply fully with the international law.31
For some SWFs, the ethical mandate stems from the fund’s overall investment
objective. As a matter of fact, the majority of SWFs have been set up with the
purpose of being saving funds for future generations.32 In the light of their inter-
generational investment horizon, saving funds aim at using national wealth to
preserve and produce value for future generations, in order to prevent them from
the current generation’s exploitation of natural resources.33 High savings are in the
interest of future generations, to the extent that they imply less consumption of
resources by the current generation and thus more investment that will benefit the
future generation.34 Hence, as long-term investors SWFs have the responsibility to
promote sustainable development and social justice through their investment, in
order to give future generations the opportunity to reap the awards of the
investment.35
According to some authors, particularly Sullivan and Hachez, the duty of SWFs
to care about responsible investment practices derives directly from the 1948
Universal Declaration of Human Rights (UDHR) under which “every individual
and every organ of society should respect and promote, to the extent of its
capabilities, the rights set out in the UDHR”.36 Thus, by being societal actors,
investors have the obligation to respect and promote human rights.37 Note, how-
ever, that the UDHR, as a resolution of the UN General Assembly, does not impose
28
29
Demeyere (2011), p. 199; Emilio Agustín Maffezzini v Spain, ICSID Case No ARB/97/7,
Decision of the Tribunal on Objections to Jurisdiction, 25 January 2000, para 77: “. . . a finding
that the entity is owned, directly or indirectly [by the State], gives rise to a rebuttable presumption
that it is a state entity”.
30
Demeyere (2011), pp. 199 ff.
31
Ibid., p. 200.
32
For a classification of SWFs according to their investment objectives see Kunzel et al. (2010),
table 1, 4.
33
International Forum of Sovereign Wealth Funds, ‘Santiago Principles: 15 case studies’, Doha
November 2014, http://www.ifswf.org/pst/SantiagoP15CaseStudies1.pdf (accessed 20 January
2016); Munari (2015), pp. 339 ff.
34
Cappelen and Urheim (2012), p. 3; Van der Zee (2012), p. 147.
35
Van der Zee (2012), p. 147.
36
Sullivan and Hachez (2012), p. 218.
37
Ibid.; see also Henkin (1999), p. 25.
278 X. Karametaxas
binding human rights obligations directly on investors, despite its widely recog-
nized status of customary international law.38
The main driving force behind SWFs adopting socially responsible investment
policies can be drawn from their status as owners of the corporations they invest
in. As a matter of fact, the growth of SWFs’ investments implies that they are
gaining in importance as capital providers and shareholders, which in turn increases
their leverage on the investee corporations. The larger the investment portfolio and
the greater the financial risks relating to social and environmental issues, the more
likely it is that an investor will apply SRI criteria to its investment decisions. SWFs,
as holders of broad portfolios that are diversified across the economy, have no
interest in adopting short-term oriented investment strategies that are causing harm
to the economic system as a whole.39
As any other shareholders, State investors can be active or passive owners and,
on that account, may or may not exert pressure on the management of investee
companies. Although SWFs make typically minority investments in foreign busi-
ness enterprises, they have the power to influence the behavior of the investee
companies.40 They can do so in a formal way through the exercise of shareholder
voting rights and the submission of proposals at annual general meetings of investee
companies or in an informal way through the media and fellow shareholders and by
engaging in negotiations with the management of a company having poor corporate
social responsibility records. Ultimately, at least in theory, they can put pressure on
such companies through disinvestment, that is to say by selling their shares. In
practice, however, selling large stakes causes important transaction costs and
requires a certain degree of market liquidity, which is often not the case in difficult
economic times.41 On the contrary, given the increase of SWFs investments in
Western companies, it might be challenging for those companies to find a balance
between maintaining their own internal policies that require compliance with
ethical issues and benefiting from the investments of SWFs. Yet, the lack of active
ownership and the focus on short-term profits instead of corporate responsibility has
in the past contributed to unethical behavior by companies.42 By being able to
substantially influence the management of large companies, the investment behav-
ior of SWFs has important consequences for society as a whole. On that account,
SWFs have a responsibility to take action to correct the negative consequences of a
corporation’s activity and to even promote a sustainable behavior.
38
39
Davis et al. (2006), p. 18.
40
Burgstaller (2011), p. 167.
41
See Coffee (1991), p. 1277; Fairfax (2011), pp. 31 ff.
42
Gill (2008), p. 459; Rohde (2011), p. 5.
Finally, although SWFs still operate mostly as portfolio investors, they are
increasingly oriented towards foreign direct investments (FDI).43 FDI establishes
lasting economic ties between a non-resident investor and a foreign enterprise,
“which allows the investor to exercise effective influence in the management of that
enterprise”.44 According to the United Nations Conference on Trade and Develop-
ment (UNCTAD), SWFs FDI flows doubled in 2012 from US $ 10 billion to over
US $ 20 billion.45 At the present time, total FDI by SWFs is estimated at US $
127 billion, with assets allocated mostly in the finance, real estate and construction
sectors and located primarily in developed economies.46 Nonetheless, compared to
the SWFs’ total assets under management, cumulative FDI by SWFs remain
somewhat low (2–3 %).47 FDI acts upon economic growth, development and
employment and can, on that account, either improve the environmental and
human rights condition or harm the situation of individuals. The latter is the case
if SWFs are investing directly in corporations that maintain, for instance, business
practices with poor employment conditions or that are damaging the environment.48
Thus, the high percentages of direct investments through SWFs enhance the
responsibility of the latter in the global economy.
4 SWFs Responsibility Under Private International

Normative Frameworks
Over the years, issues connected to sustainable development have contributed to the
emergence of voluntary codes of conduct and sets of principles that cannot only be
applied by firms, but also by investors themselves. These private regulatory
regimes, developed by the financial industry in partnership with intergovernmental
entities such as the UN, set normative standards for improved performance and
procedures for more effective and informed decision-making.49 This part examines
the four most significant private regulatory regimes in terms of socially responsible
investment and questions whether they are suited to promoting best practices
for SWFs.
43
According to the OECD, FDI is “a category of investment that reflects the objective of establishing a
lasting interest by a resident enterprise in one economy (direct investor) in an enterprise (direct
investment enterprise) that is resident in an economy other than that of the direct investor. The
accepted threshold for a FDI relationship is 10 % or more of the voting rights of the investee company.
See OECD (2008), p. 234 http://www.oecd.org/daf/inv/investmentstatisticsandanalysis/40193734.
pdf (accessed 19 January 2016).
44
Raeschke-Kessler and Gottwald (2008), p. 587.
45
UNCTAD (2013), pp. 10–12.
46
Ibid.
47
Ibid.
48
Van der Zee (2012), p. 147. See also Frankental (2012), p. 221.
49
Richardson and Lee (2015), p. 398.
280 X. Karametaxas
4.1 UN Principles for Responsible Investment
The United Nations Principles for Responsible Investment (UN-PRI) are the most
significant international initiative regarding ethical and responsible investment prac-
tices of both private and State-owned investors.50 Published in 2006 by a group of
institutional investors in partnership with the UN Environment Program Finance
Initiative and the UN Global Compact, the UN-PRI are supposed to help signatories
to integrate “economic, social and governance” (ESG) issues into their strategic
decision-making process and investment practices and acknowledge the relevance of
a long-term health and stability of the markets as a whole. Especially Principle 2 calls
on signatories to become active shareholders and incorporate ESG issues into their
ownership policies and practices.51 Yet the UN-PRI do not explicitly mention human
rights considerations, as they are supposed to be covered by the social component of
ESG.52
Even though the UN-PRI are considered “the most important developed initia-
tive” with regard to responsible investment,53 they unfortunately lack of acceptance
among SWFs. Indeed, in 2014 only three of the 273 asset owners signatories were
SWFs (i.e. the New Zealand Superannuation Fund, the Norwegian GPFG and the
French Caisse des Dépots et Consignations).54 With such a low number of adher-
ents, the impact and effectiveness of the UN-PRI is limited regarding SWFs
investments. Moreover, given the absence of any implementation mechanism, the
UN-PRI have no direct leverage on investors to make sure that they positively
influence their investee companies’ behavior, whether over human rights violations
or other ethical transgressions.55
4.2 UN Guiding Principles on Business and Human Rights
The UN Guiding Principles on Business and Human Rights (Guiding Principles)56

is the first framework focusing on the relation between business and human rights
that has been implemented within the UN system.57 Grown out of the work of UN
50
Nystuen et al. (2011), p. 3.
51
Principle 2 UN-PRI.
52
Cummine (2014), p. 168.
53
Nystuen et al. (2011), p. 3; Cummine (2014), p. 168.
54
See the UN-PRI website http://www.unpri.org/signatories/signatories/#asset_owners (accessed
15 January 2016).
55
Cummine (2014), p. 168; Nystuen et al. (2011), p. 4; Frankental (2012), p. 222.
56
United Nations, Guiding Principles on Business and Human Rights, New York and Geneva
2011, http://www.ohchr.org/Documents/Publications/GuidingPrinciplesBusinessHR_EN.pdf?
$32#v¼1392752313000/_/jcr:system/jcr:versionStorage/53/b6/9c/53b69c6d-0745-4070-
99b2-68e0$32#2dde1b99/1.4/jcr:frozenNode (accessed on 19 January 2016).
57
Frankental (2012), pp. 221 ff.
Special Representative for Business and Human Rights Professor John Ruggie, who
published the “Protect, Respect, Remedy” Framework in 2008, the Guiding Prin-
ciples focus mainly on the impact of companies on human rights through direct
investment.58 The underlying idea of the UN Guiding Principles is that all busi-
nesses, including and especially State-owned enterprises, have a responsibility to
respect human rights, which clearly includes investors and thus also SWFs. For that
purpose, the UN Guiding Principles determine three channels for addressing cor-
porate human rights violations: (1) the State’s duty to protect human rights, (2) the
corporate responsibility to respect human rights where they operate and (3) the
State’s duty to ensure that effective remedies are available for victims of corporate
human rights abuse.59 In its commentaries to the UN Guiding Principles, Professor
John Ruggie mentioned that if the business has the leverage to prevent or mitigate
the adverse impact of wrongful practices, it should exercise it.60 From this point of
view, also investors can use this framework to assess the human rights performance
of companies.61 Moreover, human rights implications of investment decisions of
SWFs may also entail the State’s duty to protect its citizens from human rights
violation, given that SWFs have been identified as State organs.62
4.3 UN Global Compact
The best-known normative framework that deals with Corporate Social Responsi-
bility (CSR) generally and on a global level is the UN Global Compact.63 This set of
principles defines itself as “a strategic policy initiative for businesses that are
committed to aligning their operations and strategies with the universally accepted
principles in the areas of human rights, labor, environment and anti-corruption”.64
Like the UN Guiding Principles, the UN Global Compact is a non-binding soft
law code that does not adopt the investor’s perspective, but addresses companies
directly. Here again, the main problem is that the effectiveness of the UN Global
Compact remains questionable due to the absence of any enforcement and punitive
mechanism.65 Also, the number of SWFs having joined the UN Global Compact is
58
See http://www.reports-and-materials.org/sites/default/files/reports-and-materials/Ruggie-
report-7-Apr-2008.pdf (accessed 11 January 2016).
59
60
Guiding Principles on Business and Human Rights, commentary of the Principle 19, p. 21.
61
Van der Zee (2012), p. 147.
62
As the commentary of Principle 4 clearly states: “Where a business enterprise is controlled by
the State or where its acts can be attributed otherwise to the State, an abuse of human rights by the
business enterprise may entail a violation of the State’s own international law obligations”,
Guiding Principles on Business and Human Rights (2011), p. 7.
63
See www.unglobalcompact.org (accessed on 11 January 2016); for a general overview of the UN
Global Compact see Banerjee (2007), pp. 97–99.
64
See www.unglobalcompact.org (accessed on 11 January 2016).
65
Banerjee (2007), p. 45; Kaufmann (2013), p. 744.
282 X. Karametaxas
very low with only three SWFs (Government Pension Fund of Norway;
New Zealand Superannuation Fund; National Pension Reserve Fund of Ireland)
that committed themselves to integrate these principles into their investment
policies.
4.4 Santiago Principles
In October 2008, a working group composed by SWFs (the International Working

Group of Sovereign Wealth Funds, IWG-SWF) has launched the Generally Agreed
Practices and Principles (GAPP), also called the Santiago Principles under the
umbrella of the International Monetary Fund (IMF). The Santiago Principles
emphasize accountability, transparency, as well as an equivalent treatment to
private funds. Established in order to ease the concerns of recipient countries
regarding SWFs’ investments, the underlying rationale of this set of principles is
to avoid political interference by SWFs.66
The Santiago Principles are the only international voluntary framework of
investment and operational principles directed specifically at SWFs. Given their
exclusive focus, they are the most appropriate to regulate the investment behavior
of SWFs. The basic premise of the Santiago Principles is to guarantee transparency,
clarity and equivalent treatment to private funds. However, surprisingly, the San-
tiago Principles do not contain any provision addressing responsible investment
practices directly.
Against this background, the question arises whether the incorporation of
responsible investment practices within a fund’s overall approach is allowed
under the Santiago Principles. One of the guiding objectives is “to invest on the
basis of economic and financial risk and return-related considerations”. Principle
19.1 states that SFWs have to disclose if their investments are on grounds other than
“financial and economic considerations”, which technically includes social, ethical
or religious reasons. Likewise, Principle 21 mentions the exercise of voting rights
by SWFs in investee companies, but does not address responsible investment
concerns. Instead, it acknowledges that the exercise of voting rights aims to protect
the financial value of the investments and merely requires the disclosure of the
exercise of voting rights: “[i]f an SWF chooses to exercise its ownership rights, it
should do so in a manner that is consistent with its investment policy and protects
the financial value of its investments”. In my opinion this implies that the avoidance
of complicity in unethical conduct or social and environmental harm is part of the
protection of the investments’ long-term value. Nevertheless, consistent with Prin-
ciple 21, the consideration of ethical investment practices by SWF must be publicly
disclosed and should not reduce the financial benefit of a SWFs’ investment.
66
Nystuen et al. (2011), p. 5.
The incorporation and promotion of responsible investment issues may also be

based on Principle 22 under which SWFs are required to establish a framework that
identifies, assesses, and manages the risk of its operations. More precisely, the
commentary on Principle 22 mentions that one of the risks that SWFs face in their
investment operations is the reputational risk, that is to say “the potential that
negative publicity regarding an SWF’s business practices, whether true or untrue,
may cause a decline in investment returns, costly litigation, or loss of counterparties
or impair the home country government’s international standing”. In fact, the
investment in a company that allegedly violates human rights or that causes
environmental damage could entail the risk of reputational risk.
In view of the foregoing observations it can be concluded that the Santiago
Principles allow the incorporation of RI considerations by SWFs, even though they
lack to encourage SWFs to do so. Yet, given their wide acceptance and their focus
on SWFs, the Santiago Principles would be a good starting point for reconciling the
ethical and financial aspirations of SWFs. A first step towards a higher implemen-
tation of responsible investment practices for SWFs should therefore be provided
by an assessment of the Santiago Principles. In the longer-term, the development of
a code of conduct under the supervision of an international body such as the IMF,
tailored to meet the specific needs of SWFs would be desirable.
5 Assessment of the Current Normative Framework
Although the evolving and growing framework point to a paradigm shift from the
traditional dichotomy between business and social and human rights issues, the
above-mentioned general regulatory frameworks are inappropriate tools to imple-
ment responsible investment practices among SWFs. They are not taking into
account the specific nature of SWF and they are lacking sufficiently recognition
of most of the SWFs.
Under the Santiago Principles, as I pointed out, SWFs do not have the direct
obligation to consider sustainability and ethical standards in their investment
practices.67 This unsatisfactory situation raises the question of how responsible
investment obligations might be imposed on SWFs. A first, yet crucial step is to
integrate in the Santiago Principles a requirement for SWFs to include in their
investment policies to commit to a responsible investment behavior. Cummine
suggested such a clause to the following effect: “The Fund must be invested in a
manner consistent with the domestic and international ethical obligations of the
owner state”. Certainly, the perception of what consists an ethical obligation is
likely to vary from one jurisdiction to another. Especially since a high number of
SWFs are established in non-democratic countries with poor human rights records,
hurdles might arise. We should keep in mind, though, that SWFs have the fiduciary
67
Cummine (2014), p. 171.
284 X. Karametaxas
duty to act in the citizens’ interests. The respect of human rights, as well as the
improvement of the citizens’ general living situation and the environment is
certainly in their interest.
Nevertheless, compliance with the Santiago Principles has been rather slow and
incomplete.68 The international leverage over sovereign governments is
constrained by the reality that SWFs are owned and controlled by sovereign
governments. The resulting non-binding character of codes of conduct and lack
of any enforcement or punitive mechanism are major hurdles to the effectiveness of
the Santiago Principles. Therefore, the principal mechanism of enforcement in the
context of SWFs is peer-pressure, which might be reinforced through naming and
shaming.69 Though beyond the scope of this paper, a “comply or explain mecha-
nism” contained in the Santiago Principles could mitigate this problem. Similarly to
what is already in use for most other corporate entities in numerous corporate
governance codes of conduct, SWFs would have to report how they apply the
Santiago principles and to what extent they comply with responsible investment
practices. If a SWF does not meet such standards, it should provide disclosure by
explaining why it does not apply responsible investment practices.70
6 SWFs as Promoters for SRI Practices
Arguably, a responsible conduct of SWFs can contribute to shape the investment

practices in the private sector and, thus, set standards in terms of responsible
investment. The underlying idea is that by incorporating environmental and
human rights considerations into their internal investment policies, SWFs can set
best practices and contribute to a change in the investment policies of private sector
counterparts.71 Although, generally speaking, SWFs remain still passive inves-
tors,72 when it comes to implement RI standards in the financial sector, SWFs are
in an ideal position. They benefit not only from their large size and potential market
leverage, but also from their long-term investment horizons and their widespread
public visibility.73 Since SWFs are able to establish their own investment policies,
they have the potential to provoke change beyond SWFs portfolios, by setting best
practices for private investors and thereby set global standards of responsible
investment.
Through internal ethical guidelines, SWFs express their expectations towards
the companies they invest in and set limitations of non-economic nature on the
68
Dixon (2014), p. 581.
69
Truman (2010), p. 103.
70
Ibid.
71
Van der Zee (2012), pp. 146 ff.
72
Rose (2013), p. 914.
73
investment decision-making of the fund. As the largest SWF applying SRI criteria,
the Norwegian Government Pension Fund Global (NGPF-G) has established itself
as the prime example of financial and social sovereign wealth activism.74 Further-
more, the NGPF-G has influenced the investment practices of several Norwegian
private institutional investors such as pension funds and investment funds.75 In
doing so, the NGPF-G not only contributed to the professionalization of RI princi-
ples, but exercises also a form of normative pressure for RI on private investors.
In order to comply with its Ethical Guidelines, Norges Bank (as the manager of
NGPF-G) pursues two basic strategies. The first strategy is the active exercise of the
NGPF-G’s ownership rights to safeguard its long-term financial interests.76 To this
end, NGPF-G follows its own internal Ethical Guidelines, which are in turn based
on the UN Global Compact and the OECD Guidelines for Corporate Governance
and the Guidelines for Multinational Enterprises. The NGPF-G’ second strategy
consists of the annual release of a company exclusion list. Drawn up by the Council
on Ethics, an independent body, this list names companies that should be excluded
from Norway’s investment universe, based on two types of exclusion criteria.77 The
product-based standards may lead to the exclusion of companies that produce
tobacco, weapons that could violate humanitarian norms or sell military goods to
certain States that are subject to investment restrictions. Conduct-based criteria
assess a company’s real or potential involvement in systematic violations of human
rights; individual rights violations in conflict or war; severe environmental harm;
flagrant corruption; or other violations of basic ethical norms.78 Whereas the main
purpose of the exclusion list is avoiding the fund’s own complicity in ethical
problematic activities,79 it might also influence its behavior, in addition to any
corporate engagement.80 In doing so, the NGPF-G not only contributes to the
professionalization of SRI principles, but also exercises a form of normative
pressure on private investors.
Nevertheless, few SWFs have specific legal mandates to invest ethically. Of the
over fifty SWFs only the NGPF-G, the New Zealand Superannuation Funds, the
74
75
Bengtsson (2008), p. 978.
76
Shemirani (2011), p. 52.
77
The company exclusion list is available online, see https://www.regjeringen.no/en/topics/the-
economy/the-government-pension-fund/internt-bruk/companies-excluded-from-the-investment-
u/id447122/ (accessed 5 January 2016).
78
Guidelines for the Observation and Exclusion of Companies from the Government Pension Fund
Global’s Investment Universe https://www.regjeringen.no/en/topics/the-economy/the-govern
ment-pension-fund/responsible-investments/guidelines-for-observation-and-exclusion/id594254/
79
About the notion of complicity and due diligence of SWFs under international norms, see
Ghahramani (2015), pp. 329 ff.
80
286 X. Karametaxas
French Pension Reserve Fund and the recently established Papua New Guinea’s
Liquefied Natural Gas Fund have the explicit legal obligation to invest ethically.81
Moreover, their legal mandate limits RI to the means of promoting long-term
financial returns. They do not have an explicit duty to invest in sustainability and
to actively promote sustainable development or to seek improvements in compa-
nies’ sustainability performance.82 According to Richardson the perception of
SWFs as RI leaders should, in the future, conduct to the establishment of explicit
duties to invest in sustainability.83
7 Conclusions
Overall, responsible investment practices play an increasingly important role and

reflect a change in the state of mind among large institutional investors such as
SWFs, for whom extra-financial factors are becoming as essential as financial
performance. Through their leverage and impact, SWFs have the potential to
contribute substantially to the improvement sustainability on the financial markets.
The fiduciary duties of SWFs towards their beneficial owners, the citizens, go
beyond the economic maximization of returns of their investment. The consider-
ation of the citizen’s ethical interests by integrating responsible investment prac-
tices should become a core part in the funds’ investment decision-making.
The existing regulatory framework reflects the growing relevance of environ-
mental, social and governance issues to investment practices of private and public
actors. However, among international frameworks, responsible investment obliga-
tions of SWFs have not received sufficient attention yet. The Santiago Principles,
forming the only existing regulatory framework specifically tailored for SWFs, do
not impose any requirement on SWFs regarding the ethical footprint of their
investment practices. The numerous codes of conducts, three of which I have
discussed briefly, claim for greater social responsibility and can, ultimately, also
be applied to institutional investors such as SWFs. Nonetheless, given their focus
on the companies’ perspective, they are unsuitable tools for SWFs. Moreover, the
low number of SWFs among the signatories of such codes of conducts emphasizes
that they are not a satisfactory way for SWFs to take responsibility. To that effect, I
suggest in the first place amending the Santiago Principles by including a require-
ment for SWFs to commit to an ethically responsible investment behavior. In the
second place, I argue that SWFs should not only avoid investing in companies that
cause harm to the environment or that violate human rights, but also act as active
promoters of sustainable development.
81
Ibid., p. 227; Cummine (2014), p. 172.
82
Ibid.
83
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Giovanna Adinolfi · Freya Baetens

José Caiado · Angela Lupone

International Economic Law

José Caiado Angela Lupone

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President, Society of International Economic Law Gabrielle Marceau

integration processes. International cooperation in the energy sector is dealt with in

Milan, Italy Giovanna Adinolfi

Part I International Economic Law and Other Concerns

Part II International Trade Law

The Mutually Agreed Solution Between Indonesia and the United

Part III Energy Issues in International Trade and Investment Law

Part IV Investment and Finance

Elisabetta Cervone is consulting counsel (World Bank, Finance and Markets

Belisa Esteca Eleoterio is a lawyer enrolled in the PhD Program of International

Natasha A. Georgiou is a PhD candidate at the University of Reading, School of

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© Springer International Publishing Switzerland and G. Giappichelli Editore 2017 3

The 2014 EC – Seals4 case illustrates recent developments under Article

2 Introducing the General Exceptions

When a government measure is found to restrict trade, Article XX may be invoked

In determining whether a measure is “necessary” under Article XX(a) and (b),

3 The Objective of a Measure and the Two-Tier Test

discriminatory. As such, the need to introduce the term “expected application” is

4 Why Measures Have Failed Article XX

5 Has the Right Balance Been Struck?

The 20 cases considered here constitute a relatively small sample. If Panel

Falling Foul of Article XX

A US measure affecting the cross-border supply of gambling and betting services

China – Audiovisual Services (2009)33

A Chinese measure seeking to reserve the importation of various forms of media

Article XX(b) and (g)

This case concerned a US measure seeking to regulate the effects of gasoline on

EC – Tariff Preferences (2004)38

An EC measure seeking to combat drug production and trafficking was contested in

Brazil – Retreaded Tyres (2007)39

China – Raw Materials (2011)42

China – Rare Earths (2014)43

The (Only) Two Successful Claims Under Article XX

The initial US – Shrimp I (1998)45 case was unsuccessful in invoking Article XX

In EC – Asbestos, the EU successfully defended its ban on asbestos under Article