The Agreement on Trade-Related Investment Measures (TRIMs)

Saravanan APhD Candidate

RGSOIPL

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Outline: Legal Background- FIRA Panel Case Uruguay Round Negotiations on TRIMs General Features of TRIMs Provisions of the TRIMS Agreement

Illustrative List: Para 1 (a) & (b) Dispute Settlement Cases Involving The TRIMs Agreement Current Debate and Prospects of TRIMs Agreement India’s notified TRIMs

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Legal Background- FIRA Panel Case:

Until 1980s, investment issues received only marginal attention in the context of GATT

In 1982, GATT dispute settlement proceeding initiated by US against Canada

For implementation of Canada’s Foreign Investment Review Act (FIRA) Certain undertakings required from foreign investors in order

to get an approval for investment projects in Canada Three undertakings

Those requiring foreign investors to buy goods of Canadian origin or from Canadian sources (LCR)

To manufacture goods in Canada Foreign investors to export specified quantities or proportions of their

local production (EPR) Several parties expressed doubt about competence of GATT Panel

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Cont… Finally panel was allowed to hear the dispute

Condition- findings would be limited to trade issues fall within scope of GATT

Panel concluded that LCR were inconsistent with N.T obligation contained in Art III:4- because they discriminated

against imported products Purchase Canadian goods (LCR) did not prevent

importation of goods Hence, not inconsistent with Art XI:1 of GATT (prohibits QR)

Panel did not rule on GATT consistency of EPR, because it falls outside the coverage of GATT

Panel made it very clear that, The dispute instituted before the Panel pertained to consistency with

GATT rules of certain TRIMs applied by Canada Not to Canada’s right to regulate FDI

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Uruguay Round Negotiations on TRIMs:

Launching Negotiations: US was the main advocate for introducing TRIMs and other

investment issues into GATT framework In 1981 joint study by IBRD and IMF concluded

EPR could have trade-distorting effects Japan and EC expressed support for US proposal Opposition from developing countries,

Argued EPR should outside the remit of GATT FIRA decision brought this issue to negotiating table In 1986, US succeeded to included the subject in agenda of

Uruguay round negotiations

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Issues During Negotiations The fundamental differences emerged between DC and Dvg C

Lack of definition and clarity in the mandate, need, nature and coverage of possible new disciplines

DC took a broad view of investment and investment measures DC (US and Jap) sought to introduce strong disciplines on

TRIMs Proposed prohibition of wide range of measures in addition to LCR

These included, manufacturing req, trade balancing req, exchange req, domestic sales req, EPR, product mandating, TT req, and local equity req.

EC and Nordic countries took somewhat more nuanced approach

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Negotiating Positions: On the contrast Dvg C led by India, Egypt and Latin

American Countries Took a much narrower view To preserve their freedom to use TRIMs as instrument of

development policy Existing GATT rules already addressed trade-restrictive and trade-

distorting effects India and other countries proposed negotiations should

address Restrictive business practices of MNCs

But, DC opposed such move

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Outcome: Finally compromise situation emerged limited to an

interpretation and clarification of application to TRIMs TRIMS Agreement did not create new obligations

Went beyond those already established under old GATT Many of the measures proposed during negotiation were

excluded from coverage of TRIMs Export performance and TT req. No new disciplines regarding treatment of FI per se were

established Dvg C succeeded in limiting the scope of TRIMs to

application of existing GATT Rules From DC point of view, the Agreement failed to cover most

of the investment measures

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General Features of TRIMs: TRIMS does not create any new substantial obligations Instead of that, it introduces transition periods for the

elimination of inconsistent measures It establishes notification req – introduced some degree of

transparency TRIMS also included a provision for its own review

Lead to amendment or expansion of its disciplines DSU- to date 41 cases have been involved

Few- resulted in panel proceedings TRIMs has never been invoked on its own

but in conjunction with other WTO provisions (Art III & XI of GATT) After 20 yrs of EIF still some debates are unsettled Working Group on Trade and Investment launched during

Doha Conference 2001

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General Features of TRIMs: It focuses on two Articles that were identified in a previous case under

the GATT Article III (National Treatment) Article XI (Quantitative Restrictions)

It is concerned with discriminatory treatment of both imported and exported products

Do not regulate the issue of entry and treatment of FI as such

TRIMs Agreement makes no distinction w.r.t phase of investment at which measure is imposed

It covers measures applied both at the moment of entry of investment as wells as afterwards

It applies only to goods and not to cover trade in services

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Aims of the Agreement: Desiring

to promote the expansion and progressive liberalization* of world trade and to facilitate investment, while ensuring competition

Take into account trade, development and financial needs of developing

countries, particularly least developed countries Recognizing

certain investment measures can use trade-restrictive and distorting effects

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Structure of TRIMS Agreement:

Nine Articles and an Annex Art I - clarifies that the agreement applies only

to trade in goods Art 2 - applies Articles III or XI and refers to the

Annex list Art 3-4 deal with general exceptions and Art

XVIII (b) Art 5- Notification and transition periods Art 9 - Review

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Economic Rationale of TRIMs: TRIMs shall not apply to any TRIM that is inconsistent with NT and

QR TRIMs Agreement does not define the term ‘TRIM’

Its coverage is provided in an illustrative list annexed to Agreement Other requirements not covered in TRIMs

Export performance, manufacturing , TT, JV and local equity

TRIMs tend to concentrate in specific industries , particularly in automotive, chemical and petrochemical, and computer/informatics

Local content requirements used more intensively in automotive sector Export performance requirements are more common in

computer/informatics Combination of both measures in chemical and petrochemical

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Economic Rationale of TRIMs:

Empirical studies shows performance requirements- employed by both DC and Dvg C

But use has been more frequent by Dvg C

Dvg C often imposed performance requirements in an attempt to

Offset market failures and monopolistic powers of MNCs Prevent foreign subsidiaries from crowding domestic enterprises

Long controversial debate on development and trade effects of PR

Has not been settled to date

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Provisions of the TRIMS Agreement:

Art 1- Coverage: This agreement covers only to trade in goods and it does

not apply to trade in services

Art 2 and the Illustrative List (Annex)- Basic Obligations: Art 2.1- core obligation requires Members not to apply any

TRIM that is inconsistent with, Art III (NT) or Art XI (prohibition of QR on imports or exports)

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Cont… Agreement does not mention any definition of TRIMs

Art 2.2 refers to an illustrative list annexed to Agreement Art III:4 of GATT- obligation of NT Art XI:1 of GATT- obligation of general elimination of QR

Para 1 identifies measures that are inconsistent with Art III:4 of GATT

Pertain to purchase or use of products by an enterprise Deals with internal measures

Para 2 identifies measures that are inconsistent with Art XI:1 Concern the importation or exportation of products by an enterprise Deals with border measures

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Illustrative List: Para 1 (a) & (b)

Para 1(a) covers LCR measures relate to purchase or use by an enterprise of products of domestic origin

Para 1(b) covers trade-balancing requirements Limit the purchase or use of imported products

It is inconsistent with Art III:4, the measure discriminates against imported products to less favourable conditions than the domestic products

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Illustrative List: Para 2 (a), (b) & (c) Para 2(a)- refers to measures that limit the importation Para 2(b) - measures that restricts imports through the

imposition of foreign exchange balancing requirement Act like import quotas- incompatible with Art XI:1

Para 2(c)- measures that involve restriction on exportation or sale for export specified in terms of particular products,

In terms of volume or value of products , or In terms of a proportion of volume or value of its local production

Para 2(c) refers to measures that restrict exports

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Three aspects of illustrative list : 1) List covers both measures

Mandatory or enforceable under domestic law or under administrative rulings

Compliance with which is necessary to obtain an advantage

2) The term ‘advantage’ is not defined but, Interpreted by Panel in Indonesia-Autos dispute

3) The list is an illustrative nature not intended to be an exhaustive one

Still, other measures not explicitly mentioned in list would still be inconsistent with Art 2 of this Agreement

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Exceptions: (Art 3) All exceptions under GATT 1994 shall apply, as appropriate to the

TRIMs Agreement Exceptions also applicable to prohibition contained in Art 2 of TRIMs

E.g. LCR applied in context of govt procurement of goods is excluded from NT obligation

Art 4- Developing Countries: In addition to transition periods, some flexibility to Dvg C Art 4- allows Dvg C to deviate temporarily from obligations in Art 2

to extent in such a manner as Art XVIII of GATT Governmental Assistance to Economic Development

Other safeguard provisions for situations of BoP difficulties

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Notification and Transitional Arrangements (Art 5):

It allowed the existing TRIMs that were inconsistent with GATT subject to certain conditions

Set forth requirement in Art 5 w r t transitional mechanism Art 5.1- Members – to notify to Council for Trade in Goods within 90

days of E.I.F of WTO (by March 31, 1995) Regarding any existing TRIM that was inconsistent with this Agreement

Art 5.2- Existing TRIMs shall be eliminated within specific time-periods Length depends upon level of economic development

DC- 2 yrs after e.i.f of WTO Agreement Dvg C- 5 yrs LDC- 7 yrs

Agreement did not provide any mechanism to monitor actions at the expiry of transition period

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Cont… Countries not members of WTO on 1.1.1995, were entitle to become

original member within two yrs After that, they should submit TRIMs notification within 90 days after acceptance

Art 5.3- CTG may authorize extension of transition periods on request by Dvg C or LDC

They have to demonstrate the ‘particular difficulties’ Several members have availed their rights under this provision

Art 5.4- prevents Members from modifying TRIMs notified under Art 5.1

The benefit of transitional arrangements shall not apply for TRIMs incase introduced less than 180 days before eif of WTO (7/5/94)

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Cont… Art 5.5- During the transition period Member may apply

the inconsistent TRIM to a new investment if this is, Necessary to prevent trade distortion the condition of competition

between new investment and existing investments To identify the product of existing investment is like products

Member shall notify to CTG incase if they apply these TRIM to a new investment

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Transparency: (Art 6) Art 6.1- incorporated by reference the transparency

obligation established in Art X of GATT and other WTO related provisions

Art 6.2- Members are required to notify to WTO Secretariat about the publication in which TRIMs may be found

Art 6.3- Confidential information is exempted from Art X of GATT

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Committee on Trade-Related Investment Measures: (Art 7)

Establishment of a Committee on Trade-Related Investment Measures

To monitor the operation and implementation of the Agreement To provide forum for consultation on implementation of the Agreement

The Committee is required to report annually to CTG

Art 8- Consultation and Dispute Settlement: Articles XXII and XXIII of GATT applied by DSU shall apply to

consultations and settlement of disputes under this Agreement To date, 41 cases cite this agreement in the request for

consultations

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Review by the Council for Trade in Goods: (Art 9)

CTG shall review the operation of this Agreement every 5 yrs The review shall offers opportunity to propose to the

Ministerial Conference as appropriate amendments to the text of text of the Agreement

During Review CTG shall consider the provisions on investment policy and competition policy

Setback: It does not mention specific procedure on how to undertake

the review Date for its completion also not mentioned in the Agreement

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Dispute Settlement Cases Involving The TRIMs Agreement:

1. EC Bananas III2. Indonesia- Autos3. Canada- Auto Pact4. India- Autos5. India- Solar cells and solar modules (Feb 24, 2016)

Claims under TRIMs Agreement accompanied by claims under Articles III and XI of GATT

Some cases SCM, TRIPs & GATS also been cited

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European Communities—Regime for the Importation, Sale and Distribution

of Bananas: (DS 27) Complainants:

Ecuador, Guatemala, Honduras, Mexico, United States Respondent:

EC Measure at issue:

The EC’s regime for the importation, distribution and sale of bananas, introduced on 1 July 1993 and established by EEC Council Regulation 404/93

Product at issue: Bananas imported from third countries

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Cont… Essence of the claims based on preferential treatment granting to EC

and African, Caribbean and Pacific (ACP) bananas at the expense of bananas from third-countries

EC’s regime violated number of WTO provisions

Complainants alleged that regime’s allocation of import quotas and import licensing procedure were inconsistent with Art III of GATT and Art 2 of TRIMs, GATS, AoA, Agreement on import licensing

Panel found that EC’s regime was inconsistent with NT obligation in Art III:4 of GATT

EC contented that the measure is being a border measure and not an internal measure

Hence, import licensing did not fall with purview or Art III:4 of GATT

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Cont… But, Panel dismissed EC’s argument and held

The measure is an internal measure held within the meaning of Art III:4

Preferred allocation of tariff quota to importers was inconsistent with Art III:4

But, Panel did not consider the rule on consistency with Art 2 of TRIMs Agreement

EC appealed against Panel report on Sept 9, 1997 But, the AB upheld the Panel’s main findings AB held, EC’s import licensing regime violated Art III:4 of

GATT

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Indonesia—Certain Measures Affecting the Automobile Industry: (DS

54, 55, 59, 64) Complainants:

EC, Japan and US Respondent: Indonesia Measure at issue:

“The 1993 Programme” that provided import duty reductions or exemptions on imports of automotive parts based on the local content percent; and

“The 1996 National Car Programme” that provided various benefits such as luxury tax exemption or import duty exemption to qualifying (local content and etc.) cars or Indonesian car companies

Product at issue: Imported motor vehicles and parts and components thereof

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Cont… Complainants alleged that these measures were inconsistent with,

Arts I, III and X of GATT Art 2 of TRIMs Several other provisions of SCM and TRIPs

Panel found that Indonesia’s measures violate Art 2.1 of TRIMs Panel found that Art III and SCM do not conflict with each other

They have different coverage and don’t impose the same type of obligations In this case both Agreements were Applicable

Panel held that the disputed measures were ‘investment measures’ Measures fall within the scope of Para 1 of illustrative list

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Cont… Panel further held, measures violated Art 2.1 of TRIMs

Also noted that Indonesia did not invoke any exceptions contained in Art 3 & 4, nor claimed for enjoyed the transition period

In order to exercise judicial economy, the Panel saw No need to address the claims under Art III:4

Panel also held that the measures violated Articles I and III:2 of GATT & Art 5(c) of SCM

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Canada—Certain Measures Affecting the Automotive Industry: (DS 139 & 142)

Complainants: Japan and EC Respondent: Canada Canada-Auto Pact concerned several measures taken by

Canada in framework of 1965 Auto Pact Agreement with US

Implemented through 1988 Motor Vehicle Tariff Order (MVTO), Several special remission orders (SRO) and letters of undertaking from Canadian car manufacturers

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Cont… To qualify for the import duty exemptions, a car manufacturer had

to meet three conditions It had to have had a manufacturing presence in Canada (base year 1963-

64) To achieve a minimum amount of Canadian value-added, which applied to

goods and services (CVA Requirements) To comply with production-to-sales ratio requirement (ratio Requirement)

Claimants contented: Canada’s measures were inconsistent with Articles I:1, III:4 and XXIV of

GATT Art 2 of TRIMS Art 3 of SCM Agreement Several GATS Articles

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Cont… Canada argued- CVA Req did not affect the internal sale or

use of imported products Panel- dismissed Canada’s argument

Panel found that CVA Req affected the internal sale or use in Canada of imported parts, materials

Panel also found- CVA Req accorded ‘less favorable treatment’ to imported products than to like domestic products

It also affected competitive opportunities Hence, Panel concluded that Canada violated Art III:4 of

GATT Panel held such measures were also inconsistent with Art

2.1 of TRIMs

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Cont… Panel also held that disputed measures affecting trade in

services inconsistent with Art II:1 of GATS Panel also rejected the claim on ratio req inconsistent with

Art 2.1 of Trims

Canada appealed to AB: AB upheld the Panel’s finding that disputed Measures were

inconsistent with this Art I of GATT AB also upheld panel’s ruling on Ratio Req But reversed the Panel’s decision on GATS Art II:1 and AB

held that measures were consistent with Art II:1

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India—Measures Affecting the Automotive Sector: (DS 146, 175)

Complainants- US and EU Respondent – India Measures at Issue:

India's indigenization (local content) requirement; and Trade balancing requirement (exports value = imports value)

imposed on its automotive sector Product at issue:

Cars and their components

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Cont… Indian adopted Automotive Policy in Dec 1997,

Mandatory requirement- Car manufactures wishing to import car kits were required to sign a ‘Memorandum of Understanding’

Car manufactures were asked to fulfill following conditions: To achieve specified minimum local content levels to 75%

(Indigenization Requirement) 75% of total value of materials used within 5 yrs

To balance the value of their imports of car kits and car parts against the value of their exports of cars and car parts (Trade balancing Req)

Car manufacturers who did not sign and MoU could be denied a license to import car kits and car parts

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Cont… EC and US raised a claims and challenging, the disputed

measures were inconsistent with Arts III:4 and XI:1 of GATT Arts 2.1 and 2.2 of TRIMS

W r t indigenization condition: Panel held such requirements were inconsistent with Art

III:4 of GATT Panel citing Canada- FIRA panel case

Automotive parts and components of domestic and foreign origin were like products

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Cont…W r t Trade Balancing requirement: Panel first examined whether it constituted a ‘measure’

within meaning of Art XI:1 Panel held it was a measure

Hence, Panel found that this req, Limit the amount of imports in relation to export commitment It acted as a restriction on importation within meaning of Art XI:1

India also failed to justify that the requirement under Art XVIII:B of GATT (BoP exception)

Therefore, Panel concluded that this measure is inconsistent with Art XI:1

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Cont… India appealed to AB, but subsequently withdrew it s

appeal Consequently, AB issued a short report,

Outlining the procedural history of case But, did not address the substantial legal issue raised by India

Eventually, India adopted AB and Panel reports on April 5, 2002

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India - Certain Measures Relating to Solar Cells and Solar Modules: (DS

456) On Jan 1, 2010, India had launched National solar policy

named, the Jawaharlal Nehru National Solar Mission (NSM) Ambitious target of generating 20,000 MW of solar power by 2022 The solar photovoltaic and solar thermal are the two types of solar

power projects

Under NSM scheme, above two projects were subject matter of certain measures,

1) It is mandatory under the scheme that, all the Solar PV projects to use cells and modules manufactured in India (100% DCR)

Measures allows for PV Modules made from thin film technologies or concentrated PV may be sourced from any country

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Cont…

2) w.r.t Solar thermal project- the project developers are to ensure 30% local content

In all plant and installations under solar thermal technology Solar power developers are entitled to enter into power

purchase agreement with NVVM (National Thermal Power Company Vidyut Vyapar Nigam Limited, Govt nodal agency)

Who would purchase the electricity produced

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Summary of key findings: US claimed that the measures appear to be inconsistent with

Art III:4 of the GATT 1994; Art 2.1 of the TRIMs Agreement; and Arts 3.1(b), 3.2, 5(c), 6.3(a) and (c), and 25 of the SCM Agreement

On 23 May 2014 DSB established a panel Brazil; Canada; China; European Union; Japan; Korea, Republic of Malaysia;

Norway; Russian Federation; Turkey; Ecuador; Saudi Arabia, Chinese Taipei reserved their 3rd parties

On 24th Feb 2016, the panel report was circulated Panel found that the disputed measures are TRIMs

Covered by Para 1(a ) of illustrative list Panel found that this suffice to establish that the measures are,

Inconsistent with both Article III:4 of GATT and Art 2.1 of TRIMs DCR do accord ‘less favourable treatment’

India claimed for Govt procurement derogation under Art III:8(a) of GATT

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Cont… Panel fount that discrimination relating to solar cells and

modules under LCR is not covered by Govt procurement exceptions

India argued LCR are justified under general exception in Art XX(j) of GATT

Risk of a disruption in imports, makes these ‘products in general or local short supply’

Panel found that terms ‘products in general or local short supply’ refer to

Quantity of supply of a product from all sources, does not meet demand in a relevant geographical area or market

India has not demonstrated the existence of any imminent risk of a short supply

Therefore, panel found that India failed to justify the challenged measured under Art XX(j) of GATT

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Cont… India also argued that LCR are justified under Art XX(d) of GATT

India’s compliance with ‘laws or regulations’ requiring it to take steps to promote sustainable development

Panel did not find any of instruments identified by India are within meaning of Art XX(d)

Therefore, panel held that India failed to demonstrate the disputed measures are justified under Art XX(d)

Finally, Panel asked India to ‘bring its measures into conformity with its obligations under TRIMs and GATT’

India will soon appeal to AB against panel’s findings

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Current Debate and Prospects of TRIMs Agreement:

Mandated Review with in 5 yrs (1.1.2000) Singapore Ministerial Conference established two Working

Groups: One on relationship between Trade and Investment Other on Future negotiations

Review under Art 9 is foreseen and not focused till to date WTO work on Trade and Investment is still unclear

It might be pursued in future

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India’s notified TRIMs: As per the provisions of Art. 5.1 of the TRIMs India had

notified three TRIMs as inconsistent with the provisions of the Agreement,

Local content (mixing) requirements in the production of News Print,

Local content requirement in the production of Rifampicin and Penicillin – G, and

Dividend balancing requirement in the case of investment in 22 categories consumer goods

Such notified due to be eliminated by 31st Dec 1999 None of these measures is in force at present Currently not have any outstanding obligations

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References: Martha Lara de Sterlini, The Agreement on Trade-Related Investment

Measures, The General Agreement on Trade in Services, The World Trade Organization: Legal, Economic and Political Analysis International Trade Law Center eds. Arthur E. Appleton, Michael G. Plummer (Springer, 2007)

Robert H. Edwards, Jr. & Simon N. Lester, Towards a More Comprehensive World Trade Organization Agreement on Trade Related Investment Measures, 33 STAN.J. INT'L L. 169 (1997)

Scott S. Quillin, The World Trade Organization and its Protection of Foreign Direct Investment: The Efficacy of The Agreement on Trade-related Investment Measures, 28 Okla. City U. L. Rev. 875 2003

Carlos Correa, Nagesh Kumar-Protecting Foreign Investment Implications of A WTO Regime and Policy Options (RIS, 2004)

Syed Nasir Aziz Rizvi, Global Investments and the WTO, World Trade Organization and India- a Critical Study of Its First Decade, eds. J K Mittal, KD Raju (New Era Law, 2005)

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Thank you….